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Connecting customers to
opportunities for 150 years
HSBC Holdings plc
Annual Report and Accounts 2014
Strategic Report
t
1 Overview
2 Cautionary statement regarding forward-looking statements
3 Highlights
4 Group Chairman’s Statement
7 Group Chief Executive’s Review
9 Strategic objectives
12 Business model
26 Strategic priorities
28 Outcomes
Report of the Directors
Financial Review
40 Financial summary
63 Global businesses
78 Geographical regions
106 Other information
111 Risk
238 Capital
Corporate Governance
263 Corporate Governance Report
264 Biographies of Directors and senior management
270 Board of Directors
276 Board committees
288 Internal control
290 Going concern
291 Employees
Directors’ Remuneration Report
300 Directors’ Remuneration Report
Financial Statements
328 Statement of Directors’ Responsibilities
329 Independent Auditor’s Report
334 Financial Statements
345 Notes on the Financial Statements
Shareholder Information
458 Shareholder information
466 Abbreviations
470 Glossary
478 Index
This document comprises the Annual Report and Accounts 2014
for HSBC Holdings plc and its subsidiaries. It contains the
Strategic Report, the Report of the Directors, the Directors’
Remuneration Report and the Financial Statements, together
with the Independent Auditor’s Report thereon, as required by
the UK Companies Act 2006 (Strategic Report and Directors’
Report) Regulations 2013. The Strategic Report on pages 1
to 39, the Report of the Directors on pages 40 to 299 and the
Directors’ Remuneration Report on pages 300 to 327 have each
been drawn up in accordance with the requirements of English
law, and liability in respect thereof is also governed by English
law.
Additional information, including commentary on 2013
compared with 2012, may be found in the Form 20-F filed
with the US Securities and Exchange Commission (‘SEC’) 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’
refer to HSBC Holdings together with its subsidiaries. Within this
document the Hong Kong Special Administrative Region of the
People’s Republic of China is referred to as ‘Hong Kong’. When
used in the terms ‘shareholders’ equity’ and ‘total shareholders’
equity’, ‘shareholders’ means holders of HSBC Holdings ordinary
shares and those preference shares and capital securities issued
by HSBC Holdings classified as equity. The abbreviations ‘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 could differ from IFRSs as issued by the IASB
if, at any point in time, new or amended IFRSs were not to be
endorsed by the EU. At 31 December 2014, there were no
unendorsed standards effective for the year ended 31
December 2014 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 2014 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 ‘adjusted’ is made in tables or
commentaries, the comparative information has been
expressed at constant currency (see page 40), the impact of fair
value movements in respect of credit spread charges on HSBC’s
own debt has been eliminated and the effects of other
significant items have been adjusted as reconciled on page 44.
Adjusted return on risk-weighted assets is defined and
reconciled on page 62.
The FSC® logo identifies products which contain wood
from well-managed forests certified in accordance with
the rules of the Forest Stewardship Council®.
Photography
Cover: (top) HSBC Archives; (bottom) Matthew Mawson
Group Chairman and Group Chief Executive by
George Brooks
© Copyright HSBC Holdings plc 2015
All rights reserved
No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording,
or otherwise, without the prior written permission of
HSBC Holdings plc.
Published by Group Finance, HSBC Holdings plc, London
Cover designed by Black Sun Plc, London; text pages
designed by Black Sun Plc and Group Finance, HSBC
Holdings plc, London
Printed by Park Communications Limited, London, on
Revive 100 White Offset paper using vegetable oil-based
inks. Made in the UK (cover board) and Austria (text
pages), the paper comprises 100% de-inked post-
consumer waste. Pulps used are totally chlorine-free.
Stock number 99383-8
Overview
Who we are
HSBC is one of the largest
banking and financial
services organisations
in the world.
Customers:
51m
Served by:
266,000
employees (257,600 FTE)
Through four global businesses:
– Retail Banking and Wealth Management
– Commercial Banking
– Global Banking and Markets
– Global Private Banking
Located in:
73
countries and territories
Across five geographical regions:
– Europe
– Asia
– Middle East and North Africa
– North America
– Latin America
Offices:
Over 6,100
Global headquarters:
– London
Market capitalisation:
US$182bn
Listed on stock exchanges in:
– London
– Hong Kong
– New York
– Paris
– Bermuda
Shareholders:
216,000 in 127
countries and territories
Our purpose
Our purpose is to be where the 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.
Our strategic priorities
We aim to be the world’s leading and most respected international
bank. We will achieve this by focusing on the needs of our
customers and the societies we serve, thereby delivering long-term
sustainable value to all our stakeholders.
In 2013, we announced a set of three interconnected and equally
weighted priorities for 2014 to 2016 to help us deliver our strategy:
– grow the business and dividends;
– implement Global Standards; and
– streamline processes and procedures.
Each priority is complementary and underpinned by initiatives being
undertaken within our day-to-day business. Together they create
value for our customers and shareholders, and contribute to the
long-term sustainability of HSBC.
How we measure performance
We track our progress in implementing our strategy with a range of
financial and non-financial measures or key performance indicators.
From 2015, we have revised our targets to better reflect the
changing regulatory and operating environment.
Highlights of 2014 are shown on page 3.
For further information on our new targets see page 32.
Rewarding performance
The remuneration of all staff within the Group, including executive
Directors, is based on the achievement of financial and non-financial
objectives. These objectives, which are aligned with the Group’s
strategy, are detailed in individuals’ annual scorecards. To be
considered for a variable pay award, an individual must have fully
complied with HSBC Values.
For further information on HSBC Values, see page 10.
HSBC HOLDINGS PLC
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Overview (continued)
Cautionary statement / Highlights
Cautionary statement
regarding forward-looking
statements
The Annual Report and Accounts 2014 contains certain
forward-looking statements with respect to HSBC’s financial
condition, results of operations, capital position 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 discretionary RWA
growth and 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.
HSBC HOLDINGS PLC
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Highlights
– Profit before tax was down 17%
to US$18.7bn on a reported
basis. Adjusted profit before tax,
excluding the effect of significant
items and currency translation, was
broadly unchanged at US$22.8bn.
– Reinforced HSBC’s capital
– Dividends to shareholders
strength. Our CRD IV transitional
common equity tier 1 ratio was 10.9%
compared with 10.8% at the end of
2013.
increased to US$9.6bn as capital
strength created capacity for organic
growth and allowed us to increase the
dividends paid.
Profit before taxation
(reported basis)
US$18.7bn
£11.3bn
HK$145bn
Capital strength
(CRD IV common equity tier 1 ratio
transitional)1
10.9%
At 31 December
Dividends per ordinary share
(in respect of year)2
US$0.50
22.6
21.9
20.6
10.8
19.0
18.7
10.9
0.49
0.50
0.45
0.41
0.36
2010
2011
2012
2013
2014
2013
2014
2010
2011
2012
2013
2014
Cost efficiency ratio
(reported basis)3
67.3%
Return on average ordinary
shareholders’ equity4
Share price
(at 31 December)
7.3%
67.3
10.9
62.8
59.6
9.5
9.2
8.4
57.5
55.2
£6.09
HK$74.00
US$47.23 American
Depositary Share
6.51
6.47
6.62
6.09
7.3
4.91
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
For a description of the difference between reported and adjusted performance, see page 40.
For footnotes, see page 39.
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Overview (continued)
Group Chairman’s Statement
Group Chairman’s Statement
HSBC’s performance in 2014 reflected another year of
consolidation in the reshaping and strengthening of the Group
against a backdrop of geopolitical and economic headwinds, many
of which could not have been foreseen at the outset of the year.
As economic activity in much of the world
failed to reach the levels required to
rebuild sustainable consumer confidence
and prompt renewed investment
expenditure, governments most impacted
expanded their stimulus measures and the
major central banks maintained interest
rates at their unprecedented low levels.
Concerns over deflationary trends,
particularly in the eurozone, grew.
Although China delivered growth which
comfortably surpassed all other major
economies, expectations of slower growth
in the future weighed heavily on market
sentiment and contributed to significant
commodity price falls and further
curtailment of global investment spending.
Unsurprisingly in this environment, revenue
growth opportunities were strongest in our
Asian businesses, with expansion in lending
and debt capital financing. Cost progression
continued globally in large part to
implement regulatory change and enhance
risk controls, notably around financial
system integrity and conduct. Streamlining
initiatives could only partly offset this cost
expansion. Further customer redress costs
and regulatory penalties around past
failings reinforced the Board’s continuing
commitment to prioritise whatever further
investment in systems and controls is
necessary to mitigate future repetition.
It is clear now that societal, regulatory and
public policy expectations of our industry
are changing its long-term cost structure.
Technological advancements around data
analytics, including ‘big data’, are providing
much more sophisticated tools to enhance
our capabilities to protect the financial
system from bad actors. Also, as more and
more customers choose to transact online
and through mobile devices, we are making
the necessary investment to protect
ourselves and our customers from cyber
threats. Building the required analytical
capabilities entails considerable investment
in systems and in maintaining customer
data which is accurate and up to date.
Reconfiguring customer and transactional
data to the digital age is no small
endeavour given legacy systems and a
multiplicity of historical data standards
globally. The benefits, however, of
enhanced customer due diligence
capabilities and greater systems security
essentially go to the core of our systemic
role and allow us to be more proactive in
fulfilling that role as a key gatekeeper to
the financial system.
As our industry reshapes in response to
public policy and regulatory directives, we
now need to demonstrate, through clarity
of our business model, the value to society
of our scale and diversification. We must
HSBC HOLDINGS PLC
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never forget that investors have choices
where to invest and individuals have
choices where to make their careers. Thus
it is essential that we can demonstrate a
positive contribution to the societies we
serve in order to bolster the business
friendly environment that all agree is
essential for economic growth and
prosperity.
For 150 years HSBC has been following
trade and investment flows to serve
customers as they fulfil their financial
ambitions. In a world which has moved
from being interconnected to being
interdependent, our business model is
increasingly relevant to companies of all
sizes and to individuals whose financial
future is linked to economic activity in
multiple countries.
This can be seen most markedly in our
Commercial Banking business, which
delivered a record year buoyed by the
expansion of supply chain management
solutions and increasing cross-border
payment flows. Our network coverage of
the countries which originate more than
85% of the world’s payment activity drives
this key element of our business model. On
the investment side, throughout our
network we saw corporate flows continuing
to target the higher growth emerging
markets. At the same time, growth in
outward investment from mainland China
accelerated as its major companies sought
diversification and access to both skill bases
and markets. These trends played to HSBC’s
scale and presence in the key financial
centres, allowing us to support customers
with debt and equity financing solutions,
offering tailored liquidity and transactional
banking support and providing risk
management solutions primarily against
our clients’ interest rate and foreign
exchange exposures. Success was
evidenced by growing recognition in
industry awards, the most important of
which are referred to in the Group Chief
Executive’s Review. Finally, our Retail
Banking and Wealth Management business
continued its journey to build a sustainable
customer focused business model,
completing the removal of formulaic links
between product sales and performance-
related pay of our staff, and expanding our
digital and mobile offerings.
Performance in 2014
Profit before tax of US$18.7bn on a
reported basis was US$3.9bn or 17%
lower than that achieved in 2013. This
primarily reflected lower business disposal
and reclassification gains and the negative
effect, on both revenue and costs, of
significant items including fines, settlements,
UK customer redress and associated
provisions. On the adjusted basis that is
one of the key metrics used to assess
current year management and business
performance, profit before tax was
US$22.8bn, broadly in line with 2013
on a comparable basis.
Earnings per share were US$0.69, against
US$0.84 in 2013. The Group’s capital
position remained strong with the
transitional common equity tier 1 ratio
standing at 10.9% at the end of the year,
compared with 10.8% 12 months earlier,
and our end point ratio at 11.1% compared
with 10.9%. Based on this capital strength
and the Group’s capital generating
capabilities, the Board approved a fourth
interim dividend in respect of 2014 of
US$0.20 per share, taking the total
dividends in respect of the year to US$0.50
per share (US$9.6bn, US$0.4bn higher than
in respect of 2013).
Taking into account this financial
performance, together with the further
progress made in reshaping the Group,
responding to regulatory change and
implementing Global Standards, the Board
considered executive management to
have made good progress during 2014
towards strengthening HSBC’s long-term
competitive position.
The Group Chief Executive’s Review
analyses in detail the important
benchmarks and highlights of 2014.
Regulatory landscape becomes
clearer but still much to do
A great deal of progress was made during
2014 to finalise the framework under which
globally systemic banks like HSBC will be
required to operate when it is fully
implemented. This clarity is essential if
we are to be able to position our global
businesses to meet the return expectations
of those who invest in us within an
acceptable risk appetite.
In particular, major progress was made in
addressing the challenge of ‘too big to fail’,
largely through finalising proposals to
augment existing loss absorbing capacity
with ‘bail-inable’ debt and through greater
definition of how resolution frameworks
would operate in practice. In both cases,
this involved the critical issue of how to
address cross-border implications and
home and host country regulatory
responsibilities.
There is, however, still much to complete.
The regulatory reform agenda for 2015
is very full with pending public policy
decisions, regulatory consultations and
impact studies in areas of far reaching
influence to the structure of our industry.
These include the conclusion of structural
separation deliberations in Europe, further
work on so called ‘shadow banking’
including identifying non-bank systemically
important institutions, addressing
the resolution framework for central
counterparties, finalising the calibration of
the leverage ratio, calibrating the quantum
of total loss absorbing capacity to be raised
and settling the disposition of that capacity
within global groups.
Restoration of trust in
our industry remains a
significant challenge as
further misdeeds are
uncovered but it is a
challenge we must meet
successfully.
In addition, further work will be undertaken
on utilising standardised risk weights to
overcome regulatory loss of confidence in
internally modelled capital measures and a
‘fundamental review of the trading book’
is also underway within the regulatory
community to look again at capital support
for this activity. These measures, which
in aggregate are designed to make the
industry structurally more stable, will take
the next five or so years to implement,
an indication of the scale of the
transformation to be completed.
During 2014, the UK government also
confirmed the permanence of the UK bank
levy. This was introduced in 2010, in part
to address the burden borne by taxpayers
from failures during the global financial
crisis; in 2014, the cost to HSBC of the levy
was US$1.1bn, an increase of US$0.2bn
over 2013. 58% of the levy we pay does
not relate to our UK banking activity.
Rebuilding trust
Restoration of trust in our industry remains
a significant challenge as further misdeeds
are uncovered but it is a challenge we must
meet successfully. We owe this not just to
HSBC HOLDINGS PLC
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society but to our staff to ensure they can
be rightly proud of the organisation to
which they have committed their careers.
When commentators extrapolate instances
of control failure or individual misconduct
to question the culture of the firm it strikes
painfully at the heart of our identity.
Swiss Private Bank
The recent disclosures around
unacceptable historical practices and
behaviour within the Swiss private bank
remind us of how much there still is to do
and how far society’s expectations have
changed in terms of banks’ responsibilities.
They are also a reminder of the need for
constant vigilance over the effectiveness of
our controls and the imperative to embed a
robust and ethical compliance culture.
We deeply regret and apologise for the
conduct and compliance failures highlighted
which were in contravention of our own
policies as well as expectations of us.
In response to, and in parallel with, the
tax investigations prompted by the data
theft more than eight years ago, we have
been completely overhauling our private
banking business, putting the entire
customer base through enhanced due
diligence and tax transparency filters. Our
Swiss Private Bank customer base and the
countries we serve are now both about
one-third of the size they were in 2007.
In addition, HSBC is already working to
implement the OECD’s Common Reporting
Standard and other measures to foster
greater transparency. We cannot change
the past. But, looking to the future, we
can and must reinforce controls and
provide demonstrable evidence of their
effectiveness. This forms part of our
commitment to Global Standards, to
ensure that we will never knowingly do
business with counterparties seeking to
evade taxes or use the financial system to
commit financial crime.
Banking standards
More broadly, following the publication in
2013 of the Parliamentary Commission on
Banking Standards, considerable progress
has been made in giving effect to its
recommendations. The Financial Services
(Banking Reform) Act of 2013 provided
greater clarity on the accountabilities and
responsibilities of management and the
Board. We welcome the appointment of
Dame Colette Bowe to lead the Banking
Standards Review Council and have
committed to support her fully in its work.
The current Fair and Effective Markets
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Overview (continued)
Group Chairman’s Statement / Group Chief Executive’s Review
Review being conducted by the Bank of
England, Her Majesty’s Treasury and the
Financial Conduct Authority is an extremely
timely and important exercise to re-establish
the integrity of wholesale financial markets.
In terms of our own governance of these
areas, the Conduct & Values Committee of
the Board that we created at the beginning
of 2014 to focus on behavioural issues
has established itself firmly as the central
support to the Board in these important
areas.
Board changes
Since we reported at the interim stage we
have taken further steps to augment the
skills and experience within the Board
and to address succession to key roles.
On 1 January 2015, Phillip Ameen joined
the Board and the Group Audit Committee
as an independent non-executive Director.
Phil was formerly Vice President,
Comptroller and Principal Accounting
Officer of General Electric Corp. He brings
with him extensive financial and accounting
experience gained in one of the world’s
leading international companies as well as
a depth of technical knowledge from his
long service in the accounting standard
setting world. As a serving Director on
HSBC’s US businesses he also brings further
detailed insight to Group Board discussions
and enhances the strong links that already
exist between the Group Board and its
major subsidiaries.
Sir Simon Robertson had previously
indicated his intention to retire from
the Board at the upcoming AGM. I am
delighted to report that Simon has
agreed to stay on for at least a further
year as Deputy Chairman. He has been a
considerable support to me and to Stuart
Gulliver, in addition to his role leading the
non-executives, and we are all delighted
that we shall continue to benefit from his
wisdom and experience.
150th anniversary
2015 marks the 150th anniversary of our
founding back in Hong Kong and Shanghai
as a small regional bank focused on trade
and investment. All of us within HSBC owe
a huge debt of gratitude and respect to our
forebears who charted the course that has
taken HSBC to one of the most important
institutions serving the financial needs of
this inter-dependent world.
Outlook
It is impossible not to reflect on the very
broad range of uncertainties and challenges
to be addressed in 2015 and beyond,
most of which are outside our control,
particularly against a backdrop of patchy
economic recovery and limited policy
ammunition. Unexpected outcomes
arising from current geopolitical tensions,
eurozone membership uncertainties,
political changes, currency and commodity
price realignments, interest rate moves
and the effectiveness of central banks’
unconventional policies, to name but a
few, all could materially affect economic
conditions and confidence around
investment and consumption decisions.
One economic uncertainty stands out for a
major financial institution headquartered in
the UK, that of continuing UK membership
of the EU. Today, we publish a major
research study which concludes that
working to complete the Single Market in
services and reforming the EU to make it
more competitive are far less risky than
going it alone, given the importance of
EU markets to British trade.
There are also many underlying positive
trends that shape our thinking about the
coming year. We are very encouraged
by the trends in outward investment from
China, the potential for further liberalisation
and internationalisation of the renminbi
and the reshaping of the Chinese economy
from export dependence to domestic
consumption. We are positive on the
opportunities that will arise from Capital
Markets Union within Europe and the
declared focus of the incoming Commission
on growth and jobs. The strength of the
US economy and the benefits of lower oil
prices should be positive drivers of growth.
There is much to be gained from successful
negotiation of the Transatlantic Trade and
Investment Partnership and the Trans-
Pacific Partnership. Current attention on
funding infrastructure investment globally
is potentially of huge significance.
Finally, on behalf of the Board, I want again
to express our thanks and gratitude to our
266,000 colleagues around the world who
worked determinedly in 2014 to build an
HSBC fit for the next 150 years.
D J Flint
Group Chairman
23 February 2015
HSBC HOLDINGS PLC
6
Group Chief Executive’s Review
2014 was a challenging year in which we continued to work hard
to improve business performance while managing the impact of a
higher operating cost environment.
Profits disappointed, although a tough
fourth quarter masked some of the
progress made over the preceding three
quarters. Many of the challenging aspects
of the fourth quarter results were common
to the industry as a whole. In spite of this,
there were a number of encouraging signs,
particularly in Commercial Banking,
Payments & Cash Management and
renminbi products and services. We were
also able to continue to grow the dividend.
Reported profit before tax in 2014 was
US$18.7bn, US$3.9bn lower than in the
previous year. This reflected lower gains
from disposals and reclassifications, and
the negative effect of other significant
items, including fines, settlements, UK
customer redress and associated
provisions, totalling US$3.7bn.
Adjusted profit before tax, which excludes
the year-on-year effects of currency
translation differences and significant
items, was US$22.8bn, broadly unchanged
on 2013.
Asia continued to provide a strong
contribution to Group profits. Middle East
and North Africa reported a record profit
before tax in 2014. Together, Asia and
MENA generated more than 70% of
adjusted Group profit before tax.
Commercial Banking also delivered a record
reported profit, which is evidence of the
successful execution of our strategy.
Revenue in CMB continued to grow,
notably in our two home markets of Hong
Kong and the UK.
Global Banking and Markets performed
relatively well for the first three quarters of
the year, but, like much of the rest of the
industry, suffered a poor fourth quarter.
Revenue was lower in 2014, particularly in
our Markets businesses, but all other client-
facing businesses delivered year-on-year
growth.
Revenue was also lower in Retail Banking
and Wealth Management, due primarily
to the continuing repositioning of the
business. However, in our Global Asset
Management business we continued our
strategy of strengthening collaboration
across our global businesses, which helped
to attract net new money of US$29bn.
Global Private Banking continues to undergo
a comprehensive overhaul which was
accelerated from 2011. As part of this
overhaul, we are implementing tough
financial crime, regulatory compliance and
tax transparency measures. In order to
achieve our desired business model and
informed by our six filters process, we have
also sold a number of businesses and
customer portfolios, including assets in
Japan, Panama and Luxembourg. The
number of customer accounts in our Swiss
Private Bank is now nearly 70% lower than
at its peak. We continued to remodel the
Private Bank in 2014, which included the sale
of a customer portfolio in Switzerland to LGT
Bank. One consequence of this remodelling
HSBC HOLDINGS PLC
7
was a reduction in revenue. We have also
grown the parts of the business that fit our
new model, attracting US$14bn of net new
money in 2014, mostly through clients of
Global Banking & Markets and Commercial
Banking.
Loan impairment charges were lower,
reflecting the current economic
environment and the changes we have
made to our portfolio since 2011.
Operating expenses were higher due to
increased regulatory and compliance costs,
inflationary pressures and investment in
strategic initiatives to support growth,
primarily in Commercial Banking in Asia
and Europe. Significant items, which
include restructuring costs, were also
higher than last year.
We agreed settlements in respect of
inquiries by the UK Financial Conduct
Authority and the US Commodity Futures
Trading Commission into the foreign
exchange market in 2014. HSBC was badly
let down by a few individuals whose
actions do not reflect the vast majority
of employees who uphold the values and
standards expected of the bank. This
matter is now rightly in the hands of the
Serious Fraud Office.
Our balance sheet remained strong, with
a ratio of customer advances to customer
accounts of 72%. Excluding the effects of
currency translation, customer loans
and advances grew by US$28bn during
2014.
The common equity tier 1 ratio on a
transitional basis was 10.9% and on a
CRD IV end point basis was 11.1% at
31 December 2014.
Connecting customers to
opportunities
2015 is HSBC’s 150th anniversary. Founded
in Hong Kong in 1865 to finance local and
international trade, the bank expanded
rapidly to capture the increasing flow of
commerce between Asia, Europe and North
America. Our ability to connect customers
across the world remains central to the
bank’s strategy today and in 2014 we
continued to develop and grow the product
areas that rely on international
connectivity.
Our market-leading Global Trade and
Receivables Finance business remains
strong and we were voted best global trade
finance bank and best trade finance bank in
MENA in the Global Trade Review ‘Leaders
In Trade’ Awards.
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Overview/Strategic objectives
Group Chief Executive’s Review / Value creation and long-term sustainability
In Payments and Cash Management,
we increased customer mandates and
improved client coverage. We were
recognised as the best global cash
management bank for the third successive
year in the 2014 Euromoney Cash
Management Survey.
Our share of the capital financing market
continued to improve and we were ranked
number one for debt capital markets in our
home markets of the UK and Hong Kong,
and number one for Equity Capital Markets
in Hong Kong by Dealogic. HSBC was also
named global bond house of the year,
global derivatives house of the year and
Asian bond house of the year in the
International Financing Review Awards
2014.
We consolidated our leadership of the
rapidly growing renminbi market in 2014.
According to SWIFT, the renminbi is now
the fifth most widely used payment
currency in the world, up from 13th just
two years ago. We increased revenue from
renminbi products and retained our ranking
as number one issuer of offshore renminbi
bonds worldwide over the last twelve
months. HSBC was also recognised as the
best overall provider for products and
services in Asiamoney’s Offshore Renminbi
Services Survey in 2014, and renminbi house
of the year in the 2014 Asia Risk Awards.
Operating a global business
It is already clear that the regulatory costs
of operating a global business model have
increased since we announced our strategy
for HSBC in 2011.
As the Group Chairman’s Statement
explains, the regulatory environment
continues to evolve.
Our commitment to be the world’s leading
international bank means that improving
our regulatory and compliance abilities
and implementing Global Standards must
remain priorities for HSBC. Our Compliance
staff headcount has more than doubled
since 2011 and there is more work still to
do to strengthen the Group’s compliance
capability.
At the same time, the level of capital that
we hold has increased by over 60% since
before the financial crisis. Specifically, we
have further strengthened our capital
levels in response to increasing capital
requirements from the UK Prudential
Regulation Authority.
Whilst we expected an increase in the
amount of capital we were required to
hold when setting targets for the Group in
2011, we could not have foreseen the full
extent of the additional costs and capital
commitment that would subsequently be
asked of us. The pace of change has been
exceptional. As a consequence, some of the
targets that we set for the Group in 2011
are no longer realistic.
In recognition of that fact, we have set new
medium-term targets that better reflect
the ongoing operating environment.
We are setting a revised return on equity
target of more than 10%. This target is
modelled using a common equity tier 1
capital ratio on a CRD IV end point basis
in the range of 12% to 13%.
Our cost target will be to grow our revenue
faster than costs (‘positive jaws’) on an
adjusted basis.
We are also restating our commitment
to grow the dividend. To be clear, the
progression of dividends should be
consistent with the growth of the overall
profitability of the Group and is predicated
on our ability to meet regulatory capital
requirements in a timely manner.
These targets offer a realistic reflection of
the capabilities of HSBC in the prevailing
operating environment.
Our employees
I am grateful for the hard work, dedication
and professionalism of all of our employees
in 2014.
Extensive work was required to prepare
HSBC for stress tests in a number of
jurisdictions throughout the year, the
results of which confirmed the capital
strength of the Group. HSBC will face
additional stress testing in 2015.
We all have to work continuously to make
sure that the Group remains compliant
with anti-money laundering and sanctions
legislation and this effort continued in
2014.
settlement agreements with the US
authorities and the UK Financial Conduct
Authority. We have now received the
second annual report from the Monitor.
Whilst it confirmed that we continue to
comply with the obligations we undertook
in the Deferred Prosecution Agreement
with the US Department of Justice, as we
expected we still have substantial work to
do.
Summary and outlook
The business remains in a good position
structurally to capitalise on broader market
trends and the macroeconomic backdrop
remains favourable, notwithstanding the
continuing low interest rate environment.
There are still a number of historical issues
left to resolve and we will make further
progress on these in 2015. We will also
continue the work we started in 2011 to
simplify the Group to make it easier to
manage and control.
Our 2014 results show a business powered
by our continued strength in Hong Kong,
with significant additional contributions
from the rest of Asia and the Middle East
and North Africa. The continuing success of
Commercial Banking and the resilience of
our differentiated Global Banking &
Markets business illustrate the
effectiveness of our strategy to bridge
global trade and capital flows. Retail
Banking & Wealth Management remains a
work in progress, but we took considerable
further steps to de-risk the business in
2014. Global Private Banking continues to
attract net new money from clients in our
other global businesses. We maintain a
sharp focus on generating net savings to
offset increased costs arising from inflation,
and the cost of implementing global
standards.
Our early 2015 performance has been
satisfactory.
We continue to focus on the execution of
our strategy and on delivering value to
shareholders.
Management and staff across the Group
continued to work very closely with the
Monitor to deliver our commitments under
the terms of our December 2012
S T Gulliver
Group Chief Executive
23 February 2015
HSBC HOLDINGS PLC
8
Strategic objectives
Value creation
and long-term
sustainability
We continue to follow the vision
for HSBC we first outlined in 2011
along with the clear strategy
that will help us achieve it. Our
strategy guides where and
how we seek to compete. We
constantly assess our progress
against this strategy and provide
regular updates to stakeholders.
Through our principal activities – making
payments, holding savings, enabling trade,
providing finance and managing risks – we
play a central role in society and in the
economic system. Our target is to build and
maintain a business which is sustainable in
the long term.
How we create value
Banks, and the individuals within them, play
a crucial role in the economic and social
system, creating value for many parties in
different ways.
We provide a facility for customers to
securely and conveniently deposit their
savings. We allow funds to flow from savers
and investors to borrowers, either directly or
through the capital markets. The borrowers
use these loans or other forms of credit to
buy goods or invest in businesses. By these
means, we help the economy to convert
savings which may be individually short-term
into financing which is, in aggregate, longer
term. We bring together investors and
people looking for investment funding. We
develop new financial products. We also
facilitate personal and commercial
transactions by acting as payment agent both
within countries and internationally. Through
these activities, we take on risks which we
then manage and reflect in our prices.
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.
Value creation
Customers
Personal, corporate, governmental, institutional and high net worth customers
and counterparties
Branches and offices
Networks
Markets
Products and Income
Loans/credit
Deposits + investments
Financial services
Interest and fee income
Trading and
other income
Risk
and
Capital
Costs
Loan losses
Salaries and other payments
Infrastructure and other costs
Taxes
Allocation
Dividends
Variable pay
Retained profit
Employees
Third parties
Governments
Shareholders
Employees
We also offer additional financial products
and services including broking, asset
management, financial advisory services,
life insurance, corporate finance, securities
services and alternative investments. We
make markets in financial assets so that
investors have confidence in efficient pricing
and the availability of buyers and sellers. We
provide these products for clients ranging
from governments to large and mid-market
corporates, small and medium-sized
enterprises, high net worth individuals and
retail customers. We help customers raise
financing from external investors in debt and
equity capital markets. We create liquidity
and price transparency in these securities
allowing investors to buy and sell them on
the secondary market. We exchange national
currencies, helping international trade.
We offer products that help a wide range
of customers to manage their risks and
exposures through, for example, life
insurance and pension products for retail
customers and receivables finance or
documentary trade instruments for
companies. Corporate customers also ask
us to help with managing the financial risks
arising in their businesses by employing our
expertise and market access.
An important way of managing risks arising
from changes in asset and liability values and
movements in rates is provided by derivative
products such as forwards, futures, swaps
and options. In this connection, we are an
active market-maker and derivative
counterparty. Customers use derivatives
to manage their risks, for example, by:
– using forward foreign currency contracts
to hedge their income from export sales
or costs of imported materials;
– using an inflation swap to hedge future
inflation-linked liabilities, for example,
for pension payments;
– transforming variable payments of debt
interest into fixed rate payments, or
vice versa; or
– providing investors with hedges against
movements in markets or particular stocks.
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HSBC HOLDINGS PLC
9
Strategic objectives
Value creation and long-term sustainability / HSBC Values / Our strategy
We charge customers a spread, representing
the difference between the price charged
to the customer and the theoretical cost of
executing an offsetting hedge in the market.
We retain that spread at maturity of the
transaction if the risk management of the
position has been effective.
We then use derivatives along with other
financial instruments to constrain the risks
arising from customer business within risk
limits. Normally, our customers both buy
and sell relevant instruments, in which case
our focus is on managing any residual risks
through transactions with other dealers or
professional counterparties. Where we do
not fully hedge the residual risks we may gain
or lose money as market movements affect
the net value of the portfolio.
Stress tests and other risk management
techniques are also used to ensure that
potential losses remain within our risk
appetite under a wide range of potential
market scenarios.
In addition, we manage risks within HSBC,
including those which arise from the business
we do with customers.
For further information on our risks, see page 21,
and on how we manage them, see page 24.
Long-term sustainability
At HSBC, we understand that the
continuing financial success of our business
is closely connected to the economic,
environmental and social landscape in
which we operate. For us, sustainability
means building our business for the long
term by balancing social, environmental
and economic considerations in the
decisions we make. This enables us to help
businesses thrive, reward shareholders
and employees, pay taxes and duties in
the countries in which we operate and
contribute to the health and growth of
communities. Achieving a sustainable
return on equity and long-term profit
growth is built on this foundation.
How we do business is as important as what
we do: our responsibilities to our customers,
employees and shareholders as well as to
wider society go far beyond simply being
profitable. These include our consistent
implementation of the highest standards
everywhere we operate to detect, deter
and protect against financial crime.
Sustainability underpins our strategic
priorities and enables us to fulfil our
purpose. Our ability to identify and
address environmental, social and ethical
developments which present risks or
opportunities for the business contributes to
our financial success. Sustainable decision-
making shapes our reputation, drives
employee engagement and affects the risk
profile of the business – and can help reduce
costs and secure new revenue streams.
Our international presence and the long-
established position of many of our
businesses in HSBC’s home and priority
growth markets, when combined with our
wide-ranging portfolio of products and
services, differentiate HSBC from our
competitors and give our business and
operating models an inherent resilience. This
has enabled the Group to remain profitable
through the most turbulent of times for our
industry, and we are confident that the
models will continue to stand us in good
stead in the future and will underpin the
achievement of our strategic priorities.
Our business and operating models are described
in more detail on page 12. For further information
about sustainability at HSBC, see page 36.
HSBC Values
Embedding HSBC Values in every
decision and every interaction
with customers and with each
other is a top priority for the
Group and is shaping the way
we do business.
The role of HSBC Values in daily operating
practice is fundamental to our culture,
and is particularly important in light of
developments in regulatory policy, investor
confidence and society’s expectations of
banks. HSBC Values are integral to the
selection, assessment, recognition,
remuneration and training of our employees.
We expect our executives and employees
to act with courageous integrity in the
execution of their duties in the following
ways:
HSBC Values
Be dependable and do the right thing
– stand firm for what is right, deliver on
commitments, be resilient and
trustworthy;
– take personal accountability, be
decisive, use judgement and common
sense, empower others.
Be open to different ideas and cultures
– communicate openly, honestly and
transparently, value challenge, learn
from mistakes;
– listen, treat people fairly, be inclusive,
value different perspectives.
Be connected with our customers,
communities, regulators and each other
– build connections, be externally
focused, collaborate across boundaries;
– care about individuals and their
progress, show respect, be supportive
and responsive.
HSBC HOLDINGS PLC
10
Our strategy
Long-term trends
Competitive advantages
A two-part approach
Our strategy is aligned to two long-term
trends:
– The world economy is becoming ever
more interconnected, with growth in
world trade and cross-border capital
flows continuing to outstrip growth in
average gross domestic product. Over
the next decade we expect growth in
trade and capital flows to outstrip GDP
growth and 35 markets to generate 85%
of world trade growth with a similar
degree of concentration in cross-border
capital flows.
– Of the world’s top 30 economies, we
expect those of Asia, Latin America,
the Middle East and Africa to have
increased by around four-fold in size
by 2050, benefiting from demographics
and urbanisation. By this time they will
be larger than those of Europe and
North America combined. By 2050, we
expect 18 of the 30 largest economies
will be from Asia, Latin America or the
Middle East and Africa.
Responding to these long-term trends,
we have developed a two-pronged
approach that reflects our competitive
advantages:
– A network of businesses connecting
the world. HSBC is well positioned to
capture growing international trade
and capital flows. Our global reach and
range of services place us in a strong
position to serve clients as they grow
from small enterprises into large multi-
nationals through our Commercial
Banking and Global Banking & Markets
businesses.
– Wealth management and retail with
local scale. We aim to capture
opportunities arising from social
mobility and wealth creation in our
priority growth markets across Asia,
Latin America and the Middle East,
through our Premier proposition and
Global Private Banking business. We
expect to invest in full scale retail
businesses only in markets where we
can achieve profitable scale.
What matters in this environment is:
– having an international network and
global product capabilities to capture
international trade and movements in
capital; and
– being able to take advantage of organic
investment opportunities in the most
attractive growth markets and
maintaining the capacity to invest.
HSBC’s competitive advantages come
from:
– our meaningful presence in and long-
term commitment to our key strategic
markets;
– our business network, which covers
over 85% of global trade and capital
flows;
– our balanced business portfolio centred
on our global client franchise;
– our strong ability to add to our capital
base while also providing competitive
rewards to our staff and good returns
to our shareholders;
– our stable funding base, with about
US$1.4 trillion of customer accounts of
which 72% has been advanced to
customers; and
– our local balance sheet strength and
trading capabilities in the most relevant
financial hubs.
HSBC HOLDINGS PLC
11
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Business model
Market presence / Organisation
Business model
Market presence
Our business model is based on
an international network
connecting and serving a cohesive
portfolio of markets.
Our comprehensive range of banking and
related financial services is provided by
operating subsidiaries and associates.
Services are primarily delivered by domestic
banks, typically with local deposit bases.
HSBC’s markets
The UK and Hong Kong are our home
markets, and a further 19 countries form our
priority growth markets (see below). These
21 markets accounted for over 90% of our
profit before tax in 2014, and are the primary
focus of capital deployment. Network
markets are markets with strong
international relevance which serve to
complement our international presence,
operating mainly through Commercial
Banking and Global Banking and Markets.
Our combination of home, priority growth
and network markets covers around 85% 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.
Our legal entities are regulated by their local
regulators and on a Group-wide basis we are
regulated from the UK by the Prudential
Regulation Authority (‘PRA’) for prudential
matters (safety and soundness) and by the
Financial Conduct Authority (‘FCA’) for
conduct (consumer and market protection).
Asia
Europe
Middle East and
North Africa
North
America
Latin
America
Home
markets
Priority
growth
markets
Network
markets
Small
markets
− Hong Kong
− UK
− France
− Germany
− Switzerland
− Turkey
− Australia
− Mainland China
− India
− Indonesia
− Malaysia
− Singapore
− Taiwan
− Egypt
− Saudi Arabia
− UAE
− Canada
− USA
− Argentina
− Brazil
− Mexico
− Operations primarily focused on international clients and businesses of Commercial Banking and Global Banking and Markets
− Together with home and priority growth markets these cover around 85% of international trade and capital flows
− Markets where HSBC has profitable scale and focused operations
− Representative Offices
Investment criteria
We use six filters to guide our decisions
about when and where to invest. The first
two – international connectivity and
economic development – determine whether
the business is strategically relevant. The next
three – profitability, efficiency and liquidity –
determine whether the financial position of
the business is attractive. The sixth filter – the
risk of financial crime – governs our activities
in high risk jurisdictions, and is applied to
protect us by restricting the scope of our
business where appropriate.
Using the six filters in decision-making
Decisions over where to invest additional
resources have three components:
– Risk: the investment must be consistent
with our risk appetite.
– Strategic: we will only invest in businesses
aligned to our strategy, mostly in our
home and priority growth markets and
in target businesses and clients;
We conduct an annual geographic and
business portfolio review following the six
filter approach to update our market and
business priorities.
– Financial: the investment must be value
accretive for the Group, and must meet
minimum returns, revenue and cost
hurdles; and
What is the
strategic relevance?
Are the current
returns attractive?
What is the financial crime risk?
1. Connectivity
2. Economic development
3. Profitability
4. Efficiency
5. Liquidity
High
Medium/low
Yes
No
Yes
No
6. Financial crime risk
Low
Invest
Turnaround/improve
Continue as is
HSBC HOLDINGS PLC
12
High
Risk mitigation
Risk mitigation
Risk mitigation
Discontinue/dispose
Organisation
Our operating model is based on
a matrix management structure
comprising global businesses,
geographical regions and global
functions.
The matrix is overlaid on a legal entity
structure headed by HSBC Holdings plc.
Holding company
HSBC Holdings, the holding company of the
Group, is the primary source of equity capital
for its subsidiaries and provides non-equity
capital to them when necessary.
Under authority delegated by the Board of
HSBC Holdings, the Group Management
Board (‘GMB’) is responsible for the
management and day-to-day running of
the Group, within the risk appetite set by
the Board. 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 banking subsidiary, nor is it a lender
of last resort and does not carry out any
banking business in its own right. Subsidiaries
operate as separately capitalised entities
implementing the Group strategy.
Global management structure
The following table lists our four global
businesses, five geographical regions and
11 global functions, and summarises their
responsibilities under HSBC’s management
structure.
For details of our principal subsidiaries see Note 22
on the Financial Statements. A simplified Group
structure chart is provided on page 462.
Global management structure
HSBC Holdings plc
Global businesses
Geographical regions
Global functions
− Retail Banking and Wealth Management
− Commercial Banking
− Global Banking and Markets
− Global Private Banking
− Europe
− Asia
− Middle East and North Africa
− North America
− Latin America
Responsible for setting globally consistent
business strategies and operating models
and issuing planning guidance regarding their
businesses, and are accountable for their
profit and loss performance and for
managing their headcount.
Share responsibility for executing business
strategies set by the global businesses. They
represent the Group to customers, 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.
Legal entities
− Communications
− Company Secretaries
− Corporate Sustainability
− Finance
− HSBC Technology and Services
− Human Resources
− Internal Audit
− Legal
− Marketing
− Risk (including Compliance)
− Strategy and Planning
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.
Operate under their own boards of directors as separately capitalised entities, implementing Group strategy and delivering Group products and
services. They are required to consider risk and maintain a capital buffer consistent with the Group’s risk appetite for their relevant country or region.
They manage their own funding and liquidity within parameters set centrally.
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Business model (continued)
Organisation / Governance
Structural Reform
Banking structural reform and
recovery and resolution planning
Globally there have been a number of
developments relating to banking structural
reform and the introduction of recovery and
resolution regimes.
As recovery and resolution planning has
developed, some regulators and national
authorities have also required changes to the
corporate structures of banks. These include
requiring the local incorporation of banks or
ring-fencing of certain businesses. In the UK,
ring-fencing legislation has been enacted
requiring the separation of retail and small
and medium-sized enterprise (‘SME’)
deposits from trading activity (see below).
Similar requirements have been introduced
or are in the process of being introduced in
other jurisdictions.
Policy background to recovery and
resolution
Following the financial crisis, G20 leaders
requested that the Financial Stability Board
(‘FSB’) establish more effective arrangements
for the recovery and resolution of 28 (now
30) designated Global Systemically Important
Banks (‘G-SIBs’), resulting in a series of policy
recommendations in relation to recovery
and resolution planning, cross-border
co-operation agreements and measures
to mitigate obstacles to resolution.
In December 2013, the PRA set out rules for
the recovery and resolution of UK banks
and international banks operating in the UK.
These rules were modified as part of the
implementation of the EU Bank Recovery and
Resolution Directive from January 2015.
HSBC resolution strategy and
corporate structure changes
We have been working with the Bank of
England, the PRA and our other primary
regulators to develop and agree a resolution
strategy for HSBC. It is our view that a
resolution strategy whereby the Group
breaks up at a subsidiary bank level at the
point of resolution (referred to as a Multiple
Point of Entry strategy) rather than being
kept together as a Group at the point of
resolution (referred to as a Single Point of
Entry strategy) is the optimal approach as it
is aligned to our existing legal and business
structure.
In common with all G-SIBs, we are working
with our regulators to understand inter-
dependencies between different businesses
and subsidiary banking entities in the Group
in order to enhance resolvability.
We have initiated plans to mitigate or
remove critical inter-dependencies to further
facilitate the resolution of the Group. In
particular, in order to remove operational
dependencies (where one subsidiary bank
provides critical services to another), we have
determined to transfer such critical services
from the subsidiary banks to a separately
incorporated group of service companies
(‘ServCo group’). The ServCo group will be
separately capitalised and funded to ensure
continuity of services in resolution. A
significant portion of the ServCo group
already exists and therefore this initiative
involves transferring the remaining critical
services still held by subsidiary banks into
the ServCo group. The services will then be
provided to the subsidiary banks by the
ServCo group.
UK ring-fencing
In December 2013, the UK’s Financial
Services (Banking Reform) Act 2013 (‘Banking
Reform Act’) received Royal Assent. It
implements most of the recommendations
of the Independent Commission on Banking
(‘ICB’), which inter alia require large banking
groups to ‘ring-fence’ UK retail banking
activity in a separately incorporated banking
subsidiary (a ‘ring-fenced bank’) that is
prohibited from engaging in significant
trading activity. For these purposes, the
UK excludes the Crown Dependencies.
Ring-fencing is to be completed by 1 January
2019.
In July 2014, secondary legislation was
finalised. This included provisions further
detailing the applicable individual customers
to be transferred to the ring-fenced bank by
reference to gross worth and enterprises to
be transferred based on turnover, assets
and number of employees. In addition, the
secondary legislation places restrictions on
the activities and geographical scope of ring-
fenced banks.
In October 2014, the PRA published a
consultation paper on ring-fencing rules in
relation to legal structure, governance, and
continuity of services and facilities. The PRA
intends to undertake further consultations
and finalise ring-fencing rules in due course.
The PRA also published a discussion paper
concerning operational continuity in
resolution.
As required by the PRA’s consultation paper,
a provisional ring-fencing project plan was
presented to the UK regulators in November
2014. This plan provided for ring-fencing of
the activities prescribed in the legislation,
broadly the retail and SME services that are
currently part of HSBC Bank plc (‘HSBC
Bank’), in a separate subsidiary.
In addition, the plan reflected the operational
continuity expectations of each of the PRA’s
consultation and discussion papers by
providing for the proposed enhancement of
the ServCo group. The plan remains subject
to further planning and approvals internally
and is ultimately subject to the approval of
the PRA, FCA and other applicable regulators.
European banking structural reform
In January 2014, the European Commission
published legislative proposals on the
structural reform of the European banking
sector which would prohibit proprietary
trading in financial instruments and
commodities, and enable supervisors, at their
discretion, to require certain trading activities
to be undertaken in a separate subsidiary
from deposit taking activities.
The ring-fenced deposit taking entity would
be subject to separation from the trading
entity including requirements for separate
capital and management structures, issuance
of own debt and arms-length transactions
between entities.
The draft proposals contain a provision which
would permit derogation by member states
that have implemented their own structural
reform legislation, subject to meeting certain
conditions. This derogation may benefit the
UK in view of the Banking Reform Act.
The proposals are currently subject to
discussion in the European Parliament and
the Council. The implementation date for
any separation under the final rules would
depend upon the date on which the final
legislation (if any) is agreed.
HSBC HOLDINGS PLC
14
Governance
The Board is committed to
establishing and maintaining the
highest standards of corporate
governance wherever we operate.
Good corporate governance is
critical to HSBC’s long-term
success and sustainability.
We believe that a robust and transparent
corporate governance framework is vital
to the sustainable success of HSBC.
Strengthening our corporate governance
framework to support the successful
implementation of our Global Standards
programme is a continuing focus for the
Board.
Role of the Board and Committees
The strategy and risk appetite for HSBC is set
by the Board, which delegates the day-to-day
running of the business to the GMB. Risk
Management Meetings of the GMB are held
in addition to regular GMB meetings.
The key roles of the non-executive
committees established by the Board are
described in the chart below. The terms of
reference of the principal non-executive
Board committees are available at
www.hsbc.com/boardcommittees.
For further details on Group corporate governance,
see page 263.
The committee structure and governance framework of the HSBC Holdings Board
HSBC Holdings plc
Board of Directors
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Committee
Group Audit
Committee
Group Remuneration
Committee
Nomination
Committee
Non-executive responsibility
for oversight of, and advice
to the Board on, high level
risk-related matters and
risk governance.
Non-executive responsibility
for oversight of, and advice
to the Board on, matters
relating to financial
reporting and of internal
controls over financial
reporting.
Non-executive responsibility
for setting the overarching
principles, parameters and
governance framework 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 appointment
to the Board.
Group Management
Board
Financial System
Vulnerabilities
Committee
Conduct & Values
Committee
Philanthropic and
Community Investment
Oversight Committee5
Chairman’s
Committee
Non-executive responsibility
for oversight of, and advice
to the Board on, HSBC
policies, procedures and
standards to ensure that the
Group conducts business
responsibly and consistently
adheres to HSBC Values.
Non-executive responsibility
for the oversight of HSBC’s
philanthropic and
community investment
activities in support of
the Group’s corporate
sustainability objectives.
Acts on behalf of the Board
between scheduled Board
meetings to facilitate
ad hoc unforeseen business
requiring urgent Board
approval.
Executive management
committee which is
responsible for management
and day-to-day running of
HSBC under the direct
authority of the Board.
Non-executive responsibility
for oversight of (i) controls
and procedures to identify
areas where HSBC and
the financial system more
broadly 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 enforcement
agencies are met.
For footnote, see page 39.
GMB executive committees
Group Management Board
Risk Management Meeting
Provide strategic direction and oversight of enterprise-wide management of all risks through a strong risk governance framework, with particular focus
on defining risk appetite and monitoring the risk profile, including assessments of current and emerging risks.
Recommend and/or approve key risk limits, policies and methodologies for the management of risks.
Develop and implement Global Standards reflecting best practices for adoption across the Group.
HSBC HOLDINGS PLC
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Business model (continued)
Global businesses
Global businesses
Our four global businesses are Retail Banking
and Wealth Management (‘RBWM’),
Commercial Banking (‘CMB’), Global Banking
and Markets (‘GB&M’) and Global Private
Banking (‘GPB’). They 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 parameters 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 business
and their products and services are summarised
below.
Main business activities by global business in 2014
Global
businesses
RBWM
Liability
driven
− Deposits
− Account services
Asset
driven
− Credit and lending
Fee driven
and other
− Asset management
− Wealth solutions and
financial planning
− Broking6
− Insurance (distribution;
life manufacturing)
CMB
GB&M
GPB
− Deposits
− Payments and cash
management
− Deposits
− Payments and cash
management
− Balance sheet management
− Deposits
− Account services
− Credit and lending
− International trade and
receivables finance
− Commercial insurance
and investments
− Credit and lending
− Asset and trade finance
− Credit and lending
− Corporate finance7
− Markets8
− Securities services
− Investment management9
− Financial advisory10
− Broking6
− Corporate finance
(via GB&M)7
− Alternative investments11
– Trusts and estate planning
For footnotes, see page 39.
Retail Banking and Wealth
Management
Products and services
RBWM takes deposits and provides
transactional banking services to enable
customers to manage their day-to-day
finances and save for the future. We offer
credit facilities to assist them 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.
RBWM offers four main types of
service:
– HSBC Premier: we provide a dedicated
relationship manager to our mass affluent
customers and their immediate families,
offering specialist and tailored advice.
Customers can access emergency travel
assistance, priority telephone banking and an
online ‘global view’ of their Premier accounts
around the world.
– HSBC Advance: we offer our emerging
affluent customers control over their day-to-
day finances and access to a range of
preferential products, rates and terms. HSBC
Advance is also the start of a relationship
where we give customers support and
guidance to help them to realise their
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.
We offer investment and wealth insurance
products manufactured by Global Asset
Management, Markets and HSBC Insurance
and by selected third-party providers.
– Personal Banking: we 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.
RBWM delivers services through four principal
channels: branches, self-service terminals,
telephone service centres and digital (internet
and mobile).
Customers
RBWM serves nearly 50 million customers.
We are committed to building lifelong
relationships with our customers as they
move from one stage of their lives to the
next, offering tailored products and services
HSBC HOLDINGS PLC
16
appropriate to their diverse goals, aspirations
and ambitions. We recognise that some of
our customers face financial challenges and,
in these cases, we aim to be tolerant, fair and
understanding and to support them during
difficult times.
We put the customer at the heart of
everything we do. We constantly carry out
research and invest resources to make sure
that customers can access our services
conveniently, securely and reliably. We have
conducted work to ensure that we sell
products that meet their needs and at a price
that represents a fair exchange of value
between customers and shareholders, and
have introduced new incentive programmes
that have no formulaic links to sales volumes
but are focused on assessing how well we are
meeting our customers’ needs.
We measure customer satisfaction through
an independent market research survey
of retail banking customers in selected
countries and calculate a Customer
Recommendation Index to measure
performance. This is benchmarked against
average scores of a peer group of banks in
each market and we set targets for our
business relative to our competitor set of
banks. We expect continuous improvements
across markets in which we operate. We aim
to handle customer complaints promptly and
fairly, monitoring trends to further improve
our services.
HSBC is leading the development of the
renminbi as a trade currency, with renminbi
capabilities in more than 50 markets.
Commercial Banking
Products and services
CMB provides a broad range of banking
and financial services to enable customers
to manage and grow their businesses
domestically and internationally. We aim to
be recognised as the leading international
trade and business bank by connecting
customers to markets and by enhancing
collaboration within the Group, both
geographically and between global
businesses. A global operating model
increases transparency, enables consistency,
improves efficiency and ensures the right
outcomes for our customers.
CMB customer offerings
typically include:
– 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.
– Global Trade and Receivables Finance: we
support customers’ access to the world’s
trade flows and provide unrivalled
experience in addressing today’s most
complex trade challenges. Our
comprehensive suite of products and
services, letters of credit, collections,
guarantees, receivables finance, supply
chain solutions, commodity and structured
finance and risk distribution, can be
combined into global solutions that make it
easier for businesses to manage risk, process
transactions and fund activities throughout
the trade cycle.
– Payments and Cash Management: we are
strategically located where most of
the world’s payments and capital flows
originate. We provide local, regional and
global transaction banking services including
payments, collections, account services,
e-commerce and liquidity management via
e-enabled platforms to address the needs of
our customers.
– 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.
– Collaboration: our CMB franchise represents
a key client base for products and services
provided by GB&M, RBWM and GPB,
including foreign exchange, interest rate,
capital markets and advisory services, payroll
and personal accounts services and wealth
management and wealth transition services.
Our range of products, services and delivery
channels is tailored to meet the needs of
specific customer segments.
Customers
We have organised ourselves around our
customers’ needs and their degree of
complexity by developing three distinct
segments within CMB: Business Banking,
Mid-Market and Large Corporates.
– Business Banking now has two distinct
needs-based servicing models:
relationship managers focused on
customers with more complex needs;
and portfolio management for customers
requiring simpler, more routine products
and services.
– We have brought increased focus to
our Mid-Market customers and are
re-configuring our organisation and
resources across our home and priority
growth markets to provide enhanced
relationship management.
– For our Large Corporate customers, who
typically have complex and multi-country
needs, we provide globally managed
senior coverage teams, who are also
able to coordinate with other global
businesses.
To ensure that our customers remain at the
heart of our business, we continue to place
the utmost value on customer feedback
and customer engagement. We are now
in the 6th year of our Client Engagement
Programme, a global survey of 15 markets
designed to deepen our understanding of
our customers and reinforce our relationship
with them. This initiative, combined with
other insight programmes, helps us to
identify customers’ critical business issues
so that we can tailor solutions and services
offered to better meet their needs.
Building long-term relationships with
reputable customers is core to our growth
strategy and organisational values.
HSBC HOLDINGS PLC
17
Global Banking and Markets
Products and services
GB&M provides wholesale capital markets
and transaction banking services organised
across eight client-facing businesses.
GB&M products and services
include:
– Sales and trading services in the secondary
market are provided in Markets, which
includes four businesses organised by asset
class:
– Credit and Rates sell, trade and distribute
fixed income securities to clients including
corporates, financial institutions,
sovereigns, agencies and public sector
issuers. They assist clients in managing risk
via interest rate and credit derivatives,
and facilitate client financing via
repurchase (‘repo’) agreements.
– Foreign Exchange provides spot and
derivative products to meet the
investment demands of institutional
investors, the hedging needs of small
and medium-sized enterprises (‘SME’s),
middle-market enterprises (‘MME’s) and
large corporates in GB&M and CMB, and
the needs of RBWM and GPB customers
in our branches. Foreign Exchange trades
on behalf of clients in over 90 currencies.
– Equities provides sales and trading
services for clients, including direct
market access and financing and hedging
solutions.
– Capital Financing offers strategic financing
and advisory services focusing on a client’s
capital structure. Products include debt and
equity capital raising in the primary market,
transformative merger and acquisition
advisory and execution, and corporate
lending and specialised structured financing
solutions such as leveraged and acquisition
finance, asset and structured finance, real
estate, infrastructure and project finance,
and export credit.
– Payments and Cash Management helps
clients move, control, access and invest their
cash. Products include non-retail deposit
taking and international, regional and
domestic payments and cash management
services.
– Securities Services provides custody and
clearing services to corporate and
institutional clients and funds administration
to both domestic and cross-border investors.
– Global Trade and Receivables Finance
provides trade services on behalf of GB&M
clients to support them throughout their
trade cycle.
In addition to the above, Balance Sheet
Management is responsible for the
management of liquidity and funding for the
Group. It also manages structural interest
rate positions within the Markets limit
structure.
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Business model (continued)
Global businesses / Employees
Customers
GB&M provides tailored financial solutions
to major governmental, corporate and
institutional clients worldwide. Managed as
a global business with regional oversight,
GB&M operates a long-term relationship
management approach to build a full
understanding of clients’ financial
requirements and strategic goals.
Client coverage is centralised in Banking,
which contains relationship managers
organised by sector, region and country who
work to understand client needs and provide
holistic solutions by bringing together our
broad array of product capabilities and
utilising our extensive global network.
Our goal is to be a ‘Top 5’ bank to our priority
clients. We strive to achieve this goal by
assembling client coverage teams across our
geographical network who work alongside
product specialists in developing individually
tailored solutions to meet client needs.
Our client coverage and product teams are
supported by a unique customer relationship
management platform and comprehensive
client planning process. Our teams utilise
these platforms to better serve global client
relationships, which facilitates our ability
to connect clients to international growth
opportunities.
Global Private Banking
Products and services
Drawing on the strength of HSBC 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.
Our products and services include Private
Banking, Investment Management and
Private Wealth Solutions.
GPB products and services include:
– 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 and brokerage across asset classes.
This includes a complete range of investment
vehicles, portfolio management, securities
services and alternatives.
– Private Wealth Solutions comprise trusts
and estate planning, designed to protect
wealth and preserve it for future
generations.
Customers
GPB serves the needs of high net worth and
ultra-high net worth individuals and their
families in our home and priority growth
markets.
Within these broad segments, GPB has teams
dedicated to serving HSBC’s global priority
clients, which include our most significant
Group relationships, and other clients who
benefit from our private banking proposition
and services offered by CMB and GB&M. Our
aim is to build and grow connectivity with
these customers Group-wide, establishing
strong relationships across all global
businesses to meet clients’ needs. We aim to
build on HSBC’s commercial banking heritage
to be the leading private bank for high net
worth business owners.
Relationship managers are the dedicated
points of contact for our clients, tailoring
services to meet their individual needs. They
develop a thorough understanding of their
clients – including their family, business,
lifestyle and ambitions – and introduce them
to specialists equipped to help build the best
financial strategy. Specialists include:
–
–
investment advisers, who discuss
investment ideas in line with a client’s
investment and risk profile;
credit advisers, who provide expertise in
complex liquidity and lending
requirements; and
– wealth planners, who have the
knowledge and expertise to manage
wealth now and for future generations.
The use of digital platforms continues to
grow in line with strong demand from self-
directed clients. These platforms enable
clients to access account information,
investment research and online transactional
capabilities directly. We continue to invest in
digital systems to better meet clients’
evolving expectations and needs.
Employees
Successfully enhancing a values-
led high performance culture in
HSBC is critical to implementing
Global Standards sustainably. We
continue to focus on embedding
HSBC Values in every decision
and interaction between
colleagues and with customers.
– We aim to attract, retain and motivate
the very best people, and our
remuneration policy supports this
endeavour.
– We actively manage succession planning
by defining the capabilities we need and
complement this by identifying talented
individuals and ensuring they are
provided with appropriate career and
development opportunities to fulfil their
potential in HSBC.
– We provide training and development
opportunities to enable employees to
acquire the technical and leadership
skills needed to enhance their careers.
– We are committed to a diverse and
inclusive culture reflective of our
customer base.
– We encourage employees to engage in
the local communities in which they
work.
At the end of 2014 we had a total workforce
of 266,000 full-time and part-time employees
compared with 263,000 at the end of 2013
and 270,000 at the end of 2012. Our main
centres of employment were as follows
(approximate numbers):
Other
73,000
France
9,000
US
15,000
UK
48,000
India
32,000
Hong Kong
30,000
Mexico
17,000
Mainland
China
21,000
Brazil
21,000
HSBC HOLDINGS PLC
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Profile of leadership
At the date of this Report, the Executive
Management of HSBC consists of four
Executive Directors, 11 Group Managing
Directors and 60 Group General Managers.
Of these, 13 (17%) are female. This
leadership team is based in 17 different
countries and comprises 13 different
nationalities. 71% have served with HSBC
for more than 10 years and the total
average tenure is 20 years.
HSBC has 13 non-executive Directors.
Employment proposition
HSBC Values
In 2014, education on HSBC Values
continued for all levels of employees
through induction and other training
programmes that covered relevant
technical, management and leadership
skills. We require a high behavioural
standard from all our employees, and our
focus on values and courageous integrity
continues to be instilled at every level in
the Group. For example, our employee
induction programme has been refreshed
to further reinforce courageous integrity
and meeting the needs of our customers.
Also, an assessment of adherence to our
values and supporting behaviours has been
formalised as part of our performance
appraisal process for all employees. In
2014, some 145,000 employees received
values training in addition to 135,000
employees in 2013. A further 100,000
employees are expected to receive this
training in 2015. A number of employees
left the Group for breaching our values.
Employee development
The development of employees is essential
if our businesses and operations are
to strengthen and prosper. We take
a systematic approach to identifying,
developing and deploying talented
employees to ensure we have a robust
supply of high calibre individuals with the
values, skills and experience for current
and future senior management positions.
We keep our approach to training current
and under constant review in order to
improve the quality of our curricula and
ensure employees are equipped with the
technical and leadership skills to operate in
a global organisation. We are standardising
our training to help employees provide a
consistently high quality experience for
customers in all our markets and support
the mitigation of current and emerging
risks and the Global Standards programme.
Employee engagement
Strong employee engagement leads
to positive commercial outcomes and
underpins improved business performance,
increased customer satisfaction, higher
productivity, talent retention and reduced
absenteeism.
We assess our employees’ engagement
through our Global People Surveys, which
were held annually from 2007 to 2011 and
biennially thereafter. The latest Survey, in
2013, focused on supporting a values-led
high performance culture by assessing
if our employees were engaged in the
Group’s purpose and felt able to deliver
on our ambition to become the world’s
leading international bank.
Our employees’ engagement continues
to be positive when compared with the
financial services industry and sector
best-in-class benchmark. The overall
engagement score in 2013 was 68%, which
was four percentage points ahead of the
financial services industry norm and eight
points behind the best-in-class benchmark.
Strong scores were registered in risk
awareness (81% and nine points above
best-in-class benchmark), leadership
capability (67%) and living the HSBC Values
(77%). Employee development significantly
improved from six points below best-in-
class in 2011 to three points above in 2013.
Aspects that required attention included
pride and advocacy, which were 12 and 13
points, respectively, below best in class
norms and had fallen from 2011 levels.
The next Global People Survey will be
conducted in 2015.
HSBC also conducts a regular survey,
Snapshot, which is sent to one quarter
of our employees every three months.
Insights from Snapshot provide a timely
indication of employee sentiment towards
the organisation, including signifiers of
engagement. As at the end of September
2014, the favourable responses to selected
questions were: support for HSBC’s
strategy, 81%; intend to still be working
at HSBC in three years’ time, 74%; pride
in working for HSBC, 79%; and willingness
to recommend HSBC to other senior
professionals as a great place to further
their career, 68%. Aspects for further
attention include helping employees see
the positive effects of HSBC’s strategic
priorities, 62%.
Succession planning
Our talent strategy aims to ensure that
high-quality candidates are available to fill
key positions and meet business needs
across all areas of the Group. We directly
align succession planning with talent
management, individual development
and career planning. The succession plan
defines the number, distribution, types
of roles and capabilities needed by HSBC,
and talented individuals are then aligned
to these roles. This approach in turn
defines the individual’s career path and
development plan. In 2014, we assessed
104 senior employees with the potential
to become leaders and determined their
career development needs. Potential
successors must demonstrate an
understanding of our Global Standards
and exemplify HSBC Values.
Our talent strategy supports our aspirations
in emerging markets, where in 2014 the
representation of those defined as talent
was 34%. We closely monitor local
nationals identified as short-term and
medium-term successors to key leadership
roles so as to improve the proportion of
local nationals in senior management over
the medium term.
Diversity and inclusion
HSBC is committed to a diverse and
inclusive culture where employees can be
confident their views are encouraged, their
concerns are attended to, 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
advancement is based on merit. Our
diversity helps us support our increasingly
diverse customer base and acquire,
develop and retain a secure supply of
skilled and committed employees.
Oversight of our diversity and inclusion
agenda resides with senior executives
on the Group Diversity Committee,
complemented by a number of subsidiary
People/Diversity Committees. We have
over 55 employee network groups
representing gender, ethnicity, age,
sexuality, disability, religion, culture,
working parents, health and community
volunteering. These groups are
instrumental in driving an inclusive
culture and maintaining effective dialogue
between management and employees.
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HSBC HOLDINGS PLC
19
Business model (continued)
Employees / Risk overview
Gender balance
An area of continued focus is gender
representation, particularly at senior levels of
our organisation. We are addressing bias in
hiring, promotions and talent identification,
expanding mentoring and sponsorship,
introducing better support for returning
parents and increasing flexible working
opportunities.
The gender balance for HSBC Directors and
employees at 31 December 2014 was as
follows:
Gender balance
Headcount
Male Female
4
–
Total
4
6
10
6,719
12
16
8,795
120,496 136,966 257,462
6
6
2,076
Executive Directors
Non-executive
Directors
Directors
Senior employees
Other employees
Total
127,225 139,048 266,273
Executive Directors
Non-executive
Directors
Directors
Senior employees
Other employees
Total
%
Male Female
–
100
Total
100
50.0
62.5
76.4
46.8
47.8
50.0
37.5
23.6
53.2
52.2
100
100
100
100
100
Overall, Group-wide female representation
was 52.2% at 31 December 2014, largely
unchanged on 2013. Female representation
at senior levels rose from 22.7% in 2013 to
23.6% in 2014, and our target is to improve
this to 25% by 2015. The proportion of
females in our talent pipeline improved from
32.2% in 2013 to 34.0% in December 2014
and female representation on the GMB was
20% (three out of fifteen) in December 2014.
The average age of our employees was 36.2
years and average tenure was 8.5 years.
Unconscious bias
It is recognised that social behaviour may
be driven by stereotypes that operate
automatically and therefore unconsciously.
These stereotypes can lead to a less inclusive
environment. We are addressing this by
incorporating inclusive behaviours in
our processes and continue to deliver
‘unconscious bias’ training to 8,700 managers
and 18,500 employees in 2014 (8,300
managers and 50,000 employees in 2013).
In 2015, our diversity and inclusion priorities
will continue to address unconscious bias
through targeted education, encourage the
career development of diverse talent with
a continued emphasis on gender and local
nationals and extend inclusion to cover wider
aspects of diversity, for example, sexual
orientation, ethnicity and disability. We
continue to enhance a bias-free approach
to performance management and improve
internal and external candidate lists,
connecting and utilising our Employee
Resource Network Groups globally and
maintaining a consistent global framework
of governance and sponsorship to drive a
diverse and inclusive culture throughout
the Group.
Health, welfare and safety
We regard the physical and psychological
health, welfare and safety of our people as
being of the utmost importance. We recently
introduced a global occupational health
framework which requires the proactive
management of employee welfare and
encourages the sharing of best practice
across the Group. Between August 2012
and the end of 2014, 96% of assigned HSBC
employees carried out our bi-annual online
health and safety training.
We run a number of employee assistance
programmes tailored to local requirements.
Skilled professional counsellors are available
on free phone lines 24 hours a day and seven
days a week to help employees manage
personal or work-related problems that
create stress and affect their work. Free
face-to-face counselling is also provided,
as is support for partners and dependents.
Programmes are offered in the UK, Hong
Kong, North America and India.
Whistleblowing
HSBC operates a global Compliance
disclosure line (telephone and email) which
is available to allow employees to make
disclosures when the normal channels for
airing grievances or concerns are unavailable
or inappropriate. The Compliance disclosure
line is available to capture employee
concerns on a number of matters, including
breaches of law or regulation, allegations of
bribery and corruption, failure to comply
with Group policies, suspicions of money
laundering, breaches of internal controls
and fraud or deliberate error in the financial
records of any Group company. Global
Regulatory Compliance is responsible for the
operation of the Compliance disclosure line
and the handling of disclosure cases. Cases
are reviewed and referred for appropriate
investigation. Whistleblowing cases may also
be raised directly with senior executives, line
managers, Human Resources and Security
and Fraud.
Additional local whistleblowing lines are
in place in several countries, operated by
Security and Fraud, Human Resources and
Regulatory Compliance. Disclosures made on
the local whistleblowing lines are escalated
to Global Regulatory Compliance or Financial
Crime Compliance. Global Regulatory
Compliance also monitors an external email
address for complaints regarding accounting
and internal financial controls or auditing
matters (accountingdisclosures@hsbc.com
highlighted under Investor Relations and
Governance on www.hsbc.com). Cases
received are escalated to the Group Chief
Accounting Officer, Group Finance Director
or Group Chief Executive as appropriate.
HSBC’s policies and procedures for capturing
and responding to whistleblowing disclosures
relating to accounting or auditing matters are
overseen by the Group Audit Committee.
Those relating to other whistleblowing
disclosures are overseen by the Conduct &
Values Committee.
Disclosures and actions taken are reported
on a periodic basis to the Conduct & Values
Committee, Group Audit Committee and the
Financial System Vulnerabilities Committee
in respect of matters relating to financial
crime compliance.
HSBC HOLDINGS PLC
20
Risk overview
All our activities involve,
to varying degrees, the
measurement, evaluation,
acceptance and management of
risk or combinations of risks.
As a provider of banking and financial
services, we actively manage risk as a
core part of our day-to-day activities. We
employ a risk management framework at
all levels of the organisation, underpinned
by a strong risk culture and reinforced by
HSBC Values and our Global Standards. It
ensures that our risk profile remains
conservative and aligned to our risk
appetite, which describes the type and
quantum of risk we are willing to accept
in achieving our strategic objectives.
Risk and our strategic priorities
The Group’s three strategic priorities are
reflected in our management of risk.
Grow the business and dividends – we
ensure risk is maintained at an acceptable
and appropriate level while creating value
and generating profits.
Implement Global Standards – we are
transforming how we detect, deter and
protect against financial crime through the
deployment of Global Standards, which
govern how we do business and with whom.
Streamline processes and procedures – our
disposal programme has made HSBC easier
to manage and control. By focusing on
streamlining our processes and procedures,
we are making HSBC less complex and
complicated to operate, creating capacity
for growth.
Our business and operating models are described
on page 12. For further information on Global
Standards, see page 26.
Risk in 2014
Concerns remained during 2014 over the
sustainability of economic growth in both
developed and emerging markets, while
geopolitical tensions rose or remained high in
many parts of the world.
We continued to sustain a conservative
risk profile based on our core philosophy
of maintaining balance sheet, liquidity and
capital strength by reducing exposure to
the most likely areas of stress:
– we managed selectively our exposures to
sovereign debt and bank counterparties
to ensure that the overall quality of the
portfolio remained strong;
– we regularly assessed higher risk
countries and sectors and adjusted our
risk appetite, limits and exposures
accordingly;
– we use stress testing, both internal and
regulatory programmes, to assess
vulnerabilities and proactively adjust our
portfolios, where required;
– we continued to reposition and exit
certain portfolios through our six filters
process (see page 12) and our focus on
certain products or customer segments;
– we made our client selection filters more
robust in managing the risk of financial
crime; and
– we mitigated risks, for example
reputational and operational, when they
were forecast to exceed our risk appetite.
The diversification of our lending portfolio
across global businesses and geographical
regions, together with our broad range of
products, ensured that we were not overly
dependent on a limited number of countries
or markets to generate income and growth.
We monitored a range of key risk metrics in
2014 as part of our risk appetite process,
supported by a limit and control framework.
Risk appetite is discussed on page 25.
Our approach to stress testing is discussed on
page 117 and regulatory stress testing programmes
on page 125.
Risks incurred in our business
activities
Our principal banking risks are credit risk,
liquidity and funding risks, market risk,
operational risk, compliance risk, fiduciary
risk, reputational risk, pension risk and
sustainability risk. We also incur insurance
risk.
The chart overleaf provides a high level guide
to how our business activities are reflected in
our risk measures and in the Group’s balance
sheet. The third-party assets and liabilities
indicate the contribution each business
makes to the balance sheet, while RWAs
illustrate the relative size of the risks incurred
in respect of each business.
For a description of our principal risks, see
page 114.
HSBC HOLDINGS PLC
21
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Business model (continued)
Risk overview
Exposure to risks arising from the business activities of global businesses
HSBC
Other
(including Holding Company)
Global
business
Business
activities
RBWM
CMB
GB&M
GPB
− Deposits
− Accounts services
− Credit and lending
− Asset management
− Wealth solutions and
financial planning
− Broking
− Insurance
(distribution; life
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
− Investment
management
− Financial advisory
− Broking
− Corporate finance
(via GB&M)
− Alternative
investments
− Trusts and estate
planning
− HSBC holding
company and
central operations
Balance
sheet 12
− Assets
− Customer
accounts
US$bn
499
581
− Assets
− Customer
accounts
US$bn
373
364
− Assets
− Customer
accounts
US$bn
1,840
319
− Assets
− Customer
accounts
US$bn
88
85
− Assets
− Customer
accounts
US$bn
165
1
RWAs
− Credit risk
− Operational risk
US$bn
168
37
− Credit risk
− Operational risk
US$bn
399
33
US$bn
326
− Credit risk
− Operational risk
US$bn
17
4
− Credit risk
− Operational risk
US$bn
45
–
− Credit risk
− Counterparty
credit risk
− Operational risk
− Market risk
90
44
56
Risk
profile
Liquidity and funding risk (page 163), Pension risk (page 200), Fiduciary risk (page 200), Reputational risk (page 199),
Compliance risk (page 189), Sustainability risk (page 201) and Insurance risk (page 190). The latter is predominantly in RBWM and CMB.
For footnote, see page 39.
For further information on credit risk, see page 127; capital and risk-weighted assets, see page 238; market risk, including value at risk, see page 175; and
operational risk see page 186.
Top and emerging risks
Identifying and monitoring top and emerging
risks are integral to our approach to risk
management.
assessment of our top and emerging risks is
informed by a comprehensive suite of risk
factors which may result in our risk appetite
being revised.
within a number of our top and emerging
risks, it has now been disclosed as a
standalone risk, as the risks in this area
continue to heighten.
We define a ‘top risk’ as being a current,
emerged risk which has arisen across any
of our risk categories, global businesses
or regions 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 time
horizon. We consider an ‘emerging risk’ to be
one with potentially significant but uncertain
outcomes which may form and crystallise
beyond a year, in the event of which it could
have a material effect on our ability to
achieve our long-term strategy.
Our top and emerging risk framework
enables us to identify and manage current
and forward-looking risks to ensure our risk
appetite remains appropriate. The ongoing
During 2014, senior management paid
particular attention to a number of top
and emerging risks. Our current ones are
summarised overleaf.
We made a number of changes to our top
and emerging risks during 2014 to reflect
our assessment of their effect on HSBC.
‘Macroeconomic risks arising from an
emerging market slowdown’ was replaced
by ‘Economic outlook and government
intervention’ as developed economies
demonstrated signs of stress in the second
half of 2014. ‘Third party risk management’
was identified as an emerging risk due to the
risks associated with the use of third-party
service providers, which may be less
transparent and more challenging to manage
or influence. While ‘People risk’ is inherent
When the top and emerging risks listed
below resulted in our risk appetite being
exceeded, or had the potential to exceed our
risk appetite, we took steps to mitigate them,
including reducing our exposure to areas of
stress. Given the impact on the Group of
breaching the US Deferred Prosecution
Agreement (‘US DPA’), significant senior
management attention was given to tracking
and monitoring our compliance with its
requirements and improving policies,
processes and controls to help minimise
the risk of a breach.
For a detailed account of these risks see page 118
and for a summary of our risk factors, see
page 113.
HSBC HOLDINGS PLC
22
Top and emerging risks –
T
/
E
Risk
Description
Mitigants
Macroeconomic and geopolitical risk
Economic outlook and government
intervention
Increased geopolitical risk
E
E
Weak economic growth in both developed and
emerging market countries could adversely affect
global trade and capital flows and our profits from
operations in those countries.
Our operations are exposed to risks arising from
political instability and civil unrest in a number of
countries, which may have a wider effect on
regional stability and regional and global
economies.
We closely monitor economic developments in
key markets and appropriate action is taken as
circumstances evolve.
We monitor the geopolitical and economic
outlook, particularly in countries where we have
material exposures and/or a physical presence.
Macro-prudential, regulatory and legal risks to our business model
T
T
T
Regulatory developments affecting our
business model and Group profitability
Governments and regulators continue to develop
policies which may impose new requirements,
particularly in the areas of capital and liquidity
management and business structure.
We engage closely with governments and
regulators in the countries in which we operate
to help ensure that the new requirements are
considered properly.
Regulatory investigations, fines,
sanctions, commitments and consent
orders 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.
Breach of the US DPA may allow the US
authorities to prosecute HSBC with respect to
matters covered thereunder.
Programmes to enhance the management of
conduct are progressing in all global businesses
and functions.
We continue to take steps to address the
requirements of the US DPA and other consent
orders in consultation with the relevant regulatory
agencies.
Dispute risk
HSBC is party to legal proceedings arising out of its
normal business operations which could give rise
to potential financial loss and significant
reputational damage.
We identify and monitor emerging regulatory and
judicial trends.
We are enhancing our financial crime and
regulatory compliance controls and resources.
Risks related to our business operations, governance and internal control systems
T
T
E
T
T
T
T
Heightened execution risk
People risk
The complexity of projects to meet regulatory
demands and risks arising from business and
portfolio disposals may affect our ability to
execute our strategy.
Significant demands are being placed on the
human capital of the Group due to the extent of
the regulatory reform agenda.
We have strengthened our prioritisation and
governance processes for significant projects.
We have reviewed our remuneration policy to
ensure we can remain competitive and retain our
key talent and continue to increase the level of
specialist resources in key areas.
Third-party risk management
Risks arising from the use of third-party service
providers may be less transparent and more
challenging to manage or influence.
We are strengthening our risk management
processes and procedures in relation to the use
and monitoring of third-party service providers.
Internet crime and fraud
HSBC is increasingly exposed to fraudulent and
Information security risk
Data management
Model risk
criminal activities as a result of increased usage of
internet and mobile channels.
HSBC and other multinational organisations
continue to be the targets of cyber attacks.
New regulatory requirements necessitate more
frequent and granular data submissions, which
must be produced on a consistent, accurate and
timely basis.
Adverse consequences could result from decisions
based on incorrect model outputs or from models
that are poorly developed, implemented or used.
We continually assess these threats as they evolve
and adapt our controls and defences to mitigate
them.
We have invested significantly in staff training and
enhanced multi-layered controls to protect our
information and technical infrastructure.
Our Data Strategy Board is driving consistent data
aggregation, reporting and management across
the Group.
Model development, usage and validation are
subject to governance and independent review.
HSBC HOLDINGS PLC
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Business model (continued)
Risk overview
How we manage risk
Managing risk effectively is fundamental
to the delivery of our strategic priorities.
Our enterprise-wide risk management
framework fosters the continuous
monitoring of the risk environment and
an integrated evaluation of risks and their
interactions. It also ensures that we have
a robust and consistent approach to risk
management at all levels of the organisation
and across all risk types.
This framework is underpinned by a strong
risk culture, which is instrumental in aligning
the behaviours of individuals with the
Group’s attitude to assuming and managing
risk and ensuring that our risk profile remains
in line with our risk appetite and strategy. It is
reinforced by the HSBC Values and our Global
Standards.
Our approach to managing risk is
summarised below.
Driving our risk culture
Risk Management Framework
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Role of HSBC Board
Approves risk appetite, plans and performance targets (page 270).
Role of Board Committees
Group Risk
Committee
(‘GRC’)
Financial System
Vulnerabilities Committee
(‘FSVC’)
Conduct & Values
Committee
(‘CVC’)
GRC advises on risk appetite, risk governance and other high-level risk
related matters (page 280).
FSVC advises on financial crime and financial systems abuse (page 282).
CVC advises on polices and procedures to ensure we adhere to HSBC
Values (page 286).
Other sub-committees of the Board are described on page 276.
Role of senior management
Formulate and implement strategy within risk appetite.
Responsible for risk governance and controls.
Risk appetite
Describes the risks we are prepared to accept based on our long-term
strategy, core risk principles, HSBC Values and risk management
competencies (page 205).
Risk governance framework
Three lines of defence model
People
Independent Risk function
Our risk governance framework ensures appropriate oversight of and
accountability for management of risk (page 204).
Our risk culture empowers our people to do the right thing for our
customers, reinforced by our approach to remuneration (page 34).
Our ‘Three lines of defence’ model defines roles and responsibilities
for risk management (page 186).
An independent Risk function ensures the necessary balance in
risk/return decisions (page 204).
Risk management processes and procedures
Processes to identify, monitor and mitigate risks that exceed our
risk appetite (page 117).
Top and
emerging risks
Risk map
Stress testing
Principal banking and insurance risks
Risks arising from our business activities that are measured,
monitored and managed (page 114).
Underpinned by HSBC Values
HSBC HOLDINGS PLC
24
Risk appetite
The Group’s risk appetite statement (‘RAS’) is
a key component in the management of risk.
It describes the types and quantum of risks
that we are willing to accept in achieving our
medium and long-term strategic objectives.
The RAS is approved by the Board on the
advice of the Group Risk Committee.
Our risk appetite is established and
monitored via the Group risk appetite
framework, which provides a globally
consistent and structured approach to the
management, measurement and control
of risk in accordance with our core risk
principles. The framework outlines the
processes, policies, metrics and governance
bodies and how to address risk appetite
as part of day-to-day business and risk
management activities.
The RAS guides the annual planning process
by defining the desired forward-looking risk
profile of the Group in achieving our strategic
objectives and plays an important role in our
six filters process. Our risk appetite may be
revised in response to our assessment of the
top and emerging risks we have identified.
Quantitative and qualitative metrics are
assigned to a number of key categories
including returns, capital, liquidity and
funding, securitisations, cost of risk and
intra-Group lending, risk categories such
as credit, market and operational risk,
risk diversification and concentration, and
financial crime compliance. These measures
are reviewed annually for continued
relevance.
Measurement against the metrics:
– guides underlying business activity,
ensuring it is aligned to risk appetite
statements;
– enables the key underlying assumptions
to be monitored and, where necessary,
adjusted through subsequent business
planning cycles;
Risk appetite is embedded in day-to-day risk
management decisions through the use of
risk tolerances and limits for material risk
types. This ensures that our risk profile
remains aligned with our risk appetite,
balancing risk and returns.
Global businesses and geographical regions
are required to align their risk appetite
statements with the Group’s.
Some of the core metrics that were
measured, monitored and presented
monthly to the Risk Management Meeting of
the GMB during 2014 are tabulated below:
Key risk appetite metrics
2014
target
actual
Common equity
tier 1 ratio1
Return on equity
RoRWA13
Cost efficiency ratio
Advances to customer
accounts ratio
Cost of risk
(loan impairment
charges)
≥ 10%
Trending
upwards to
12-15%
by 2016
2.2-2.6%
Mid-50s
Below 90%
Below 15%
of operating
income
11.1%
7.3%
1.5%
67.3%
72.2%
5.4%
For footnotes, see page 39.
In the early part of 2014, we undertook our
annual review of our risk appetite statement.
It was approved by the Risk Managament
Meeting of the GMB in January 2014 and the
HSBC Holdings Board in February 2014. The
core aspects of the RAS were incorporated
into the 2014 scorecards for the Executive
Directors, as set out on page 405 of the
Annual Report and Accounts 2013.
We also strengthened the Group’s RAS in
2014 by incorporating into it measures
related to the core financial crime
compliance principles of deterrence,
detection and protection.
Targets for 2015 are discussed on page 32.
– allows the business decisions needed to
mitigate risk to be promptly identified; and
For details of requirements under CRD IV, see
page 239.
– informs risk-adjusted remuneration.
How risk affects our performance
The management of risk is an integral part of
all our activities. Risk measures our exposure
to uncertainty and the consequent variability
of return.
Credit metrics in our retail portfolio benefited
from the continued sale of non-strategic
portfolios, an improved economic
environment across many markets and
growth in Asia and in the core business
in the US, while our wholesale portfolios
remained broadly stable with an overall
favourable change in key impairment
metrics. Loan impairment charges fell
for reasons outlined on page 29.
Operational losses rose, driven by UK
customer redress programme charges and
settlements relating to legal and regulatory
matters. There are many factors which could
affect estimated liabilities with respect to
legal and regulatory matters and there
remains a high degree of uncertainty as to
the eventual cost of fines, penalties and
redress for these matters.
HSBC is party to legal proceedings,
investigations and regulatory matters in a
number of jurisdictions arising out of our
normal business operations. Our provisions
for legal proceedings and regulatory
matters and for customer remediation
at 31 December 2014 totalled US$4.0bn.
The reported results of HSBC reflect the
choice of accounting policies, assumptions
and estimates that underlie the preparation
of our consolidated financial statements and
reflect our assessment of the financial impact
of risks affecting the Group.
For a description of material legal proceedings and
regulatory matters, see Note 40 on the Financial
Statements on page 446.
Provisions for legal proceedings and regulatory
matters and for customer remediation are disclosed
in Note 29 on the Financial Statements on
page 420.
For details of operational losses, see page 188.
For details of our critical accounting estimates and
judgements, see page 62.
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Strategic priorities
Grow the business / Implement Global Standards
Strategic priorities
We previously defined three
interconnected and equally
weighted priorities for 2014
to 2016 to help us deliver our
strategy:
− grow the business and dividends;
− implement Global Standards; and
− streamline processes and
procedures.
Each priority is complementary and
underpinned by initiatives within our day-
to-day business. Together, they create
value for our customers and shareholders
and contribute to the long-term
sustainability of HSBC.
In the process, we shall maintain a robust,
resilient and environmentally sustainable
business in which our customers can have
confidence, our employees can take pride
and our communities can trust.
Grow the business
and dividends
In growing the business and
dividends, our targets are to
grow risk-weighted assets in line
with our organic investment
criteria, progressively grow
dividends, while reducing the
effect of legacy and non-strategic
activities on our profit and RWAs.
Our strategy is to take advantage of the
continuing growth of international trade
and capital flows, and wealth creation,
particularly in Asia, the Middle East and
Latin America. We aim to achieve growth
by leveraging our international network
and client franchise to improve HSBC’s
market position in products aligned to
our strategy.
To facilitate this growth, we recycle RWAs
from low into high performing businesses
within our risk appetite.
In 2014, we launched a number of
investment priorities to capitalise on our
global network and accelerate organic
growth:
− Global Trade and Receivables Finance:
We are investing in our sales and
product capabilities, particularly for high
growth products and trade corridors,
and expanding in trade hubs as a means
of reinforcing HSBC’s leading position
in trade.
− Payments and Cash Management:
We aim to deliver improved client
coverage and products via investments
in better sales coverage and customer
proposition and mobile enhancements.
− Foreign Exchange: We aim to improve
our services to clients and efficiency
by improving our electronic trading
platforms and capabilities.
− Renminbi: Building on our market-
leading position, we are investing to roll
out our renminbi servicing capabilities
internationally, with the aim of
capturing a larger share of offshore
renminbi foreign exchange and capital
markets opportunities.
Industry awards and market share gains
have validated our strategy. Our market
shares in core international connectivity
products such as Payments and Cash
Management, Global Trade and
Receivables Finance and Foreign Exchange
have all improved consistently over the
past three years. For three consecutive
years, including 2014, HSBC has been
voted the top global cash manager for
corporate and financial institutions in the
Euromoney Cash Management survey.
In the same survey, HSBC was voted best
global cash manager for non-financial
institutions for a second consecutive year
in 2014. We have also been voted the
‘Best Overall for Products and Services’
by Asiamoney in its Offshore Renminbi
Services survey every year since the
survey’s inception in 2012.
We aim to continue investing in key growth
markets and align global resources to city
clusters with fast-growing international
revenue pools:
− UK and Hong Kong as our home
markets: Our goal is to strengthen and
develop our home market position in
key products, such as mortgages and
personal lending.
− China: Mainland China continues to be
of strategic significance for HSBC and
presents a structural long-term growth
opportunity. We therefore continue to
invest in organic growth, particularly
in Guangdong and other economically
important regions. We strive to invest
and be the first to capture opportunities
that may arise from regulatory changes
such as the introduction of the Shanghai
Free-Trade Zone.
− US and Germany: We continue to
improve our position in the world’s
largest economy and in Europe’s leading
HSBC HOLDINGS PLC
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trade nation through the expansion of
our corporate franchise. In 2014, we
broadened our customer base by
enhancing our products, widening our
geographical coverage and adjusting our
risk appetite. International revenues
increased through deeper relationships
with customers and developing cross-
business opportunities.
Our universal banking model enables
us to generate revenues across global
businesses. In 2014, cross-business
collaboration revenues grew in all of our
identified opportunities, except for Markets
revenue from CMB customers primarily
due to lower foreign exchange volatility.
Approximately half of the total collaboration
revenues for the year came from Markets
and Capital Financing products provided to
CMB customers. In GPB, net new money
resulting from cross-business client
referrals doubled from 2013.
Implement Global
Standards
At HSBC, we are adopting
the highest or most effective
financial crime controls and
deploying them everywhere
we operate.
Two new global policies set out these
controls for anti-money laundering (‘AML’)
and sanctions. They are our Global
Standards.
In line with our ambition to be recognised
as the world’s leading international bank,
we aspire to set the industry standard for
knowing our customers and detecting,
deterring and protecting against financial
crime. Delivering on this means introducing
a more consistent, comprehensive approach
to managing financial crime risk – from
understanding more about our customers,
what they do and where and why they
do it, to ensuring their banking activity
matches what we would expect it to be.
We aim to apply our financial crime risk
standards throughout the lifetime of our
customer relationships: from selecting and
onboarding customers to managing our
ongoing relationships and monitoring and
assessing the changing risk landscape in
the bank.
Our new global AML policy is designed to
stop criminals laundering money through
HSBC. It sets out global requirements for
carrying out customer due diligence,
monitoring transactions and escalating
concerns about suspicious activity.
Enterprise-wide risk assessment
We have conducted our second annual
enterprise-wide assessment of our risks
and controls related to sanctions and
AML compliance. The outcome of this
assessment has formed the basis for risk
management planning, prioritisation and
resource allocation for 2015.
The Monitor
Under the agreements entered into with
the US Department of Justice (‘DoJ’), the
UK FCA (formerly the Financial Services
Authority (‘FSA’)) and the US Federal
Reserve Board (‘FRB’) in 2012, including the
five-year Deferred Prosecution Agreement
(‘US DPA’), an independent compliance
monitor (‘the Monitor’) was appointed to
evaluate our progress in fully implementing
our obligations and produce regular
assessments of the effectiveness of our
Compliance function.
Michael Cherkasky began his work as
the Monitor in July 2013, charged with
evaluating and reporting upon the
effectiveness of the Group’s internal
controls, policies and procedures as
they relate to ongoing compliance with
applicable AML, sanctions, terrorist
financing and proliferation financing
obligations, over a five-year period.
HSBC is continuing to take concerted action
to remedy AML and sanctions compliance
deficiencies and to implement Global
Standards. HSBC is also working to
implement the agreed recommendations
flowing from the Monitor’s 2013 review.
We recognise we are only part way through
a journey, being two years into our five-year
US DPA. We look forward to maintaining a
strong, collaborative relationship with the
Monitor and his team.
Our new global sanctions policy aims
to ensure that we comply with local
sanctions-related laws and regulations
in countries where we operate, as well
as with global sanctions imposed by the
UN Security Council, European Union, US,
UK and Hong Kong governments.
In many cases, our policy extends beyond
what we are legally required to do,
reflecting the fact that HSBC has no
appetite for business with illicit actors.
We expect our Global Standards to
underpin our business practices now and
in the future, and to provide a source of
competitive advantage. Global Standards
are expected to allow us to:
– strengthen our response to the ongoing
threat of financial crime;
– make consistent – and therefore
simplify – the ways by which we monitor
and enforce high standards at HSBC;
– strengthen policies and processes that
govern how we do business and with
whom; and
– ensure that we consistently apply our
HSBC Values.
Implementing Global Standards
Each global business and Financial Crime
Compliance have identified where and how
they need to enhance existing procedures
to meet the Global Standards. They are
now in the process of deploying the
systems, processes, training and support
to put the enhanced procedures into
practice in each country of operation.
This is being done in two stages:
– delivering policy components with
limited infrastructure dependency
according to an accelerated timeline;
and
– implementing, in parallel, long-term
strategic control enhancements and
associated enhancements to
infrastructure.
During 2014, we made material progress
in a number of areas, including:
– global implementation of customer
selection policies and governance;
– first deployment of enhanced customer
due diligence procedures for gathering
and verifying customer information;
– integration of global sanctions screening
lists into our customer and transaction
screening tools;
– targeted training for the highest risk
roles and all-employee campaigns to
raise awareness of financial crime risk
and encourage escalation;
– global roll out of financial intelligence
and investigations units to follow up
on escalations and alerts, and identify
emerging trends and issues; and
– the establishment of global procedures
and governance to exit business that is
outside our financial crime risk appetite.
Governance framework
The global businesses and Financial
Crime Compliance, supported by HSBC
Technology and Services, are formally
accountable for delivering business
procedures, controls and the associated
operating environment to implement our
new policies within each global business
and jurisdiction. This accountability is
overseen by the Global Standards
Execution Committee, which is under
the chairmanship of the Group Chief Risk
Officer and consists of the Chief Executive
Officers of each global business and the
Global Head of Financial Crime Compliance.
Correspondingly, and to promote closer
integration with business as usual, a report
on the implementation of Global Standards
is a standing item at the Group’s Risk
Management Meeting. The Financial
System Vulnerabilities Committee and
the Board continue to receive regular
reports on the Global Standards
programme as part of their continued
role in providing oversight.
Risk appetite
Financial crime risk controls are a part
of our everyday business and they are
governed according to our global financial
crime risk appetite statement. This aims
to ensure sustainability in the long term.
Our overarching appetite and approach
to financial crime risk is that we will not
tolerate operating without the systems
and controls in place designed to detect
and prevent financial crime and will not
conduct business with individuals or
entities we believe are engaged in illicit
behaviour.
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Strategic priorities/Outcomes
Streamline processes / Financial performance
Streamline
processes and
procedures
We continue to refine our
operational processes, develop
our global functions, implement
consistent business models and
streamline IT.
Since 2011, we have changed how HSBC is
managed by introducing a leaner reporting
structure and establishing an operating
model with global businesses and
functions. These changes – together with
improvements in software development
productivity, process optimisation and our
property portfolio – realised US$5.7bn in
sustainable savings, equivalent to US$6.1bn
on an annualised (run rate) basis. This
exceeded our commitment to deliver
US$2.5–3.5bn of sustainable savings at the
outset of the organisational effectiveness
programme included in the first phase of
our strategy.
Sustainable savings arise from the
reduction or elimination of complexity,
inefficiencies or unnecessary activities, and
release capital that can be reinvested in
growing our business as well as increase
returns to shareholders.
The reorganisation of the Group into
four global businesses and eleven global
functions further allows us to run
globally consistent operating models.
This establishes the foundation for our
next stage of streamlining.
Going forward, we aim to fund investments
in growth and compliance and offset
inflation through efficiency gains. This
requires net cost reductions. This
programme will be applied to:
– improving the end-to-end optimisation
of processes and servicing channels;
– technology simplification, reducing the
number of applications used across the
Group; and
– enhancing infrastructure, including
optimising our real estate utilisation and
the location where certain activities are
carried out.
Streamlining is expected to be achieved
through a combination of simplifying
and globalising our processes, products,
systems and operations. ‘Simplifying’
involves identifying inefficiencies or
excessive complexity and redesigning or
rationalising processes to make them
easier to understand and manage and
more efficient. ‘Globalising’ involves
developing standard global processes and
implementing them around the Group.
Cost efficiency ratio
Our cost efficiency ratio for 2014 was
67.3%, up from 59.6% in 2013. This change
was driven by higher legal, regulatory and
conduct settlement costs; inflationary
pressures; continued investment in
strategic initiatives; and a rise in the bank
levy. Cost increases were partly offset by
realised sustainable savings of US$1.3bn.
HSBC HOLDINGS PLC
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Outcomes
Financial
performance
Performance reflected lower
gains on disposals and the
negative effect of other
significant items.
Reported results
2014
US$m
2013
US$m
2012
US$m
Net interest income
Net fee income
Other income
34,705
15,957
10,586
35,539
16,434
12,672
37,672
16,430
14,228
Net operating
income14
LICs15
61,248
(3,851)
64,645
(5,849)
68,330
(8,311)
Net operating income 57,397
Total operating
expenses
(41,249)
58,796
60,019
(38,556)
(42,927)
Operating profit
Income from
associates16
16,148
20,240
17,092
2,532
2,325
3,557
Profit before tax
18,680
22,565
20,649
For footnotes, see page 39.
Profit before tax of US$18.7bn on a reported
basis was US$3.9bn or 17% lower than that
achieved in 2013. This primarily reflected
lower business disposal and reclassification
gains and the negative effect, on both
revenue and costs, of other significant items
including fines, settlements, UK customer
redress and associated provisions.
Reported net operating income before loan
impairment charges and other credit risk
provisions (‘revenue’) of US$61bn was
US$3.4bn or 5% lower than in 2013. In 2014
there were lower gains (net of losses) from
disposals and reclassifications (2013
included a US$1.1bn accounting gain arising
from the reclassification of Industrial Bank
Co. Limited (‘Industrial Bank’) as a financial
investment following its issue of additional
share capital to third parties, and a US$1.1bn
gain on the sale of our operations in
Panama). In addition, other significant items
included adverse fair value movements
on non-qualifying hedges of US$0.5bn
compared with favourable movements of
US$0.5bn in 2013, a US$0.6bn provision
arising from the ongoing review of
compliance with the Consumer Credit Act in
the UK as well as a net adverse movement
on debit valuation adjustments on derivative
contracts of US$0.4bn. These factors were
partially offset by favourable fair value
movements of US$0.4bn on our own debt
designated at fair value, which resulted from
changes in credit spreads, compared with
adverse movements of US$1.2bn in 2013
together with a US$0.4bn gain on the sale
of our shareholding in Bank of Shanghai in
2014.
Loan impairment charges and other credit
risk provisions (‘LICs’) of US$3.9bn were
US$2.0bn or 34% lower than in 2013,
notably in North America, Europe and
Latin America.
Operating expenses of US$41bn were
US$2.7bn or 7% higher than in 2013,
primarily as a result of significant items
which were US$0.9bn higher than in 2013.
These included settlements and provisions
in connection with foreign exchange
investigations of US$1.2bn and a charge of
US$0.6bn in the US relating to a settlement
agreement with the Federal Housing Finance
Agency.
Income from associates of US$2.5bn
was US$0.2bn or 9% higher than 2013,
primarily reflecting the non-recurrence of
an impairment charge of US$106m on the
investment in our banking associate in
Vietnam in 2013.
The Board approved a 5% increase in the
fourth interim dividend in respect of 2014
to US$0.20 per share, US$0.01 higher than
the fourth interim dividend in respect of
2013. Total dividends in respect of 2014
were US$9.6bn (US$0.50 per share),
US$0.4bn higher than in 2013.
The transitional CET1 ratio of 10.9% was
up from 10.8% at the end of 2013 and our
end point basis of 11.1% was up from 10.9%
at the end of 2013, as a result of continued
capital generation and management actions
offset by RWA growth, foreign exchange
movements and regulatory changes.
Adjusted performance
For further information on non-GAAP financial
measures, see page 40
.
From reported results to adjusted performance
To arrive at adjusted performance:
– we adjust for the year-on-year effects of
foreign currency translation; and
– we adjust for the effect of significant items.
Reconciliations of our reported results to an
adjusted basis are set out on page 44.
On an adjusted basis, profit before tax
of US$23bn was broadly unchanged
compared with 2013. Lower LICs, notably
in North America, Europe and Latin
America, together with a marginal rise
in revenue was largely offset by higher
operating expenses.
Adjusted profit before tax
(US$bn)
The following commentary is on an
adjusted basis.
Revenue was broadly unchanged.
Growth in CMB, notably in our home
markets of Hong Kong and the UK,
was offset by decreased revenue in
RBWM, GB&M and GPB
Revenue rose by US$0.1bn to US$62bn.
Revenue increased in CMB following growth
in average lending and deposit balances in
Hong Kong, together with rising average
deposit balances and wider lending spreads
in the UK. Revenue also benefited from
higher term lending fees in the UK.
These factors were mostly offset by lower
revenue in RBWM, GB&M and GPB. In
RBWM, it was primarily driven by the run-off
of our US Consumer and Mortgage Lending
(‘CML’) portfolio with revenue in Principal
RBWM broadly unchanged. In GB&M,
revenue was lower due to the introduction of
the funding fair value adjustment (‘FFVA’) on
certain derivative contracts which resulted
in a charge of US$263m, together with a
decrease from our Foreign Exchange
business, partly offset by an increase in
Capital Financing. In GPB, revenue was down
reflecting a managed reduction in client
assets as we continued to reposition the
business, and reduced market volatility.
LICs fell in the majority of our regions,
notably in North America, Europe and
Latin America
LICs were US$1.8bn or 31% lower than
in 2013, primarily in North America and
mainly in RBWM, reflecting reduced levels
of delinquency and new impaired loans in
the CML portfolio, together with decreased
lending balances from the continued
portfolio run-off and loan sales. LICs were
also lower in Europe, mainly reflecting a fall
in individually assessed charges in the UK in
CMB and GB&M, and higher net releases of
credit risk provisions on available-for-sale
asset-backed securities (‘ABS’s) in GB&M in
the UK. LICs were lower in Latin America too,
primarily in Mexico and, to a lesser extent, in
Brazil. In Mexico, the decrease in LICs mainly
reflected lower individually assessed charges
in CMB, while in Brazil LICs were lower in
both RBWM and CMB, partly offset by an
increase in GB&M.
HSBC HOLDINGS PLC
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22.6
0.4
23.0
4.1
22.8
18.7
2013
2014
Reported
Currency translation
and significant items
Adjusted profit
Reported profit attributable to ordinary
shareholders
(US$m)
15,631
13,454
13,115
2012
2013
2014
Reported earnings per share
(US$)
0.84
0.74
0.69
2012
2013
2014
Return on tangible equity
(%)
11.0
9.8
8.5
2012
2013
2014
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Outcomes (continued)
Financial performance
Operating expenses were higher,
in part reflecting increases in
Regulatory Programmes and
Compliance costs and inflation,
partly offset by further sustainable
cost savings
Operating expenses were US$38bn,
US$2.2bn or 6% higher than in 2013.
Regulatory Programmes and Compliance
costs increased as a result of continued
focus on Global Standards and the broader
regulatory reform programme being
implemented by the industry to build the
necessary infrastructure to meet today’s
enhanced compliance standards.
Operating expenses also increased due
to inflationary pressures, including wage
inflation, primarily in Asia and Latin
America, and an increase in the UK bank
levy charge compared with 2013. We
continued to invest in strategic initiatives
in support of organically growing our
business, primarily in CMB. We also
increased expenditure on marketing and
advertising to support revenue generating
initiatives, primarily in RBWM.
These factors were partially offset by
further sustainable cost savings in the year
of US$1.3bn, primarily by re-engineering
certain of our back office processes.
The number of employees expressed in
full-time equivalent numbers (‘FTE’s) at
the end of 2014 increased by 3,500 or 1%.
The average number of FTEs was broadly
unchanged as reductions through
sustainable savings programmes were
offset by the initiatives related to the
Regulatory Programmes and Compliance
and business growth.
Income from associates rose, mainly
in Asia and the Middle East and
North Africa
Income from associates increased,
primarily reflecting higher contributions
from Bank of Communications Co, Limited
(‘BoCom’) and The Saudi British Bank,
principally reflecting balance sheet growth.
The effective tax rate was 21.3% compared
with 21.1% in 2013.
For more details of the Group’s financial
performance, see page 46.
Balance sheet strength
Total reported assets were US$2.6 trillion,
1% lower than at 31 December 2013. On a
constant currency basis, total assets were
US$85bn or 3% higher. Our balance sheet
remained strong with a ratio of customer
advances to customer accounts of 72%.
This was a consequence of our business
model and of our conservative risk
appetite, which is based on funding the
growth in customer loans with growth
in customer accounts.
On a constant currency basis, loans and
advances grew by US$28bn and customer
accounts increased by US$47bn.
For further information on the Balance Sheet,
see page 57, and on the Group’s liquidity and
funding, see page 163.
Total assets
(US$bn)
2,693
2,671
2,634
2012
2013
2014
Post-tax return on average total assets
(%)
0.7
0.6
0.5
2012
2013
2014
Loans and advances to customers17
(US$bn)
963
992
975
2012
2013
2014
Customer accounts17
(US$bn)
1,311
1,361
1,351
2012
2013
2014
Ratio of customer advances to customer
deposits17
(%)
73.4
72.9
72.2
2012
2013
2014
For footnote, see page 39.
HSBC HOLDINGS PLC
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Capital strength
Our approach to managing Group capital is
designed to ensure that we exceed current
regulatory requirements and are well placed
to meet those expected in the future.
We monitor capital adequacy, inter alia, by
using capital ratios, which measure capital
relative to a regulatory assessment of
risks taken, and the leverage ratio, which
measures capital relative to exposure.
In June 2013, the European Commission
published the final Regulation and Directive,
known collectively as CRD IV, to give effect
to the Basel III framework in the EU. This
came into effect on 1 January 2014.
Under the new regime, common equity
tier 1 (‘CET1’) represents the highest form of
Capital ratios and risk-weighted assets
CRD IV1
eligible regulatory capital against which
the capital strength of banks is measured.
In 2014 we managed our capital position to
meet an internal target ratio on a CET1 end
point basis of greater than 10%. This has
since been reviewed and, in 2015, we expect
to manage Group capital to meet a medium-
term target for return on equity of more than
10%. This is modelled on a CET1 ratio on an
end point basis in the range of 12% to 13%.
Leverage ratio
The following table presents our estimated
leverage ratio in accordance with PRA
instructions. The numerator is calculated
using the CRD IV end point tier 1 capital
definition and the exposure measure is
calculated using the EU delegated act
published in January 2015 (which is based
on the Basel III 2014 revised definition).
Estimated leverage ratio
At 31 December
Tier 1 capital under CRD IV (end point)
Exposures after regulatory adjustment
Estimated leverage ratio (end point)
2014
US$bn
142
2,953
4.8%
For further details of the leverage ratio, see
page 251.
For further information on the Group’s capital
and our risk-weighted assets, see page 239.
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(transitional)
(%)
Total capital ratio
(transitional)
(%)
Common equity tier 1 ratio
(end point)
(%)
Risk-weighted assets
(‘RWA’s)
(US$bn)
10.8
10.9
15.6
10.9
11.1
1,215
1,220
14.9
2013
2014
2013
2014
2013
2014
2013
2014
Basel 2.51
Core tier 1 ratio
(%)
Total capital ratio
(%)
Risk-weighted assets
(US$bn)
13.6
12.3
16.1
17.8
1,124
1,093
2012
2013
2012
2013
2012
2013
For footnote, see page 39.
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Outcomes (continued)
Financial performance
Meeting our targets
We set financial targets against
which we measure our performance.
In 2011, we articulated our ambition to
be the leading international bank and
specified financial metrics against which we
would measure performance through 2013.
Targets were set under our understanding
at the time of capital requirements and
included a CET1 ratio of 9.5-10.5% under
Basel III; return on equity (‘ROE’) of 12-
15%; and a cost efficiency ratio (‘CER’)
of 48-52% supported by US$2.5-3.5bn in
sustainable cost savings over three years.
Over the period to 2013, we strengthened
our capital position, realised US$4.9bn in
sustainable savings and increased dividend
pay-outs to shareholders in line with
targets.
In May 2013, we defined our strategic
priorities for the period from 2014 to 2016
and revisited the financial metrics used to
track performance. We continued to target
an ROE of 12-15% and added a further
target of US$2-3bn in sustainable savings.
To allow for investment in growth
initiatives and to reflect the increasing
requirements involved in operating as a
global bank, we revised the CER target to
the mid-50s, adding that revenues must
grow faster than costs (‘positive jaws’).
We defined a target CET1 ratio, on an
end point basis, as greater than 10% and
continued to seek progressive dividends
for shareholders. We also set a cap on
our loans to deposits ratio of 90%.
During 2014, we achieved a CET1 ratio on
an end point basis of 11.1% and declared
US$9.6bn of total dividends in respect
of the year. We realised incremental
sustainable savings of US$1.3bn and
maintained a loans-to-deposits ratio of
72%. The ROE of 7.3% and the CER of
67.3% fell short of our target.
Changing regulatory and operating
environment
When we set our targets in 2011, we did so
based on a CET1 ratio on an end point basis
of greater than 10%. Whilst this factored in
foreseeable capital requirements, it did not
anticipate, and could not have anticipated,
the full extent of capital commitments and
additional costs asked of us in the years to
come. These factors have included:
• progressively strengthening our capital
levels in response to increasing capital
requirements;
• the stepped increase in costs due to the
implementation of regulatory change
and enhancing risk controls, notably
around financial system integrity and
conduct;
• an increase in the bank levy;
• the continuing low interest rate
environment; and
• the impact of significant items, notably
the high level of fines, settlements,
UK customer redress and associated
provisions.
As a consequence, we are setting new
targets that better reflect the present
and ongoing operating environment.
From 2015, our return on equity target
will therefore be replaced with a medium-
term target of more than 10%. This is
modelled on a CET1 ratio on an end point
basis in the range of 12% to 13%.
At the same time, we are reaffirming our
target of growing business revenues faster
than operating expenses (on an adjusted
basis).
We also remain committed to delivering
a progressive dividend. The progression
of dividends will be consistent with the
growth of the overall profitability of the
Group and is predicated on our continued
ability to meet regulatory capital
requirements.
We remain strongly capitalised, providing
capacity for both organic growth and
dividend return to shareholders.
Brand value
Maintenance of the HSBC brand
and our overall reputation remains
a priority for the Group.
This is our fourth year of using the Brand
Finance valuation method reported
in The Banker magazine as our brand
value benchmark. The Brand Finance
methodology provides a comprehensive
measure of the strength of the brand
and its impact across all business lines
and customer segments. It is wholly
independent and is publicly reported.
Our target is a top three position in the
banking peer group and we have achieved
this target with an overall value of US$27.3bn
Pre-tax return on risk-weighted assets13
(%)
2.0
1.8
1.5
2012
2013
2014
Dividend payout ratio
(%)
71.0
55.4
57.1
2012
2013
2014
Brand value
(US$bn)
22.9
3rd
place
26.9
2nd
place
27.3
3rd
place
Feb-2013
Feb-2014
Feb-2015
For footnote, see page 39.
(up 2% from 2014), placing us third. We
maintain an AAA rating for our brand in
this year’s report.
In addition to the Brand Finance measure,
we have reviewed our performance in the
Interbrand Annual Best Global Brands report,
published in September 2014. This showed
HSBC as the top ranked banking brand with
a valuation of US$13.1bn (up from US$12bn
in 2013) and in second place when all
financial services brands are considered.
HSBC HOLDINGS PLC
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We believe this performance is driven by an
underlying strong brand equity established
in recent years and a consistent and active
programme of activities in support of the
brand throughout 2014.
Economic contribution
By running a sustainable business, HSBC
is able to make a valuable contribution to
the economy by paying dividends to our
shareholders, salaries to our employees,
payments to suppliers, and tax revenues
to governments in the countries and
territories where we operate. We also
finance companies so that they, in turn,
can create employment.
HSBC’s net tax paid18
Distribution of economic benefits
2014
US$bn
2013
US$bn
3.6
1.6
1.0
0.9
0.8
7.9
4.7
1.6
0.7
0.8
0.8
8.6
Tax on profits
Employer taxes
UK bank levy19
Irrecoverable value-added
tax
Other duties and levies
Year ended 31 December
For footnotes, see page 39.
Taxes collected for government20
2014
US$bn
2013
US$bn
1.7
1.1
2.0
1.0
3.3
9 1
9.1
1.5
1.3
1.5
1.0
3.5
8.8
Region
UK
Rest of Europe
Asia
North America
Latin America
Year ended 31 December
For footnote, see page 39.
Net cash tax
outflow
Distributions to
shareholders
and non-
controlling
interests
Employee
compensation
and benefits
General
administrative
expenses
including
premises and
procurement
2014
US$bn
2013
US$bn
2012
US$bn
7.9
8.6
9.3
10.6
10.2
8.7
20.4
19.2
20.5
18.6
17.1
20.0
Pro-forma post-tax profit allocation21
2014
%
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53
15
100
2013
%
53
35
12
100
Retained earnings/capital
Dividends
Variable pay
Year ended 31 December
For footnote, see page 39.
Market capitalisation and total shareholder return
US$0.50 ordinary shares
in issue
19,218m
2013: 18,830m
2012: 18,476m
Market
capitalisation
US$182bn
2013: US$207bn
2012: US$194bn
To 31 December 2014
Benchmarks:
– MSCI Banks24
For footnotes, see page 39.
London
£6.09
2013: £6.62
2012: £6.47
Over 1 year
97
100
Closing market price
Hong Kong
HK$74.00
2013: HK$84.15
2012: HK$81.30
Total shareholder return23
Over 3 years
144
160
American
Depositary Share22
US$47.23
2013: US$55.13
2012: US$53.07
Over 5 years
109
132
HSBC HOLDINGS PLC
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Outcomes (continued)
Remuneration
Remuneration
Our remuneration strategy
rewards commercial success
and compliance with our risk
management framework.
The quality of our people and their
commitment to the Group are fundamental
to our success. We therefore aim to attract,
retain and motivate the very best people
who are committed to a long-term career
with HSBC in the long-term interests of
shareholders.
Employee remuneration
Our remuneration strategy is designed to
reward competitively the achievement of
long-term sustainable performance. HSBC’s
reward package comprises four key elements
of remuneration:
– fixed pay;
– benefits;
– annual incentive; and
– the Group Performance Share Plan
(‘GPSP’).
The governance of our remuneration
principles and oversight of their
implementation by the Group Remuneration
Committee ensures what we pay our people
is aligned to our business strategy and
performance is judged not only on what is
achieved over the short- and long-term but
also, importantly, on how it is achieved, as
we believe the latter contributes to the
long-term sustainability of the business.
Full details of our remuneration policy may be
found under Remuneration Policy on our website
(http://www.hsbc.com/investor-
relations/governance).
Industry changes and key challenges
New regulatory requirements such as the
bonus cap have influenced how we pay
our senior executives and those of our
employees identified by the PRA as having
a material impact on the institution’s risk
profile, being what are termed ‘material
risk takers’ (‘MRTs’). This year, a new
requirement has been introduced for firms
to ensure that clawback (i.e. a firm’s ability
to recoup paid and/or vested awards)
can be applied to all variable pay awards
granted on or after 1 January 2015 for a
period of at least seven years from the
date of award. These requirements present
challenges for HSBC in ensuring that the
total compensation package for our
employees in all of the markets in which
we operate around the world remains
competitive, in particular, relative to other
banks not subject to these requirements.
Looking ahead to 2015/2016, further
significant regulatory changes to executive
remuneration are expected and it is
possible that we will need to make changes
to our remuneration policy in 2016. The
number and volume of changes that have
been and are being proposed hinders our
ability to communicate with any certainty
to our current and potential employees the
remuneration policies and structures that
would apply to them. It also contributes to
a general misunderstanding about how our
policies work and the effect of those policies
on employee performance.
For full details of industry changes and key
challenges, see page 300.
Variable pay pool
The total variable pay pool for 2014 was
US$3.7bn, down from US$3.9bn in 2013:
Group
2014
US$m
2013
US$m
3,660
3,920
16%
14%
15%
18%
Variable pay pool25
– total
– as a percentage of pre-tax
profit (pre-variable pay)
– percentage of pool deferred
For footnote, see page 39.
The Group Remuneration Committee
considers many factors in determining
HSBC’s variable pay pool, including the
performance of the Group considered in
the context of our risk appetite statement.
This ensures that the variable pay pool is
shaped by risk considerations and by an
integrated approach to business, risk and
capital management which supports
achievement of our strategic objectives.
The Group Remuneration Committee also
takes into account Group profitability,
capital strength, shareholder returns, the
distribution of profits between capital,
dividends and variable pay, the commercial
requirement to remain market competitive
and overall affordability.
For full details of variable pay pool determination,
see pages 309.
Relative importance of expenditure on
pay
The following chart provides a breakdown of
total staff pay relative to the amount paid out
in dividends.
Relative importance of expenditure on
pay
(US$m)
2014
2013
4%
9,600
9,200
4%
20,366
19,626
19,196
(430)
Ordinary
dividends26
Employee compensation
and benefits27
For footnotes, see page 39.
Directors’ remuneration
The remuneration policy for our executive
and non-executive Directors was approved
at the Annual General Meeting on 23 May
2014. The full policy is available in the
Directors’ Remuneration Report in the
Annual Report and Accounts 2013, a copy
of which can be obtained by visiting the
following website: http://www.hsbc.com/
investor-relations/financial-and-regulatory-
reports.
The single total figure for Directors’
remuneration required by Schedule 8 of
the Large and Medium-Sized Companies
(Accounts and Reports) Regulations 2008
is as follows:
HSBC HOLDINGS PLC
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Executive Directors
Fixed pay
Base salary
Fixed pay allowance
Pension
Variable pay
Annual incentive
GPSP
Total fixed and variable pay
Benefits
Non-taxable benefits
Notional return on deferred cash
Douglas Flint
2014
£000
1,500
–
750
2,250
–
–
–
2013
£000
1,500
–
750
2,250
–
–
–
2,250
2,250
136
105
41
48
102
27
Stuart Gulliver
2014
£000
2013
£000
Iain Mackay
2014
£000
Marc Moses
2014
£000
2013
£000
1,250
1,700
625
3,575
1,290
2,112
3,402
6,977
589
53
–
1,250
–
625
1,875
1,833
3,667
5,500
7,375
591
67
–
2013
£000
700
–
350
700
950
350
700
950
350
2,000
1,050
2,000
867
1,131
1,998
3,998
43
28
11
1,074
2,148
3,222
4,272
33
53
7
1,033
1,131
2,164
4,164
6
33
36
–
–
–
–
–
–
–
–
–
–
–
–
Total single figure of remuneration
2,532
2,427
7,619
8,033
4,080
4,365
4,239
Douglas Flint, as Group Chairman, is not
eligible for an annual incentive but was
eligible under the policy to receive a
one-time GPSP award for 2014.
his personal contribution to the Group. His
2013 figures have not been disclosed.
For full details of Directors’ remuneration, see
page 307.
Marc Moses, the Group Chief Risk Officer,
was appointed an executive Director with
effect from 1 January 2014, reflecting the
criticality of the Risk function to HSBC and
his leadership of the function, and recognises
Remuneration policy going
forward
Our remuneration policy was approved by
shareholders at the 2014 Annual General
Meeting and will apply for performance year
2015. The table below summarises how each
element of pay will be implemented in 2015.
External reporting
The required remuneration disclosures for
Directors, MRTs and highest paid employees
in the Group are made in the Directors’
Remuneration Report on pages 300 to 323.
Purpose and link to strategy
Operation and planned changes to policy
Fixed pay
Base salary
Fixed pay allowance28
Pension
Benefits
Benefits
Variable pay
Annual incentive28
GPSP
For footnote, see page 39.
Base salary levels will remain unchanged from their 2014 levels as follows:
• Douglas Flint: £1,500,000
• Stuart Gulliver: £1,250,000
• Iain Mackay: £700,000
• Marc Moses: £700,000
Fixed pay allowances will remain unchanged from their 2014 levels as follows:
• Douglas Flint: Nil
• Stuart Gulliver: £1,700,000
• Iain Mackay: £950,000
• Marc Moses: £950,000
Pension allowances to apply in 2015 as a percentage of base salary will remain unchanged as follows:
• Douglas Flint: 50%
• Stuart Gulliver: 50%
• Iain Mackay: 50%
• Marc Moses: 50%
No changes are proposed to the benefits package for 2015.
No changes are proposed to the annual incentive.
No changes are proposed to the GPSP.
HSBC HOLDINGS PLC
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Outcomes (continued)
Sustainability
Sustainability
Sustainability underpins our
strategic priorities and enables
us to fulfil our purpose as an
international bank.
At HSBC, how we do business is as
important as what we do. For us,
sustainability means building our business
for the long term by balancing social,
environmental and economic
considerations in the decisions we make.
This enables us to help businesses thrive
and contribute to the health and growth
of communities.
Approach to corporate
sustainability
Corporate sustainability is governed by
the Conduct & Values Committee, a sub-
committee of the Board which oversees
and advises on a range of issues including
adherence to HSBC’s values and ensuring
we respond to the changing expectations
of society and key stakeholders.
Sustainability priorities are set and
programmes are led by the Global
Corporate Sustainability function. HSBC’s
country operations, global functions and
global businesses work together to ensure
sustainability is embedded into the Group’s
business and operations and properly
implemented. Executives within the Risk
and the HSBC Technology and Services
functions hold a specific remit to deliver
aspects of the sustainability programme
for the Group.
Our sustainability programme focuses
on three areas: sustainable finance;
sustainable operations, and sustainable
communities.
Sustainable finance
We anticipate and manage the risks and
opportunities associated with a changing
climate, environment and economy. In a
rapidly changing world, we must ensure our
business anticipates and prepares for shifts
in environmental priorities and societal
expectations.
Sustainability risk framework
We manage the risk that the financial
services which we provide to customers may
have unacceptable effects on people or the
environment. Sustainability risk can also lead
to commercial risk for customers, credit risk
for HSBC and significant reputational risk.
For over 10 years we have been working
with our business customers to help them
were receptive to the new standards,
gained certification as a result of the new
requirement and benefited from advice.
Other customer relationships will end as
soon as contractual terms allow, in cases
where customers have been unable or
unwilling to meet the new standards.
Agricultural commodities policy
The new agricultural commodities policy
requires palm oil customers to become
members of the Roundtable on Sustainable
Palm Oil (‘RSPO’) by 30 June 2014, to have at
least one operation certified by the end of
2014 and all operations by the end of 2018.
A number of customer relationships will be
closed where the deadline has not been met.
Other customers have succeeded in joining
the RSPO and having at least one operation
certified by the end of 2014. One example is
an Indonesian processing, refining and export
company. HSBC started to engage with this
and other companies in January 2014 on the
changes and continued to offer advice. The
management of the company sought expert
advice from third parties to understand more
about RSPO certification, which they found
was less complex than they had imagined.
Two units of the company obtained RSPO
certification in June 2014, and one further is
planned.
In order to encourage the shift towards
sustainable palm oil we have introduced
a discounted prepayment export finance
product for trade flows of certified
sustainable palm oil. This structured, bespoke
financing was launched in Singapore and
Indonesia in 2014 and in Malaysia in early
2015.
The inaugural financing using this product
was for a major palm oil exporter which has
been a member of the RSPO for ten years
and is now fully certified. The product is
available to both existing and future clients
and is hoped to encourage an expansion in
the proportion of palm oil that is certified
sustainable.
Customers in Malaysia, Indonesia, mainland
China, Taiwan, South Korea, Thailand, Turkey
and Mexico have decided to certify their
operations as a result of HSBC’s new policies
and deadlines. A number of others were
already certified. Fuller reporting on the
effect of these new policies will be available
in April 2015 at hsbc.com.
understand and manage their environmental
and social impact in relation to sensitive
sectors and themes. We assess and support
customers using our own policies which we
regularly review and refine. We have policies
covering agricultural commodities, chemicals,
defence, energy, forestry, freshwater
infrastructure, mining and metals, World
Heritage Sites and Ramsar Wetlands. We
also apply the Equator Principles.
We welcome constructive feedback from
non-governmental organisations and
campaign groups and regularly discuss
matters of shared interest with them.
Our sustainability risk framework is based
on robust policies, formal processes and
well-trained, empowered people.
In 2014, we trained risk and relationship
managers in sustainability risk, focusing
on the recent policy updates and revised
processes. Our designated Sustainability Risk
Managers provided training to executives
from Risk, GB&M and CMB in every
geographical region.
We have used the Equator Principles since
2003. A new version of the Equator Principles
– EP3 – was launched in 2013, and HSBC
introduced these changes on 1 January 2014
following training and the development of
clear templates to ensure the transition was
smooth.
Data and the independent assurance of our
application of the Equator Principles will be
available at hsbc.com in April 2015.
Policy reviews and updates in 2014
In 2014, we published the reports of two
independent reviews into the content and
implementation of our Forest Land and
Forest Products Sector Policy, by Proforest
and PricewaterhouseCoopers LLP,
respectively. We also issued new policies
on forestry, agricultural commodities and
World Heritage Sites and Ramsar Wetlands,
reflecting the recommendations. These
documents can be found online at
hsbc.com/sus-risk.
Forestry policy
The new forestry policy, issued in March
2014, requires forestry customers to gain
100% certification by the Forest Stewardship
Council (‘FSC’) or the Programme for the
Endorsement of Forest Certification (‘PEFC’)
in high risk countries by 31 December 2014.
Certification requires that customers are
operating legally and sustainably.
Feedback from stakeholders on the new
policy was positive. Timber customers from
affected countries such as Turkey and Mexico
HSBC HOLDINGS PLC
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The World Heritage Sites and Ramsar
Wetlands policy
This is designed to protect unique sites of
outstanding international significance as
listed by the UN and wetlands of
international importance. The policy relates
to all business customers involved in major
projects, particularly in sectors such as
forestry, agriculture, mining, energy,
property and infrastructure development.
The policy helps HSBC to make balanced and
clear decisions on whether or not to finance
projects which could have an effect on these
sites or wetlands. HSBC has avoided financing
projects in light of the policy.
Our approach to managing sustainability risk is
described on page 237.
Climate business
We understand that in response to climate
change there is a shift required towards a
lower-carbon economy. We are committed
to accelerating that shift by supporting
customers involved in ‘climate business’ by
seeking long-term low-carbon commercial
business opportunities. Our climate business
includes clients in the solar, wind, biomass,
energy efficiency, low-carbon transport and
water sectors. In 2014, our Climate Change
Research team was recognised as the top
team in the industry. We were also a leader
in public markets equity-related wind
financings for international companies,
including the largest wind turbine equity
raising since 2010 as part of the €1.4bn
Vestas refinancing.
‘Green bonds’ are any type of bond
instruments where the proceeds will be
exclusively applied to finance climate or
environmental projects. In April 2014, HSBC
became a member of the International
Capital Market Association Executive
Committee for the Green Bond Principles.
The Green Bond Principles are voluntary
process guidelines that recommend
transparency and disclosure and promote
integrity in the development of the green
bond market by clarifying the approach for
issuance of a green bond.
In 2014, we commissioned a report, ‘Bonds
and Climate Change: the state of the market
in 2014’ from the Climate Bonds Initiative to
help raise awareness of climate financing.
HSBC has been at the forefront of this fast-
developing area. In 2014, we were the sole
global coordinator and joint leader, manager
and bookrunner for the first green bond issue
by an Asian corporate issuer, Advanced
Semiconductor Engineering Inc. We also
acted as sole global coordinator on the first
green bond issued by Abengoa, the first high-
yield green bond to be issued in Europe as
well as the being a joint lead manager and
bookrunner for the first government issuer
in the Canadian market for the Province of
Ontario.
UN Environment Programme Finance
Initiative Principles for Sustainable
Insurance
As a signatory to the Principles for
Sustainable Insurance (‘PSI’), a global
sustainability framework, HSBC’s Insurance
business has committed to integrating
environmental, social and governance issues
across its processes, and to publicly disclosing
its progress in doing so on an annual basis.
A global programme manager has been
appointed to provide leadership, co-
ordination and control of Insurance
sustainability initiatives world-wide and
ensure alignment with the Group’s approach
and the requirements of the PSI initiative.
This includes driving appropriate activities
both within the Insurance business and with
partners, regulators and other industry
players; disseminating industry best practice,
and developing global insurance
sustainability initiatives.
Sustainable operations
Managing our own environmental footprint
supports business efficiency and is part of our
long-term contribution to society. We work
together and with our suppliers to find new
ways to reduce the impact of our operations
on the environment. We are purchasing
renewable energy, designing and operating
our buildings and data centres more
efficiently and reducing waste. We have
committed to cut our annual per employee
carbon emissions from 3.5 to 2.5 tonnes by
2020.
Sustainability Leadership Programme
To deliver our ten sustainability goals we
have trained 847 senior managers through
HSBC’s Sustainability Leadership
Programme since 2009. The programme is
a mix of hands-on learning and leadership
development sessions and is aligned to
the HSBC Values agenda. The programme
participants are expected to embed
sustainability into decision-making and
project delivery in the businesses and
functions where they work.
Renewable energy procurement
In 2014, we signed three power purchase
agreements with renewable energy
generators in the UK and India. This is
expected to provide 9% of HSBC’s energy. In
August, a 10-megawatt solar power plant in
Hyderabad, India came online to provide
the Group with clean energy. This is
expected to power three Global Service
Centres and a Technology Centre in India.
HSBC played a key role in facilitating the
project by agreeing to purchase the plant’s
energy at a government backed fixed price
for the next ten years. The plant will provide
a clean and reliable source of energy. In
addition, we have redefined our renewables
target only to count energy from newly
constructed renewable energy sources
which have been commissioned by HSBC.
Paper use
Our paper goal is being achieved in three
ways: ensuring that the paper we buy is from
a sustainable source in accordance with our
paper sourcing policy, reducing the volume of
paper consumed by our offices and branches
and providing paperless banking for all retail
and commercial customers. We have
continued to reduce the total amount of
paper purchased and to increase the
proportion of paper we use that is certified
as sustainably sourced by the FSC and PEFC.
Since 2011, we have achieved a 53%
reduction in paper purchased. Certified
sustainably sourced paper reached 92% of
all paper used by the end of 2014.
HSBC HOLDINGS PLC
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Outcomes (continued)
Sustainability / Footnotes
Our 10-point sustainable operations
strategy
1. Sustainability engagement: encourage
employees to deliver improved
efficiency by 2020
2. Supply chain collaboration: sustainable
savings through efficiency and
innovation
3. HSBC Eco-efficiency fund: US$50m
annually to develop new ways of
working, based on employee
innovations
4. Energy: reduce annual energy
consumption per employee by 1MWh
by 2020, compared to 6.2MWh in
2011
5. Waste: use less, and recycle 100% of
our office waste and electronic waste
6. Renewables: aim to increase energy
consumption from renewables to 25%
by 2020 from zero
7. Green buildings: design, build and run
energy efficient, sustainable buildings
to the highest international standards
8. Data centres: achieve an energy
efficiency (power usage effectiveness)
rating of 1.5 by 2020
9. Travel: reduce travel emissions per
employee
10. Paper: paperless banking available for
all retail and commercial customers
and 100% sustainably sourced paper
by 2020
Carbon emissions
HSBC’s carbon dioxide emissions are
calculated on the basis of the energy used in
our buildings and employee business travel
from over 28 countries (covering about 93%
of our operations by FTE). The data gathered
on energy consumption and distance
travelled are converted to carbon dioxide
emissions using conversion factors from the
following sources, if available, in order of
preference:
1. factors provided by the data/service
providers;
emission factors for national grid
electricity from the International Energy
Agency as recommended for use by the
Greenhouse Gas Protocol; and
3. for other types of energy and travel, if
no specific factors can be obtained from
the first two sources, we use the latest
available factors provided by the UK
Department for Environment, Food and
Rural Affairs and/or the Department of
Energy and Climate Change in the UK.
To incorporate all of the operations over
which we have financial (management)
control, the calculated carbon dioxide
emissions are scaled up on the basis of the
FTE coverage rate to account for any missing
data (typically less than 10% of FTEs). In
addition, emission uplift rates are applied
to allow for uncertainty on the quality and
coverage of emission measurement and
estimation. The rates are 4% for electricity,
10% for other energy and 6% for business
travel, based on the Intergovernmental Panel
on Climate Change Good Practice Guidance
and Uncertainty Management in National
Greenhouse Gas Inventories, and our internal
analysis of data coverage and quality.
Carbon dioxide emissions in tonnes
Total
From energy
From travel
2014
2013
752,000
633,000
119,000
889,000
755,000
134,000
Carbon dioxide emissions in tonnes per FTE
Total
From energy
From travel
2014
2.92
2.46
0.46
2013
3.43
2.91
0.52
Our greenhouse gas reporting year runs from
October to September. For the year ended
30 September 2014, carbon dioxide
emissions from our global operations were
752,000 tonnes.
Sustainable communities
We believe that education and resources
such as safe water and sanitation are
essential to resilient communities which are,
in turn, the basis of thriving economies and
businesses.
2. factors provided by the local public
environmental authorities. For
electricity, if specific factors cannot be
obtained from the above two sources
we use the latest available carbon
We provide financial contributions to
community projects, and thousands of
employees across the world get involved
by volunteering their time and sharing
their skills.
Volunteering and donations
Thousands of HSBC employees globally are
involved every year in volunteering for our
Community Investment programmes. Further
details on our programmes are available at
hsbc.com and will be updated with
information for 2014 in April 2015.
In 2014, we donated a total of US$114m to
community projects (2013: US$117m). Of
this, US$66m was donated in Europe (2013:
US$64m); US$28m was donated in Asia-
Pacific (2013: US$24m); US$3m was
donated in the Middle East (2013: US$5m);
US$10m was donated in North America
(2013: US$11m); and US$7m was donated
in Latin America (2013: US$12m).
Employees gave 303,922 hours of their
time to volunteer during the working day
(2013: 255,925 hours).
Human rights
We apply human rights considerations
directly as they affect our employees
and indirectly through our suppliers and
customers, in the latter case in particular
through our project finance lending and
sustainability risk policies. Human rights
issues most directly relevant for HSBC
are those relating to the right to just
and favourable conditions of work and
remuneration, the right to equal pay for
equal work, the right to form and join trade
unions, the right to rest and leisure and the
prohibition of slavery and child labour.
Alongside our own commitments, such as
our HSBC Code of Conduct for Suppliers (in
place since 2005), the HSBC Global Standards
Manual and HSBC Values, we have signed up
to global commitments and standards,
including the UN Global Compact, the
Universal Declaration of Human Rights and
the Global Sullivan Principles.
Further detail on our 2014 performance will be
available from the end of April 2015 on our
website, along with independent assurance of
our application of the Equator Principles and
carbon emissions.
On behalf of the Board
D J Flint
Group Chairman
HSBC Holdings plc
23 February 2015
HSBC HOLDINGS PLC
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Footnotes to Strategic Report
1 On 1 January 2014, CRD IV came into force and capital and RWAs at 31 December 2014 are calculated and presented on this basis. Prior to this, capital and
RWAs were calculated and presented on a Basel 2.5 basis. In addition, capital and RWAs at 31 December 2013 were also estimated based on the Group’s
interpretation of final CRD IV legislation and final rules issued by the PRA. At 31 December 2012, the CRD IV estimated capital and RWAs were based on the July
2011 draft CRD IV text.
2 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 2013 of US$0.10 was paid on 11 December 2013. The fourth interim dividend for 2013 of US$0.19 was paid on 30 April 2014. First, second
and third interim dividends for 2014, each of US$0.10 per ordinary share, were paid on 10 July 2014, 9 October 2014 and 10 December 2014, respectively.
Note 9 on the Financial Statements provides more information on the dividends declared in 2014. On 23 February 2015, the Directors declared a fourth interim
dividend for 2014 of US$0.20 per ordinary share in lieu of a final dividend, which will be payable to ordinary shareholders on 30 April 2015 in cash in US dollars,
or in pounds sterling or Hong Kong dollars at exchange rates to be determined on 20 April 2015, with a scrip dividend alternative. The reserves available for
distribution at 31 December 2014 were US$48,883m.
Quarterly dividends of US$15.5 per 6.20% 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 17 March 2014, 16 June 2014, 15 September
2014 and 15 December 2014.
Quarterly coupons of US$0.508 per security were paid with respect to 8.125% capital securities on 15 January 2014, 15 April 2014, 15 July 2014 and 15 October
2014.
Quarterly coupons of US$0.50 per security were paid with respect to 8% capital securities on 17 March 2014, 16 June 2014, 15 September 2014 and
15 December 2014.
3 The cost efficiency ratio is defined as total operating expenses divided by net operating income before loan impairment charges and other credit risk provisions.
4 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.
5 Established on 5 December 2014.
6 Intermediation of securities, funds and insurance products, including Securities Services in GB&M.
7 Merger and acquisition, event and project financing, and co-investments in GPB.
8 Including Foreign Exchange, Rates, Credit and Equities.
9 Including portfolio management.
10 Including private trust and estate planning (for financial and non-financial assets).
11 Including hedge funds, real estate and private equity.
12 The sum of balances presented does not agree to consolidated amounts because inter-company eliminations are not presented here.
13 Pre-tax return on average risk-weighted assets is calculated using average RWAs based on a Basel 2.5 basis for all periods up to and including 31 December
2013 and on a CRD IV end point basis for all periods from 1 January 2014.
14 Net operating income before loan impairment charges and other credit risk provisions, also referred to as ‘revenue’.
15 Loan impairment charges and other credit risk provisions.
16 Share of profit in associates and joint ventures.
17 From 1 January 2014, non-trading reverse repos and repos are presented as separate lines in the balance sheet. Previously, non-trading reverse repos were
included within ‘Loans and advances to banks’ and ‘Loans and advances to customers’ and non-trading repos were included within ‘Deposits by banks’ and
‘Customer accounts’. Comparative data have been re-presented accordingly. Non-trading reverse repos and repos have been presented as separate lines in the
balance sheet to align disclosure with market practice and provide more meaningful information in relation to loans and advances. The extent to which reverse
repos and repos represent loans to/from customers and banks is set out in Note 17 on the Financial Statements.
18 Taxes paid by HSBC relate to HSBC’s own tax liabilities and is reported on a cash flow basis.
19 UK bank levy paid reflects the payments made to the tax authorities during the calendar year and may differ from the recognition of liabilities charged to the
income statement.
20 Taxes collected relate to those taxes which HSBC is liable to pay as agent for taxation authorities across the world and include all employee-related taxes,
together with taxes withheld from payments of interest and charged on the provision of goods and services to its customers. Taxes collected are reported on a
cash flow basis.
21 Excludes movements in the fair value of own debt and before variable pay distributions.
22 Each American Depositary Share represents five ordinary shares.
23 Total shareholder return is defined as the growth in share value and declared dividend income during the relevant period.
24 The Morgan Stanley Capital International World Bank Index.
25 The 2014 Group pre-tax pre-variable pay profit calculation as described in the Directors’ Remuneration Report on page 309 .The percentage of variable pay
deferred for the Code Staff population was 50%.
26 Dividends per ordinary share in respect of that year. For 2014, this includes the first, second and third interim dividends paid in 2014 of US$5.8bn (gross of scrip)
and a fourth interim dividend of US$3.8bn.
27 Employee compensation and benefits in 2013 totalled US$19,196m which included an accounting gain arising from a change in the basis of delivering ill-health
benefits in the UK of US$430m. Excluding this accounting gain, 2013 employee compensation and benefits totalled US$19,626m.
28 This approach applies to all executive Directors with the exception of the Group Chairman, Douglas Flint, who is not eligible for a fixed pay allowance or variable
pay awards.
HSBC HOLDINGS PLC
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Report of the Directors: Financial summary
Use of non-GAAP financial measures
Financial summary
Use of non-GAAP financial measures
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 insurance premium income
Other operating income
Net insurance claims and benefits paid 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 2014
Reconciliation of RoRWA measures
Critical accounting estimates and judgements
40
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62
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The management commentary included in the Report of the
Directors: ‘Financial Review’, together with the ‘Employees’ and
‘Corporate sustainability’ sections of ‘Corporate Governance’
and the ‘Directors’ Remuneration Report’ is presented in
compliance with the IFRSs 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 on
page 334. In measuring our performance, the financial
measures that we use include those which have been
derived from our reported results in order to eliminate
factors which distort year-on-year comparisons. These
are considered non-GAAP financial measures. The
primary non-GAAP financial measure we use is ‘adjusted
performance’. Other non-GAAP financial measures are
described and reconciled to the most relevant reported
financial measure when used.
Adjusted performance
Adjusted performance is computed by adjusting
reported results for the year-on-year effects of foreign
currency translation differences and significant items
which distort year-on-year comparisons.
Previously we used the non-GAAP financial measure
of ‘underlying performance’, which was calculated by
adjusting reported results for the year-on-year effects
of currency translation differences, own credit spread
and acquisitions, disposals and dilutions. In 2014, we
modified our approach to better align it with the way
we view our performance internally and with feedback
received from investors. Adjusted performance builds on
underlying performance by maintaining the adjustment
for currency translation differences and incorporating
the adjustments for own credit spread and acquisitions,
disposals and dilutions into the definition of significant
items. We use the term ‘significant items’ to collectively
describe the group of individual adjustments which are
excluded from reported results when arriving at adjusted
performance. Significant items, which are detailed
below, are those items which management and investors
would ordinarily identify and consider separately when
assessing performance in order to better understand the
underlying trends in the business.
We believe adjusted performance provides useful
information for investors by aligning internal and
external reporting, identifying and quantifying items
management believe to be significant and providing
insight into how management assesses year-on-year
performance.
We arrive at adjusted performance by excluding from
our reported results:
• the year-on-year effects of foreign currency
translation differences. This is done by comparing
reported results for 2014 with reported results for
2013 retranslated at 2014 exchange rates. The
foreign currency translation differences reflect the
movements of the US dollar against most major
currencies; and
• significant items which distort the year-on-year
comparison of reported results by obscuring the
underlying factors and trends which affect operations.
Significant items include adjustments for own credit
spread and acquisitions, disposals and dilutions which
were previously part of our underlying measure. The
following pages provide further details, including a
reconciliation from reported to adjusted results.
HSBC HOLDINGS PLC
40
For acquisitions, disposals and changes of ownership
levels of subsidiaries, associates, joint ventures and
businesses, we eliminate the gain or loss on disposal
or dilution and any associated gain or loss on
reclassification or impairment recognised in the year
incurred, and remove the operating profit or loss of the
acquired, disposed of or diluted subsidiaries, associates,
joint ventures and businesses from all the years
presented so we can view results on a like-for-like basis.
Disposal of strategic investments other than those
included in the above definition would be included in
other significant items if material.
The following acquisitions, disposals and changes to
ownership levels affected adjusted performance:
Disposal gains/(losses) affecting adjusted performance
Date
Disposal
gain/(loss)
US$m
Reclassification gain in respect of our holding in Industrial Bank Co., Limited following the issue of additional
share capital to third parties1
HSBC Insurance (Asia-Pacific) Holdings Limited’s disposal of its shareholding in Bao Viet Holdings1
Household Insurance Group Holding company’s disposal of its insurance manufacturing business1
HSBC Seguros, S.A. de C.V., Grupo Financiero HSBC’s disposal of its property and Casualty Insurance business
in Mexico1
HSBC Bank plc’s disposal of its shareholding in HSBC (Hellas) Mutual Funds Management SA2
HSBC Insurance (Asia-Pacific) Holdings Limited disposal of its shareholding in Hana HSBC Life Insurance
Company Limited1
HSBC Bank plc’s disposal of HSBC Assurances IARD2
The Hongkong and Shanghai Banking Corporation Limited’s disposal of HSBC Life (International) Limited’s
Taiwan branch operations2
HSBC Markets (USA) Inc.’s disposal of its subsidiary, Rutland Plastic Technologies2
HSBC Insurance (Singapore) Pte Ltd’s disposal of its Employee Benefits Insurance business in Singapore2
HSBC Investment Bank Holdings plc’s disposal of its investment in associate FIP Colorado2
HSBC Investment Bank Holdings plc group’s disposal of its investment in subsidiary, Viking Sea Tech1
HSBC Latin America Holdings UK Limited’s disposal of HSBC Bank (Panama) S.A.2
HSBC Latin America Holdings UK Limited’s disposal of HSBC Bank (Peru) S.A.2
HSBC Latin America Holdings UK Limited’s disposal of HSBC Bank (Paraguay) S.A.2
Reclassification loss in respect of our holding in Yantai Bank Co., Limited following an increase in its
registered share capital1
HSBC Latin America Holdings UK Limited’s disposal of HSBC Bank (Colombia) S.A.1
Reclassification loss in respect of our holding in Vietnam Technological & Commercial Joint Stock Bank
following the loss of significant influence1
HSBC Bank Middle East Limited’s disposal of its operations in Pakistan1
Jan 2013
Mar 2013
Mar 2013
Apr 2013
Apr 2013
May 2013
May 2013
June 2013
Aug 2013
Aug 2013
Aug 2013
Aug 2013
Oct 2013
Nov 2013
Nov 2013
Dec 2013
Feb 2014
Jun 2014
Oct 2014
1,089
104
(99)
20
(7)
28
(4)
(36)
17
(8)
(5)
54
1,107
(18)
(21)
(38)
18
(32)
(27)
For footnotes, see page 109.
Foreign currency translation differences
(‘constant currency’)
Foreign currency translation differences reflect the
movements of the US dollar against most major
currencies during 2014. We exclude the translation
differences when using constant currency because it
allows us to assess balance sheet and income statement
performance on a like-for-like basis to better understand
the underlying trends in the business.
Foreign currency translation differences
Foreign currency translation differences for 2013 are computed
by retranslating into US dollars for non-US dollar branches,
subsidiaries, joint ventures and associates:
•
the income statements for 2013 at the average rates of
exchange for 2014; and
•
the balance sheet at 31 December 2013 at the prevailing
rates of exchange on 31 December 2014.
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 foreign currency translation differences 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 year on the
basis described above.
HSBC HOLDINGS PLC
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Report of the Directors: Financial summary (continued)
Use of non-GAAP financial measures
Other significant items
The following tables detail the effect of other significant items in 2014 and 2013 on each of our geographical segments
and global businesses.
Other significant items affecting adjusted performance – (gains)/losses
Revenue
Debit valuation adjustment on derivative contracts
Fair value movements on non-qualifying hedges3
Gain on sale of several tranches of real estate secured accounts
in the US
Gain on sale of shareholding in Bank of Shanghai
Impairment of our investment in Industrial Bank
Provisions arising from the ongoing review of compliance with the
Consumer Credit Act in the UK
Year ended 31 December 2014
Operating expenses
Charge in relation to the settlement agreement with the Federal
Housing Finance Authority
Settlements and provisions in connection with foreign exchange
investigations
Restructuring and other related costs
Regulatory provisions in GPB
UK customer redress programmes
Year ended 31 December 2014
Revenue
Debit valuation adjustment on derivative contracts
Fair value movements on non-qualifying hedges3
Gain on sale of several tranches of real estate secured accounts
in the US
Gain on sale of shareholding in Bank of Shanghai
Impairment of our investment in Industrial Bank
Provisions arising from the ongoing review of compliance with the
Consumer Credit Act in the UK
Year ended 31 December 2014
Operating expenses
Charge in relation to the settlement agreement with the Federal
Housing Finance Authority
Settlements and provisions in connection with foreign exchange
investigations
Restructuring and other related costs
Regulatory provisions in GPB
UK customer redress programmes
Year ended 31 December 2014
Total
US$m
332
541
(168)
(428)
271
632
1,180
550
1,187
278
65
1,275
3,355
Total
US$m
332
541
(168)
(428)
271
Europe
US$m
Asia
US$m
MENA
America
US$m
US$m
North
Latin
America
US$m
234
235
−
−
−
632
1,101
−
1,187
123
16
1,275
2,601
69
4
−
(428)
271
−
(84)
−
−
9
49
−
58
5
−
−
−
−
−
5
−
−
2
−
−
2
16
302
(168)
−
−
−
150
550
−
28
−
−
578
8
−
−
−
−
−
8
−
−
116
−
−
116
RBWM
US$m
CMB
US$m
GB&M
US$m
GPB
US$m
Other
US$m
−
493
(168)
−
−
568
893
17
−
88
−
992
1,097
−
(1)
−
−
−
24
23
332
8
−
−
−
−
340
−
533
−
37
−
138
175
1,187
27
−
145
1,892
−
1
−
−
−
40
41
−
−
6
65
−
71
−
40
−
(428)
271
−
632
(117)
1,180
−
550
−
120
−
−
120
1,187
278
65
1,275
3,355
HSBC HOLDINGS PLC
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Europe
US$m
Asia
US$m
MENA
US$m
North
America
Latin
America
US$m
US$m
Total
US$m
Revenue
Net gain on completion of Ping An disposal
Debit valuation adjustment on derivative contracts
Fair value movements on non-qualifying hedges3
FX gains relating to sterling debt issued by HSBC Holdings
Write-off of allocated goodwill relating to the GPB Monaco business
Loss on sale of several tranches of real estate secured accounts in
the US
Loss on sale of non-real estate secured accounts in the US
Loss on early termination of cash flow hedges in the US run-off
portfolio
Loss on sale of an HFC Bank UK secured loan portfolio
Year ended 31 December 2013
Operating expenses
Restructuring and other related costs
UK customer redress programmes
Madoff-related litigation costs
Regulatory provisions in GPB
US customer remediation provisions relating to CRS
Accounting gain arising from change in basis of delivering ill-health
benefits in the UK
Year ended 31 December 2013
−
(65)
(297)
(442)
279
−
−
−
146
(379)
217
1,235
298
317
−
(430)
1,637
(553)
(40)
32
−
−
−
−
−
−
(561)
86
−
−
35
−
−
121
−
(2)
−
−
−
−
−
−
−
(2)
4
−
−
−
−
−
4
−
14
(246)
−
−
123
271
199
−
361
101
−
−
−
100
−
201
−
(13)
−
−
−
−
−
−
−
(13)
75
−
−
−
−
−
75
(553)
(106)
(511)
(442)
279
123
271
199
146
(594)
483
1,235
298
352
100
(430)
2,038
Revenue
Net gain on completion of Ping An disposal
Debit valuation adjustment on derivative contracts
Fair value movements on non-qualifying hedges3
FX gains relating to sterling debt issued by HSBC Holdings
Write-off of allocated goodwill relating to the GPB Monaco business
Loss on sale of several tranches of real estate secured accounts in
the US
Loss on sale of non-real estate secured accounts in the US
Loss on early termination of cash flow hedges in the US run-off
portfolio
Loss on sale of an HFC Bank UK secured loan portfolio
Year ended 31 December 2013
Operating expenses
Restructuring and other related costs
UK customer redress programmes
Madoff-related litigation costs
Regulatory provisions in GPB
US customer remediation provisions relating to CRS
Accounting gain arising from change in basis of delivering ill-health
benefits in the UK
Year ended 31 December 2013
For footnote, see page 109.
RBWM
US$m
CMB
US$m
GB&M
US$m
GPB
US$m
Other
US$m
Total
US$m
−
−
(262)
−
−
123
271
199
146
477
167
953
−
−
100
(189)
1,031
−
−
−
−
−
−
−
−
−
−
31
148
−
−
−
(160)
19
−
(106)
18
−
−
−
−
−
−
−
−
−
−
279
−
−
−
−
(553)
−
(267)
(442)
−
−
−
−
−
(88)
279
(1,262)
13
134
298
−
−
(81)
364
73
−
−
352
−
−
425
199
−
−
−
−
−
199
(553)
(106)
(511)
(442)
279
123
271
199
146
(594)
483
1,235
298
352
100
(430)
2,038
HSBC HOLDINGS PLC
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Report of the Directors: Financial summary (continued)
Use of non-GAAP financial measures / Consolidated income statement
The following table reconciles selected reported items
for 2014 and 2013 to adjusted items. Equivalent tables
are provided for each of our global businesses and
geographical segments on www.hsbc.com.
2014
US$m
2013
US$m
Change5
%
61,248
(417)
(9)
1,180
62,002
(3,851)
−
−
(3,851)
(41,249)
40
3,355
(37,854)
61.1%
2,532
−
−
2,532
18,680
(417)
31
4,535
22,829
64,645
(686)
1,246
(2,757)
(594)
61,854
(5,849)
168
67
−
(5,614)
(38,556)
348
488
2,038
(35,682)
57.7%
2,325
11
87
−
2,423
22,565
(159)
1,246
(2,115)
1,444
22,981
(5)
−
34
31
(7)
(6)
9
4
(17)
(1)
2014
US$m
2013
US$m
Change5
%
7,648
8,940
8,114
738
(2,611)
22,829
3,905
14,635
1,854
2,111
324
22,829
7,959
7,910
9,208
900
(2,996)
22,981
4,301
14,309
1,673
2,048
650
22,981
(4)
13
(12)
(18)
13
(1)
(9)
2
11
3
(50)
(1)
Reconciliation of reported and adjusted items
Revenue4
Reported
Currency translation adjustment6
Own credit spread7
Acquisitions, disposals and dilutions
Other significant items
Adjusted
Loan impairment charges and other credit risk provisions
Reported
Currency translation adjustment6
Acquisitions, disposals and dilutions
Other significant items
Adjusted
Total operating expenses
Reported
Currency translation adjustment6
Acquisitions, disposals and dilutions
Other significant items
Adjusted
Adjusted cost efficiency ratio
Share of profit in associates and joint ventures
Reported
Currency translation adjustment6
Acquisitions, disposals and dilutions
Other significant items
Adjusted
Profit before tax
Reported
Currency translation adjustment6
Own credit spread7
Acquisitions, disposals and dilutions
Other significant items
Adjusted
For footnotes, see page 109.
Adjusted profit before tax
By global business
Retail Banking and Wealth Management
Commercial Banking
Global Banking and Markets
Global Private Banking
Other
Year ended 31 December
By geographical region
Europe
Asia8
Middle East and North Africa
North America
Latin America
Year ended 31 December
For footnotes, see page 109.
HSBC HOLDINGS PLC
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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 insurance premium income
Gains on disposal of US branch network, US cards business and
Ping An Insurance (Group) Company of China, Ltd
Other operating income
Total operating income
Net insurance claims and benefits paid and movement in
liabilities to policyholders
Net operating income before loan impairment charges
and other credit risk provisions
Loan impairment charges and other credit risk provisions
Net operating income
Total operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
Tax expense
Profit for the year
Profit attributable to shareholders of the parent company
Profit attributable to non-controlling interests
Five-year financial information
Basic earnings per share
Diluted earnings per share
Dividends per ordinary share9
Dividend payout ratio10
Post-tax return on average total assets
Return on average ordinary shareholders’ equity
Average foreign exchange translation rates to US$:
US$1: £
US$1: €
For footnotes, see page 109.
2014
US$m
34,705
15,957
6,760
2,473
1,335
311
11,921
–
1,131
74,593
2013
US$m
35,539
16,434
8,690
768
2,012
322
11,940
–
2,632
78,337
2012
US$m
37,672
16,430
7,091
(2,226)
1,189
221
13,044
7,024
2,100
82,545
2011
US$m
40,662
17,160
6,506
3,439
907
149
12,872
–
1,766
83,461
2010
US$m
39,441
17,355
7,210
1,220
968
112
11,146
–
2,562
80,014
(13,345)
(13,692)
(14,215)
(11,181)
(11,767)
61,248
(3,851)
57,397
64,645
(5,849)
58,796
68,330
(8,311)
60,019
(41,249)
(38,556)
(42,927)
72,280
(12,127)
60,153
(41,545)
18,608
3,264
21,872
17,092
3,557
20,649
(5,315)
(3,928)
15,334
14,027
1,307
17,944
16,797
1,147
2012
US$
0.74
0.74
0.41
%
55.4
0.6
8.4
2011
US$
0.92
0.91
0.39
%
42.4
0.6
10.9
68,247
(14,039)
54,208
(37,688)
16,520
2,517
19,037
(4,846)
14,191
13,159
1,032
2010
US$
0.73
0.72
0.34
%
46.6
0.6
9.5
0.631
0.778
0.624
0.719
0.648
0.755
16,148
2,532
18,680
(3,975)
14,705
13,688
1,017
2014
US$
0.69
0.69
0.49
%
71.0
0.5
7.3
0.607
0.754
20,240
2,325
22,565
(4,765)
17,800
16,204
1,596
2013
US$
0.84
0.84
0.48
%
57.1
0.7
9.2
0.639
0.753
Unless stated otherwise, all tables in the Annual Report and Accounts 2014 are presented on a reported basis.
For a summary of our financial performance in 2014, see page 28.
HSBC HOLDINGS PLC
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Report of the Directors: Financial summary (continued)
Group performance by income and expense item
Group performance by income and expense item
Net interest income
Interest income
Interest expense
Net interest income11
Average interest-earning assets
Gross interest yield12
Less: cost of funds
Net interest spread13
Net interest margin14
For footnotes, see page 109.
Summary of interest income by type of asset
2014
US$m
50,955
(16,250)
34,705
2013
US$m
51,192
(15,653)
35,539
2012
US$m
56,702
(19,030)
37,672
1,786,536
1,669,368
1,625,068
2.85%
(1.05%)
1.80%
1.94%
3.07%
(1.10%)
1.97%
2.13%
3.49%
(1.36%)
2.13%
2.32%
Average
balance
US$m
2014
Interest
income
US$m
237,148
931,311
3,068
37,429
198,273
399,816
19,988
1,800
8,323
335
Yield
%
1.29
4.02
0.91
2.08
1.68
Average
balance
US$m
2013
Interest
income
US$m
Yield
Average
balance
%
US$m
2012
Interest
income
US$m
236,377
897,322
2,851
38,529
1.21
4.29
3,505
235,831
891,699 40,870
114,324
393,309
28,036
995
8,002
815
0.87
2.03
2.91
83,105
387,329
27,104
975
9,078
2,274
1,786,536
50,955
2.85
1,669,368
51,192
3.07 1,625,068 56,702
Yield
%
1.49
4.58
1.17
2.34
8.39
3.49
238,958
(14,015)
668,564
5,596
2.34
354,817
(15,954)
683,785
5,763
1.62
6,931
1.88
368,406
(17,421)
730,901
2,680,043
56,551
2.11
2,692,016
56,955
2.12 2,706,954 63,633
2.35
Short-term funds and loans and
advances to banks27
Loans and advances to customers27
Reverse repurchase agreements –
non-trading26,27
Financial investments
Other interest-earning assets
Total interest-earning assets
Trading assets and financial assets
designated at fair value15,16,26
Impairment provisions
Non-interest-earning assets
Year ended 31 December
For footnotes, see page 109.
Summary of interest expense by type of liability and equity
Deposits by banks17,27
Financial liabilities designated at fair value
– own debt issued18
Customer accounts19,27
Repurchase agreements – non-trading26,27
Debt securities in issue
Other interest-bearing liabilities
Total interest-bearing liabilities
Trading liabilities and financial liabilities
designated at fair value (excluding own
debt issued)26
Non-interest bearing current accounts
Total equity and other non-interest bearing
liabilities
2014
Average
balance
US$m
Interest
expense
US$m
61,217
481
66,374
1,088,493
190,705
129,724
10,120
837
9,131
652
4,554
595
Average
balance
US$m
61,616
72,333
1,035,500
94,410
150,976
11,345
Cost
%
0.79
1.26
0.84
0.34
3.51
5.88
2013
Interest
expense
US$m
Cost
Average
balance
%
US$m
2012
Interest
expense
US$m
555
0.90
78,023
1,001
967
8,794
405
4,182
750
75,016
1.34
0.85 1,012,056
55,536
0.43
161,348
2.77
19,275
6.61
1,325
10,650
387
4,755
912
1,546,633
16,250
1.05 1,426,180
15,653
1.10 1,401,254 19,030
Cost
%
1.28
1.77
1.05
0.70
2.95
4.73
1.36
178,518
185,990
768,902
2,856
1.60
301,353
184,370
780,113
3,027
1.00
3,445
1.08
318,883
177,085
809,732
Year ended 31 December
2,680,043
19,106
0.71
2,692,016
18,680
0.69 2,706,954 22,475
0.83
For footnotes, see page 109.
HSBC HOLDINGS PLC
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Reported net interest income of US$35bn decreased by
US$834m or 2% compared with 2013. This included the
significant items and currency translation summarised
in the table below.
Significant items and currency translation
Significant items
Provisions arising from the ongoing review of compliance with the Consumer Credit Act in the UK
Acquisitions, disposals and dilutions
2014
US$m
(632)
38
(594)
–
(594)
2013
US$m
–
386
386
518
904
was partially offset by compressed yields. In Europe,
excluding the effect of the CCA provisions noted above,
interest income on customer lending rose due to
increases in mortgage and term lending balances.
Interest income on short-term funds and financial
investments increased both in Latin America and Asia, as
interest rates rose in certain countries in these regions
(notably in Brazil, Argentina and mainland China) and
average balances grew. However, in Europe, interest
income on short-term funds and financial investments
fell as maturing positions were replaced by longer-term
but lower-yielding bonds.
Interest expense
Reported interest expense increased in the year.
We recorded increased interest expense on customer
accounts in Asia and Latin America, partly offset by a
reduction in North America. In Asia, the growth was
principally from an increase in the average balances
of customer accounts. In Latin America, interest expense
on customer accounts rose as reductions in average
balances were more than offset by the increase in the
cost of funds due to interest rate rises, notably in Brazil.
However, the effects of this were partly offset by a fall in
the cost of funds in Mexico as Central Bank rates fell, and
the disposal of non-strategic businesses. Conversely, in
North America, interest expense on customer deposits
declined as a result of a strategic decision to re-price
deposits downwards. In addition, other interest expense
decreased due to a release of accrued interest
associated with an uncertain tax position.
Interest expense on debt issued rose. We recorded an
increase in the cost of funds which was partly offset by
decreased overall balances. Interest expense rose in
Latin America, notably in Brazil, in line with interest rate
rises and increased medium-term loan note balances.
By contrast, in North America the business disposals led
to a decline in our funding requirements. The cost of
funds also fell as higher coupon debt matured and was
repaid. In Europe, interest expense on debt also
decreased, as average outstanding balances fell as a
result of net redemptions and the cost of funds reduced.
Currency translation
Year ended 31 December
On a reported basis, net interest spread and margin both
fell, reflecting lower yields on customer lending in North
America and Europe. In North America, this was due to
changes in the composition of the lending portfolios
towards lower yielding secured assets and to the run-off
of the CML portfolio. In Europe, it was principally due
to a significant item, namely provisions arising from the
ongoing review of compliance with the Consumer Credit
Act (‘CCA’) in the UK. These factors were partially offset
by a lower cost of funds.
Excluding the significant items and currency translation
tabulated above, net interest income rose by US$664m
or 2% from 2013, driven by increases in Asia, partly
reflecting growth in customer lending volumes.
Interest income
Reported interest income was broadly unchanged, as
decreases in interest income from customer lending
(which included the effect of the CCA provisions) were
offset by increases in income from short-term funds, as
well as a rise due to the change in the management of
reverse repo transactions (see page 48).
Interest income on loans and advances to customers
decreased, principally in North America and Latin
America, partially offset by increases in Asia. In North
America, this was a consequence of the disposal of the
higher yielding non-real estate loan portfolio and the
reduction in the CML portfolio from run-off and sales. In
addition, new lending to customers in RBWM and CMB
was at lower yields, reflecting a shift in the portfolio
towards higher levels of lower yielding first lien real
estate secured loans. In Latin America, interest income
on customer lending also decreased, reflecting a fall in
yields in both Brazil and Mexico, despite the rise in
average balances in term lending in both countries. In
Brazil, the falling yield reflected the shift in product and
client mix to more secured, relationship-led lending
while, in Mexico, it was driven by reductions in Central
Bank interest rates. The region was also affected by the
disposal of non-strategic businesses.
By contrast, we recorded increased interest income
on customer lending in Asia, driven by growth in term
lending volumes and, to a lesser extent, residential
mortgages during the year. This increase in balances
HSBC HOLDINGS PLC
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Report of the Directors: Financial summary (continued)
Group performance by income and expense item
Repos and reverse repos
During the final quarter of 2013, GB&M changed the way
it managed reverse repurchase (‘reverse repo’) and
repurchase (‘repo’) activities. This had the effect of
reducing the net interest margin as average interest
earning assets and interest bearing liabilities increased
significantly. These reverse repo and repo agreements
have a lower gross yield and cost of funds, respectively,
than the remainder of our portfolio.
‘Net interest income’ includes the expense of internally
funded trading assets, while related revenue is reported
in ‘Net trading income’. The internal cost of funding
these assets decreased, as average trading asset
balances fell to a greater extent than trading liabilities. In
reporting our global business results, this cost is included
within ‘Net trading income’.
Net fee income
Account services
Funds under management
Cards
Credit facilities
Broking income
Imports/exports
Unit trusts
Underwriting
Remittances
Global custody
Insurance
Other
Fee income
Less: fee expense
Year ended 31 December
2014
US$m
3,407
2,658
2,460
1,890
1,371
1,115
1,005
872
833
726
516
2,692
19,545
(3,588)
15,957
2013
US$m
3,581
2,673
2,455
1,907
1,388
1,157
891
866
849
698
551
2,957
19,973
(3,539)
16,434
2012
US$m
3,563
2,561
3,030
1,761
1,350
1,196
739
739
819
737
696
2,958
20,149
(3,719)
16,430
Reported net fee income fell by US$477m, primarily in
Latin America and North America. In Latin America, the
decrease included the effect of currency translation and
the continued repositioning and disposal of businesses,
notably the sale of our Panama operations in 2013. In
North America, net fee income was lower following
the expiry of the Transition Servicing Agreements we
entered into with the buyer of the Card and Retail
Services (‘CRS’) business, and adverse adjustments to
mortgage servicing rights valuations.
Account services fee income decreased, notably in Latin
America and Europe. In Latin America, the fall was due
to a reduction in customer numbers in Mexico, as we
continued to reposition the business, and in Brazil, due
to strong market competition. In Europe, account
services fees were lower, primarily in Switzerland due
to the repositioning of our GPB business, and in the UK,
in part reflecting the implementation of the Retail
Distribution Review in 2013.
By contrast, unit trust fees rose, primarily in Asia, due
to increased sales of equity funds in Hong Kong.
Other fee income declined in North America due to the
expiry of the Transition Servicing Agreements and
in Latin America following the sale of our operations in
Panama in 2013 and the continued repositioning of the
business in Mexico.
In addition, fee expenses were higher due to adverse
adjustments to mortgage servicing rights valuations
in North America, reflecting mortgage interest rate
decreases in 2014 which compared with increases in
2013.
HSBC HOLDINGS PLC
48
Net trading income
Trading activities20
Ping An contingent forward sale contract
Net interest income on trading activities
Gain/(loss) on termination of hedges
Other trading income – hedge ineffectiveness:
– on cash flow hedges
– on fair value hedges
Fair value movement on non-qualifying hedges21
Year ended 31 December
For footnotes, see page 109.
2014
US$m
5,419
–
1,907
1
34
19
(620)
6,760
2013
US$m
6,921
(682)
2,047
(194)
22
65
511
8,690
2012
US$m
5,249
(553)
2,683
–
35
(27)
(296)
7,091
Reported net trading income of US$6.8bn was US$1.9bn
lower, predominantly in Europe. The reduction in net
trading income was partly driven by the significant items
summarised in the table below.
Significant items and currency translation
Significant items
Included within trading activities:
– Debit valuation adjustment on derivative contracts
– FX gains relating to sterling debt issued by HSBC Holdings
Included in other net trading income:
– Ping An contingent forward sale contract22
– Loss on early termination of cash flow hedges in the US run-off portfolio
– Fair value movement on non-qualifying hedges
– Acquisitions, disposals and dilutions
Currency translation
Year ended 31 December
For footnote, see page 109.
Excluding the significant items and currency translation
tabulated above, net trading income from trading
activities decreased by US$0.6bn, notably in Markets
within GB&M. This was predominantly driven by our
Foreign Exchange business, which was affected by lower
volatility and reduced client flows. In Equities, revenue
decreased, as 2013 benefited from higher revaluation
gains which more than offset a rise in 2014 in revenue
from increased client flows and higher derivatives
income.
In 2014, we revised our estimation methodology
for valuing uncollateralised derivative portfolios by
introducing the funding fair value adjustment (‘FFVA’),
resulting in a reduction in net trading income of
US$263m, primarily in Rates (US$164m) and Credit
(US$97m). Excluding the FFVA, Credit was also affected
by adverse movements on credit spreads and a reduction
in revenue in Legacy Credit. By contrast, Rates was
affected by favourable market movements, notably in
2014
US$m
2013
US$m
(332)
(332)
−
(539)
−
−
(541)
2
(871)
–
(871)
548
106
442
(346)
(682)
(199)
511
24
202
(11)
191
Asia, along with minimal fair value movements on our
own credit spread on structured liabilities compared
with adverse movements in 2013. These factors were
partly offset by a fall in Rates in Europe.
Included within net trading income from trading
activities, there were favourable foreign exchange
movements on assets held as economic hedges of
foreign currency debt designated at fair value, compared
with adverse movements in 2013. These movements
offset fair value movements on the foreign currency
debt which are reported in ‘Net income/(expense) from
financial instruments designated at fair value’.
In addition, net interest income from trading activities
fell due to lower average balances, notably relating to
reverse repo and repo agreements, in line with the
change in the way GB&M manages these agreements.
The net interest income from these activities is now
recorded in ‘Net interest income’.
HSBC HOLDINGS PLC
49
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2012
US$m
2,980
(996)
(4,327)
(5,215)
888
117
(2,226)
2012
US$m
33,582
87,720
8,376
23,655
74,768
Report of the Directors: Financial summary (continued)
Group performance by income and expense item
Net income/(expense) from financial instruments designated at fair value
Net income/(expense) arising from:
– financial assets held to meet liabilities under insurance and investment contracts
– liabilities to customers under investment contracts
– HSBC’s long-term debt issued and related derivatives
– change in own credit spread on long-term debt (significant item)
– other changes in fair value22
– other instruments designated at fair value and related derivatives
Year ended 31 December
For footnote, see page 109.
2014
US$m
2,300
(435)
508
417
91
100
2,473
2013
US$m
3,170
(1,237)
(1,228)
(1,246)
18
63
768
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 DPF
– unit-linked insurance and other insurance and investment contracts
Long-term debt issues designated at fair value
The accounting policies for the designation of financial
instruments at fair value and the treatment of the
associated income and expenses are described in Note 2
on the Financial Statements.
The majority of the financial liabilities designated at fair
value are fixed-rate long-term debt issues, the interest
rate profile of which has been changed to floating
through 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. 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 adjusted
results, and related fair value movements are not
included in the calculation of regulatory capital.
Reported net income from financial instruments
designated at fair value was US$2.5bn in 2014, compared
with US$768m in 2013. The former included favourable
movements in the fair value of our own long-term debt
of US$417m due to changes in credit spread, compared
with adverse movements of US$1.2bn in 2013. Excluding
2014
US$m
29,037
76,153
10,650
16,333
69,681
2013
US$m
38,430
89,084
10,717
25,423
75,278
this significant item, net income from financial
instruments designated at fair value increased by
US$42m.
Net income arising from financial assets held to meet
liabilities under insurance and investment contracts of
US$2.3bn was US$870m lower than in 2013. This was
driven by weaker equity market performance in the UK
and France, partly offset by improved equity market
performance in Hong Kong and higher net income on
the bonds portfolio in Brazil.
Investment gains or losses arising from equity markets
result in a corresponding movement in liabilities to
customers, reflecting the extent to which unit-linked
policyholders, in particular, participate in the investment
performance of the associated asset portfolio. Where
these relate to assets held to back investment contracts,
the corresponding movement in liabilities to customers
is also recorded under ‘Net income/(expense) from
financial instruments designated at fair value’. This is
in contrast to gains or losses related to assets held to
back insurance contracts or investment contracts with
discretionary participation features (‘DPF’), where the
corresponding movement in liabilities to customers is
recorded under ‘Net insurance claims and benefits paid
and movement in liabilities to policyholders’.
Other changes in fair value reflected a net favourable
movement due to interest and exchange rate hedging
ineffectiveness. This was partly offset by net adverse
foreign exchange movements on foreign currency debt
designated at fair value and issued as part of our overall
funding strategy (offset from assets held as economic
hedges in ‘Net trading income’).
HSBC HOLDINGS PLC
50
Gains less losses from financial investments
Net gains/(losses) from disposal of:
– debt securities
– equity securities
– other financial investments
Impairment of available-for-sale equity securities
Year ended 31 December
2014
US$m
665
1,037
6
1,708
(373)
1,335
2013
US$m
491
1,697
(1)
2,187
(175)
2,012
Reported gains less losses from financial investments
were US$1.3bn, a decrease of US$677m from 2013. The
decrease primarily reflected the significant items
summarised below.
2012
US$m
781
823
5
1,609
(420)
1,189
2013
US$m
–
–
1,235
5
1,240
(10)
1,230
2014
US$m
428
(271)
−
−
157
−
157
reported higher gains on sale of available-for-sale equity
securities and lower impairments on available-for-sale
equity securities from improved market conditions and
business performance of the underlying portfolio.
2014
US$m
12,370
(449)
11,921
2013
US$m
12,398
(458)
11,940
2012
US$m
13,602
(558)
13,044
external independent financial adviser distribution
channels for certain linked insurance contracts in the
second half of 2013. This was partly offset by increases
in France, mainly reflecting higher sales of investment
contracts with DPF.
Net insurance premium income also fell in Latin America,
primarily in Brazil, reflecting lower sales, in part due to
changes in our distribution channel.
Significant items and currency translation
Significant items
Gain on sale of shareholding in Bank of Shanghai
Impairment on our investment in Industrial Bank
Net gain on completion of Ping An disposal22
Acquisitions, disposals and dilutions
Currency translation
Year ended 31 December
For footnote, see page 109.
Excluding the significant items and currency translation
noted above, gains less losses from financial investments
increased by US$396m, primarily driven by higher net
gains on the disposal of debt securities as we actively
managed the Legacy Credit portfolio. In addition, we
Net insurance premium income
Gross insurance premium income
Reinsurance premiums
Year ended 31 December
Reported net insurance premium income was broadly
unchanged, with reductions in Europe and Latin America
largely offset by higher premium income in Asia.
In Asia, premium income rose, primarily in Hong Kong,
due to increased new business from deferred annuity,
universal life and endowment contracts. This was partly
offset by lower new business from unit-linked contracts.
In Europe, premium income decreased, mainly in the UK,
reflecting lower sales following the withdrawal of
HSBC HOLDINGS PLC
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Report of the Directors: Financial summary (continued)
Group performance by income and expense item
Other operating income
Rent received
Gains/(losses) recognised on assets held for sale
Gains on investment properties
Gain on disposal of property, plant and equipment, intangible assets and
non-financial investments
Gains/(losses) arising from dilution of interest in Industrial Bank and other associates
and joint ventures
Gain on disposal of HSBC Bank (Panama) S.A.
Change in present value of in-force long-term insurance business
Other
Year ended 31 December
Change in present value of in-force long-term insurance business
Value of new business
Expected return
Assumption changes and experience variances
Other adjustments
Year ended 31 December
Reported other operating income of US$1.1bn decreased
by US$1.5bn from 2013. This was largely due to the
significant items summarised in the table below.
Significant items and currency translation
2014
US$m
162
220
120
32
(32)
–
261
368
1,131
2014
US$m
870
(545)
(116)
52
261
Significant items
Included within gains/(losses) recognised on assets held for sale:
– write-off of allocated goodwill relating to the GPB Monaco business
– loss on sale of the non-real estate portfolio in the US
– gain/(loss) on sale of several tranches of real estate secured accounts in the US
– Household Insurance Group Holding company’s disposal of its insurance manufacturing business2
Included within the remaining line items:
– reclassification gain in respect of our holding in Industrial Bank Co., Limited following the issue of
additional share capital to third parties2
– HSBC Latin America Holdings UK Limited’s disposal of HSBC Bank (Panama) S.A.3
– HSBC Insurance (Asia-Pacific) Holdings Limited’s disposal of its shareholding in Bao Viet Holdings2
– loss on sale of an HFC Bank UK secured loan portfolio
– acquisitions, disposals and dilutions
2013
US$m
155
(729)
113
178
1,051
1,107
525
232
2,632
2013
US$m
924
(505)
88
18
525
2014
US$m
168
–
–
168
–
(41)
–
–
–
–
(41)
–
127
2012
US$m
210
485
72
187
–
–
737
409
2,100
2012
US$m
1,027
(420)
69
61
737
2013
US$m
(772)
(279)
(271)
(123)
(99)
2,193
1,089
1,107
104
(146)
39
(18)
1,403
Currency translation
Year ended 31 December
Excluding the significant items and currency translation
tabulated above, other operating income decreased by
US$0.2bn compared with 2013. This was primarily from
lower favourable movements in 2014 in present value of
in-force (‘PVIF’) long-term insurance business, and lower
disposal and revaluation gains on investment properties,
mainly in Hong Kong. The decrease was partly offset by
gains reported in Legacy Credit in GB&M in the UK as
we actively managed the portfolio.
Lower favourable movements in the PVIF long-term
insurance business asset in 2014 were mainly due to the
following factors:
• a reduction in the value of new business, mainly in
Brazil, due to higher interest rates and lower volumes;
and
• adverse assumption changes and experience
variances in 2014 compared with favourable
movements in 2013. This was mainly driven by falling
interest rates in France and adverse actuarial
assumption updates in Hong Kong, partly offset by
the favourable effects of interest rate fluctuations,
mainly in Asia and Brazil.
HSBC HOLDINGS PLC
52
Net insurance claims and benefits paid and movement in liabilities to policyholders
Net insurance claims and benefits paid and movement in liabilities to policyholders:
– gross
– less reinsurers’ share
Year ended 31 December24
For footnote, see page 109.
2014
US$m
13,723
(378)
13,345
2013
US$m
13,948
(256)
13,692
2012
US$m
14,529
(314)
14,215
Reported net insurance claims and benefits paid and
movement in liabilities to policyholders were US$347m
lower than in 2013.
Movements in claims resulting from investment returns
on the assets held to support policyholder contracts,
where the policyholder bears investment risk, decreased.
This reflected weaker equity market performance in the
UK and France, partly offset by improved equity market
performance in Hong Kong and higher net income on the
bonds portfolio in Brazil. The gains or losses recognised
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’.
Reductions in claims resulting from a decrease in new
business written in Europe and Latin America were
mostly offset by increases in Hong Kong as explained
under ‘Net earned insurance premiums’.
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/(releases of impairment) on available-for-sale
debt securities
Other credit risk provisions
Year ended 31 December
Impairment charges on loans and advances to customers as a percentage of
average gross loans and advances to customers27
For footnote, see page 109.
Reported loan impairment charges and other credit risk
provisions (‘LICs’) of US$3.9bn were US$2.0bn lower
than in 2013, primarily in North America, Europe and
Latin America. The percentage of impairment charges
to average gross loans and advances fell to 0.4% at
31 December 2014 from 0.7% at 31 December 2013.
Individually assessed charges decreased by US$540m,
primarily in Europe, partly offset by an increase in Asia
and the Middle East and North Africa. In Europe,
they were lower, mainly in CMB in the UK, reflecting
improved quality in the portfolio and the economic
environment, as well as in GB&M. In Asia, the increase
was on a small number of exposures in Hong Kong and
in mainland China, primarily in CMB and GB&M, while
in the Middle East and North Africa we recorded net
charges compared with net releases in 2013, mainly due
to lower releases on a particular UAE-related exposure
in GB&M.
Collectively assessed charges declined by US$1.5bn,
primarily due to decreases in North America and Latin
America. In North America, the reduction was mainly
in RBWM, reflecting reduced levels of delinquency and
new impaired loans in the CML portfolio. A decrease in
2014
US$m
5,010
(955)
4,055
1,780
2,275
(319)
115
3,851
0.4%
2013
US$m
7,344
(1,296)
6,048
2,320
3,728
(211)
12
5,849
0.7%
2012
US$m
9,306
(1,146)
8,160
2,139
6,021
99
52
8,311
0.9%
lending balances from continued portfolio run-off and
loan sales was partly offset by an increase relating to
less favourable market value adjustments of underlying
properties as improvements in housing market
conditions were less pronounced in 2014 than in 2013.
In Latin America, the reduction in collectively assessed
charges was driven by the adverse effect of changes to
the impairment model and assumption revisions for
restructured loan portfolios in Brazil which occurred in
2013, both in RBWM and CMB. Charges were also lower
due to reduced Business Banking provisions reflecting
improved delinquency rates and the effect of the
disposal of non-strategic businesses.
Net releases of credit risk provisions of US$204m were
broadly unchanged, as higher releases on available-for-
sale ABSs in GB&M in Europe were offset by provisions
in Latin America and North America. In Latin America,
a provision was made in Brazil against a guarantee in
GB&M. In North America we recorded provisions in
Canada, compared with releases in 2013, and in the US
reflecting a deterioration in the underlying asset values
of a specific GB&M exposure.
HSBC HOLDINGS PLC
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Report of the Directors: Financial summary (continued)
Group performance by income and expense item
Operating expenses
By expense category
Employee compensation and benefits
Premises and equipment (excluding depreciation and impairment)
General and administrative expenses
Administrative expenses
Depreciation and impairment of property, plant and equipment
Amortisation and impairment of intangible assets
Year ended 31 December
Staff numbers (full-time equivalents)
Geographical regions
Europe
Asia8
Middle East and North Africa
North America
Latin America
At 31 December
For footnote, see page 109.
2014
US$m
20,366
4,204
14,361
38,931
1,382
936
41,249
2013
US$m
19,196
4,183
12,882
36,261
1,364
931
38,556
2012
US$m
20,491
4,326
15,657
40,474
1,484
969
42,927
2014
2013
2012
69,363
118,322
8,305
20,412
41,201
257,603
68,334
113,701
8,618
20,871
42,542
254,066
70,061
112,766
8,765
22,443
46,556
260,591
Reported operating expenses of US$41bn were
US$2.7bn or 7% higher than in 2013. The increase in
operating expenses was partly driven by the significant
items noted in the table below, including settlements
and provisions in connection with foreign exchange
investigations, of which US$809m was recorded in the
fourth quarter of 2014 (see Note 40 on the Financial
Statements for further details).
2014
US$m
–
550
–
1,187
65
1,275
–
278
40
3,395
–
3,395
2013
US$m
(430)
–
298
–
352
1,235
100
483
488
2,526
348
2,874
country, encompassing local requirements as necessary.
During 2014, we invested in developing our financial
crime compliance expertise and building strategic
infrastructure solutions for customer due diligence,
transaction monitoring and sanctions screening.
We continued to invest in strategic initiatives in support
of organically growing our business, primarily in CMB
in both Asia, in Business Banking and Global Trade and
Receivables Finance and, to a lesser extent, in Europe.
We also increased expenditure on marketing and
advertising to support revenue generating initiatives,
primarily in RBWM's core propositions of Premier and
Advance and personal lending products.
Significant items and currency translation
Significant items
Accounting gain arising from change in basis of delivering ill-health benefits in the UK
Charge in relation to settlement agreement with Federal Housing Finance Authority
Madoff-related litigation costs
Settlements and provisions in connection with foreign exchange investigations
Regulatory provisions in GPB
UK customer redress programmes
US customer remediation provision relating to CRS
Restructuring and other related costs
Acquisitions, disposals and dilutions
Currency translation
Year ended 31 December
Excluding significant items and currency translation,
operating expenses were US$2.2bn or 6% higher than in
2013.
Regulatory Programmes and Compliance costs increased
as a result of the continued focus on Global Standards
and the broader regulatory reform programme being
implemented by the industry to build the necessary
infrastructure to meet today’s enhanced compliance
standards, along with implementation costs to meet
obligations such as stress tests in different jurisdictions
and structural reform.
During 2014, we accelerated the deployment of Global
Standards throughout the Group. Our global businesses
and Compliance function have developed operating
procedures to meet our new global AML and sanctions
policies and these are now being implemented in every
HSBC HOLDINGS PLC
54
The increase in costs also reflected:
• inflationary pressures, including wage inflation,
primarily in Asia and Latin America;
• the UK bank levy charge, which increased to
US$1.1bn in 2014 from US$904m in 2013, mainly
due to an increase in the rate of the levy. Both years
also included adjustments relating to the previous
year’s bank levy charge (2014: US$45m favourable
adjustment; 2013: US$12m adverse adjustment); and
• the Financial Services Compensation Scheme levy in
the UK, as a result of the timing of the recognition.
During 2014, we generated further sustainable savings of
US$1.3bn, primarily driven by re-engineering our back
office processes, which in part offset the investments
and inflation noted above.
The average number of FTEs was broadly unchanged as
reductions through sustainable savings programmes
were broadly offset by the initiatives related to
Regulatory Programmes and Compliance and business
growth.
Reported cost efficiency ratios25
HSBC
Geographical regions
Europe
Asia8
Middle East and North Africa
North America
Latin America
Global businesses
Retail Banking and Wealth Management
Commercial Banking
Global Banking and Markets
Global Private Banking
For footnotes, see page 109.
Share of profit in associates and joint ventures
Associates
Bank of Communications Co., Limited
Ping An Insurance (Group) Company of China, Ltd
Industrial Bank Co., Limited
The Saudi British Bank
Other
Share of profit in associates
Share of profit in joint ventures
Year ended 31 December
2014
%
67.3
93.7
44.0
47.7
78.9
71.7
71.2
45.9
67.7
74.8
2014
US$m
1,974
–
–
455
64
2,493
39
2,532
2013
%
59.6
84.0
40.7
51.5
72.9
56.1
64.5
43.1
51.9
91.4
2013
US$m
1,878
–
–
403
5
2,286
39
2,325
2012
%
62.8
108.4
39.4
48.0
60.8
58.7
58.4
45.9
54.2
67.6
2012
US$m
1,670
763
670
346
72
3,521
36
3,557
HSBC’s reported share of profit in associates and joint
ventures was US$2.5bn, an increase of US$207m or 9%,
in part due to the non-recurrence of an impairment
charge of US$106m on our banking associate in Vietnam
in 2013. Excluding this, our share of profit in associates
and joint ventures increased, driven by higher
contributions from BoCom and The Saudi British Bank.
Our share of profit from BoCom rose as a result of
balance sheet growth and increased trading income,
partly offset by higher operating expenses and a rise in
loan impairment charges.
At 31 December 2014, we performed an impairment
review of our investment in BoCom and concluded that it
was not impaired, based on our value in use calculation
(see Note 20 on the Financial Statements for further
details).
In future periods, the value in use may increase or
decrease depending on the effect of changes to model
inputs. It is expected that the carrying amount will
increase in 2015 due to retained profits earned by
BoCom. At the point where the carrying amount exceeds
the value in use, HSBC would continue to recognise its
share of BoCom’s profit or loss, but the carrying amount
would be reduced to equal the value in use, with a
corresponding reduction in income, unless the market
value has increased to a level above the carrying
amount.
Profits from The Saudi British Bank rose, reflecting strong
balance sheet growth.
HSBC HOLDINGS PLC
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Report of the Directors: Financial summary (continued)
Group performance by income and expense item / Consolidated balance sheet
Tax expense
Profit before tax
Tax expense
Profit after tax for the year ended 31 December
Effective tax rate
The effective tax rate for 2014 of 21.3% was lower than
the blended UK corporation tax rate for the year of
21.5%.
The effective tax rate in the year reflected the following
recurring benefits: tax exempt income from government
bonds and equities held by a number of Group entities
and recognition of the Group’s share of post-tax profits
of associates and joint ventures within our pre-tax
income. In addition, the effective tax rate reflected a
current tax credit for prior periods. This was partly offset
by non-tax deductible settlements and provisions in
connection with foreign exchange investigations.
The tax expense decreased by US$0.8bn to US$4.0bn for
2014, primarily due to a reduction in accounting profits
and the benefit of the current tax credit for previous
years.
2014
US$m
18,680
(3,975)
14,705
21.3%
2013
US$m
22,565
(4,765)
17,800
21.1%
2012
US$m
20,649
(5,315)
15,334
25.7%
In 2014, the tax borne and paid by the Group to the
relevant tax authorities, including tax on profits, bank
levy and employer-related taxes, was US$7.9bn (2013:
US$8.6bn). The amount differs from the tax charge
reported in the income statement due to indirect taxes
such as VAT and the bank levy which are included in
pre-tax profit, and the timing of payments.
We also play a major role as tax collector for
governments in the jurisdictions in which we operate.
Such taxes include employee-related taxes and taxes
withheld from payments to deposit holders. In 2014,
we collected US$9.1bn (2013: US$8.8bn).
HSBC HOLDINGS PLC
56
Consolidated balance sheet
Five-year summary consolidated balance sheet
ASSETS
Cash and balances at central banks
Trading assets26
Financial assets designated at fair value
Derivatives
Loans and advances to banks27
Loans and advances to customers27,28
Reverse repurchase agreements – non-trading26,27
Financial investments
Other assets
2014
US$m
2013
US$m
2012
US$m
2011
US$m
2010
US$m
129,957
304,193
29,037
345,008
112,149
974,660
161,713
415,467
161,955
166,599
303,192
38,430
282,265
120,046
992,089
179,690
425,925
163,082
141,532
408,811
33,582
357,450
117,085
962,972
70,112
421,101
179,893
129,902
330,451
30,856
346,379
139,078
899,010
83,328
400,044
196,531
57,383
385,052
37,011
260,757
141,869
897,847
126,921
400,755
147,094
Total assets at 31 December
2,634,139
2,671,318
2,692,538
2,555,579
2,454,689
LIABILITIES AND EQUITY
Liabilities
Deposits by banks27
Customer accounts27
Repurchase agreements – non-trading26,27
Trading liabilities26
Financial liabilities designated at fair value
Derivatives
Debt securities in issue
Liabilities under insurance contracts
Other liabilities
Total liabilities at 31 December
Equity
Total shareholders’ equity
Non-controlling interests
Total equity at 31 December
77,426
1,350,642
107,432
190,572
76,153
340,669
95,947
73,861
121,459
86,507
1,361,297
164,220
207,025
89,084
274,284
104,080
74,181
120,181
95,480
1,311,396
40,567
304,563
87,720
358,886
119,461
68,195
123,141
95,205
1,223,140
48,402
265,192
85,724
345,380
131,013
61,259
134,171
87,221
1,190,763
60,325
300,703
88,133
258,665
145,401
58,609
109,954
2,434,161
2,480,859
2,509,409
2,389,486
2,299,774
190,447
9,531
199,978
181,871
8,588
190,459
175,242
7,887
158,725
7,368
183,129
166,093
147,667
7,248
154,915
Total liabilities and equity at 31 December
2,634,139
2,671,318
2,692,538
2,555,579
2,454,689
Five-year selected financial information
Called up share capital
Capital resources29,30
Undated subordinated loan capital
Preferred securities and dated subordinated loan capital31
Risk-weighted assets29
Financial statistics
Loans and advances to customers as a percentage of
customer accounts27
Average total shareholders’ equity to average total assets
Net asset value per ordinary share at year-end32 (US$)
Number of US$0.50 ordinary shares in issue (millions)
Closing foreign exchange translation rates to US$:
US$1: £
US$1: €
For footnotes, see page 109.
2014
US$m
9,609
190,730
2,773
47,208
1,219,765
2013
US$m
9,415
194,009
2,777
48,114
1,092,653
2012
US$m
9,238
180,806
2,778
48,260
1,123,943
2011
US$m
8,934
170,334
2,779
49,438
1,209,514
2010
US$m
8,843
167,555
2,781
54,421
1,103,113
72.2
7.01
9.28
19,218
0.642
0.823
72.9
6.55
9.27
18,830
0.605
0.726
73.4
6.16
9.09
18,476
73.5
5.64
8.48
17,868
0.619
0.758
0.646
0.773
75.4
5.53
7.94
17,686
0.644
0.748
A more detailed consolidated balance sheet is contained in the Financial Statements on page 337.
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Report of the Directors: Financial summary (continued)
Consolidated balance sheet
Movement in 2014
Total reported assets were US$2.6 trillion, 1% lower
than at 31 December 2013. On a constant currency
basis, total assets were US$85bn or 3% higher.
Our balance sheet remains strong with a ratio of
customer advances to customer accounts of 72%.
Although customer loans and customer accounts
have fallen on a reported basis, both have increased
on a constant currency basis, notably rising in Asia.
The following commentary is on a reported basis unless
otherwise stated.
Assets
Cash and balances at central banks decreased by
US$37bn, notably in Europe, in part reflecting net
reductions in repurchase and reverse repurchase
agreements.
Trading assets were broadly unchanged. Excluding
adverse foreign exchange movements of US$18bn,
trading assets grew, primarily from the holdings of debt
securities in Asia to support GB&M’s Rates business.
In Europe, trading assets were broadly unchanged as
increased holdings of equity securities were broadly
offset by reductions in several other asset classes.
Financial assets designated at fair value decreased by
US$9bn, notably in Europe, largely from the transfer
to ‘Assets held for sale’ of balances relating to the UK
Pension business of HSBC Life (UK) Limited.
Derivative assets increased by 22%, notably in Europe
relating to interest rate and foreign exchange derivative
contracts reflecting market movements, including
changes in yield curves and foreign exchange rates.
Loans and advances to customers marginally decreased
by US$17bn or 2% including adverse foreign exchange
movements of US$45bn. Excluding these movements,
customer lending grew by US$28bn, or 3%, largely from
growth in Asia of US$32bn and, to a lesser extent, in
North America and Latin America. By contrast, balances
decreased in Europe by US$15bn, as term lending
growth in CMB and GB&M was more than offset by a
fall in corporate overdraft balances relating to a small
number of customers, as explained further below.
In Asia, term lending to CMB and GB&M customers grew,
which included growth in commercial real estate and
other property-related lending. Mortgage balances
also increased, mainly in Hong Kong. In North America,
the growth in balances was driven by increased term
lending to corporate and commercial customers in CMB
and GB&M, partly offset by a decline in RBWM from the
continued reduction in the US run-off portfolio and the
transfer to ‘Assets held for sale’ of US first lien mortgage
balances. Balances also rose in Latin America, mainly in
CMB in Brazil and GB&M in Mexico.
The fall in lending in Europe of US$15bn was driven by
a reduction in corporate overdraft balances. In the UK,
a small number of clients benefit from the use of net
interest arrangements across their overdraft and deposit
positions. During the year, as we aligned our approach
in our Payments and Cash Management business to be
more globally consistent, many of these clients increased
the frequency with which they settled these balances,
reducing their overdraft and deposit balances which
fell by US$28bn. Other customer loans and advances
increased by US$13bn, mainly in CMB and GB&M,
driven by an increase in term lending to corporate and
commercial customers, notably in the second half of the
year.
Reverse repurchase agreements decreased by US$18bn,
driven by a managed reduction in Europe as we
reassessed the overall returns of these activities in light
of new regulatory requirements. This decrease was
partly offset by increases in Asia and North America.
Liabilities
Repurchase agreements decreased by US$57bn or 35%,
driven by a decrease in Europe, notably in the UK and
France, reflecting the managed reduction in reverse
repurchase agreements in Europe as noted above.
Customer accounts decreased marginally by US$11bn,
and included adverse foreign exchange movements of
US$58bn. Excluding these movements, balances
increased by US$47bn or 4%, with growth in all regions,
notably Asia, of US$36bn. The increase in Asia reflected
growth in our Payments and Cash Management business
in CMB and GB&M, an increase in balances in Securities
Services in GB&M and a rise in RBWM, in part reflecting
successful deposit campaigns. In Europe, balances
increased marginally despite a US$28bn fall in corporate
current accounts, mainly in GB&M, in line with the fall in
corporate overdraft balances, and a reduction in client
deposits in GPB. These factors were more than offset by
growth in CMB and, to a lesser extent, in GB&M as
deposits from our Payments and Cash Management
business increased together with a rise in RBWM
balances reflecting customers’ continued preference for
holding balances in current and savings accounts.
Trading liabilities fell by US$16bn including adverse
foreign exchange movements of US$12bn. Excluding
these, balances fell reflecting changes in client demand.
Financial liabilities designated at fair value reduced by
US$13bn, mainly in Europe reflecting the transfer
to ‘Liabilities held for sale’ of balances relating to the
UK Pension business of HSBC Life (UK) Limited.
The increase in derivative liabilities was in line with that
of ‘Derivative assets’ as the underlying risk is broadly
matched.
HSBC HOLDINGS PLC
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Equity
Total shareholders’ equity rose by 5%, driven by profits
generated in the year, which were partially offset
by dividends paid. In addition, shareholders’ equity
increased as we issued new contingent convertible
securities of US$5.7bn during 2014. For further details
of these securities, see Note 35 on the Financial
Statements. These movements were partly offset by a
reduction of US$9bn in our foreign exchange reserve
reflecting the notable appreciation in the US dollar
against sterling and the euro, particularly in the second
half of the year.
Reconciliation of consolidated reported and constant currency assets and liabilities
31 December 2014 compared with 31 December 2013
31 Dec 13
as
reported
US$m
166,599
303,192
38,430
282,265
120,046
992,089
179,690
425,925
163,082
Currency
translation
adjustment33
31 Dec 13
at 31 Dec 14
exchange
rates
US$m
(9,384)
(18,176)
(2,467)
(16,582)
(4,923)
(45,494)
(9,961)
(15,285)
(385)
US$m
157,215
285,016
35,963
265,683
115,123
946,595
169,729
410,640
162,697
31 Dec 14
as
reported
US$m
129,957
304,193
29,037
345,008
112,149
974,660
161,713
415,467
161,955
2,671,318
(122,657)
2,548,661
2,634,139
Cash and balances at central banks
Trading assets
Financial assets designated at fair value
Derivative assets
Loans and advances to banks27
Loans and advances to customers27
Reverse repurchase agreements –
non-trading26,27
Financial investments
Other assets
Total assets
Deposits by banks27
Customer accounts27
Repurchase agreements – non-trading26, 27
Trading liabilities
Financial liabilities designated at
fair value
Derivative liabilities
Debt securities in issue
Liabilities under insurance contracts
Other liabilities
86,507
1,361,297
164,220
207,025
89,084
274,284
104,080
74,181
120,181
(3,317)
(57,673)
(7,730)
(12,208)
(3,930)
(16,214)
(5,089)
(4,447)
(4,221)
83,190
1,303,624
156,490
194,817
85,154
258,070
98,991
69,734
115,960
77,426
1,350,642
107,432
190,572
76,153
340,669
95,947
73,861
121,459
Total liabilities
Total shareholders’ equity
Non-controlling interests
Total equity
2,480,859
(114,829)
2,366,030
2,434,161
181,871
8,588
190,459
(7,720)
(108)
(7,828)
174,151
8,480
182,631
190,447
9,531
199,978
Total liabilities and equity
2,671,318
(122,657)
2,548,661
2,634,139
For footnotes, see page 109.
Reported
change
Constant
currency
change
%
(22)
−
(24)
22
(7)
(2)
(10)
(2)
(1)
(1)
(10)
(1)
(35)
(8)
(15)
24
(8)
−
1
(2)
5
11
5
(1)
%
(17)
7
(19)
30
(3)
3
(5)
1
−
3
(7)
4
(31)
(2)
(11)
32
(3)
6
5
3
9
12
9
3
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Report of the Directors: Financial summary (continued)
Consolidated balance sheet
Combined view of lending and deposits26,27
Customers – amortised cost
Loans and advances to customers
Loans and advances to customers reported in ‘Assets held for sale’34
Reverse repurchase agreements – non-trading
Combined customer lending
Customer accounts
Customer accounts reported in ‘Liabilities of disposal groups held for sale’
Repurchase agreements – non-trading
Combined customer deposits
2014
US$m
974,660
577
66,310
2013
US$m
992,089
1,703
88,215
1,041,547
1,082,007
1,350,642
145
79,556
1,430,343
1,361,297
2,187
121,515
1,484,999
Banks – amortised cost
Loans and advances to banks
Reverse repurchase agreements – non-trading
Combined bank lending
Deposits by banks
Repurchase agreements – non-trading
Combined bank deposits
Customers and banks – fair value
Trading assets – reverse repos
– loans and advances to customers
– loans and advances to banks
Trading liabilities – repos
– customer accounts
– deposits by banks
For footnotes, see page 109.
Financial investments
112,149
95,403
207,552
77,426
27,876
105,302
1,297
908
389
3,798
898
2,900
Balance Sheet Management
Insurance entities
Structured entities
Principal Investments
Other
At 31 December
Equity
securities
US$bn
–
–
0.1
2.0
8.6
10.7
2014
Debt
securities
US$bn
306.8
48.5
14.9
–
34.6
404.8
Total
US$bn
306.8
48.5
15.0
2.0
43.2
415.5
Equity
securities
US$bn
–
–
0.1
2.7
6.3
9.1
120,046
91,475
211,521
86,507
42,705
129,212
10,120
7,180
2,940
17,421
9,611
7,810
2013
Debt
securities
US$bn
314.4
46.4
22.6
–
33.4
416.8
Change
%
(2)
(66)
(25)
(4)
(1)
(93)
(35)
(4)
(7)
4
(2)
(10)
(35)
(19)
(87)
(87)
(87)
(78)
(91)
(63)
Total
US$bn
314.4
46.4
22.7
2.7
39.7
425.9
HSBC HOLDINGS PLC
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Customer accounts by country
Europe
UK
France35
Germany
Switzerland
Turkey
Other
Asia8
Hong Kong
Australia
India
Indonesia
Mainland China
Malaysia
Singapore
Taiwan
Other
Middle East and North Africa (excluding Saudi Arabia)
Egypt
UAE
Other
North America
US
Canada
Other
Latin America
Argentina
Brazil
Mexico
Other
At 31 December
For footnotes, see page 109.
2014
US$m
545,959
439,313
40,750
15,757
11,058
7,856
31,225
577,491
389,094
19,312
11,678
5,788
46,588
16,292
43,731
14,901
30,107
39,720
7,663
19,771
12,286
138,884
84,894
43,871
10,119
48,588
4,384
23,204
18,360
2,640
2013
US$m
581,933
462,796
45,149
16,615
16,796
7,795
32,782
548,483
365,905
19,812
11,549
5,865
40,579
17,093
43,988
12,758
30,934
38,683
7,401
18,433
12,849
140,809
80,037
47,872
12,900
51,389
4,468
23,999
21,529
1,393
1,350,642
1,361,297
HSBC HOLDINGS PLC
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Report of the Directors: Financial summary / Global businesses
Reconciliation of RoRWA / Critical accounting estimates and judgements / Summary
Reconciliation of RoRWA
measures
Performance Management
During 2014, we targeted a return on average ordinary
shareholders’ equity of 12%–15%. For internal management
purposes we monitored global businesses and geographical
regions by pre-tax return on RWAs, a metric which combines
return on equity and regulatory capital efficiency objectives.
We targeted a return on average risk-weighted assets of 2.2%-
2.6% in 2014.
In addition to the return on average risk-weighted assets
(‘RoRWA’) we measure our performance internally using
the non-GAAP measure of adjusted RoRWA, which is
adjusted profit before tax as a percentage of average
risk-weighted assets adjusted for the effects of foreign
currency translation differences and the effects of
significant items. Excluded from adjusted RoRWA are
certain items which distort year-on-year performance
as explained on page 40.
We also present the non-GAAP measure of adjusted
RoRWA which is further adjusted for the effect of
operations that are not regarded as contributing to the
long-term performance of the Group. These include the
run-off portfolios and the CRS business which was sold in
2012.
The CRS 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 adjusted
RoRWA calculation. At the end of 2014, the residual
CRS operational risk RWAs relating to the CRS portfolio
were fully amortised.
Reconciliation of adjusted RoRWA (excluding run-off portfolios and Card and Retail Services)
Reported
Adjusted37
Run-off portfolios
Legacy credit in GB&M
US CML and other38
Card and Retail Services
Adjusted (excluding run-off portfolios and CRS)
Pre-tax
return
US$m
18,680
22,829
870
172
698
–
21,959
2014
Average
RWAs36
US$bn
1,209
1,207
115
48
67
–
1,092
RoRWA36
%
1.5
1.9
0.8
0.4
1.0
–
2.0
Reconciliation of reported and adjusted average risk-weighted assets
Average reported RWAs36
Currency translation adjustment33
Acquisitions, disposals and dilutions
Other significant items
Average adjusted RWAs36
For footnotes, see page 109.
Pre-tax
return
US$m
22,565
22,981
443
186
257
–
22,538
2013
Average
RWAs36
US$bn
1,104
1,071
121
33
88
4
946
Year ended 31 December
2014
US$bn
1,209
–
(2)
–
1,207
2013
US$bn
1,104
(8)
(21)
(4)
1,071
RoRWA36
%
2.0
2.1
0.4
0.6
0.3
–
2.4
Change
%
9.5
12.6
Critical accounting
estimates and judgements
The results of HSBC reflect the choice of accounting
policies, assumptions and estimates that underlie
the preparation of HSBC’s consolidated financial
statements. The significant accounting policies, including
the policies which include critical accounting estimates
and judgements, are described in Note 1 and in the
individual Notes on the Financial Statements. The
accounting policies listed below are highlighted as they
involve a high degree of judgement and estimation
uncertainty and have a material impact on the financial
statements:
• Impairment of loans and advances: Note 1(k) on
page 349;
• Deferred tax assets: Note 8 on page 365;
• Valuation of financial instruments: Note 13 on
page 378;
• Impairment of interests in associates: Note 20 on
page 403;
• Goodwill impairment: Note 21 on page 407; and
• Provisions: Note 29 on page 420.
In view of the inherent uncertainties and the high
level of subjectivity involved in the recognition or
measurement of the items above, it is possible that the
outcomes in the next financial year could differ from
those on which management’s estimates are based,
resulting in the recognition and measurement of
materially different amounts from those estimated
by management in the 2014 Financial Statements.
HSBC HOLDINGS PLC
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Global businesses
Summary
Retail Banking and Wealth Management
Commercial Banking
Global Banking and Markets
Global Private Banking
Other
Analysis by global business
63
64
67
70
72
75
76
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 78). Performance
is discussed in this order because certain strategic
themes, business initiatives and trends affect more than
one geographical region. All commentaries are on an
adjusted basis (page 40) unless stated otherwise, while
tables are on a reported basis unless stated otherwise.
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 along with 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 presentation
by global business, the cost of the levy is included in ‘Other’.
Profit/(loss) before tax
Retail Banking and Wealth Management
Commercial Banking
Global Banking and Markets
Global Private Banking
Other39
Year ended 31 December
Total assets40
Retail Banking and Wealth Management
Commercial Banking
Global Banking and Markets
Global Private Banking
Other
Intra-HSBC items
At 31 December
For footnotes, see page 109.
Risk-weighted assets
Retail Banking and Wealth Management
Commercial Banking
Global Banking and Markets
Global Private Banking
Other
At 31 December
2014
US$m
5,651
8,744
5,889
626
(2,230)
18,680
%
30.3
46.8
31.5
3.4
(12.0)
100.0
2013
US$m
6,649
8,441
9,441
193
(2,159)
%
29.5
37.4
41.8
0.9
(9.6)
2012
US$m
9,575
8,535
8,520
1,009
(6,990)
%
46.4
41.3
41.3
4.9
(33.9)
22,565
100.0
20,649
100.0
2014
US$m
499,083
372,739
1,839,644
88,342
164,537
(330,206)
%
18.9
14.2
69.8
3.4
6.2
(12.5)
2013
US$m
517,085
360,623
1,975,509
97,655
171,812
(451,366)
%
19.4
13.5
74.0
3.7
6.4
(17.0)
2,634,139
100.0
2,671,318
100.0
2014
US$bn
205.1
432.4
516.1
20.8
45.4
%
16.8
35.4
42.3
1.8
3.7
2013
US$bn
233.5
391.7
422.3
21.7
23.5
%
21.4
35.8
38.6
2.0
2.2
1,219.8
100.0
1,092.7
100.0
Principal Retail Banking and Wealth
Management business
RBWM comprises the Principal RBWM business, the US
run-off portfolio and the disposed-of US CRS business.
We believe that looking at the Principal RBWM business
allows management to more clearly discuss the cause
of material changes from year-to-year in the ongoing
business and to assess the factors and trends in the
business which are expected to have a material effect
in future years. The reconciliation of RBWM to Principal
RBWM is on page 64. Tables which reconcile reported to
adjusted financial measures are available on
www.hsbc.com.
HSBC HOLDINGS PLC
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Report of the Directors: Global businesses (continued)
RBWM
Retail Banking and Wealth
Management
RBWM provides banking and wealth
management services for our personal
customers to help them secure their future
prosperity and realise their ambitions.
US
Principal RBWM RoRWA
3.3%
Global mobile application
downloads surpass
6 million
Total
RBWM
US$m US$m
US
CRS portfolio
US$m
run-off Principal
RBWM
US$m
2014
Net interest income
Net fee income
Other income/
(expense)42
Net operating income4
LICs43
Net operating income
Total operating
expenses
Operating profit
Income from
associates44
Profit before tax
RoRWA36
2013
Net interest income
Net fee income
Other income/
(expense)42
16,782
6,668
1,144
24,594
(1,819)
22,775
(17,522)
5,253
398
5,651
2.6%
18,339
7,021
1,380
Net operating income4 26,740
LICs43
(3,227)
Net operating income
Total operating
expenses
Operating profit/(loss)
Income/(expense) from
associates44
Profit/(loss) before tax
RoRWA36
2012
Net interest income
Net fee income
Other income/
(expense)42
23,513
(17,248)
6,265
384
6,649
2.6%
20,298
7,205
6,358
Net operating income4 33,861
LICs43
(5,515)
1,390
(4)
15,392
6,672
(49)
1,193
1,337
23,257
(30)
(1,789)
1,307
21,468
(738)
(16,784)
569
4,684
–
398
569
0.8%
5,082
3.3%
2,061
11
16,278
7,010
(400)
1,780
1,672
25,068
(705)
(2,522)
967
22,546
(1,166)
(16,082)
(199)
6,464
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1)
(200)
–
(0.2%)
385
6,849
4.4%
1,267
395
3,155
4,817
2,563
33
16,468
6,777
(200)
3,403
2,396
26,648
(322)
(2,569)
(2,624)
Net operating income/
(expense)
Total operating
expenses
Operating profit/(loss)
Income from
associates44
Profit/(loss) before tax
RoRWA36
28,346
4,495
(173)
24,024
(19,769)
(729)
(1,103)
(17,937)
8,577
3,766
(1,276)
6,087
998
–
2
996
9,575
3,766
(1,274)
3.1% 14.7%
(1.1%)
7,083
4.2%
For footnotes, see page 109.
Best Mobile Banking Application 2014
(Global Finance Magazine)
Strategic direction
RBWM provides retail banking and wealth management
services for personal customers in markets where we have, or
can build, the scale in our target customer segments 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;
• using our 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 to focus our capital and resources on key
markets.
Our three growth priorities are customer growth in target
segments, deepening customer relationships through wealth
management and relationship-led lending, and enhancing
distribution capabilities, including digital.
Implementing Global Standards, enhancing risk management
control models and simplifying processes also remain top
priorities for RBWM.
Review of reported performance
• On a reported basis, RBWM profit before tax reduced
by US$1.0bn to US$5.7bn, while Principal RBWM
profit before tax fell by US$1.8bn to US$5.1bn.
The reduction in RBWM partly reflected the effects
of significant items (see page 42) including provisions
of US$568m arising from the ongoing review of
compliance with the CCA in the UK, adverse
movements in non-qualifying hedges of US$493m
in 2014 compared with favourable movements of
US$262m in 2013, UK customer redress provisions
of US$992m compared with US$953m in 2013,
and disposals.
• In the US run-off portfolio, a profit before tax was
recorded compared with a loss in 2013. A reduction in
revenue was more than offset by lower LICs reflecting
decreased lending balances, reduced new impaired
loans and lower delinquency levels. Operating
expenses also fell, mainly from the non-recurrence
of a customer remediation provision relating to our
former CRS business and lower divestiture costs.
HSBC HOLDINGS PLC
64
Review of adjusted performance45
• Revenue from current accounts, savings and deposits
The commentary that follows reflects performance in our
Principal RBWM46 business (see page 63).
Profit before tax (US$m)
1,829
6,911
6,849
799
7,648
5,082
2014
Reported
Currency translation
and significant items
2013
Adjusted profit
• Profit before tax fell by US$0.7bn to US$6.9bn.
Revenue was broadly unchanged, while lower LICs
were more than offset by higher operating expenses.
Revenue (US$m)
23,257
728
23,985
25,068
24,197
(871)
2013
Currency translation
and significant items
Adjusted revenue
2014
Reported
• Revenue was broadly unchanged despite the effect
of de-risking initiatives and against a backdrop of
continued low interest rates and muted growth in
certain key markets. Higher income from current
accounts, savings and deposits was broadly offset by
lower revenues from personal lending and wealth
management products.
Principal RBWM: management view of adjusted revenue
increased by 4%. This reflected an increase in
customer account balances, of 4% compared with
2013, mainly in Hong Kong and the UK. In addition,
higher revenue reflected increased spreads on savings
products in the UK and, to a lesser extent, on deposits
in mainland China where market interest rates
increased.
• Revenue from wealth management products reduced
by 1%. Investment distribution income declined,
mainly as a result of lower fees in the UK, in part
reflecting the Retail Distribution Review undertaken
in 2013, and in Brazil reflecting a change in product
mix. Life insurance manufacturing income was
broadly unchanged. This reflected higher new
business sales and investment income in Hong Kong,
and a net favourable movement in the PVIF asset in
Brazil, offset by a reduction in the PVIF asset in France
where a fall in long-term yields increased the cost
of guarantees on savings business.
• Personal lending revenue was down by 1%. While
mortgage and credit card revenues were broadly
unchanged, other personal lending income declined
by 4%, notably in the UK due to the cessation of
certain overdraft fees.
• LICs decreased by 22% with reductions across all
regions, mainly in Brazil due to impairment model
changes and assumption revisions for restructured
loans in 2013 which were not repeated in 2014. LICs
also reduced in the US and the UK, partly reflecting
lower delinquency levels and reduced outstanding
credit card and UK loan balances.
Operating expenses (US$m)
16,784
15,685
16,082
(1,099)
14,641
(1,441)
Current accounts, savings and deposits
Wealth management products
– investment distribution47
– life insurance manufacturing
– asset management
Personal lending
– mortgages
– credit cards
– other personal lending48
Other49
Net operating income4
For footnotes, see page 109.
2014
US$m
5,839
6,201
3,456
1,603
1,142
11,300
3,169
4,339
3,792
645
2013
US$m
5,606
6,263
3,568
1,602
1,093
11,455
3,182
4,310
3,963
873
23,985
24,197
2014
Reported
2013
Currency translation
and significant items
Adjusted operating
expenses
• Operating expenses increased by 7%, reflecting
inflationary pressures, particularly in Latin America, in
addition to higher costs associated with Regulatory
Programmes and Compliance. The increase also
reflected the timing of the recognition of the Financial
Services Compensation Scheme levy in the UK and
higher marketing costs across the regions. These
factors were partly offset by sustainable cost savings
of over US$200m.
HSBC HOLDINGS PLC
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Report of the Directors: Global businesses (continued)
RBWM / CMB
Growth priorities
Focus on relationship-led personal lending to
drive balance sheet growth
• In 2014, we continued to focus on improving
the quality of our revenue through the ongoing
implementation of de-risking initiatives, although
these have weighed on income. They included
the introduction of a new discretionary incentive
framework for our Retail Banking customer-facing
staff similar to the one launched for Wealth
Management relationship managers (‘RM’s) in
2013, removing the formulaic link between product
sales and variable pay for front line staff. We also
continued to simplify our product range, improve
our risk governance and align our practices following
regulatory changes.
• We aim to deepen relationships with our existing
customers and use personal lending to generate new
business, targeting different segments and offerings
in each market. To achieve this we continued to use
improved analytics to support product decisions.
Based on pricing and customer response measures,
we enhanced revenue and grew balances in certain
targeted segments, including the re-launch of the
Advance segment in 17 markets in 2014. Lending and
deposit balances and revenue per customer for
Advance increased compared with 2013.
• We maintained discipline around growing lending
within our risk appetite in our home and priority
growth markets. Home loan average balances
increased by 3% in 2014, reflecting growth in our
priority markets, notably with double-digit growth
in approximately half of these countries as we re-
balanced the product mix towards secured loans,
although this mix change translated into lower
spreads. In our home markets, we continued to target
growth in unsecured lending, with average balances
marginally higher including an increase in average
card balances in Hong Kong, partly offset by
a reduction in the UK. Despite overall balance
growth, LICs remained lower than in 2013.
• Customer recommendation levels improved in
several markets during 2014, with the total volume
of complaints related to products and services
decreasing by more than 20% in the second half of
the year, compared with the equivalent period in
2013. Further work is required and is ongoing to
better meet our customer needs as they continue to
evolve.
Continue to develop wealth management with a
focus on growing customer balances
• We remain committed to capturing opportunities
from wealth creation, primarily through our Premier
offering with its customers generating nearly four
times the average revenue of non-Premier clients.
• Although revenue from wealth management products
remained lower than expected we continued to grow
wealth balances, which comprise investment and
insurance balances. These balances increased
compared with 2013 across insurance, mutual funds
and equities trading.
• In 2014, Global Asset Management continued its
strategy of strengthening collaboration across the
global businesses to serve their customers. This
helped to attract US$29bn of net new money
principally in fixed income and liquidity products, in
particular with GB&M clients. The investment
performance in over 74% of Global Asset
Management’s eligible funds by value were above
the market median.
• In 2014, we improved our RMs’ productivity through
new training programmes and tools. Client contact
and coverage rates increased from 2013 with higher
numbers of client appointments, financial reviews
and needs fulfilled per RM.
Develop digital capabilities to support customers
and reduce cost
• We continue to develop our digital channels and
streamline processes to improve the customer
experience and to deliver cost savings through our
distribution network.
• In 2014, downloads of our global mobile application,
now with enriched functionality, were over 3m with
the total number of downloads surpassing 6m. Global
Finance magazine presented HSBC with the award for
Best Mobile Banking App at its 2014 World’s Best
Internet Bank event based on the application’s global
reach and functionality.
• In addition, we launched our first straight-through
on-line mortgage application service in the UK and, by
the end of 2014, 14% of our annual approvals were
produced online. We also deployed new Premier
platforms, digital capabilities and tablet-based tools
to enhance the end-to-end delivery process and
customer experience. Across our priority growth
markets, the revenue derived from digital channels
increased by 18% compared with 2013.
HSBC HOLDINGS PLC
66
Commercial Banking
CMB offers a full range of commercial
financial services and tailored solutions to
more than 2.5 million customers ranging
from small and medium-sized enterprises
to publicly quoted companies in almost
60 countries.
Net interest income
Net fee income
Other income42
Net operating income4
LICs43
Net operating income
Total operating expenses
Operating profit
Income from associates44
Profit before tax
RoRWA36
2014
US$m
10,506
4,738
1,059
16,303
(1,675)
14,628
(7,489)
7,139
1,605
8,744
2.1%
2013
US$m
10,200
4,717
1,448
16,365
(2,384)
13,981
(7,049)
6,932
1,509
8,441
2.2%
2012
US$m
10,361
4,470
1,720
16,551
(2,099)
14,452
(7,598)
6,854
1,681
8,535
2.2%
Record reported profit before tax of
US$8.7bn
10%
Growth in customer lending balances
(excluding the effect of currency translation)
Best Global Cash Management Bank for
Corporates and Financial Institutions
for the third consecutive year
(Euromoney 2014)
Strategic direction
CMB aims to be the banking partner of choice for our
customers building on our rich heritage, international
capabilities and relationships to enable global connectivity.
We have four growth priorities:
• providing consistency and efficiency for our customers
through a business model organised around global
customer segments and products;
• utilising our distinctive geographical network to support
and facilitate global trade and capital flows;
• delivering excellence in our core flow products – specifically
in Trade and in Payments and Cash Management; and
• enhancing collaboration with other global businesses.
Implementing Global Standards, enhancing risk management
controls and simplifying processes also remain top priorities
for CMB.
For footnotes, see page 109.
Review of reported performance
• In 2014, CMB reported a record profit before tax of
US$8.7bn, 4% higher than in 2013. Reported profit
before tax included the effect of a number of
significant items (see page 42), notably the gain on
sale of our operations in Panama of US$479m in
2013. The increase in reported profit before tax was
also driven by a reduction in LICs, although this was
partly offset by higher operating expenses.
Review of adjusted performance45
Profit before tax (US$m)
8,744
196
8,940
8,441
7,910
(531)
2014
Reported
Currency translation
and significant items
2013
Adjusted profit
• Profit before tax grew by 13% to US$8.9bn. This was
driven by increased revenue and a reduction in LICs,
partly offset by a rise in operating expenses.
Revenue (US$m)
16,303
9
16,312
16,365
15,479
(886)
2014
2013
Reported
Currency translation
and significant items
Adjusted revenue
• Revenue grew by 5%, driven by Credit and Lending
and Payments and Cash Management, notably in our
home markets of Hong Kong and the UK. This was due
to higher net interest income from growth in average
lending and deposit balances in Hong Kong and rising
average deposit balances and wider lending spreads
in the UK. Higher net fee income was driven by an
increase in term lending fees in the UK.
• Despite lending spread compression compared with
2013, spreads in 2014 stabilised and showed signs
of recovery in certain markets. In addition, we saw
notable growth in our UK lending balances in the
second half of 2014.
HSBC HOLDINGS PLC
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Report of the Directors: Global businesses (continued)
CMB
Management view of adjusted revenue
Global Trade and Receivables Finance
Credit and Lending
Payments and Cash Management,
2014
US$m
2,680
6,316
2013
US$m
2,625
5,938
current accounts and savings deposits
5,018
4,709
Markets products, Insurance and
Investments and Other51
Net operating income4
For footnotes, see page 109.
2,298
2,207
16,312
15,479
The table above has been restated to reclassify Foreign Exchange
revenue. In 2014, ‘Markets products, Insurance and Investments and
Other’ included Foreign Exchange revenue of US$207m previously
included within ‘Global Trade and Receivables Finance’ (2013:
US$213m) and US$516m previously included within ‘Payments and
Cash Management’ (2013: US$462m).
• Global Trade and Receivables Finance revenue
increased by 2% compared with 2013. Average
balances rose, with growth in Asia, Europe and
Latin America. The effect was partly offset by spread
compression in Latin America, reflecting a change in
portfolio mix in Brazil. In 2014, spread compression
stabilised and showed signs of recovery in certain
markets.
• Credit and Lending revenue increased by 6%
compared with 2013, reflecting higher average
balances in Hong Kong and the US and, to a lesser
extent, in Brazil. Revenue also increased in the UK
due to wider lending spreads and increased fee
income from term lending due to higher new business
volumes. These factors were partly offset by spread
compression in Latin America, primarily in Brazil
as discussed above and in Mexico due to the
repositioning of the business, and in mainland China.
• Payments and Cash Management revenue increased
by 7% compared with 2013. This reflected strong
deposit growth, notably in the UK and Hong Kong,
along with an increase in high value payment
transaction volumes. This was partly offset by
spread compression, notably in Europe.
• Markets products, Insurance and Investments and
Other revenue was 4% higher, primarily in North
America. In Canada, this reflected the non-recurrence
of a write-down of an investment property held for
sale in 2013 and a gain on sale of an investment
portfolio in 2014. In the US, higher revenue was
driven by a gain on sale of a real estate portfolio.
• LICs decreased by US$663m, mainly in Europe
and Latin America. Lower LICs in Europe reflected a
reduction in individually assessed loan impairment
charges in the UK. The reduction in Latin America
was driven by lower individually assessed charges in
Mexico, in particular relating to homebuilders, and
lower collectively assessed impairments in Brazil
due to impairment model changes and assumption
revisions for restructured loans in the Business
Banking portfolios in 2013 not repeated in 2014.
These factors were partly offset by higher individually
assessed charges in Asia, notably in mainland China
and Hong Kong.
Operating expenses (US$m)
7,489
7,300
(189)
7,049
6,765
(284)
2014
2013
Reported
Currency translation
and significant items
Adjusted operating
expenses
• Operating expenses increased by 8%, principally in
Europe, Latin America and Asia. In Europe and Asia,
higher costs reflected increased investment in staff to
support business growth and inflationary pressures,
while in Latin America costs rose due to inflation
which was largely attributable to union-agreed
salary increases in Brazil and Argentina. In addition,
operating expenses increased due to higher
Regulatory Programmes and Compliance costs.
• Income from associates increased by 4% due to
the improved performance of BoCom and The Saudi
British Bank.
Growth priorities
Providing consistency through a globally led
business model
• Our business strategy is built on the foundation of
global scale and consistency, focusing on customer
segments and customer behaviour to ensure we
provide tailored products to suit their needs.
We continue to invest in providing global product
coverage for our business segments. This enables
us to manage risk more efficiently.
• The creation of new senior management positions
and a more defined global strategy within our
customer segments enabled us to improve client
coverage. In 2014, we appointed a new Global
Head of International Subsidiary Banking to drive
investment in supporting our international customers
across our network. We also established dedicated
RM teams for international subsidiary banking in
key markets to focus on meeting the needs of these
subsidiaries and growing the associated revenue
streams.
• We appointed a new Global Head of Lending and
Transaction Management with a remit to support
all segments. This globally-aligned product group is
designed to optimise capital allocation and improve
revenue mix within our risk appetite.
• In 2014, we redefined our Large Corporate segment
to focus on a smaller number of higher-value clients.
The Large Corporate segment experienced strong
HSBC HOLDINGS PLC
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growth in most markets fuelled by multi-country flow
mandates and increased event-driven capital markets
activity. The increased focus on ‘global wallet’ and
connectivity led to increased awareness amongst our
customers of our franchise and capabilities, resulting
in stronger global strategic partnerships.
• In addition, we increased our market presence in six
of our key MME markets (Hong Kong, the UK, Canada,
the US, Mexico and Brazil). We made further progress
by appointing regional and country heads of MME
and by enhancing our client management system.
• In Business Banking, we invested in additional RMs
in key markets, increased training worldwide and
continued to deploy a globally consistent customer
management system within our relationship-
managed portfolios. Six major campaigns were
launched in 2014 to help SME customers achieve their
growth ambitions and expand overseas, including
offering funds in the UK, France, the US, Canada,
Australia and Turkey totalling US$18bn.
Utilising our geographical network to support
our customers’ international growth ambitions
• HSBC’s network across the major global trade
corridors continued to assist us to provide value-
added solutions for our clients. For example, we
helped one of the largest retailers in the US
to improve its supply chain management by providing
holistic financing and liquidity solutions including
working capital, trade and supply chain finance.
• In Payments and Cash Management, CMB remained
well positioned to benefit from global trends such as
the increase in cross-border payment flows as we are
strategically located where more than 85% of the
world’s payment activity originates. For example, new
customer mandates increased by 23% on 2013. In
addition, we improved our digital offering, migrating
over 80,000 customers to date from legacy platforms
to core electronic banking channels, and continued
to develop innovative products. These included the
enhancement of our Global Liquidity Solutions, which
enables customers in mainland China to connect their
operating cash with their liquidity structures globally.
Delivering excellence in our core products
• HSBC is one of the largest trade finance banks in the
world with access to more than 85% of the world’s
trade and capital flows. We continued to enhance
our open account financing capabilities through
investment in Receivables Finance and Supply
Chain, specifically the launch of a new Supply Chain
Solutions platform and the consolidation of the
existing Receivables platform into regional hubs.
This offers customers broader access to expertise
and liquidity and gives us the ability to deploy our
capabilities rapidly in new markets, providing better
risk management and lower operating costs.
• Against the backdrop of declining commodity prices,
we achieved double-digit asset balance growth in
Commodity and Structured Trade Finance compared
with 2013.
Enhancing collaboration with other global
businesses
• We maintained our focus on strengthening CMB’s
collaboration with GB&M and GPB by increasing
product coverage across the Group to our customers.
In 2014, CMB customers generated over 80% of
HSBC’s total collaboration revenues. Revenue from
collaboration remained broadly unchanged compared
with 2013. This was driven by lower sales of Markets
products to CMB customers, notably in the Foreign
Exchange business, offset by growth in the sale of
Capital Financing products with regard to mergers
and acquisitions and debt capital markets.
HSBC HOLDINGS PLC
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Report of the Directors: Global businesses (continued)
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 income50
Other income42
Net operating income4
LICs43
2014
US$m
7,022
3,560
5,861
1,335
2013
US$m
6,766
3,482
6,780
2,148
2012
US$m
6,960
3,329
5,690
2,294
17,778
19,176
18,273
(365)
(207)
(670)
Net operating income
17,413
18,969
17,603
Total operating expenses
(12,028)
Operating profit
Income from associates44
Profit before tax
RoRWA36
5,385
504
5,889
1.2%
(9,960)
9,009
432
9,441
2.3%
(9,907)
7,696
824
8,520
2.1%
Review of reported performance
• GB&M’s reported profit before tax of US$5.9bn was
down by US$3.6bn, primarily in Europe and North
America, from higher operating expenses and lower
revenue. The increase in operating expenses and
decrease in revenue reflected a number of significant
items (see page 42). Operating expenses included
settlements and provisions of US$1.2bn in connection
with foreign exchange investigations, of which
US$809m was recorded in the fourth quarter of 2014,
and a charge of US$533m in the US relating to a
settlement agreement with the Federal Housing
Finance Agency, which are included in significant
items.
Review of adjusted performance45
Profit before tax (US$m)
2,225
8,114
5,889
9,441
9,208
(233)
Client flows up in Equities,
although subdued in Foreign Exchange
Sustained growth in revenues in
Payments and Cash Management
Bond and Derivatives
House of the year
(International Finance Review 2014)
Strategic direction
GB&M’s business model and strategy is well established with
the objective of being a ‘top 5’ bank to our priority clients and
in our chosen products and geographies.
We focus on the following growth priorities:
• connecting clients to international growth opportunities;
• continuing to be well positioned in products that will
benefit from global trends; and
•
leveraging our distinctive international expertise and
geographical network which connects developed and
faster-growing regions.
Enhancing risk management controls, implementing Global
Standards and collaborating with other global businesses also
remain top priorities for GB&M.
For footnotes, see page 109.
2014
Reported
Currency translation
and significant items
2013
Adjusted profit
• Profit before tax of US$8.1bn was US$1.1bn lower
than in 2013, driven by higher operating expenses
and a fall in revenue, which included the introduction
of the FFVA on certain derivative contracts that
resulted in a charge of US$263m.
Revenue (US$m)
17,778
328
18,106
19,176
18,532
(644)
2014
Reported
2013
Currency translation
and significant items
Adjusted revenue
• Revenue was lower principally due to the effect
of the FFVA and a reduction in our Foreign Exchange
business which was partly offset by an increase in
Capital Financing.
HSBC HOLDINGS PLC
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Management view of adjusted revenue
Markets52
– Credit
– Rates
– Foreign Exchange
– Equities
Capital Financing
Payments and Cash Management
Securities Services
Global Trade and Receivables Finance
Balance Sheet Management
Principal Investments
Other53
Total operating income4
For footnotes, see page 109.
2014
US$m
6,262
567
1,563
2,916
1,216
4,066
1,794
1,698
767
3,020
531
(32)
2013
US$m
6,933
801
1,678
3,140
1,314
3,981
1,743
1,653
723
3,046
450
3
18,106
18,532
• The table below outlines the effect on businesses and
total adjusted operating income of the FFVA:
Effect of FFVA on total operating income
Total operating income
– FFVA in Rates
– FFVA in Credit
– FFVA in other businesses
Total operating income excluding FFVA
– of which Rates excluding FFVA
– of which Credit excluding FFVA
2014
US$m
18,106
(164)
(97)
(2)
18,369
1,727
664
2013
US$m
18,532
–
–
–
18,532
1,678
801
• Excluding the above, revenue in the majority of
our Markets businesses was lower. This was
predominantly driven by a decline in our Foreign
Exchange business, which was affected by lower
volatility, notably in the first half of 2014, and
reduced client flows. Credit revenue also decreased
due to adverse movements in credit spreads and a
reduction in Legacy Credit. Equities revenue fell too,
as 2013 benefited from higher revaluation gains
which more than offset a rise in revenue from
increased client flows and higher derivatives income
in 2014. By contrast, Rates revenue rose due to
favourable market movements, notably in Asia, along
with minimal fair value movements on our own credit
spread on structured liabilities compared with
adverse movements in 2013. These factors were
partly offset by a fall in Rates revenue in Europe.
• In Capital Financing, revenue grew by US$85m, as the
effects of increased volumes and market share gains
across our advisory, equity capital markets and
lending products were partly offset by spread and fee
compression.
• Payments and Cash Management revenue was
marginally higher, due to both increased deposit
balances, notably in Asia, and a rise in high value
transaction volumes, partly offset by spread
compression. We also experienced growth in
Securities Services revenue, in part from new business
in Europe, and Global Trade and Receivables Finance
from growth in lending balances.
• LICs were higher due to a revision to certain estimates
used in our corporate collective loan impairment
calculation and increased individually assessed
provisions, including a provision against a guarantee in
Brazil recorded as a credit risk provision. These were
partially offset by higher net releases on available-for-
sale ABSs in our legacy portfolio than in 2013.
Operating expenses (US$m)
12,028
10,131
9,960
9,562
(1,897)
(398)
2014
2013
Reported
Currency translation
and significant items
Adjusted operating
expenses
• Operating expenses increased by 6%, primarily due to
higher Regulatory Programmes and Compliance
related costs and from increased staff costs. These
factors were partially offset by sustainable savings of
over US$80m.
Growth priorities
Connecting clients to international growth
opportunities
• Following the re-shaping of GB&M in 2013, as part
of which we brought together all our financing
businesses into Capital Financing, including lending,
debt capital markets and equity capital markets, we
continued to focus on better aligning our resources
with clients’ needs. We segmented our client base
and created a Client Strategy Group to ensure that
GB&M’s product, sector and coverage expertise
supports clients in the growth of their business
activities. Strong collaboration between these teams
was recently demonstrated by our appointment as
the joint global coordinator and joint book runner on
the largest European corporate equity rights issue
since 2011. This was our fifth transaction with this
client in the last 12 months.
• We are utilising our global network to provide
solutions for our clients in both established markets
and faster-growing regions. Our ability to connect
clients to opportunities was highlighted by the first
Sukuk bond issued outside the Islamic world on
which we acted as sole structuring advisor, joint
lead manager and joint book runner.
• We continued to strengthen our Foreign Exchange
franchise by enhancing our risk management
capabilities and further developing our distribution
platforms and electronic pricing capabilities. This will
improve our systems and governance whilst enabling
us to better serve clients with a robust and efficient
offering.
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Report of the Directors: Global businesses (continued)
GB&M/GPB
Continuing to be well positioned in products that
will benefit from global trends
• Capturing new opportunities arising from the
internationalisation of the renminbi continues to be
one of our key growth priorities. Recently, we acted
as joint lead manager, book runner and financial
advisor on a pioneering Formosa bond issue, which
simultaneously listed on three exchanges worldwide.
We were also voted ‘Best Overall for Products and
Services’ by Asiamoney Offshore RMB Services Survey
2014 for the third consecutive year, demonstrating
our continued leading position in the overseas
renminbi market.
• In November 2014 we launched the Stock Connect
programme, a mechanism linking trading and clearing
between the Shanghai and Hong Kong securities
markets. This will give our clients direct access to the
Chinese A-share market and the ability to fund equity
purchases in renminbi.
• Geographical expansion of large corporates and rising
world trade are expected to increase the demand for
cross-border payments and related services. Our
strength in Payments and Cash Management was
recognised by Euromoney, who named HSBC the
‘Best Global Cash Manager for Non-financial
Institutions’ and ‘Best Global Cash Manager for
Corporate and Financial Institutions’, for the second
and third consecutive years, respectively. We were
also able to win a mandate for renminbi cash
management and additional foreign exchange and
deposit business from a global automotive group
which is seeking to expand into mainland China.
Leveraging our distinctive international expertise
and geographical network which connects
developed and faster-growing regions
• Our distinctive geographical network and global
expertise allows us to provide a truly international
service to our clients. We recently demonstrated the
value of our global capital markets capabilities and
leading position in faster-growing markets to a
European automotive group. We advised and acted as
joint sub-underwriter on a domestic securitisation in
mainland China which was structured to attract both
international and domestic investors. We were the
first foreign bank to advise on the structuring of an
internationally rated ABS transaction in mainland
China.
• GB&M continues to focus on collaborating with other
global businesses and supporting clients in accessing a
range of products across our Markets and Capital
Financing businesses. In 2014, collaboration revenue
between GB&M and CMB was broadly unchanged,
driven by a reduction in Foreign Exchange which was
offset by growth in Capital Financing, notably in
advisory.
Global Private Banking
GPB serves high net worth individuals and
families with complex and international
needs within the Group’s priority markets.
Net interest income
Net fee income
Other income42
Net operating income4
LICs43
Net operating income
Total operating expenses
Operating profit
Income from associates44
Profit before tax
RoRWA36
2014
US$m
994
1,056
327
2,377
8
2,385
(1,778)
607
19
626
2013
US$m
1,146
1,150
143
2,439
(31)
2,408
(2,229)
179
14
193
2.9%
0.9%
2012
US$m
1,294
1,232
646
3,172
(27)
3,145
(2,143)
1,002
7
1,009
4.6%
Positive net new money of
US$14bn
in areas targeted for growth
since December 2013
Performance continued to be affected by
actions taken to reposition the customer
base
Best Family Office Offering
(Private Banker International Global Wealth Awards)
Strategic direction
GPB aims to build on HSBC’s commercial banking heritage to be
the leading private bank for high net worth business owners by:
• capturing growth opportunities in home and priority growth
markets, particularly from intra-Group collaboration by
accessing owners and principals of CMB and GB&M clients;
and
• repositioning the business to concentrate on onshore
markets and a smaller number of target offshore markets,
aligned with Group priorities.
Implementing Global Standards, enhancing risk management
controls, tax transparency and simplifying processes also
remain top priorities for GPB.
For footnotes, see page 109.
HSBC HOLDINGS PLC
72
Review of reported performance
• Reported profit before tax of US$626m was US$433m
higher than in 2013. This was due to a small number
of significant items (see page 42), most notably in
2013 from the loss on write-off of allocated goodwill
relating to our Monaco business of US$279m and
regulatory provisions of US$352m.
• We expect our GPB results in 2015 to be affected by
the reduction in our client assets as we continue to
reposition our business model, including reducing the
number of clients in non-priority markets.
Review of adjusted performance45
Profit before tax (US$m)
707
900
112
738
626
Operating expenses (US$m)
1,778
1,707
(71)
2,229
1,806
(423)
2014
2013
Reported
Currency translation
and significant items
Adjusted operating
expenses
• Operating expenses decreased by 5%, primarily
due to the release of a UK customer redress provision
recognised in 2012, the non-recurrence of the UK
provision relating to a bilateral Rubik tax agreement
between the UK and Swiss governments, and the
managed reduction in staff numbers.
193
Reported client assets54
2014
Reported
Currency translation
and significant items
2013
Adjusted profit
At 1 January
Net new money
Of which: areas targeted for growth
2014
US$bn
2013
US$bn
382
(3)
14
8
(11)
(11)
365
398
(26)
(7)
12
(3)
1
382
2014
US$bn
2013
US$bn
179
112
63
11
365
197
108
65
12
382
Value change
Disposals
Exchange and other
At 31 December
Reported client assets by geography
Europe
Asia
North America
Latin America
At 31 December
For footnote, see page 109.
• On a reported basis, client assets, which include funds
under management and cash deposits, decreased,
mainly in Europe, due to the effect of the sale of a
portfolio of clients in Switzerland, the disposal of
our HSBC Trinkaus & Burkhardt AG business in
Luxembourg and negative net new money. In
addition there were unfavourable foreign exchange
movements, mainly in Europe. This was partly offset
by favourable market movements. Negative net new
money of US$3bn was mainly driven by the continued
repositioning of our business, though we attracted
positive net new money of US$14bn in areas that we
have targeted for growth, including our home and
priority growth markets and the high net worth client
segment.
• Profit before tax fell by US$162m to US$738m,
mainly due to reduced revenue as we continued to
reposition the business, partly offset by lower
operating expenses and LICs.
Revenue (US$m)
2,377
41
2,418
2,439
286
2,725
2014
2013
Reported
Currency translation
and significant items
Adjusted revenue
• Revenue decreased by 11% compared with 2013, due
to lower trading income and net fee income reflecting
a managed reduction in client assets and lower
market volatility. Net interest income also declined,
mainly in Europe and Asia, driven by a reduction
in deposit balances and lower treasury income,
respectively, both reflecting actions to reposition
the business. In addition, lending spreads narrowed
compared with 2013.
• Net loan impairment releases in 2014 compared with
charges of US$33m in 2013, largely due to releases of
collective impairment allowances in the UK and in the
US.
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Report of the Directors: Global businesses (continued)
GPB /Other
• On a reported basis, our return on assets, defined as
the percentage of revenue to average client assets,
was 63bps in 2014, broadly unchanged compared
with 2013. On an adjusted basis, our return on assets
was 6bps lower in 2014, reflecting the effect of the
repositioning and reduced market volatility. Our client
return on assets, which excludes treasury and capital
revenue, also decreased by 4bps.
• In January 2015, the Swiss National Bank removed its
currency cap with the euro which resulted in the
appreciation of the Swiss franc. We monitor the
impact of foreign exchange rate fluctuations on a
continuing basis and do not expect any significant
effect on the reported results of our GPB business.
Strategic direction
Capture growth in our home and priority growth
markets and focus on collaboration revenues
• In 2014, new referrals from other global businesses
generated net new money of over US$10bn, which
was US$5.5bn higher than in 2013. In total, 74% of
our net new money from areas targeted for growth
in 2014 came from Group-referred clients, helped
by adopting a more coordinated and systematic
approach to identifying client needs in conjunction
with the other global businesses.
• We integrated our collaboration efforts with GB&M
and CMB into one team, the Corporate Client Group
(‘CCG’). This was established to improve client
introductions to and from GPB by standardising best
practices and developing tailored offerings to meet
client needs more effectively. The CCG is also
responsible for enhancing coverage of existing
personal and corporate relationships through a
coordinated approach. In addition, the Global
Solutions Group was established to deliver bespoke
solutions to ultra-high net worth and global priority
clients. This involves working closely with GB&M and
CMB to enhance the service we offer to these
sophisticated clients.
• We also established the Wealth Client Group with
responsibility for ensuring greater alignment and
increased collaboration with RBWM, including
utilising RBWM’s transactional banking capabilities.
• To support client growth, we expanded our product
offering with investment opportunities in three new
Alternatives products, comprising one private equity
fund and two real estate funds. We strengthened our
investment group by ensuring that the majority of
clients with assets greater than US$5m now have
access to a dedicated investment counsellor. We
partnered with the GB&M Global Research team to
improve the advisory services for our clients
supported by easy client access to a wider range of
investment research reports. We plan to deploy this
globally by the end of 2015. We also worked closely
with HSBC Securities Services to provide our ultra-
high net worth and family office clients with access to
our institutional global custody platform in Europe
and the Middle East and North Africa, providing
clients with access to trade capture, clearing and
settlement, safekeeping and investment
administration services.
Repositioning the business
• We continued to reposition the GPB business model
and client base in 2014 by reviewing our portfolio
and seeking to ensure that all clients comply with
our Global Standards, including financial crime
compliance and tax transparency standards.
• We remain focused on clients with wider Group
connectivity within our home and priority growth
markets. Following the announcement of the sale
of a portfolio of clients in Switzerland to LGT Bank
(Switzerland) Ltd earlier this year, we completed the
migration of US$8bn of client assets in the second
half of 2014. We also continued to reduce the
number of clients in non-priority markets.
• In 2014, we continued to streamline and rationalise
the business, closing a number of non-strategic
representative offices, and we announced the
consolidation of our trust business in Europe into
a regional hub in Jersey. We also commenced
development of a new global IT banking platform.
This is expected to deliver improved efficiency,
enhanced services and a consistent client offering by
consolidating GPB’s multiple systems onto a single
banking platform. We remain on track to deliver the
first phase of the implementation in 2015.
• We enhanced our digital capabilities with the
deployment of a new mobile application in
Switzerland, Monaco, Luxembourg and Guernsey,
enabling clients to view their investment holdings
and transactions while on the move. We introduced
a secure tablet application for front office staff in
Switzerland delivering digital document browsing
during client visits, and also deployed video meeting
capabilities in the US. Wider deployment of these and
other applications is scheduled for 2015.
HSBC HOLDINGS PLC
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Other39
‘Other’ contains the results of HSBC’s
holding company and financing operations,
central support and functional costs with
associated recoveries, unallocated
investment activities, centrally held
investment companies, certain property
transactions and movements in fair value
of own debt.
2014
US$m
(501)
(65)
(92)
2013
US$m
(737)
64
6
2012
US$m
(730)
194
(537)
508
(1,228)
(4,327)
(9)
(576)
(1,136)
499
6,524
6,365
−
6,365
(8,601)
(2,236)
(1,804)
8,122
5,651
−
5,651
(7,796)
(2,145)
(5,463)
8,868
2,332
–
2,332
(9,369)
(7,037)
6
(14)
47
(2,230)
(2,159)
(6,990)
Net interest expense
Net fee income/
(expense)
Net trading income/
(expense)50
Changes in fair value of
long-term debt issued
and related derivatives
Changes in other financial
instruments designated
at fair value
Net income/(expense)
from financial
instruments designated
at fair value
Other income
Net operating income4
LICs43
Net operating income
Total operating expenses
Operating loss
Income/(expense) from
associates44
Loss before tax
For footnotes, see page 109.
Review of reported performance
Reported loss before tax of US$2.2bn was 3% higher
than in 2013. This was driven by increased operating
costs partly offset by higher revenue.
The increase in loss before tax of US$71m included
favourable movements in the fair value of own debt of
US$417m in 2014 compared with adverse movements
of US$1.2bn in 2013. These results also included the
following items in 2013:
• gain on derecognition of Industrial Bank as an
associate (US$1.1bn);
• net gain on disposal of Ping An Insurance (Group)
Company of China, Ltd (‘Ping An’) (US$553m); and
• foreign exchange gains relating to sterling debt issued
by HSBC Holdings (US$442m);
and the following items in 2014:
• gain on sale of our shareholding in Bank of Shanghai
in 2014 (US$428m); and
• an impairment on our investment in Industrial Bank
(US$271m).
For further details of all significant items, see page 42.
Review of adjusted performance45
Loss before tax (US$m)
(2,230)
(2,159)
(381)
(2,611)
2014
Reported
(837)
(2,996)
2013
Currency translation
and significant items
Adjusted loss
• The loss before tax decreased, reflecting increased
revenue partly offset by higher operating costs.
Revenue (US$m)
6,365
5,864
(501)
5,651
4,532
(1,119)
2014
2013
Reported
Currency translation
and significant items
Adjusted revenue
• Revenue rose by US$1.3bn, primarily due to
favourable movements in 2014 of US$96m on interest
and exchange rate ineffectiveness in the hedging of
long-term debt designated at fair value issued
principally by HSBC Holdings and its European
subsidiaries, compared with adverse movements
of US$551m in 2013. In addition, recoveries of certain
expenses from global businesses increased, reflecting
higher operating expenses, and we recorded a gain
arising from the external hedging of an intra-Group
financing transaction in Europe. There was also
a release of accrued interest on uncertain tax
reserves in the US. These factors were partly offset by
the expiry of the TSAs relating to the sale of the CRS
business in the US and lower income from investment
properties in Asia.
Operating expenses (US$m)
8,601
8,481
(120)
7,796
7,535
(261)
2014
Reported
2013
Currency translation
and significant items
Adjusted operating
expenses
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Report of the Directors: Global businesses (continued)
Analysis
• Operating expenses increased by US$946m due to
higher costs associated with Regulatory Programmes
and Compliance, an increase in Global Resourcing
costs in India and mainland China and the 2013
release of a litigation provision in Asia. In addition,
the UK bank levy charge of US$1.1bn in 2014 was
Analysis by global business
HSBC profit/(loss) before tax and balance sheet data
higher than the charge of US$916m in 2013, primarily
due to an increase in the rate of the levy. This was
partly offset by a reduction in North America by the
expiry of the TSAs relating to the sale of the CRS
business.
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
16,782
6,668
10,506
4,738
(28)
9
(19)
620
(2)
618
−
−
1,675
288
1,675
14
24
10,570
719
36,433
(11,839)
24,594
(1,819)
22,775
(5,038)
(12,484)
(17,522)
5,253
398
5,651
%
30.3
71.2
288
31
18
1,296
248
17,743
(1,440)
16,303
(1,675)
14,628
(2,439)
(5,050)
(7,489)
7,139
1,605
8,744
%
46.8
45.9
7,022
3,560
4,063
1,798
5,861
−
12
12
1,117
80
5
124
17,781
(3)
17,778
(365)
17,413
(3,655)
(8,373)
(12,028)
5,385
504
5,889
%
31.5
67.7
2014
Global
Private
Banking
US$m
994
1,056
298
(4)
294
−
(1)
(1)
9
5
50
33
2,440
(63)
2,377
8
2,385
(732)
(1,046)
(1,778)
607
19
626
%
3.4
74.8
Inter-
segment
elimination55
US$m
Other39
US$m
(98)
−
−
98
98
−
−
−
−
−
−
(6,169)
(6,169)
−
(6,169)
−
(6,169)
−
6,169
6,169
−
−
−
(501)
(65)
(100)
8
(92)
508
(9)
499
164
184
−
6,176
6,365
−
6,365
−
6,365
(8,502)
(99)
(8,601)
(2,236)
6
(2,230)
%
(12.0)
135.1
Total
US$m
34,705
15,957
4,853
1,907
6,760
508
1,965
2,473
1,335
311
11,921
1,131
74,593
(13,345)
61,248
(3,851)
57,397
(20,366)
(20,883)
(41,249)
16,148
2,532
18,680
%
100.0
67.3
US$m
US$m
US$m
US$m
US$m
359,744
499,083
581,421
313,999
372,739
363,654
254,463
1,839,644
319,121
44,102
88,342
85,465
2,352
164,537
981
(330,206)
US$m
974,660
2,634,139
1,350,642
Profit/(loss) before tax
Net interest income/(expense)
Net fee income/(expense)
Trading income/(expense) excluding
net interest income
Net interest income/(expense) on
trading activities
Net trading income/(expense)50
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 insurance premium income
Other operating income
Total operating income
Net insurance claims56
Net operating income4
Loan impairment (charges)/
recoveries and other credit risk
provisions
Net operating income
Employee expenses57
Other operating expenses
Total operating expenses
Operating profit/(loss)
Share of profit in associates
and joint ventures
Profit/(loss) before tax
Share of HSBC’s profit before tax
Cost efficiency ratio
Balance sheet data40
Loans and advances to customers
(net)27
Total assets
Customer accounts27
HSBC HOLDINGS PLC
76
Profit/(loss) before tax
Net interest income/(expense)
Net fee income
Trading income/(expense) excluding
net interest income
Net interest income/(expense) on
trading activities
Net trading income50
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 insurance premium income
Other operating income/(expense)
Total operating income
Net insurance claims56
Net operating income4
Loan impairment charges and other
credit risk provisions
Net operating income
Employee expenses57
Other operating expenses
Total operating expenses
Operating profit/(loss)
Share of profit/(loss) in associates
and joint ventures
Profit/(loss) before tax
Share of HSBC’s profit before tax
Cost efficiency ratio
Balance sheet data40
Loans and advances to customers
(net)27
Total assets
Customer accounts27
For footnotes, see page 109.
Retail Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
18,339
7,021
10,200
4,717
689
(3)
686
649
−
649
6,766
3,482
4,953
1,827
6,780
−
–
–
1,638
332
599
1,638
55
21
10,543
544
38,847
(12,107)
26,740
(3,227)
23,513
(5,219)
(12,029)
(17,248)
6,265
384
6,649
%
29.5
64.5
332
1
15
1,375
621
17,910
(1,545)
16,365
(2,384)
13,981
(2,327)
(4,722)
(7,049)
6,932
1,509
8,441
%
37.4
43.1
599
747
129
6
670
19,179
(3)
19,176
(207)
18,969
(3,549)
(6,411)
(9,960)
9,009
432
9,441
%
41.8
51.9
2013
Global
Private
Banking
US$m
1,146
1,150
390
4
394
–
4
4
(3)
8
16
(239)
2,476
(37)
2,439
(31)
2,408
(776)
(1,453)
(2,229)
179
14
193
%
0.9
91.4
Inter-
segment
elimination55
US$m
Other39
US$m
(737)
64
(38)
44
6
(175)
−
−
175
175
Total
US$m
35,539
16,434
6,643
2,047
8,690
(1,228)
–
(1,228)
(576)
(1)
1,996
(1,804)
(1)
768
−
−
−
(5,725)
(5,726)
−
(5,726)
−
(5,726)
−
5,726
5,726
−
−
−
1,212
149
−
6,761
5,651
−
5,651
−
5,651
(7,325)
(471)
(7,796)
(2,145)
(14)
(2,159)
%
(9.6)
138.0
2,012
322
11,940
2,632
78,337
(13,692)
64,645
(5,849)
58,796
(19,196)
(19,360)
(38,556)
20,240
2,325
22,565
%
100.0
59.6
US$m
US$m
US$m
US$m
US$m
US$m
375,086
517,085
579,994
297,852
360,623
354,298
272,473
1,975,509
328,800
44,224
97,655
96,770
2,454
171,812
1,435
(451,366)
992,089
2,671,318
1,361,297
HSBC HOLDINGS PLC
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Report of the Directors: Geographical regions
Summary / Europe
Geographical regions
Summary
Europe
Asia
Middle East and North Africa
North America
Latin America
78
79
84
91
96
101
Summary
Additional information on results in 2014 may be found
in the ‘Financial Summary’ on pages 40 to 62.
In the analysis of profit and loss by geographical regions
that follows, operating income and operating expenses
include intra-HSBC items of US$2,972m (2013:
US$2,628m; 2012: US$2,684m).
From 1 January 2014, the geographical region ‘Asia’
replaced the geographical regions previously reported
as ‘Hong Kong’ and ‘Rest of Asia-Pacific’. This aligns with
changes made in the financial information used internally
to manage the business. Comparative data have been
represented accordingly.
All commentaries are on an adjusted basis (page 40)
unless otherwise stated, while tables are on a reported
basis unless otherwise stated.
Profit/(loss) before tax
Europe
Asia8
Middle East and North Africa
North America
Latin America
Year ended 31 December
Total assets40
Europe
Asia8
Middle East and North Africa
North America
Latin America
Intra-HSBC items
At 31 December
Risk-weighted assets58
At 31 December
Europe
Asia8
Middle East and North Africa
North America
Latin America
For footnotes, see page 109.
2014
US$m
596
14,625
1,826
1,417
216
18,680
%
3.2
78.3
9.8
7.6
1.1
100.0
2013
US$m
1,825
15,853
1,694
1,221
1,972
22,565
%
8.1
70.3
7.5
5.4
8.7
2012
US$m
(3,414)
18,030
1,350
2,299
2,384
%
(16.5)
87.3
6.5
11.1
11.6
100.0
20,649
100.0
2014
US$m
1,290,926
878,723
62,417
436,859
115,354
(150,140)
%
49.0
33.4
2.4
16.6
4.4
(5.8)
2013
US$m
1,392,959
831,791
60,810
432,035
113,999
(160,276)
%
52.1
31.1
2.3
16.2
4.3
(6.0)
2,634,139
100.0
2,671,318
100.0
2014
US$bn
1,219.8
375.4
499.8
63.0
221.4
88.8
%
100.0
30.1
40.0
5.0
17.8
7.1
2013
US$bn
%
1,092.7
100.0
300.1
430.7
62.5
223.8
89.5
27.1
38.9
5.7
20.2
8.1
HSBC HOLDINGS PLC
78
Europe
Our principal banking operations in Europe
are HSBC Bank plc in the UK, HSBC France,
HSBC Bank A.S. in Turkey, 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)
Net operating income4
LICs43
Net operating income
2014
US$m
10,611
6,042
2,534
2,384
21,571
(764)
20,807
2013
US$m
10,693
6,032
4,423
(181)
20,967
(1,530)
19,437
2012
US$m
10,394
6,169
2,707
(1,662)
17,608
(1,921)
15,687
Total operating expenses
(20,217)
(17,613)
(19,095)
Operating profit/(loss)
590
1,824
(3,408)
Income/(expense) from
associates44
Profit/(loss) before tax
Cost efficiency ratio
RoRWA36
6
596
93.7%
0.2%
1
1,825
84.0%
0.6%
(6)
(3,414)
108.4%
(1.0%)
Year-end staff numbers
69,363
68,334
70,061
Best Debt House in Western Europe
for the second consecutive year
(Euromoney Awards)
UK No1 Trade Bank
(Global Finance Magazine)
US$3.1bn
of regulatory fines, provisions,
penalties and UK customer redress
For footnotes, see page 109.
Economic background
The UK recovery continued through the second half of
2014, though the pace of expansion moderated towards
the end of the year. Preliminary estimates indicate that
the annual rate of growth of real Gross Domestic Product
(‘GDP’) was 2.6%. The unemployment rate fell to 5.7%
in the three months to December and wage growth
accelerated slightly from a very low level. The annual
Consumer Price Index (‘CPI’) measure of inflation
reached a 14-year low of 0.5% in December. After a
period of rapid activity in 2013 and the early months of
2014, there were signs that both economic activity and
price inflation in the housing market were moderating as
the year ended. The Bank of England kept the Bank Rate
steady at 0.5%.
The recovery in eurozone economic activity in 2014 was
slow and uneven across member states. Real GDP in the
region as a whole grew by 0.9% in the year. The German
and Spanish economies grew by 1.6% and 1.5%,
respectively, while French GDP grew by a more modest
0.4%. Eurozone inflation fell to minus 0.2% in December,
prompting fears that the region could move towards a
sustained period of deflation. The likelihood that low
growth and inflation could persist for an extended period
prompted the European Central Bank (‘ECB’) to cut the
main refinancing rate and the deposit rate to 0.05% and
minus 0.2%, respectively, in September and embark on
a policy of balance sheet expansion starting with
purchases of covered bonds and asset-backed securities.
Financial overview
Profit before tax (US$m)
3,309
3,905
2,476
4,301
596
2014
Reported
Currency translation
and significant items
1,825
2013
Adjusted profit
Our European operations reported a profit before tax of
US$596m in 2014 compared with US$1.8bn in 2013. The
decrease in reported profit before tax was driven by a
number of significant items and increased operating
expenses, partly offset by reduced LICs. The former
included charges relating to UK customer redress of
US$1.3bn, settlements and provisions in relation to
regulatory investigations into foreign exchange of
US$1.2bn, of which US$809m was recorded in the
fourth quarter of 2014, and provisions arising from the
ongoing review of compliance with the CCA in the UK
of US$632m. For further details of all significant items,
see page 42.
HSBC HOLDINGS PLC
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Report of the Directors: Geographical regions (continued)
Europe
Profit/(loss) before tax by country within global businesses
Retail Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
Global
Private
Banking
US$m
UK
France35
Germany
Switzerland
Turkey
Other
Year ended 31 December 2014
UK
France35
Germany
Switzerland
Turkey
Other
Year ended 31 December 2013
UK
France35
Germany
Switzerland
Turkey
Other
Year ended 31 December 2012
For footnote, see page 109.
589
(181)
28
−
(155)
33
314
1,471
285
30
−
(74)
41
1,753
343
135
29
–
(32)
34
509
2,193
240
71
5
5
34
2,548
1,684
255
70
2
36
41
2,088
832
203
64
2
71
36
1,208
(801)
354
162
2
92
240
49
1,246
351
183
2
108
(89)
1,801
(111)
514
283
1
104
195
986
191
−
27
38
−
59
315
252
21
44
(291)
(1)
(190)
(165)
235
(11)
40
133
–
102
499
Other
US$m
(2,228)
(199)
(10)
(3)
(6)
(184)
(2,630)
(3,493)
(162)
(25)
−
1
27
(3,652)
(6,355)
(263)
(72)
–
1
73
(6,616)
Total
US$m
(56)
214
278
42
(64)
182
596
1,160
750
302
(287)
70
(170)
1,825
(5,056)
578
344
136
144
440
(3,414)
Adjusted profit before tax decreased by US$396m,
primarily reflecting an increase in costs which was partly
offset by a reduction in LICs; revenue was broadly in line
with 2013.
Country business highlights
In the UK, overall CMB lending increased by 7%
compared with 2013, with new lending and re-financing
before attrition and amortisation increasing by 38% and
over 85% of small business loan applications approved.
In addition, Business Banking launched a campaign to
offer further support and lending to SME customers. As
part of this, £5.8bn (US$9.9bn) of future lending was
made available to help finance growth across the UK.
Lending in Global Trade and Receivables Finance also
grew by 3% as we built on our position in the market in
Trade Finance and reduced attrition from our existing
clients in Receivables Finance.
In RBWM, we approved £11.4bn (US$18.8bn) of new
mortgage lending to over 118,000 customers, including
£3.5bn (US$5.8bn) to over 27,500 first-time buyers.
However, our aggregate amount of mortgage balances
drawn down decreased marginally. The loan-to-value
(‘LTV’) ratio on new lending was 60% compared with an
average of 43.7% for the total mortgage portfolio. In
October 2014, we expanded our mortgage distribution
channels to include an intermediary in order to reach the
growing proportion of the mortgage market in the UK
that wishes to source its finance that way.
As part of the re-shaping of the GB&M business in 2013,
we brought together all our financing businesses into
Capital Financing, including lending, debt capital markets
and equity capital markets. We increased our sector
expertise and enhanced our geographical spread by
appointing two new co-heads of UK Banking. In 2014,
the advisory and equity capital markets businesses
within Capital Financing experienced volume growth
that outstripped the market.
In France, in GB&M, we acted as sole advisor on one of
the largest mergers and acquisitions (‘M&A’) transactions
in Europe. In CMB, our Payments and Cash Management
business implemented the Single Euro Payments Area
platform (‘SEPA’) for euro-denominated credit transfer
and direct debit payments across our European
locations. This allows our clients to make and receive
payments in euros from their HSBC accounts in the 34
countries that have implemented SEPA, all governed by
a consistent set of standards, rules and conditions. In
addition, in CMB, we allocated a further €1.5bn
(US$2.0bn) to the SME fund and approved over €2.0bn
(US$2.7bn) of lending in 2014. In RBWM, we experienced
strong growth in home loans.
In Germany, as part of our growth initiative, we opened
three branches in Dortmund, Mannheim and Cologne,
increased the number of relationship managers by 26%
and held a number of roadshows in countries including
France, mainland China and the UK to reinforce Germany
as a key international hub. In GPB, we disposed of our
HSBC Trinkaus & Burkhardt AG business in Luxembourg.
In Turkey, the regulator imposed interest rate caps on
credit cards and overdrafts which affected revenue.
Despite this, in September 2014 CMB launched a TRL2bn
(US$914m) international fund in order to provide
sustainable support and global connectivity for
international business, of which TRL1.1bn (US$519m)
was drawn down.
HSBC HOLDINGS PLC
80
In Switzerland, we continued to reposition the GPB
business and focused on growth through the high net
worth client segment. Client assets, which include funds
under management and cash deposits, decreased due
to this repositioning, as well as the sale of a portfolio
of client assets.
In November 2014, we sold the Kazakhstan business in
line with the Group strategy.
Review of adjusted performance45
Revenue increased by US$76m, primarily in the UK,
partly offset by reductions elsewhere, including France,
Switzerland and Turkey.
Revenue (US$m)
21,571
708
22,279
20,967
1,236
22,203
2014
2013
Reported
Currency translation
and significant items
Adjusted revenue
Country view of adjusted revenue
UK
France
Germany
Switzerland
Turkey
Other
Year ended 31 December
2014
US$m
16,080
2,937
945
736
791
790
22,279
2013
US$m
15,365
3,097
960
831
827
1,123
22,203
In the UK, revenue increased by US$715m. This was
driven by favourable fair value movements of US$222m
from interest and exchange rate ineffectiveness in the
hedging of long-term debt issued principally by HSBC
Holdings in 2014, compared with adverse movements
of US$480m in 2013, and a gain arising from external
hedging of an intra-Group financing transaction.
Revenue also rose in CMB due to growth in deposit
volumes in Payments and Cash Management and net
interest income improved due to wider spreads in term
lending. In addition, net fee income grew, partly
reflecting increased volumes of new business lending
in the Large Corporate and Mid-Market segments.
By contrast, GB&M revenue decreased compared with
2013, primarily driven by Markets. This included the
introduction of the FFVA on certain derivative contracts
which resulted in a charge affecting Rates and Credit.
Revenue also fell in Foreign Exchange, reflecting lower
volatility and reduced client flows. Furthermore, revenue
decreased in Equities, as 2013 benefited from higher
revaluation gains, which more than offset the increase
in revenue from increased client flows and higher
derivative income.
RBWM revenue reduced marginally due to spread
compression, primarily on mortgages. In addition, fee
income fell as a result of higher fees payable under
partnership agreements and lower fee income from
investment products and overdrafts. These factors were
partly offset by improved spreads on savings products and
higher current account balances.
In the rest of Europe, revenue decreased in France,
Switzerland and Turkey. Revenue in France fell principally
in RBWM in the Insurance business due to adverse
movements of US$203m in the PVIF asset, reflecting a fall
in long-term yields which increased the cost of guarantees
on the savings business, compared with favourable
movements of US$48m in 2013. This was coupled with a
fall in GB&M in Rates, due to lower volatility and levels
of market activity. In Switzerland, the fall in revenue
reflected the repositioning of the GPB business and a
reduction in client assets. Revenue also decreased in
Turkey, principally in RBWM due to interest rate caps on
cards and overdrafts imposed by the local regulator, partly
offset by an increase in card fees.
LICs reduced, primarily in the UK and, to a lesser extent, in
Spain. In the UK in CMB, individually assessed provisions
fell, reflecting the quality of the portfolio and improved
economic conditions. GB&M also recorded reduced loan
impairment charges due to lower individually assessed
provisions, and higher net releases of credit risk provisions
on available-for-sale ABSs. This was partly offset by an
increase due to a revision in certain estimates in our
corporate collective loan impairment calculation. Loan
impairment charges in RBWM decreased as a result of
lower delinquency levels in the improved economic
environment and as customers continued to reduce
outstanding credit card and loan balances. Loan
impairment charges in Spain decreased due to lower
individually assessed provisions.
The decreases in the UK and Spain were partly offset by
increases in Turkey and France. Loan impairment charges
increased in Turkey due to growth in card delinquency
rates following regulatory changes. Loan impairment
charges in France increased, predominantly in GB&M and
CMB due to higher individually assessed provisions.
Operating expenses (US$m)
20,217
(2,601)
17,616
17,613
16,324
(1,289)
2014
2013
Reported
Currency translation
and significant items
Adjusted operating
expenses
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Report of the Directors: Geographical regions (continued)
Europe
Operating expenses rose by US$1.3bn, mainly in the UK,
reflecting growth in Regulatory Programmes and
Compliance costs in all businesses and increased staff
costs. In addition, the UK bank levy charge of US$1.1bn
in respect of 2014 was US$0.2bn higher than in 2013,
primarily due to an increase in the rate of the levy.
Expenses also increased due to the timing of the
recognition of the Financial Services Compensation
Scheme levy in the UK. These increases were partly
offset by sustainable cost savings of over US$330m.
Profit/(loss) before tax and balance sheet data – Europe
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
2014
Global
Private
Banking
US$m
Inter-
segment
elimination55
US$m
Other
US$m
Profit/(loss) before tax
Net interest income/(expense)
Net fee income/(expense)
Trading income/(expense)
5,196
2,456
3,616
1,900
excluding net interest income
(260)
1,956
1,087
1,943
660
2,603
−
14
14
730
50
−
(3)
6,437
−
6,437
−
6,437
(6,391)
46
3
49
%
0.3
99.3
594
626
140
(4)
136
−
(1)
(1)
9
2
50
29
1,445
(63)
1,382
4
1,386
(1,071)
315
−
315
%
1.7
77.5
33
2
35
−
14
(246)
−
616
119
616
12
3
2,741
(127)
10,651
(3,450)
7,201
(268)
6,933
(6,621)
312
2
314
%
1.7
91.9
119
10
7
217
45
5,949
(306)
5,643
(502)
5,141
(2,594)
2,547
1
2,548
%
13.6
46.0
Net interest income/(expense)
on trading activities
Net trading income/(expense)50
Changes in fair value of long-term
debt issued and related
derivatives
Net income/(expense) from other
financial instruments
designated at fair value
Net income/(expense) from
financial instruments
designated at fair value
Gains less losses from financial
investments
Dividend income
Net insurance premium
income/(expense)
Other operating income/(expense)
Total operating income
Net insurance claims56
Net operating income4
Loan impairment (charges)/
recoveries and other credit risk
provisions
Net operating income
Total operating expenses
Operating profit/(loss)
Share of profit in associates
and joint ventures
Profit/(loss) before tax
Share of HSBC’s profit before tax
Cost efficiency ratio
Balance sheet data40
Loans and advances to customers
(net)27
Total assets
Customer accounts27
Total
US$m
10,611
6,042
1,764
770
2,534
614
737
1,351
772
65
3,008
1,007
25,390
(3,819)
21,571
(654)
(27)
(92)
1
(91)
614
(11)
603
11
3
−
1,249
1,094
−
(97)
−
−
97
97
−
−
−
−
−
−
(186)
(186)
−
1,094
(186)
2
1,096
(3,726)
(2,630)
−
(2,630)
%
(14.1)
340.6
−
(764)
(186)
20,807
186
(20,217)
−
−
−
590
6
596
%
3.2
93.7
US$m
409,733
1,290,926
545,959
US$m
US$m
US$m
US$m
US$m
165,112
221,679
202,413
106,342
120,819
135,837
113,136
948,951
166,075
24,766
64,676
41,380
377
64,182
254
(129,381)
HSBC HOLDINGS PLC
82
Profit/(loss) before tax
Net interest income/(expense)
Net fee income/(expense)
Trading income excluding net
interest income
Net interest income on trading
activities
Net trading income50
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 insurance premium
income/(expense)
Other operating income/(expense)
Total operating income/(expense)
Net insurance claims56
Net operating income/(expense)4
Loan impairment charges and
other credit risk provisions
Net operating income/(expense)
Total operating expenses
Operating profit/(loss)
Share of profit/(loss) in associates
and joint ventures
Profit/(loss) before tax
Share of HSBC’s profit before tax
Cost efficiency ratio
Balance sheet data40
Loans and advances to customers
(net)27
Total assets
Customer accounts27
For footnotes, see page 109.
(570)
(1)
1,354
Total
US$m
10,693
6,032
3,307
1,116
4,423
(936)
418
379
75
3,158
529
25,707
(4,740)
20,967
(1,530)
19,437
(17,613)
1,824
1
1,825
%
8.1
84.0
US$m
456,110
1,392,959
581,933
Retail Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
2013
Global
Private
Banking
US$m
Inter-
segment
elimination55
US$m
Other
US$m
5,600
2,545
3,353
1,789
206
2
208
−
30
5
35
−
1,774
957
2,181
1,013
3,194
−
1,059
271
591
1,059
271
52
4
2,782
(103)
12,147
(4,136)
8,011
(329)
7,682
(5,934)
1,748
−
2
361
9
5,820
(567)
5,253
(935)
4,318
(2,231)
2,087
5
1
1,753
2,088
%
7.8
74.1
%
9.2
42.5
591
344
65
(1)
110
7,034
−
7,034
(242)
6,792
(4,987)
1,805
(4)
1,801
%
8.0
70.9
722
744
192
4
196
−
4
4
(17)
4
16
(253)
1,416
(37)
1,379
(24)
1,355
(1,519)
(164)
(1)
(165)
%
(0.7)
110.2
(694)
(3)
698
30
728
(936)
(62)
–
–
62
62
−
(1,506)
(1)
−
−
−
−
(1)
−
(1)
−
(1)
1
−
−
−
−
−
−
766
(709)
−
(709)
−
(709)
(2,943)
(3,652)
−
(3,652)
%
(16.2)
(415.1)
US$m
US$m
US$m
US$m
US$m
177,357
238,499
205,288
105,498
124,242
134,120
145,136
1,054,506
191,715
27,289
75,718
49,789
830
72,174
1,021
(172,180)
HSBC HOLDINGS PLC
83
t
r
o
p
e
R
c
i
g
e
t
a
r
t
S
i
w
e
v
e
R
l
a
i
c
n
a
n
i
F
e
c
n
a
n
r
e
v
o
G
e
t
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o
p
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o
C
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e
m
e
t
a
t
S
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a
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a
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F
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i
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f
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I
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Report of the Directors: Geographical regions (continued)
Asia
Asia8
HSBC’s principal banking subsidiaries
in Hong Kong are The Hongkong and
Shanghai Banking Corporation Limited and
Hang Seng Bank Limited. The former is the
largest bank incorporated in Hong Kong
and is our flagship bank in Asia.
We offer a wide range of banking and
financial services in mainland China,
through our local subsidiaries HSBC Bank
(China) Company Limited and Hang Seng
Bank (China) Limited. We also participate
indirectly in mainland China through our
associate, Bank of Communications.
Outside Hong Kong and mainland China,
we conduct business in 18 countries and
territories in Asia, with particularly strong
coverage in Australia, India, Indonesia,
Malaysia and Singapore.
Net interest income
Net fee income
Net trading income
Other income
Net operating income4
2014
US$m
12,273
5,910
2,622
2,872
23,677
2013
US$m
11,432
5,936
2,026
5,038
24,432
LICs43
(647)
(498)
Net operating income
23,030
23,934
Total operating expenses
(10,427)
(9,936)
Operating profit
12,603
13,998
Income from associates44
2,022
1,855
Profit before tax
14,625
15,853
Cost efficiency ratio
RoRWA36
44.0%
3.1%
40.7%
3.8%
2012
US$m
10,707
5,418
2,516
6,691
25,332
(510)
24,822
(9,980)
14,842
3,188
18,030
39.4%
4.4%
Year-end staff numbers
118,322
113,701
112,766
10%
Growth in customer lending balances
excluding the effect of currency translation
Market leader for
Asia ex-Japan Bonds
(Bloomberg)
Best Bank in Asia
(The Euromoney Awards of Excellence 2014)
For footnotes, see page 109.
Economic background
Hong Kong’s real GDP growth slowed in 2014 relative
to 2013 due to weaker domestic demand, partly
attributable to the slowdown in the annual growth of
retail sales. Labour market conditions softened with
unemployment rising, albeit from historically low levels.
Tourism arrivals to Hong Kong held up overall, up by 16%
in the year compared with 2013, driven by the growth
of visitors from mainland China. Headline CPI inflation
averaged just over 4% for 2014, with a number of
expiring government subsidies offsetting lower inflation
in fuel and food prices.
In mainland China, real GDP growth slowed from 7.7%
in 2013 to 7.4% in 2014, largely due to a slowdown in
activity in construction and manufacturing investment
which was only partially offset by resilient infrastructure
investment. Headline annual CPI inflation fell steadily to
1.5% in December, significantly below the government’s
target of 3.5%. The People’s Bank of China eased
monetary policy in November by cutting policy interest
rates for the first time since July 2012. The one-year
deposit rate was lowered by 25bps to 2.75% and the
one-year lending rate by 40bps to 5.6%. Further
measures were announced in December to support
bank lending and spur economic activity.
Japan experienced significant economic volatility during
2014 from the imposition of a 3 percentage point
consumption tax increase, which took effect on 1 April.
The economy recorded annualised GDP growth of 5.8%
in the first quarter of 2014, but growth slowed sharply
after the tax rise, as government stimuli and exports
were unable to offset the decline in private consumption.
GDP grew at an annualised rate of 2.2% in the fourth
quarter after falls of 6.7% and 1.9% in the preceding
quarters. The Bank of Japan announced another round
of quantitative easing on 31 October 2014, prompting
further depreciation of the yen.
In India, a new government with a strong mandate for
reform boosted market sentiment regarding the long-
term prospects for the country’s economy. However,
the recovery remained constrained in 2014 with many
infrastructure projects delayed pending government
clearance. The steep decline in international commodity
prices during the second half of the year helped push
down goods price inflation and reduce the current
account deficit. Following an interest rate rise early
in 2014, the central bank kept monetary policy stable
throughout the year.
The downward trend in global commodity prices
permitted Indonesia and Malaysia to cut costly fuel
subsidies, which is expected to reduce external
imbalances and improve their fiscal position. Domestic
demand in these countries remained relatively robust
throughout 2014, supporting economic growth. In
Singapore, GDP growth slowed in 2014 from weaker
export growth and domestic economic restructuring.
The Monetary Authority maintained its policy of gradual
currency appreciation.
HSBC HOLDINGS PLC
84
Profit/(loss) before tax by country within global businesses
Retail Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
Global
Private
Banking
US$m
Hong Kong
Australia
India
Indonesia
Mainland China
Malaysia
Singapore
Taiwan
Other
Year ended 31 December 2014
Hong Kong
Australia
India
Indonesia
Mainland China
Malaysia
Singapore
Taiwan
Other
Year ended 31 December 2013
Hong Kong
Australia
India
Indonesia
Mainland China
Malaysia
Singapore
Taiwan
Other
Year ended 31 December 2012
3,727
78
4
10
292
156
129
19
57
4,472
3,742
100
(21)
12
223
148
147
7
61
4,419
3,694
97
41
29
838
183
201
62
66
5,211
2,264
126
121
53
1,533
122
168
35
320
4,742
2,110
131
113
106
1,536
105
120
30
207
4,458
2,188
38
89
124
1,724
131
139
36
321
4,790
1,807
232
442
110
954
190
243
166
432
4,576
1,971
189
418
126
842
236
262
158
473
4,675
1,518
184
497
146
1,257
242
296
136
567
4,843
146
−
11
−
(3)
−
57
−
−
211
208
−
7
−
(4)
−
74
−
(1)
284
249
–
7
–
(4)
–
97
–
59
408
Other
US$m
198
(4)
122
25
175
28
(8)
1
87
624
58
26
136
36
1,644
25
22
5
65
2,017
(67)
(44)
175
7
2,525
8
(65)
–
239
2,778
Total
US$m
8,142
432
700
198
2,951
496
589
221
896
14,625
8,089
446
653
280
4,241
514
625
200
805
15,853
7,582
275
809
306
6,340
564
668
234
1,252
18,030
In Australia, real GDP growth rose to an annual rate
of around 2.8% in 2014 and unemployment remained
roughly unchanged at 6.1%. Mining investment fell
sharply and was only partly offset by an improvement
in other sectors of the economy. Low interest rates
continued to drive an increase in housing market activity
and credit growth picked up modestly. The Australian
dollar weakened during the year but remained well
above its long-run average level.
In Taiwan, economic activity accelerated with the level
of GDP in 2014 rising 3.5% in the year as a whole. This
was the strongest annual rate of growth since 2011
and an improvement on the 2.1% growth seen in 2013.
Growth was driven by a combination of strong exports
and domestic consumption thanks to low unemployment
and rising wage growth. The central bank in Taiwan
kept its key policy rate unchanged throughout 2014
at 1.875%, which is the level it has been since 2011.
Financial overview
Profit before tax (US$m)
14,625
10
14,635
15,853
14,309
(1,544)
2014
Reported
Currency translation
and significant items
2013
Adjusted profit
Our operations in Asia reported a profit before tax of
US$14.6bn in 2014 compared with US$15.9bn in 2013,
a decrease of 8%. The reduction reflected a decrease
in revenue and an increase in costs and LICs, partly offset
by a higher share of profits from associates. Revenue
included the effect of a number of significant items,
notably in 2013, an accounting gain arising from
the reclassification of Industrial Bank as a financial
investment (US$1.1bn) and the net gain on completion
of the Ping An disposal (US$553m).
HSBC HOLDINGS PLC
85
t
r
o
p
e
R
c
i
g
e
t
a
r
t
S
i
w
e
v
e
R
l
a
i
c
n
a
n
i
F
e
c
n
a
n
r
e
v
o
G
e
t
a
r
o
p
r
o
C
s
t
n
e
m
e
t
a
t
S
l
a
i
c
n
a
n
i
F
n
o
i
t
a
m
r
o
f
n
I
l
r
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d
o
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Report of the Directors: Geographical regions (continued)
Asia
Analysis of mainland China profit/(loss) before tax
BoCom and other associates
Mainland China operations
Industrial Bank
Ping An
Year ended 31 December 2014
BoCom and other associates
Mainland China operations
Industrial Bank
Ping An
Year ended 31 December 2013
BoCom and other associates
Mainland China operations
Industrial Bank
Ping An
Year ended 31 December 2012
Retail Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
Global
Private
Banking
US$m
Other
US$m
Total
US$m
255
37
–
–
292
247
(24)
–
–
223
214
(52)
54
622
838
1,421
112
–
–
1,533
1,360
176
–
–
1,536
1,193
176
273
82
1,724
296
658
–
–
954
284
558
–
–
842
248
606
343
60
1,257
–
(3)
–
–
(3)
–
(4)
–
–
(4)
–
(4)
–
–
(4)
1
174
–
–
175
(38)
40
1,089
553
1,644
–
66
–
2,459
2,525
1,973
978
–
–
2,951
1,853
746
1,089
553
4,241
1,655
792
670
3,223
6,340
In 2014, significant items included the gain on sale of
our investment in Bank of Shanghai (US$428m) and
an impairment of our investment in Industrial Bank
(US$271m). See page 42 for further details of significant
items.
On an adjusted basis, profit before tax rose by US$326m
or 2%, driven by higher revenue partly offset by
increased operating expenses and LICs.
Country business highlights
We continued to focus on our strategic priorities for Asia,
using our international network to drive organic growth
and connect customers across borders. We completed
the sale of our investment in Bank of Shanghai and
implemented a discretionary incentive framework that
removes the formulaic link between product sales and
remuneration. We also saw continued adoption of our
mobile banking applications, extended the contact-less
payment systems to Android phones and enhanced our
digital banking capabilities.
In Hong Kong, average mortgage balances in RBWM
increased by 7%, with average LTV ratios of 47% on new
mortgage drawdowns and an estimated 29% on the
portfolio as a whole. In November 2014, to coincide with
the launch of the Hong Kong-Shanghai Stock Connect
platform, we rolled out new services allowing retail
customers to trade and invest in eligible shares that are
listed on the Shanghai Stock Exchange. We strengthened
our cards offering with the launch of the ‘Visa Signature’
card product in Hong Kong and continued building new
merchant partnerships across the region. We also re-
launched our Advance offering to emerging affluent
customers in Hong Kong and nine other regional
markets. We were awarded ‘International Retail Bank
of the Year’ by Asian Banking and Finance.
In CMB, we were one of the first foreign banks to
announce renminbi cross-border pooling capability in the
Shanghai Free Trade Zone. The collaboration between
CMB and GB&M continued throughout the year, as a
consequence of which 157 primary markets transactions
were completed in 2014, up from 122 in 2013, primarily
for debt capital market issuances and leveraged asset
finance mandates. In addition, we were named ‘Best
Commercial Bank’ by FinanceAsia Achievement Awards
2014.
In GB&M, we maintained our market leadership in Asia
ex-Japan G3 currency and investment grade bonds, and
led the market in Hong Kong dollar bond issuances. We
were involved in three of the five largest equity capital
market transactions during 2014, as well as the first
Sukuk sovereign bond issuance in Hong Kong.
Furthermore, we continued to lead the market in
offshore renminbi bond issuance in Hong Kong,
becoming one of the Hong Kong Monetary Authority’s
primary liquidity providers for offshore renminbi.
We also acted as a joint book runner for an offshore
preference share issuance for a mainland Chinese bank,
the first mainland Chinese Basel III compliant additional
tier-1 capital offering. We remain well-positioned to
service our institutional investors using Stock Connect
through our integrated Custody Plus platform.
In mainland China, we continued to develop our branch
network, which comprised 173 HSBC outlets, 25 HSBC
rural bank outlets and 50 Hang Seng Bank outlets at
the end of the year. In RBWM, we were one of the first
foreign banks to launch renminbi derivative products
linked to the US dollar/renminbi rate and were awarded
‘Best Foreign Retail Bank’ by The Asian Banker for the
sixth consecutive year. During 2014, we were the first
foreign custodian bank to service renminbi qualified
foreign institutional investors based in Singapore and
South Korea. We also became a member of the Shanghai
Gold Exchange’s international board, a newly established
trading platform connecting mainland China’s gold
market to global investors. In addition, we received
regulatory approval to be one of the first market makers
to directly trade renminbi, euro and Singaporean dollars
in mainland China’s interbank foreign exchange market.
HSBC HOLDINGS PLC
86
In Payments and Cash Management, we launched the
Global Payments System which supports all cross-border
payments in and out of mainland China in all currencies,
including renminbi. In Global Trade and Receivables
Finance, we launched trade link initiatives to connect
mainland China with the rest of Asia, Germany and the
US, to enhance international connectivity and promote
activity between key trade routes. In mergers and
acquisitions (‘M&A’), we were adviser to a number
of state owned enterprises on significant overseas
investments and acquisitions.
Elsewhere in Asia, in India, we continued to grow our
balance sheet in CMB, including term lending and
Payments and Cash Management deposits, particularly
helping UK corporations to invest in India. In GB&M, we
were adviser on two of the largest M&A transactions
in 2014, and in Wealth Management we launched
Managed Solutions, a multi-asset fund series. In
Australia, we were a mandated lead arranger for the
largest mining project financing deal and for the largest
transport infrastructure project during 2014. In CMB, we
also announced an A$250m (US$225m) International
Growth Fund, providing credit facilities to local SMEs to
explore business opportunities abroad.
Review of adjusted performance45
Revenue (US$m)
23,677
23,629
24,432
(48)
2014
Reported
Currency translation
and significant items
22,454
(1,978)
2013
Adjusted revenue
Revenue was US$1.2bn or 5% higher, driven by Hong
Kong and mainland China, mainly in CMB and RBWM
from balance sheet growth, as well as in GB&M from
portfolio growth in Balance Sheet Management and
increased term lending. Revenue was also higher in
India and Australia.
Country view of adjusted revenue
Hong Kong
Australia
India
Indonesia
Mainland China
Malaysia
Singapore
Taiwan
Other
Year ended 31 December
2014
US$m
13,725
975
1,826
561
2,463
1,066
1,339
491
1,183
23,629
2013
US$m
13,211
898
1,666
559
1,948
1,063
1,319
501
1,289
22,454
In Hong Kong, revenue increased by 4%, primarily
in CMB and RBWM and, to a lesser extent, in GB&M.
Higher revenue in CMB was due to increased net interest
income from growth in term lending across a range of
sectors, higher average Payments and Cash Management
deposit balances and higher fees from remittance
volumes, as well as improved lending spreads.
In RBWM, revenue growth was driven by higher net
interest income from increased average lending
balances, mainly credit cards and other personal lending,
and from growth in average deposit balances, though
the benefit of higher volumes was partly offset by spread
compression. Net fee income also increased, principally
from volume growth in unit trusts, credit card
transactions and securities brokerage. In our insurance
operations, revenue growth reflected higher premium
income, which also contributed to growth in the debt
securities portfolio, although this was partly offset by
less favourable movements in the PVIF asset from annual
actuarial assumption updates.
Revenue in GB&M also increased, mainly in Balance
Sheet Management due to portfolio growth, and in
Capital Financing from higher average term lending
balances. This was partly offset by lower net fee income
in Markets due to reduced client flows and in Capital
Financing reflecting fee compression.
In mainland China, revenue increased by 26% compared
with 2013. In GB&M, we reported greater net interest
income from Balance Sheet Management due to
portfolio growth and higher reinvestment rates, and a
rise in average term lending balances. Additionally,
trading income improved in Rates from higher interest
income on debt securities and revaluation gains on
trading bonds as yields fell, and in Foreign Exchange
from increased client flows. Revenue in RBWM
increased, mainly from wider deposit spreads as market
interest rates rose in the first half of 2014, while in CMB
revenue growth was driven by higher average deposit
and lending balances.
Elsewhere in Asia, revenue in India rose by 10%,
primarily in GB&M from higher Rates trading income
due to favourable credit valuation adjustments (‘CVA’s)
on derivatives, coupled with higher net interest income
from portfolio growth in Balance Sheet Management.
In Australia, we reported an increase in revenue of 9%,
predominantly in GB&M from higher trading income in
Rates and Foreign Exchange. This was partly offset by
lower revenue in South Korea following the run-off of
our RBWM operations in 2013.
LICs rose by US$167m or 35%, principally in GB&M
and CMB from a rise in a small number of individually
assessed impairment charges in Hong Kong and
mainland China. This was partly offset by a reduction
in individually assessed impairment charges in CMB
in New Zealand, Malaysia and Vietnam.
HSBC HOLDINGS PLC
87
t
r
o
p
e
R
c
i
g
e
t
a
r
t
S
i
w
e
v
e
R
l
a
i
c
n
a
n
i
F
e
c
n
a
n
r
e
v
o
G
e
t
a
r
o
p
r
o
C
s
t
n
e
m
e
t
a
t
S
l
a
i
c
n
a
n
i
F
n
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Report of the Directors: Geographical regions (continued)
Asia
Operating expenses (US$m)
10,427
10,369
(58)
9,936
9,616
(320)
2014
2013
Reported
Currency translation
and significant items
Adjusted operating
expenses
Operating expenses rose by US$753m following
investment in the region, notably in Regulatory
Programmes and Compliance, and increased use of our
Global Services Centres across the Group. Cost growth
also reflected wage inflation and additional headcount,
notably in Hong Kong and mainland China to support
business growth, mainly in CMB, as well as increased
marketing activity. These factors were partly offset by
around US$270m of sustainable cost savings achieved in
2014.
Share of profit from associates and joint ventures rose
by US$71m, mainly from BoCom, reflecting higher
revenue from balance sheet growth and trading income,
partly offset by increases in operating expenses and LICs.
HSBC HOLDINGS PLC
88
Profit before tax and balance sheet data – Asia
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
2014
Global
Private
Banking
US$m
Profit before tax
Net interest income/(expense)
Net fee income
Trading income/(expense)
excluding net interest income
Net interest income/(expense)
on trading activities
Net trading income50
Changes in fair value of long-term
debt issued and related
derivatives
Net income/(expense) from other
financial instruments
designated at fair value
Net income/(expense) from
financial instruments
designated at fair value
Gains less losses from financial
investments
Dividend income
Net insurance premium income
Other operating income
Total operating income
Net insurance claims56
Net operating income4
Loan impairment (charges)/
recoveries and other credit
risk provisions
Net operating income
Total operating expenses
Operating profit
Share of profit in associates
and joint ventures
Profit before tax
Share of HSBC’s profit before tax
Cost efficiency ratio
Balance sheet data40
Loans and advances to customers
(net)27
Total assets
Customer accounts27
5,003
2,792
216
(13)
203
−
543
543
1
1
6,596
516
15,655
(6,979)
8,676
(317)
8,359
(4,191)
4,168
304
4,472
%
23.9
48.3
3,439
1,529
382
(9)
373
−
(6)
(6)
5
−
794
95
6,229
(782)
5,447
(228)
5,219
(1,897)
3,322
1,420
4,742
%
25.4
34.8
3,579
1,311
1,220
771
1,991
−
(2)
(2)
46
1
−
141
7,067
−
7,067
(103)
6,964
(2,686)
4,278
298
4,576
%
24.5
38.0
177
272
142
−
142
−
−
−
−
−
−
3
594
−
594
1
595
(384)
211
−
211
%
1.1
64.6
Inter-
segment
elimination55
US$m
91
−
−
(91)
(91)
−
−
−
−
−
−
(1,158)
(1,158)
−
Other
US$m
(16)
6
(5)
9
4
(4)
2
(2)
148
177
−
2,734
3,051
−
3,051
(1,158)
−
(1,158)
1,158
−
−
−
−
3,051
(2,427)
624
−
624
%
3.4
79.5
US$m
US$m
US$m
US$m
US$m
115,643
166,577
286,670
132,509
158,747
155,608
99,934
548,865
104,896
12,894
14,905
29,847
1,975
79,477
470
(89,848)
HSBC HOLDINGS PLC
89
Total
US$m
12,273
5,910
1,955
667
2,622
(4)
537
533
200
179
7,390
2,331
31,438
(7,761)
23,677
(647)
23,030
(10,427)
12,603
2,022
14,625
%
78.3
44.0
US$m
362,955
878,723
577,491
t
r
o
p
e
R
c
i
g
e
t
a
r
t
S
i
w
e
v
e
R
l
a
i
c
n
a
n
i
F
e
c
n
a
n
r
e
v
o
G
e
t
a
r
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
o
i
t
a
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o
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Report of the Directors: Geographical regions (continued)
Asia/Middle East and North Africa
Retail Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
2013
Global
Private
Banking
US$m
Inter-
segment
elimination55
US$m
Other
US$m
4,895
2,758
238
(16)
222
–
315
315
(1)
–
6,263
764
15,216
(6,609)
8,607
(347)
8,260
(4,138)
4,122
297
4,419
%
19.6
48.1
3,103
1,518
377
(6)
371
–
–
–
–
1
654
97
5,744
(687)
5,057
(144)
4,913
(1,786)
3,127
1,331
4,458
%
19.8
35.3
3,245
1,419
1,483
608
2,091
–
7
7
58
6
1
163
6,990
–
6,990
(3)
6,987
(2,560)
4,427
248
4,675
%
20.7
36.6
205
249
175
–
175
–
–
–
14
–
–
12
655
–
655
(4)
651
(367)
284
–
284
%
1.3
56.0
108
–
–
(108)
(108)
–
–
–
–
–
–
(1,232)
(1,232)
–
(1,232)
–
(1,232)
1,232
–
–
–
(124)
(8)
(739)
14
(725)
(1)
(7)
(8)
1,204
145
–
3,871
4,355
–
4,355
–
4,355
(2,317)
2,038
(21)
2,017
%
8.9
53.2
US$m
US$m
US$m
US$m
US$m
111,769
158,456
278,392
122,882
146,898
141,958
89,722
515,023
96,546
10,904
12,994
31,250
1,620
82,453
337
(84,033)
Profit before tax
Net interest income/(expense)
Net fee income/(expense)
Trading income/(expense)
excluding net interest income
Net interest income/(expense)
on trading activities
Net trading income/(expense)50
Changes in fair value of long-term
debt issued and related
derivatives
Net income/(expense) from other
financial instruments
designated at fair value
Net income/(expense) from
financial instruments
designated at fair value
Gains less losses from financial
investments
Dividend income
Net insurance premium income
Other operating income
Total operating income
Net insurance claims56
Net operating income4
Loan impairment charges and
other credit risk provisions
Net operating income
Total operating expenses
Operating profit
Share of profit/(loss) in associates
and joint ventures
Profit before tax
Share of HSBC’s profit before tax
Cost efficiency ratio
Balance sheet data40
Loans and advances to customers
(net)27
Total assets
Customer accounts27
For footnotes, see page 109.
Total
US$m
11,432
5,936
1,534
492
2,026
(1)
315
314
1,275
152
6,918
3,675
31,728
(7,296)
24,432
(498)
23,934
(9,936)
13,998
1,855
15,853
%
70.3
40.7
US$m
336,897
831,791
548,483
HSBC HOLDINGS PLC
90
Middle East and
North Africa
The network of branches of HSBC Bank
Middle East Limited, together with HSBC’s
subsidiaries and associates, gives us wide
coverage in the region. Our associate in
Saudi Arabia, The Saudi British Bank (40%
owned), is the Kingdom’s sixth largest bank
by total assets.
Net interest income
Net fee income
Net trading income
Other income/(expense)
Net operating income4
LICs43
Net operating income
Total operating expenses
Operating profit
Income from associates44
Profit before tax
Cost efficiency ratio
RoRWA36
Year-end staff numbers
2014
US$m
1,519
650
314
65
2,548
6
2,554
(1,216)
1,338
488
1,826
47.7%
2.9%
8,305
2013
US$m
1,486
622
357
38
2,503
42
2,545
(1,289)
1,256
438
1,694
51.5%
2.7%
8,618
2012
US$m
1,470
595
390
(25)
2,430
(286)
2,144
(1,166)
978
372
1,350
48.0%
2.2%
8,765
Economic background
Economic activity across the Middle East and North
Africa remained strong during 2014, despite heightened
geopolitical uncertainties and weaker global oil prices
towards the end of the year. The region’s energy
exporters fared particularly well, buoyed by an oil-
funded fiscal stimulus and an expansionary monetary
stance. Saudi Arabia, the Middle East’s largest oil
exporter, grew strongly as the Kingdom pushed ahead
with its infrastructure and industrial expansion
programme. The United Arab Emirates (‘UAE’),
however, showed the most significant gains in
momentum, boosted by growth in both its export-
orientated non-oil sector and an increasingly
expansionary fiscal stance. Though showing some gains
as growth picked up speed, inflation remained muted at
under 5% across the Gulf.
Egypt showed further signs of stabilisation in 2014.
Although still below the trend levels that prevailed prior
to the 2011 revolution, some momentum in growth
was achieved in the second half of the year, boosted
by the receipt of further concessional funding and
an improvement in political order and policy making
following the May presidential election. Inflation rose
and the budget deficit remained high, recording a third
successive double-digit deficit as a percentage of GDP.
International reserves fell in the latter months of the
year, highlighting ongoing pressure on the currency
which remained subject to significant controls.
Best Investment Bank in the
Middle East
(Euromoney 2014)
Financial overview
Profit before tax (US$m)
1,826
28
1,854
1,694
1,673
(21)
Record reported profit before tax of
US$1.8bn
Completed disposal of our operations in
Jordan and Pakistan
in line with the Group’s
six filters investment criteria
For footnotes, see page 109.
2014
Reported
Currency translation
and significant items
2013
Adjusted profit
Our operations in the Middle East and North Africa
reported a profit before tax of US$1.8bn, an increase of
8% on a reported basis, despite the effects of business
disposals, including the loss on sale of our Pakistan
business. See page 42 for further details of our
significant items.
On an adjusted basis, profit before tax grew by 11%
driven by higher revenue and increased income from our
associate, The Saudi British Bank.
HSBC HOLDINGS PLC
91
t
r
o
p
e
R
c
i
g
e
t
a
r
t
S
i
w
e
v
e
R
l
a
i
c
n
a
n
i
F
e
c
n
a
n
r
e
v
o
G
e
t
a
r
o
p
r
o
C
s
t
n
e
m
e
t
a
t
S
l
a
i
c
n
a
n
i
F
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Report of the Directors: Geographical regions (continued)
Middle East and North Africa
Profit/(loss) before tax by country within global businesses
Egypt
United Arab Emirates
Saudi Arabia
Other
Year ended 31 December 2014
Egypt
United Arab Emirates
Saudi Arabia
Other
Year ended 31 December 2013
Egypt
United Arab Emirates
Saudi Arabia
Other
Year ended 31 December 2012
Retail Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
Global
Private
Banking
US$m
Other
US$m
64
154
91
14
323
31
142
82
3
258
67
143
60
(18)
252
94
190
168
152
604
37
290
146
172
645
71
235
120
161
587
177
364
203
182
926
166
275
188
240
869
157
141
170
113
581
−
−
19
−
19
−
1
15
−
16
–
1
9
–
10
−
(46)
5
(5)
(46)
(29)
(72)
7
−
(94)
(5)
(56)
18
(37)
(80)
Total
US$m
335
662
486
343
1,826
205
636
438
415
1,694
290
464
377
219
1,350
Country business highlights
In the UAE, we made significant progress in executing
the strategic plan we announced in 2013. In RBWM, we
expanded our range of products in Wealth Management,
including the launch of the International Bonds and
Portfolio Advisory Service to widen our offering for
Premier clients. The introduction of a financial health
check to better understand customer needs coupled
with the opening of a Customer Service Unit in Abu
Dhabi illustrated our focus on putting the customer first.
In CMB, we enhanced our services to customers that
trade internationally by completing the implementation
of our International Subsidiary Business model across the
region in order to better meet their cross-border banking
requirements and cement our strategic relationships.
We also launched a second tranche of the International
Growth Fund for AED1bn (US$272m). We continued to
invest in our Payments and Cash Management business
including recruiting client-facing and specialised staff and
won the Best Regional Cash Management Provider in the
Middle East award.
In GB&M, we advised a major regional airline on
its investment in a European air carrier and a large
investment company in Dubai on its inaugural US$1bn
bond issue. In addition, we increased our collaboration
with CMB, particularly in Capital Financing, focusing on
existing clients and taking advantage of our connectivity
with other regions.
The drop in oil prices did not have a material impact on
our financial performance in the UAE.
In Egypt, in RBWM, we expanded our product offering
with enhanced features and reduced pricing for credit
cards, and were ranked number one in the customer
recommendation index. In GB&M, we acted as the
global coordinator, structuring bank, mandated lead
arranger and facility agent for a government entity. This
reflected our commitment to supporting the Egyptian
government’s plan for the development of the country’s
infrastructure.
In Saudi Arabia, through our associates, The Saudi British
Bank and HSBC Saudi Arabia Limited, we acted as joint
financial advisor, joint lead manager and a receiving bank
on the US$6bn National Commercial Bank initial public
offering (‘IPO’). This was the Middle East’s largest ever
IPO and the world’s second largest in 2014.
Review of adjusted performance45
Revenue (US$m)
2,548
2,545
2,503
(3)
2,402
(101)
2014
2013
Reported
Currency translation
and significant items
Adjusted revenue
Revenue increased in the majority of our markets, most
notably in Egypt in all global businesses and in the UAE.
Country view of adjusted revenue
UAE
Egypt
Rest of MENA
Year ended 31 December
2014
US$m
1,448
531
566
2,545
2013
US$m
1,401
451
550
2,402
In Egypt, revenue increased by US$80m, reflecting higher
net interest income in RBWM due to improved deposit
spreads as a result of re-pricing, and the non-recurrence
of losses on disposal of available-for-sale debt securities
HSBC HOLDINGS PLC
92
in GB&M in 2013. In addition, the Central Bank resumed
interest payments on overnight placements during 2014,
which contributed to the rise in revenue in all global
businesses.
In the UAE, revenue increased by US$47m, primarily
in GB&M reflecting a rise in Capital Financing due to
increased advisory mandates in Project and Export
Finance and a gain on restructuring a specific loan in
Credit and Lending. In addition, revenue rose in our
Equities and Securities Services businesses from
increased customer flows, which in part reflected the
upgrade of the UAE to emerging markets status in the
MSCI Index. In RBWM, revenue increased, but to a lesser
extent, reflecting higher net interest income as mortgage
balances rose and deposit spreads improved due to re-
pricing initiatives. This was partially offset by reduced
revenue in CMB from lower spreads on lending balances,
reflecting a highly liquid and competitive market coupled
with lower charges on foreign exchange transactions in
Payments and Cash Management.
In the rest of the region, revenue was higher with
increases in Oman and Qatar partly offset by a reduction
in Algeria. Higher revenue in Oman in part reflected
growth in customer advances in CMB. The increase in
Qatar was driven by fees in GB&M reflecting increased
customer flows in our Securities Services business, which
in part reflected the upgrade of Qatar to emerging
markets status in the MSCI Index. The reduction in
Algeria reflected regulatory restrictions on foreign
exchange spreads charged on corporate customer
transactions.
Net loan impairment releases were lower by US$44m,
primarily driven by lower impairment releases for a
particular UAE-related exposure in GB&M.
Operating expenses (US$m)
1,216
1,183
1,289
1,214
(33)
(75)
2014
2013
Reported
Currency translation
and significant items
Adjusted operating
expenses
Operating expenses of US$1,183m decreased by
US$31m, mainly due to reductions in Egypt and the UAE.
In Egypt, expenses fell following charges recorded in
2013 relating to changes in the interpretation of tax
regulations. In the UAE, expenses reduced due to the
non-recurrence of charges incurred in 2013 on customer
redress programmes in RBWM relating to fees charged
on overseas credit card transactions. This was partly
offset by wage inflation, investment in Regulatory
Programmes and Compliance, growth in customer-facing
staff in RBWM and increased service and product
support staff in CMB.
Share of profits from associates and joint ventures
increased by 12%, mainly from The Saudi British Bank.
This was driven by higher revenue resulting from strong
balance sheet growth.
HSBC HOLDINGS PLC
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r
o
p
e
R
c
i
g
e
t
a
r
t
S
i
w
e
v
e
R
l
a
i
c
n
a
n
i
F
e
c
n
a
n
r
e
v
o
G
e
t
a
r
o
p
r
o
C
s
t
n
e
m
e
t
a
t
S
l
a
i
c
n
a
n
i
F
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Report of the Directors: Geographical regions (continued)
Middle East and North Africa
Profit/(loss) before tax and balance sheet data – Middle East and North Africa
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
2014
Global
Private
Banking
US$m
Inter-
segment
elimination55
US$m
Other
US$m
Profit/(loss) before tax
Net interest income
Net fee income/(expense)
Trading income/(expense)
excluding net interest income
Net interest income on trading
activities
Net trading income/(expense)50
Net expense from financial
instruments designated at fair
value
Gains less losses from financial
investments
Dividend income
Other operating income
Total operating income
Net insurance claims56
Net operating income4
Loan impairment (charges)/
recoveries and other credit
risk provisions
Net operating income
Total operating expenses
Operating profit/(loss)
Share of profit in associates and
joint ventures
Profit/(loss) before tax
Share of HSBC’s profit before tax
Cost efficiency ratio
Balance sheet data40
Loans and advances to customers
(net)27
Total assets
Customer accounts27
615
152
58
−
58
−
1
1
8
835
−
835
(26)
809
(578)
231
92
323
%
1.7
69.2
467
268
68
−
68
−
1
1
−
805
−
805
(21)
784
(348)
436
168
604
%
3.2
43.2
410
240
207
10
217
−
20
12
27
926
−
926
53
979
(256)
723
203
926
%
5.0
27.6
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
19
19
%
0.1
−
24
−
−
(24)
(24)
−
−
−
(111)
(111)
−
(111)
−
(111)
111
−
−
−
3
(10)
(5)
−
(5)
(3)
−
−
108
93
−
93
−
93
(145)
(52)
6
(46)
%
(0.2)
155.9
US$m
US$m
US$m
US$m
US$m
6,318
7,073
18,024
13,104
14,911
11,809
9,641
39,229
9,630
−
77
−
−
2,900
257
(1,773)
Total
US$m
1,519
650
328
(14)
314
(3)
22
14
32
2,548
−
2,548
6
2,554
(1,216)
1,338
488
1,826
%
9.8
47.7
US$m
29,063
62,417
39,720
HSBC HOLDINGS PLC
94
Retail Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
2013
Global
Private
Banking
US$m
Inter-
segment
elimination55
US$m
Other
US$m
585
161
59
−
59
−
−
−
25
830
−
830
(49)
781
(606)
175
83
258
%
1.1
73.0
486
269
85
−
85
−
−
−
30
870
−
870
(20)
850
(350)
500
145
645
%
2.9
40.2
390
197
220
14
234
−
(18)
9
15
827
−
827
110
937
(256)
681
188
869
%
3.8
31.0
−
−
−
−
−
−
−
−
−
−
−
−
1
1
−
1
15
16
%
0.1
–
4
(5)
−
−
−
21
–
–
(21)
(21)
(2)
−
−
−
(120)
(120)
−
(120)
−
(120)
120
−
−
−
−
−
99
96
−
96
−
96
(197)
(101)
7
(94)
%
(0.4)
205.2
US$m
US$m
US$m
US$m
US$m
6,152
7,016
18,771
11,814
13,776
12,402
9,241
39,302
7,432
−
64
1
4
3,340
77
(2,688)
Total
US$m
1,486
622
364
(7)
357
(2)
(18)
9
49
2,503
−
2,503
42
2,545
(1,289)
1,256
438
1,694
%
7.5
51.5
US$m
27,211
60,810
38,683
Profit/(loss) before tax
Net interest income
Net fee income/(expense)
Trading income excluding net
interest income
Net interest income on trading
activities
Net trading income50
Net expense from financial
instruments designated at fair
value
Gains less losses from financial
investments
Dividend income
Other operating income
Total operating income
Net insurance claims56
Net operating income4
Loan impairment (charges)/
recoveries 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
Share of HSBC’s profit before tax
Cost efficiency ratio
Balance sheet data40
Loans and advances to customers
(net)27
Total assets
Customer accounts27
For footnotes, see page 109.
HSBC HOLDINGS PLC
95
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i
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v
e
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a
i
c
n
a
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i
F
e
c
n
a
n
r
e
v
o
G
e
t
a
r
o
p
r
o
C
s
t
n
e
m
e
t
a
t
S
l
a
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n
a
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F
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Report of the Directors: Geographical regions (continued)
North America
North America
Our principal North American businesses
are located in the US and Canada.
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.
Canadian operations are conducted
through HSBC Bank Canada.
Net interest income
Net fee income
Net trading income
Gains on disposals of US
branch network and
cards business
Other income/(expense)
Net operating income4
LICs43
Net operating income
Total operating expenses
Operating profit
Income from associates44
Profit before tax
Cost efficiency ratio
RoRWA36
2014
US$m
5,015
1,940
411
–
786
8,152
(322)
7,830
(6,429)
1,401
16
1,417
78.9%
0.6%
2013
US$m
5,742
2,143
948
–
(30)
8,803
(1,197)
7,606
(6,416)
1,190
31
1,221
72.9%
0.5%
2012
US$m
8,117
2,513
507
4,012
(456)
14,693
(3,457)
11,236
(8,940)
2,296
3
2,299
60.8%
0.8%
Year-end staff numbers
20,412
20,871
22,443
Economic background
In the US, real GDP rose by 2.4% in 2014, after 2.2%
growth in 2013. Both consumer spending and business
fixed investment increased at a moderate pace in 2014,
climbing 2.5% and 5.2%, respectively. Growth in
residential investment slowed markedly, however,
to 1.8% in 2014, from 11.9% in 2013. Government
expenditure fell by 0.2% in 2014, as a decline in federal
government spending more than offset an increase
in state and local government expenditure. The
unemployment rate fell from 6.7% at the end of 2013 to
5.6% at the end of 2014. CPI inflation averaged 1.6% in
2014, after averaging 1.5% in 2013. The Federal Reserve
continued to pursue a highly accommodative monetary
policy in 2014, keeping the federal funds rate in a
0.00% to 0.25% range. It gradually reduced its monthly
purchases of longer-term Treasury securities and agency
mortgage-backed securities during the first ten months
of the year, bringing its asset purchase programme to a
conclusion at the end of October.
Canadian real GDP grew at a 2.4% annual rate through the
first three quarters of 2014, an improvement on the 1.8%
increase observed during the comparable period in 2013.
Exports were supported by US economic growth and
rising oil production. Business investment was largely
unchanged in 2014. The annual rate of CPI inflation rose
to a peak of 2.4% in late 2013 and early 2014. However,
as the oil price fell late in the year, fuel prices declined
and the annual rate of inflation dropped to 1.5% in
December, below the Bank of Canada’s 2% inflation target.
Monetary policy remained accommodative with the Bank
of Canada keeping its policy rate at 1% throughout 2014,
where it has been since September 2010.
Best Export Finance Arranger in
North America
(Trade Finance Awards for Excellence – 2014)
Financial overview
Profit before tax (US$m)
11%
increase in
CMB customer lending balances
on a reported basis
73%
decrease in
loan impairment charges
on a reported basis
For footnotes, see page 109.
694
2,111
827
2,048
1,417
1,221
2014
Reported
Currency translation
and significant items
2013
Adjusted profit
Our operations in North America reported a profit before
tax of US$1.4bn in 2014 compared with US$1.2bn in 2013.
The increase of US$196m primarily reflected lower LICs,
mainly in the US CML portfolio. This was partly offset by
lower revenue, primarily reflecting continued CML run-off
and a reduction in GB&M in the US. Costs were broadly
unchanged as portfolio run-off broadly offset a US$550m
charge in relation to a settlement with the Federal
Housing Finance Authority.
See page 42 for further details of significant items.
HSBC HOLDINGS PLC
96
Profit/(loss) before tax by country within global businesses
US
Canada
Other
Year ended 31 December 2014
US
Canada
Other
Year ended 31 December 2013
US
Canada
Other
Year ended 31 December 2012
Retail Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
Global
Private
Banking
US$m
513
96
23
632
(358)
131
20
(207)
2,746
207
42
2,995
400
514
(1)
913
296
506
(16)
786
637
577
(15)
1,199
(403)
242
49
(112)
633
280
16
929
661
314
(18)
957
82
−
3
85
53
−
4
57
72
(1)
1
72
Other
US$m
(60)
(23)
(18)
(101)
(350)
(3)
9
(344)
(2,901)
(16)
(7)
(2,924)
Total
US$m
532
829
56
1,417
274
914
33
1,221
1,215
1,081
3
2,299
Adjusted profit before tax was US$63m higher, reflecting a
reduction in LICs and operating expenses, partially offset
by a decrease in revenue.
Country business highlights
In the US, CMB added US$4.0bn in 2014 to its SME fund
which supports businesses that trade or aspire to trade
internationally, raising the programme’s total available
funding to US$5.0bn. Of this, US$3.7bn was utilised at
31 December 2014. Corporate lending balances rose as
we continued to be successful in our markets targeted
for expansion, with balances in both the Midwest and
the West Coast increasing by more than 25% year on
year.
In RBWM, we continued to optimise the mortgage
origination process to improve the customer experience
and expanded our digital channel capabilities. The re-
launch of our Global Premier programme along with
other related campaigns led to approximately 22,000
new Premier customers being added in 2014, an increase
of 25%.
Despite lower revenue in GB&M, we continued to
execute our growth strategy utilising GB&M’s unique
client franchise, its geographical network and product
capabilities to connect our markets. In addition
collaboration with CMB resulted in revenue from its
clients rising by 19%.
In Canada, CMB continued to focus on the acquisition
of new clients, to whom advances reached over
US$1.3bn. We created a dedicated International
Subsidiary Banking team to manage and support our
international clients on a consistent basis. GB&M
focused on increasing its multinational client base, and
the Project and Export Finance business continued to
reflect growth. Our focus in RBWM continued to be
on developing the Premier customer base, building
mortgage, credit card, and deposit balances and growing
assets under management.
We continued to make progress in our strategy to
accelerate the run-off and sale of our US CML portfolio.
We completed the sale of several tranches of real estate
secured accounts with an aggregate unpaid principal
balance of US$2.9bn during 2014 and recognised a
cumulative gain on sale of US$168m. Gross lending
balances in the CML portfolio, including loans held for
sale, were US$25bn at 31 December 2014, a decline
of US$5.8bn from 2013.
Review of adjusted performance45
Revenue (US$m)
8,152
116
8,268
8,803
536
9,339
2014
2013
Reported
Currency translation
and significant items
Adjusted revenue
Revenue fell in the US in RBWM, partly reflecting
continued CML run-off, and in GB&M. Revenue also
reduced in Canada, mainly reflecting the continued run-
off of the Consumer Finance business.
Country view of adjusted revenue
US
Canada
Other
Year ended 31 December
2014
US$m
6,083
1,921
264
8,268
2013
US$m
7,071
1,975
293
9,339
In the US, revenue decreased by US$988m, mainly in
RBWM where lower average lending balances driven by
the continued run-off and loan sales of the CML portfolio
led to lower net interest income. In addition, loan yields
fell, partly reflecting the sale of our higher yielding CML
non-real estate personal loan portfolio, which resulted in
a significant shift in product mix towards increased levels
of lower yielding first lien real estate loans. Revenue also
declined due to lower deposit volumes and narrower
deposit spreads. The fall in revenue was partly offset by
HSBC HOLDINGS PLC
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a
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a
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i
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c
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a
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v
o
G
e
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a
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o
p
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s
t
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m
e
t
a
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S
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a
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Report of the Directors: Geographical regions (continued)
North America
Operating expenses (US$m)
6,429
5,851
(578)
6,416
6,136
(280)
2014
2013
Reported
Currency translation
and significant items
Adjusted operating
expenses
Operating expenses decreased by US$285m, primarily in
the US, reflecting lower divestiture costs as our former
Cards business reached the end of the data separation
process, and lower average staff numbers and costs
resulting from the continued run-off and sales of
tranches of our CML portfolio. In addition, we also
achieved over US$185m of sustainable cost savings,
primarily reflecting organisational effectiveness
initiatives. Partly offsetting the lower operating
expenses were higher legal costs and the growth in
costs associated with Regulatory Programmes and
Compliance, reflecting our continued investment in
Global Standards.
releases of mortgage loan repurchase obligations related
to loans previously sold, which compared with provisions
in 2013.
Revenue decreased in GB&M, driven by a reduction
in Balance Sheet Management income due to lower
reported gains on sales of available-for-sale debt
securities as a result of our ongoing portfolio
repositioning for risk management purposes, and the
adverse performance of economic hedges used to
manage interest rate risk. Credit revenue also reduced,
primarily in our legacy credit portfolio partly reflecting
net adverse fair value movements on the portfolio.
By contrast, revenue increased in CMB, mainly reflecting
increased lending balances in markets targeted for
expansion and higher income in GB&M from increased
collaboration in acquisition financing activity.
In Canada, revenue decreased by US$54m, mainly in
RBWM reflecting a fall in net interest income due to
lower average lending balances from the continued run-
off of the Consumer Finance business. Excluding this,
RBWM revenues rose, driven by higher fees partly
reflecting increased sales of wealth management
products. In CMB, revenues also increased, largely
because of the non-recurrence of a reduction in the fair
value of an investment property held for sale and
recognised in 2013. By contrast, GB&M revenue
decreased, reflecting lower trading income from foreign
exchange and a reduction in reported gains on sales
of available-for-sale debt securities.
LICs fell, mainly in the CML portfolio reflecting reduced
levels of delinquency, new impaired loans and lower
lending balances from the continued run-off and loan
sales. This was partly offset by less favourable market
value adjustments to underlying property prices because
improvements in housing market conditions were less
pronounced in 2014 than in 2013. LICs also fell in
Principal RBWM, mainly reflecting lower levels of
delinquency, and in Canada in CMB from lower
individually and collectively assessed impairment
charges.
HSBC HOLDINGS PLC
98
Profit/(loss) before tax and balance sheet data – North America
Retail Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
2014
Global
Private
Banking
US$m
Inter-
segment
elimination55
US$m
Other
US$m
Profit/(loss) before tax
Net interest income
Net fee income/(expense)
Trading income/(expense)
excluding net interest income
Net interest income/(expense)
on trading activities
Net trading income/(expense)50
Changes in fair value of long-term
debt issued and related
derivatives
Net income from other financial
instruments designated at
fair value
Net expense from financial
instruments designated at
fair value
Gains less losses from financial
investments
Dividend income
Net insurance premium income
Other operating income
Total operating income
Net insurance claims56
Net operating income4
Loan impairment (charges)/
recoveries and other credit
risk provisions
Net operating income
Total operating expenses
Operating profit/(loss)
Share of profit in associates
and joint ventures
Profit/(loss) before tax
Share of HSBC’s profit before tax
Cost efficiency ratio
Balance sheet data40
Loans and advances to customers
(net)27
Total assets
Customer accounts27
2,645
497
(165)
7
(158)
−
−
−
−
13
−
268
3,265
−
3,265
(117)
3,148
(2,516)
632
−
632
%
3.4
77.1
1,455
572
34
1
35
−
−
−
15
8
−
61
2,146
−
2,146
(148)
1,998
(1,101)
897
16
913
%
4.9
51.3
587
775
302
183
485
−
−
−
237
16
−
101
2,201
−
2,201
(63)
2,138
(2,250)
(112)
−
(112)
%
(0.6)
102.2
204
130
13
−
13
−
−
−
−
3
−
1
351
−
351
8
359
(274)
85
−
85
%
0.5
78.1
157
(34)
3
−
3
(99)
−
(99)
5
4
−
1,872
1,908
−
1,908
(33)
−
−
33
33
−
−
−
−
−
−
(1,719)
(1,719)
−
(1,719)
(2)
−
(1,719)
1,719
−
−
−
1,906
(2,007)
(101)
−
(101)
%
(0.5)
105.2
US$m
US$m
US$m
US$m
US$m
60,365
74,680
51,258
41,966
48,411
45,275
21,110
319,819
30,301
6,346
8,386
12,050
–
16,823
–
(31,260)
Total
US$m
5,015
1,940
187
224
411
(99)
−
(99)
257
44
−
584
8,152
−
8,152
(322)
7,830
(6,429)
1,401
16
1,417
%
7.6
78.9
US$m
129,787
436,859
138,884
HSBC HOLDINGS PLC
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r
o
p
e
R
c
i
g
e
t
a
r
t
S
i
w
e
v
e
R
l
a
i
c
n
a
n
i
F
e
c
n
a
n
r
e
v
o
G
e
t
a
r
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
o
i
t
a
m
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o
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n
I
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r
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d
o
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Report of the Directors: Geographical regions (continued)
North America / Latin America
Retail Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
2013
Global
Private
Banking
US$m
Inter-
segment
elimination55
US$m
Other
US$m
3,483
605
1,430
593
48
11
59
−
−
−
4
12
34
(454)
3,743
(39)
3,704
(950)
2,754
(2,960)
(206)
(1)
(207)
%
(0.9)
79.9
40
1
41
–
−
−
−
9
–
−
2,073
−
2,073
(223)
1,850
(1,096)
754
32
786
%
3.5
52.9
582
741
613
172
785
–
−
−
282
48
–
229
2,667
−
2,667
(20)
2,647
(1,718)
929
−
929
%
4.1
64.4
195
125
19
−
19
–
−
−
−
4
–
1
344
−
344
(4)
340
(283)
57
−
57
%
0.3
82.3
(37)
−
−
37
37
–
−
−
−
−
–
(1,713)
(1,713)
−
(1,713)
−
(1,713)
1,713
−
−
−
89
79
7
−
7
(288)
−
(288)
8
4
–
1,829
1,728
−
1,728
−
1,728
(2,072)
(344)
−
(344)
%
(1.6)
119.9
US$m
US$m
US$m
US$m
US$m
66,192
82,530
53,600
37,735
45,706
49,225
18,070
313,701
24,113
5,956
8,542
13,871
−
13,211
−
(31,655)
Total
US$m
5,742
2,143
727
221
948
(288)
−
(288)
294
77
34
(108)
8,842
(39)
8,803
(1,197)
7,606
(6,416)
1,190
31
1,221
%
5.4
72.9
US$m
127,953
432,035
140,809
Profit/(loss) before tax
Net interest income
Net fee income
Trading income excluding net
interest income
Net interest income on trading
activities
Net trading income50
Changes in fair value of long-term
debt issued and related
derivatives
Net income from other financial
instruments designated at fair
value
Net expense from financial
instruments designated at
fair value
Gains less losses from financial
investments
Dividend income
Net insurance premium income
Other operating income/
(expense)
Total operating income
Net insurance claims56
Net operating income4
Loan impairment charges and
other credit risk provisions
Net operating income
Total operating expenses
Operating profit/(loss)
Share of profit/(loss) in associates
and joint ventures
Profit/(loss) before tax
Share of HSBC’s profit before tax
Cost efficiency ratio
Balance sheet data40
Loans and advances to customers
(net)27
Total assets
Customer accounts27
For footnotes, see page 109.
HSBC HOLDINGS PLC
100
Latin America
Our operations in Latin America principally
comprise HSBC Bank Brasil S.A.-Banco
Múltiplo, HSBC México, S.A. and HSBC
Bank Argentina S.A. In addition to banking
services, we operate insurance businesses
in Brazil, Mexico and Argentina.
Net interest income
Net fee income
Net trading income
Other income
Net operating income4
LICs43
Net operating income
Total operating expenses
Operating profit
Income from associates44
Profit before tax
Cost efficiency ratio
RoRWA36
2014
US$m
5,310
1,415
856
691
8,272
(2,124)
6,148
(5,932)
216
−
216
71.7%
0.2%
2013
US$m
6,186
1,701
936
1,745
2012
US$m
6,984
1,735
971
1,261
10,568
10,951
(2,666)
7,902
(5,930)
1,972
−
1,972
56.1%
2.0%
(2,137)
8,814
(6,430)
2,384
–
2,384
58.7%
2.4%
Year-end staff numbers
41,201
42,542
46,556
Economic background
Data for the third quarter of 2014 suggested that Latin
America may have seen a material slowdown in its
average real annual GDP growth in 2014 to nearly 1.0%
from 2.6% in 2013.
A slowdown in the Brazilian economy explains much of
this weakness. The level of economic activity was broadly
unchanged in 2014 following growth of 2.5% in 2013,
but deteriorating business confidence and the resulting
contraction in business investment spending were
the main factors behind the economic slowdown. To
mitigate inflationary pressures from a weakening
currency, the central bank raised the key policy rate by
75bps in the fourth quarter to 11.75%.
Mexico’s economic growth accelerated in 2014 after
low real GDP growth of only 1.1% in 2013. Consumer
spending, the main area of weakness in 2013,
accelerated during the year and the improvement in US
demand served to boost exports. Inflationary pressures
remained muted and the Mexican central bank cut its
key policy rate to 3% from 3.5% at the start of the year.
The Argentinian economy contracted in 2014 due to
falling commodity prices, a stagnant Brazilian economy
and a technical default on the dollar-denominated
external debt of the country. A significant devaluation
of the Argentine peso at the beginning of 2014 fuelled
higher inflation.
Further progress made in repositioning
our businesses in Brazil and Mexico
Financial overview
Profit before tax (US$m)
Loan House and Bond House of the Year
(LatinFinance, 2014)
216
108
324
1,972
650
(1,322)
2013
#1
in Domestic Cash Management
in Argentina and Mexico
(Euromoney Cash Management Survey, 2014)
For footnotes, see page 109.
2014
Reported
Currency translation
and significant items
Adjusted profit
Latin America reported a profit before tax of US$216m
in 2014 compared with US$2.0bn in 2013. The reduction
was due to lower revenue, primarily driven by the
non-recurrence of the US$1.1bn gain on sale of our
operations in Panama in 2013 partly offset by a decrease
in LICs.
Adjusted profit before tax decreased by US$326m,
and included a loss before tax in Brazil. The reduction
in profit primarily reflected higher operating expenses,
mainly due to inflationary and union-agreed salary
increases in Brazil and Argentina, and lower revenue
in Mexico and Brazil as we progressed with repositioning
our business. These factors were partly offset by an
increase in revenue in Argentina and a reduction in LICs,
primarily in Mexico.
HSBC HOLDINGS PLC
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a
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R
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a
i
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n
a
n
i
F
e
c
n
a
n
r
e
v
o
G
e
t
a
r
o
p
r
o
C
s
t
n
e
m
e
t
a
t
S
l
a
i
c
n
a
n
i
F
n
o
i
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a
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Report of the Directors: Geographical regions (continued)
Latin America
Profit/(loss) before tax by country within global businesses
Retail Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
Global
Private
Banking
US$m
Argentina
Brazil
Mexico
Other
Year ended 31 December 2014
Argentina
Brazil
Mexico
Other
Year ended 31 December 2013
Argentina
Brazil
Mexico
Other
Year ended 31 December 2012
52
(174)
36
(4)
(90)
97
(114)
154
289
426
209
94
338
(33)
608
135
(153)
(52)
7
(63)
142
(43)
(160)
525
464
169
359
176
47
751
219
115
89
27
450
170
514
115
368
1,167
174
696
201
82
1,153
−
(2)
(2)
−
(4)
−
5
(3)
(1)
1
–
17
2
1
20
Other
US$m
(22)
(33)
(20)
(2)
(77)
(1)
(11)
11
(85)
(86)
(46)
(43)
(18)
(41)
(148)
Total
US$m
384
(247)
51
28
216
408
351
117
1,096
1,972
506
1,123
699
56
2,384
Country business highlights
In 2014, in our priority growth markets of Brazil, Mexico
and Argentina, we continued to implement strategic
initiatives to improve future returns whilst we faced
economic and inflationary pressures.
In Brazil, we made progress in our efforts to transform
the business in order to ensure its long-term
sustainability. In RBWM, we are updating our business
model by concentrating RMs on specific client segments
in order to better serve customer needs. We also
updated certain features of our lending products to
improve our competitiveness such as increasing the
duration of some of our personal loans, and further
strengthened our retail credit capabilities to improve the
quality of originations. We continued to rationalise our
branch network, closing 21 branches in areas with lower
growth potential as we concentrated our efforts on
city clusters with faster-growing revenue pools, and
launching 60 client service units with a focus on sales
and automated transactions. In CMB, we increased MME
market presence and in RBWM we grew lending by 4%
following contraction in the past two years. In addition,
we saw increased client activity in GB&M, mainly in our
Rates business.
In Mexico, we remained focused on achieving
sustainable growth although revenue was subdued.
In RBWM we introduced RMs dedicated to our
Advance segment to improve productivity and customer
experience. We launched a balance transfer campaign,
selectively increased credit limits for lower risk
customers and saw mortgage balances grow by 5%
reflecting competitive pricing. In CMB we improved
processes in the Business Banking segment to allow
RMs to better support their clients. In GB&M, lending
balances rose by 48% as a result of new business
initiatives following energy reforms in the second half
of 2014. We made strong progress on repositioning our
business, which has reduced customer numbers, and
continued to focus on streamlining, managing our cost
base and strengthening our risk management and
controls.
In Argentina, we continued to manage our business
conservatively as the economic environment remained
challenging. We focused our growth on GB&M and
corporate CMB customers and continued to follow
cautious lending policies in RBWM and Business Banking.
We retained leading market positions in Trade and
Foreign Exchange.
Review of adjusted performance45
Revenue (US$m)
10,568
8,272
8,253
(19)
8,075
(2,493)
2014
2013
Reported
Currency translation
and significant items
Adjusted revenue
Revenue was higher in Argentina due to favourable
results in GB&M and growth in RBWM and CMB. This
was partly offset by reductions in Mexico across all
global businesses and in Brazil, primarily in CMB and
GB&M.
Country view of adjusted revenue
Argentina
Brazil
Mexico
Other
Year ended 31 December
2014
US$m
1,070
4,821
2,304
58
8,253
2013
US$m
718
4,932
2,479
(54)
8,075
HSBC HOLDINGS PLC
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In Argentina, revenue increased by US$352m, primarily
in GB&M, together with growth in RBWM and CMB. In
GB&M, the increase reflected favourable trading results
and higher revenue in Balance Sheet Management, as
volumes and spreads related to short-term funds grew in
a volatile market.
Revenue increased in RBWM, primarily due to growth
in insurance revenue from higher investment income
which reflected movements in the bond markets. In
addition, revenue rose from increased net interest
income, driven by wider spreads due to higher interest
rates coupled with growth in average deposit balances.
In CMB, revenue increased due to growth in net interest
income reflecting wider spreads due to an increase in
interest rates, higher average lending balances and
growth in Payments and Cash Management deposit
balances. Higher balances also led to increased fees
from both Payments and Cash Management and Trade
products.
In Mexico, revenue decreased by US$175m, mainly
in RBWM and, to a lesser extent, in CMB and GB&M.
In RBWM, revenue fell primarily due to lower sales
volumes in the insurance business. Revenue was also
adversely affected as we continued to progress with
repositioning the business. In addition, we experienced
narrower liability spreads on current accounts, savings
and deposits following a decrease in interest rates
although the effect was partly offset by higher mortgage
balances.
In CMB, net interest income decreased due to asset
spread compression and a reduction in average lending
balances. This was notably in Business Banking, where
we continued to reposition the business, there were pre-
payments by a small number of large corporates and a
portion of loans to certain homebuilders were written
off. Net interest income was also adversely affected
by narrower deposit spreads following a decrease in
interest rates. In addition, fee income decreased as a
result of lower Account Services and Payments and Cash
Management fees reflecting fewer customers, as we
continued to reposition the business.
In GB&M, lower revenue was primarily due to market
movements which affected counterparty credit spreads
resulting in increased CVA charges, and lower gains on
disposal of available-for-sale securities.
In Brazil, revenue decreased in CMB and GB&M, while
RBWM remained broadly unchanged. In CMB, revenue
was lower, despite growth in overall lending balances,
as the portfolio mix changed to reflect an increase in
lower-yielding MMEs.
In GB&M, revenue reduced in Balance Sheet
Management, though this was partly offset by growth
in Rates revenue, driven by higher client activity.
Revenue in RBWM was broadly unchanged. Insurance
revenue increased due to favourable movements in the
PVIF asset compared with adverse movements in 2013.
This was offset by a decrease in fee income across a
number of products, in part reflecting a change in mix by
customers towards more secured, lower-yielding assets
and strong market competition.
LICs fell, primarily in Mexico and, to a lesser extent, in
Brazil.
In Mexico, LICs improved due to lower individually
assessed charges in CMB, in particular relating to certain
homebuilders following a change in the public housing
policy in 2013, and in GB&M due to the non-recurrence
of a large specific provision booked in 2013.
In Brazil, the fall was driven by changes to the
impairment model and assumption revisions for
restructured loan account portfolios which occurred in
2013 in both RBWM and CMB. In addition, collectively
assessed impairments reduced in CMB, notably in
Business Banking, reflecting improved delinquency rates.
This was partly offset by an increase in GB&M driven by
an individually assessed impairment and a provision
made against a guarantee.
Operating expenses (US$m)
5,932
5,807
5,930
(125)
5,011
(919)
2014
2013
Reported
Currency translation
and significant items
Adjusted operating
expenses
Operating expenses increased by US$796m, primarily in
Brazil and Argentina, largely due to union-agreed salary
increases and inflationary pressures. In addition, we saw
higher transactional taxes in Argentina in line with a
growth in revenue and increased infrastructure costs
across the region. We also incurred specific costs
in Brazil in 2014 relating to an accelerated depreciation
charge and an impairment of an intangible asset in
RBWM. Despite these factors, our strict cost control
continued and we progressed with our strategic focus on
streamlining, which resulted in sustainable cost savings
of over US$155m.
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a
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v
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a
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p
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a
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Report of the Directors: Geographical regions (continued)
Latin America
Profit/(loss) before tax and balance sheet data – Latin America
Retail Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
2014
Global
Private
Banking
US$m
Inter-
segment
elimination55
US$m
Other
US$m
Profit/(loss) before tax
Net interest income
Net fee income
Trading income/(expense)
excluding net interest income
Net interest income/(expense) on
trading activities
Net trading income/(expense)50
Changes in fair value of long-term
debt issued and related
derivatives
Net income from other financial
instruments designated at
fair value
Net income from financial
instruments designated at
fair value
Gains less losses from financial
investments
Dividend income
Net insurance premium income
Other operating income
Total operating income
Net insurance claims56
Net operating income4
Loan impairment (charges)/
recoveries and other credit risk
provisions
Net operating income
Total operating expenses
Operating profit/(loss)
Share of profit in associates and
joint ventures
Profit/(loss) before tax
Share of HSBC’s profit before tax
Cost efficiency ratio
Balance sheet data40
Loans and advances to customers
(net)27
Total assets
Customer accounts27
3,323
771
123
1
124
1,529
469
103
4
107
−
−
516
175
516
−
6
1,233
54
6,027
(1,410)
4,617
(1,091)
3,526
(3,616)
(90)
−
(90)
%
(0.5)
78.3
175
−
2
285
47
2,614
(352)
2,262
(776)
1,486
(1,549)
(63)
−
(63)
%
(0.3)
68.5
490
147
391
174
565
−
−
−
84
1
5
19
1,311
(3)
1,308
(252)
1,056
(606)
450
−
450
%
2.4
46.3
19
28
3
−
3
−
−
−
−
−
−
−
50
−
50
(5)
45
(49)
(4)
−
(4)
%
−
98.0
(60)
−
−
60
60
−
−
−
−
−
−
(184)
(184)
−
(184)
−
(184)
184
−
−
−
9
−
(1)
(2)
(3)
−
−
−
−
−
−
213
219
−
219
−
219
(296)
(77)
−
(77)
%
(0.5)
135.2
US$m
US$m
US$m
US$m
US$m
12,306
29,074
23,056
20,078
29,851
15,125
10,642
55,827
8,219
96
298
2,188
–
1,155
−
(851)
Total
US$m
5,310
1,415
619
237
856
−
691
691
84
9
1,523
149
10,037
(1,765)
8,272
(2,124)
6,148
(5,932)
216
−
216
%
1.1
71.7
US$m
43,122
115,354
48,588
HSBC HOLDINGS PLC
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Retail Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
2013
Global
Private
Banking
US$m
Inter-
segment
elimination55
US$m
Other
US$m
3,776
952
1,828
548
138
−
138
−
264
264
−
5
1,464
312
6,911
(1,323)
5,588
(1,552)
4,036
(3,610)
426
−
426
%
1.9
64.6
117
−
117
−
61
61
1
3
360
485
3,403
(291)
3,112
(1,062)
2,050
(1,586)
464
−
464
%
2.0
51.0
775
168
456
20
476
−
1
1
81
1
6
310
1,818
(3)
1,815
(52)
1,763
(596)
1,167
−
1,167
%
5.2
32.8
24
32
4
−
4
−
−
−
−
−
−
1
61
−
61
−
61
(60)
1
−
1
%
−
98.4
(205)
−
−
205
205
−
−
−
−
−
−
(189)
(189)
−
(189)
−
(189)
189
−
−
−
(12)
1
(4)
−
(4)
−
−
−
−
−
−
196
181
−
181
−
181
(267)
(86)
−
(86)
%
(0.4)
147.5
US$m
US$m
US$m
US$m
US$m
13,616
30,584
23,943
19,923
30,001
16,593
10,304
52,977
8,994
75
337
1,859
−
634
−
(534)
Total
US$m
6,186
1,701
711
225
936
−
326
326
82
9
1,830
1,115
12,185
(1,617)
10,568
(2,666)
7,902
(5,930)
1,972
−
1,972
%
8.7
56.1
US$m
43,918
113,999
51,389
Profit/(loss) before tax
Net interest income/(expense)
Net fee income
Trading income/(expense)
excluding net interest income
Net interest income on trading
activities
Net trading income/(expense)50
Changes in fair value of long-term
debt issued and related
derivatives
Net income from other financial
instruments designated at
fair value
Net income from financial
instruments designated at
fair value
Gains less losses from financial
investments
Dividend income
Net insurance premium income
Other operating income
Total operating income
Net insurance claims56
Net operating income4
Loan impairment charges and
other credit risk provisions
Net operating income
Total operating expenses
Operating profit/(loss)
Share of profit in associates and
joint ventures
Profit/(loss) before tax
Share of HSBC’s profit before tax
Cost efficiency ratio
Balance sheet data40
Loans and advances to customers
(net)27
Total assets
Customer accounts27
For footnotes, see page 109.
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Report of the Directors: Other information
FuM/Taxes paid/Property/Disclosure philosophy
Other information
Funds under management and assets held in custody
106
Taxes paid by region and country
Property
Our disclosure philosophy
Disclosures arising from EDTF recommendations
106
107
107
108
Funds under management
and assets held in custody
Funds under management59
Funds under management
At 1 January
Net new money
Value change
Exchange and other
At 31 December
Funds under management by
business
Global Asset Management
Global Private Banking
Affiliates
Other
At 31 December
For footnote, see page 109.
2014
US$bn
2013
US$bn
921
38
40
(45)
954
910
(18)
34
(5)
921
2014
US$bn
2013
US$bn
445
275
5
229
954
420
282
5
214
921
Funds under management (‘FuM’) at 31 December 2014
amounted to US$954bn, an increase of 4%, primarily due
to favourable market movements and net inflows in the
year.
Global Asset Management FuM increased by 6% to
US$445bn as we attracted US$29bn of net new money,
notably in fixed income products from our customers in
Europe and Asia, as well as from net inflows into liquidity
funds in Europe and North America. In addition, we
transferred FuM of US$18bn which had previously been
reported within Other FuM and we benefited from
favourable movements in equity and bond markets.
These increases were partly offset by adverse foreign
exchange movements reflecting the strengthening of
the US dollar against all major currencies.
GPB FuM decreased by 3% to US$275bn due to the
ongoing repositioning of our client base, which gave rise
to disposals of a portfolio of assets in Switzerland to
LGT Bank (Switzerland) Ltd and our HSBC Trinkaus &
Burkhardt AG business in Luxembourg with a combined
FuM of US$8bn, and negative net new money in Europe.
In addition, there were unfavourable foreign exchange
movements, mainly in Europe. This was partly offset by
favourable market movements, also principally in
Europe, and from positive net new money in areas
targeted for growth.
Other FuM increased by 7% to US$229bn, primarily
due to strong net inflows and favourable market
movements. This was partly offset by the transfer of
FuM into Global Asset Management noted above.
Assets held in custody59 and under administration
Custody is the safekeeping and servicing of securities
and other financial assets on behalf of clients. At
31 December 2014, we held assets as custodian of
US$6.4 trillion, 3% higher than the US$6.2 trillion
held at 31 December 2013. This was mainly driven
by incremental net asset inflows in Asia and Europe,
and notably in Middle East and North Africa, partly
offset by adverse foreign exchange movements.
Our assets under administration business, which includes
the provision of bond and loan administration services
and the valuation of portfolios of securities and other
financial assets on behalf of clients, complements the
custody business. At 31 December 2014, the value
of assets held under administration by the Group
amounted to US$3.2 trillion, which was 6% higher
than at 31 December 2013. This was mainly driven by
incremental net asset inflows in the Funds business in
Europe and Asia, which was partly offset by adverse
foreign exchange movements.
Taxes paid by region and
country
The following tables reflect a geographical view of
HSBC’s operations and the basis of preparation is aligned
to the Group’s approach in meeting its country-by-
country reporting obligations as laid out in Article 89
of the EU’s CRD IV.
Breakdown of tax paid by region60
Region
UK
Rest of Europe
Asia
Middle East and North Africa
North America
Latin America
Total
For footnote, see page 109.
2014
US$bn
2013
US$bn
2.4
1.3
2.7
0.2
(0.1)
1.4
7.9
2.1
1.5
2.5
0.3
0.4
1.8
8.6
HSBC HOLDINGS PLC
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Taxes paid by country60
Total taxes paid analysed
by regions
Asia
Home and priority growth
markets
– Hong Kong
– Mainland China
– India
– Australia
– Malaysia
– Indonesia
– Singapore
– Taiwan
Other markets
Europe
Home and priority growth
markets
– UK
– France
– Germany
– Switzerland
– Turkey
Other markets
Middle East and
North Africa
Priority growth markets
– UAE
– Egypt
Other markets
North America
Priority growth markets
– US
– Canada
Other markets
Latin America
Priority growth markets
– Brazil
– Argentina
– Mexico
Other markets
Total
2014
US$m
2013
US$m
2012
US$m
2,687
2,536
2,639
2,399
1,273
278
290
204
133
76
101
44
288
3,709
3,466
2,363
790
131
107
75
243
210
162
102
60
48
(108)
(377)
269
–
1,384
1,338
804
333
201
46
7,882
2,185
1,248
207
318
105
106
74
88
39
351
3,570
3,326
2,107
844
151
142
82
244
251
213
98
115
38
414
125
285
4
1,836
1,645
1,002
318
325
191
8,607
2,225
974
276
349
209
193
113
89
22
414
3,213
3,021
1,906
679
200
160
76
192
284
234
120
114
50
1,236
798
434
4
1,977
1,835
1,174
391
270
142
9,349
For footnote, see page 109.
Property
At 31 December 2014, we operated from some
7,885 operational properties worldwide, of which
approximately 1,965 were located in Europe, 2,500
in Asia, 450 in North America, 2,700 in Latin America and
275 in the Middle East and North Africa. These
properties had an area of approximately 54.3m square
feet (2013: 56.6m square feet).
Our freehold and long leasehold properties, together
with all our leasehold land in Hong Kong, were valued
in 2014. The value of these properties was US$10.8bn
(2013: US$10.3bn) in excess of their carrying amount in
the consolidated balance sheet on an historical cost
based measure. In addition, properties with a net book
value of US$1.6bn (2013: US$1.5bn) 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 23 on the Financial
Statements.
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:
• In order to make the financial statements and notes
thereon easier to understand, we have undertaken an
initiative to provide more focused information and to
remove duplication where possible. As a result, we
have changed the location and the wording used to
describe certain accounting policies within the notes,
removed certain immaterial disclosures and changed
the order of certain sections. In applying materiality
to financial statement disclosures, we consider both
the amount and nature of each item. The main
changes to the presentation of the financial
statements and notes thereon in 2014 are described
on pages 346 and 347.
• 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, we
provide additional disclosures having regard to the
recommendations of the Enhanced Disclosures Task
Force (‘EDTF’) report ‘Enhancing the Risk Disclosures
of Banks’ issued in October 2012. 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. In addition, we continue to enhance our
disclosures in line with good practice recommendations
issued by relevant regulators and standard setters and
in response to feedback received from users of our
financial statements.
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Report of the Directors: Other information (continued)
EDTF disclosures/Footnotes
Disclosures 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.
Pillar 1 capital requirements.
For calculation of Pillar 1 capital requirements, see the Pillar 3 Disclosures
2014 document.
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 the different tiers of regulatory
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 the Pillar 3 Disclosures 2014 document.
For analysis of credit risk for each Basel asset class,
see the Pillar 3 Disclosures 2014 document.
Flow statements reconciling the movements in risk-weighted assets
for each risk-weighted asset type.
For discussion of Basel credit risk model performance, see the
Pillar 3 Disclosures 2014 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.
Reconciliations of the opening and closing balances of impaired loans and
impairment allowances during the year.
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.
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117 to 118
118 to 124
119 to 120 and 252 to
256
280 to 281
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117 to 118
258 to 259
249
245
239 and 252 to 258
240
242 to 244
165 to 166
171 to 173
426 to 435
168
179 to 180
176 to 179
223 to 224
224 to 225
129 to 130
137 and 208 to 213
137 and 142 to 143
150 to 151
146 to 150
187 to 189
118 to 124
The 32 recommendations listed above were made in the report ‘Enhancing the Risk Disclosures of Banks’ issued by the Enhanced Disclosure Task
Force of the Financial Stability Board in October 2012.
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Footnotes to pages 40 to 108
Use of non-GAAP financial measures
1 The operating results of these disposals were removed from adjusted results in addition to disposal gains and losses.
2 The operating results of these disposals and acquisitions were not removed from adjusted results as they were not significant.
3 Excludes items where there are substantial offsets in the income statement for the same year.
4 Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue.
5 Positive numbers are favourable: negative numbers are unfavourable.
6 ‘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.
7 ‘Own credit spread’ includes the fair value movements on our long-term debt attributable to credit spread where the net result of such
movements will be zero upon maturity of the debt. This does not include fair value changes due to own credit risk in respect of trading liabilities
or derivative liabilities.
8 From 1 January 2014, the geographical region ‘Asia’ replaced the geographical regions previously reported as ‘Hong Kong’ and ‘Rest of
Asia-Pacific’ (see Note 11 on the Financial Statements for further details). Comparative data have been represented accordingly.
Consolidated income statement
9 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. For further information, see footnote 3 on page 39.
10 Dividends per ordinary share expressed as a percentage of basic earnings per share.
11 Net interest income includes the cost of internally 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 Global Banking and Market’s net trading income as interest
expense.
12 Gross interest yield is the average annualised interest rate earned on average interest-earning assets (‘AIEA’).
13 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.
14 Net interest margin is net interest income expressed as an annualised percentage of AIEA.
15 Interest income on trading assets is reported as ‘Net trading income’ in the consolidated income statement.
16 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.
17 Including interest-bearing bank deposits only.
18 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’.
19 Including interest-bearing customer accounts only.
20 Net trading income includes a favourable movement of US$15m (2013: unfavourable movement of US$66m; 2012: unfavourable movement of
US$629m), associated with changes in the fair value of issued structured notes and other hybrid instrument liabilities arising from movements in
HSBC issuance spreads.
21 Trading income also includes 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. 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.
22 In 2013, we recorded a net gain on US$553m on the completion of the Ping An disposal. This represented the net effect of US$1,235m gain on
de-recognition of equity securities classified as available for sale and recorded in ‘Gains less losses from financial investments’, partly offset by
US$682m on a contingent forward sale contract, recorded in ‘Net trading income’.
23 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.
24 Net insurance claims and benefits paid 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 incurred 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.
25 The cost efficiency ratio is defined as total operating expenses divided by net operating income before loan impairment charges and other credit
risk provisions.
Consolidated balance sheet
26 In 2013, GB&M changed the way it manages reverse repo and repo activities in the Credit and Rates business. This led to a decrease in amounts
classified as ‘Trading assets’ and ‘Trading liabilities’ in the balance sheet and an increase in the amount classified as ‘Non-trading reverse repos’
at amortised cost and ‘Non-trading repos’ at amortised cost respectively.
27 From 1 January 2014, non-trading reverse repos and repos are presented as separate lines in the balance sheet. Previously, non-trading reverse
repos were included within ‘Loans and advances to banks’ and ‘Loans and advances to customers’ and non-trading repos were included within
‘Deposits by banks’ and ‘Customer accounts’. Comparative data have been re-presented accordingly. Non-trading reverse repos and repos have
been presented as separate lines in the balance sheet to align disclosure with market practice and provide more meaningful information in
relation to loans and advances. The extent to which reverse repos and repos represent loans to/from customers and banks is set out in Note 17
on the Financial Statements.
28 Net of impairment allowances.
29 On 1 January 2014, CRD IV came into force and the calculation of capital resources and risk-weighted assets at 31 December 2014 are
calculated and presented on this basis. 2011 to 2013 comparatives are on a Basel 2.5 basis. 2010 comparatives are on a Basel II basis.
30 Capital resources are total regulatory capital, the calculation of which is set out on page 246.
31 Including perpetual preferred securities, details of which can be found in Note 30 on the Financial Statements.
32 The definition of net asset value per ordinary share is total shareholders’ equity, less non-cumulative preference shares and capital securities,
divided by the number of ordinary shares in issue excluding shares the company has purchased and are held in treasury.
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Report of the Directors: Other information / Risk
Footnotes / Risk profile
33 ‘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.
34 Balance included in disposal groups of assets held for sale.
35 France primarily comprises the domestic operations of HSBC Finance, HSBC Assurances Vie and the Paris branch of HSBC Bank plc.
Reconciliation of RoRWA measures
36 Risk-weighted assets (‘RWA’s) and pre-tax return on average risk-weighted assets (‘RoRWA’).
37 Adjusted RoRWA is calculated using adjusted pre-tax return and reported average RWAs at constant currency and adjusted for the effects of
significant items.
38 ‘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.
Global businesses and geographical regions
39 The main items reported under ‘Other’ are the results of HSBC’s holding company and financing operations, which includes 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, along with the costs incurred by the Group Service Centres and Shared Service Organisations and associated recoveries. The results
also include fines and penalties as part of the settlement of investigations into past inadequate compliance with anti-money laundering and
sanctions laws, the UK bank levy together with unallocated investment activities, centrally held investment companies, gains arising from the
dilution of interests in associates and joint ventures and certain property transactions. In addition, ‘Other’ also includes part of the movement in
the fair value of long-term debt designated at fair value (the remainder of the Group’s movement on own debt is included in GB&M).
40 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.
41 For disposed of businesses, this includes the gain or loss on disposal and material results of operations as described on page 40.
42 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 insurance premium income and other operating income less net
insurance claims and benefits paid and movement in liabilities to policyholders.
43 Loan impairment charges and other credit risk provisions.
44 Share of profit in associates and joint ventures.
45 See ‘Use of non-GAAP financial measures’ on page 40. Reconciliation of adjusted results to reported results is provided in the Form 20-F filed
with the Securities and Exchange Commission, which is available on www.hsbc.com.
46 The Principal RBWM business measure excludes the effects of the US run-off portfolio and the disposed-of US CRS business. Concentrating on
the Principal RBWM business allows management to identify material changes in the ongoing business and assess the factors and trends which
are expected to have a material effect on it in future years. Tables which reconcile reported to adjusted financial measures for Principal RBWM
are available on www.hsbc.com.
47 ‘Investment distribution’ includes Investments, which comprises mutual funds (HSBC manufactured and third party), structured products and
securities trading, and Wealth Insurance distribution, consisting of HSBC manufactured and third-party life, pension and investment insurance
products.
48 ‘Other personal lending’ includes personal non-residential closed-end loans and personal overdrafts.
49 ‘Other’ mainly includes the distribution and manufacturing (where applicable) of retail and credit protection insurance.
50 In the analysis of global businesses, net trading income/(expense) comprises all gains and losses from changes in the fair value of financial
assets and financial liabilities classified as held for trading, related external and internal interest income and interest expense, and dividends
received; in the statutory presentation internal interest income and expense are eliminated.
51 ‘Markets products, Insurance and Investments and Other’ includes revenue from Foreign Exchange, insurance manufacturing and distribution,
interest rate management and GCF products.
52 In 2014, Markets included a favourable fair value movement of US$15m on the widening of credit spreads on structured liabilities (2013:
adverse fair value movement of US$66m; 2012: adverse fair value movement of US$629m).
53 ‘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’.
54 ‘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 (US$275bn as at 31 December 2014) which are not
reported on the Group’s balance sheet, and customer deposits (US$90bn as at 31 December 2014), of which US$85bn is reported on the Group’s
balance sheet and US$5bn are off-balance sheet deposits.
55 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.
56 Net insurance claims and benefits paid and movement in liabilities to policyholders.
57 ‘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’.
58 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.
59 Funds under management and assets held in custody are not reported on the Group’s balance sheet, except where it is deemed that we
are acting as principal rather than agent in our role as investment manager, and these assets are consolidated as Structured entities (see
Note 39 on the Financial Statements).
60 Taxes paid by HSBC relate to HSBC’s own tax liabilities including tax on profits earned, employer taxes, bank levy and other duties/levies such as
stamp duty. Numbers are reported on a cash flow basis.
HSBC HOLDINGS PLC
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Risk
Risk profile2
Managing risk2
Risk management framework
Risk factors
Risks managed by HSBC
Risk management processes and procedures
Risk governance
Risk appetite
Top and emerging risks2
Macroeconomic and geopolitical risk
Macro-prudential, regulatory and legal risks
to our business model
Regulatory commitments and consent orders
Risks related to our business operations,
governance and internal control systems
Areas of special interest2
Financial crime compliance and
regulatory compliance
Private Bank
Regulatory stress tests
Oil and gas prices
Russia
Eurozone
Credit risk4
Liquidity and funding4
Market risk4
Operational risk2
Compliance risk
Legal risk
Global security and fraud risk
Systems risk
Vendor risk management
Risk management of insurance operations3
Other material risks2
Reputational risk
Fiduciary risk
Pension risk
Sustainability risk
Page
App1
Risk profile
(Unaudited)
Managing our risk profile
• A strong balance sheet remains core to our philosophy.
• Our portfolios continue to be aligned to our risk
appetite and strategy.
• Our risk management framework is supported
by strong forward-looking risk identification.
Maintaining capital strength and a strong
liquidity position
• Our transitional common equity tier 1 capital ratio
remains strong at 10.9%.
• We have sustained our strong liquidity position
throughout 2014.
• The ratio of customer advances to deposits remains
significantly 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.
• 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 risks
to our business model.
• Risks related to our business operations, governance
and internal control systems.
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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 204.
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Report of the Directors: Risk (continued)
Managing risk
Managing risk
(Unaudited)
As a provider of banking and financial services,
we actively manage risk as a core part of our
day-to-day activities.
Risk management framework
Our risk management framework, which is employed at
all levels of the organisation, is set out on page 24. The
key elements are discussed below.
The Group’s Risk Appetite Statement is a key component
in our management of risk and is described on page 24.
Risk governance framework
Robust risk governance and accountability are
embedded throughout the Group through an established
framework that ensures appropriate oversight of and
accountability for the effective management of risk at
all levels of the organisation and across all risk types.
Adherence to consistent standards and risk management
policies is required across HSBC by our Global Standards
and our Global Risk operating model.
The Board has ultimate responsibility for approving
HSBC’s risk appetite and the effective management of
risk.
• The Group Risk Committee advises the Board on
risk appetite and its alignment with strategy, risk
governance and internal controls and high-level risk
related matters.
• The Financial System Vulnerabilities Committee
reports to the Board on matters relating to financial
crime and financial system abuse and provides a
forward-looking perspective on financial crime risk.
• The Conduct & Values Committee was established in
January 2014 to oversee the design and application of
HSBC’s policies, procedures and standards, to ensure
that we conduct business responsibly and consistently
adhere to HSBC Values and to advise the Board
accordingly.
Executive accountability for the ongoing monitoring,
assessment and management of the risk environment
and the effectiveness of our risk management policies
resides with the Risk Management Meeting of the
GMB. Day-to-day risk management activities are
the responsibility of senior managers of individual
businesses, supported by global functions as described
under ‘Three lines of defence’ below.
The executive and non-executive risk governance
structures and their interactions are set out on page 204,
with similar arrangements in place for major operating
subsidiaries.
The report of the Group Risk Committee is on page 280. The
Report of the Financial System Vulnerabilities Committee is on
page 282. The report of the Conduct & Values Committee is on
page 286.
Three lines of defence
We use a three lines of defence model in the
management of risk.
• First line – every employee is responsible for the risks
that form part of their day to day jobs. The first line
of defence ensures that all key risks within their
operations are identified, mitigated and monitored by
appropriate internal controls within an overall control
environment.
• Second line – global functions such as Risk, Finance and
Human Resources form the second line of defence.
They are responsible for providing assurance, challenge
and oversight of the activities conducted by the first
line.
• Third line – Internal Audit forms the third line of
defence, providing independent assurance to senior
management and the Board over the first and second
lines of defence.
For details of our operational risk management framework,
see page 186.
People
All employees are required to identify, assess and
manage risk within the scope of their assigned
responsibilities and, as such, they are critical to the
effectiveness of the three lines of defence. Personal
accountability for Global Standards is reinforced by
HSBC Values.
Clear and consistent employee communication on risk
conveys strategic messages and sets the tone from
senior leadership. A suite of mandatory training on
critical risk and compliance topics is deployed to embed
skills and understanding and strengthen the risk culture
within HSBC. It reinforces the attitude to risk in the
behaviour expected of employees, as described in our
risk policies. The training is updated regularly, describing
technical aspects of the various risks assumed by the
Group and how they should be managed effectively.
Staff are supported in their roles by a disclosure line
which enables them to raise concerns confidentially
(see page 20).
Our risk culture is reinforced by our approach to
remuneration. Individual awards, including those for
executives, are based on compliance with HSBC Values
and the achievement of financial and non-financial
objectives which are aligned to our risk appetite and
global strategy.
For further information on risk and remuneration, see the Report
of the Group Remuneration Committee on page 300.
Independent Risk function
Global Risk, headed by the Group Chief Risk Officer,
is responsible for enterprise-wide risk oversight including
the establishment of global policy, the monitoring of
risk profiles and forward-looking risk identification
and management. Global Risk also has functional
responsibility for risk management in support of HSBC’s
global businesses and regions through an integrated
network of Risk sub-functions which are independent
HSBC HOLDINGS PLC
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from the sales and trading functions of our businesses.
This independence ensures the necessary balance in
risk/return decisions.
We run Global Risk like a business, ensuring that the
function is dynamic and responsive to the needs of its
stakeholders.
Risks faced by HSBC
All of our activities involve, to varying degrees, the
analysis, evaluation, acceptance and management
of risks or combinations of risks.
Risk factors
We have identified a comprehensive suite of risk factors
which covers the broad range of risks our businesses are
exposed to.
A number of the risk factors have the potential to affect
the results of our operations or financial condition, but
may not necessarily be deemed as top or emerging risks.
However, they inform the ongoing assessment of our top
and emerging risks which may result in our risk appetite
being revised. The risk factors are:
Macroeconomic and geopolitical risk
• Current economic and market conditions may
adversely affect our results.
• We are subject to political and economic risks in the
countries in which we operate, including the risk of
government intervention.
• We may suffer adverse effects as a result of the
renewed economic and sovereign debt tensions in the
eurozone.
• Changes in foreign currency exchange rates may affect
our results.
Macro-prudential, regulatory and legal risks to
our business model
• Failure to implement our obligations under the
deferred prosecution agreements could have a
material adverse effect on our results and operations.
• Failure to comply with certain regulatory requirements
would have a material adverse effect on our results and
operations.
• Failure to meet the requirements of regulatory stress
tests could have a material adverse effect on our
capital position, operations, results and future
prospects.
• 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 have a material adverse effect on our operations,
financial condition and prospects.
• HSBC Holdings and its UK subsidiaries may become
subject to stabilisation provisions under the Bank Act
2009, as amended, in certain significant stress
situations.
• Structural separation of banking and trading activities
proposed or enacted in a number of jurisdictions could
have a material adverse effect on our operations and
operating results.
• 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, business
operations, governance and internal control
systems
• The delivery of our strategic priorities is subject to
execution risk.
• We may not achieve all the expected benefits of our
strategic initiatives.
• We operate in markets that are highly competitive.
• 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 and service
providers.
• Our operations are highly dependent on our
information technology systems.
• We may not be able to meet regulatory requests for
data.
• 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
judgements, estimates and assumptions which are
subject to uncertainty.
• HSBC could incur losses or be required to hold
additional capital as a result of model limitations or
failure.
• Third parties may use us as a conduit for illegal
activities without our knowledge, which could have
a material adverse effect on us.
• We have significant exposure to counterparty risk.
• 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.
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Report of the Directors: Risk (continued)
Risks managed by HSBC
• 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 loan payments and dividends from
its subsidiaries to meet its obligations, including
Description of risks – banking operations
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.
Risks managed by HSBC
The principal risks associated with our banking and
insurance manufacturing operations are described in
the tables below.
Arising from
Measurement, monitoring and management of risk
Risks
Credit risk (page 127)
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;
• 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
• managed through a robust risk control framework which outlines
clear and consistent policies, principles and guidance for risk
managers.
Liquidity and funding risk is:
• measured using internal metrics including stressed operational cash
flow projections, coverage ratios and advances to core funding
ratios;
• 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
• 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.
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;
• 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
• 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.
Liquidity and funding risk (page 163)
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.
Market risk (page 175)
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.
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 (page 198).
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Risks
Operational risk (page 186)
Arising from
Measurement, monitoring and management of 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).
Operational risk arises from
day to day operations or
external events, and is
relevant to every aspect of
our business.
Compliance risk and fiduciary
risk are discussed below.
Other operational risks are
covered in the Appendix to
Risk (page 204).
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;
• monitored using key indicators and other internal control activities;
and
• managed primarily 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. Global Operational Risk is responsible
for the framework and for overseeing the management of
operational risks within businesses and functions.
Compliance risk (page 189)
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.
Other material risks
Reputational risk (page 199)
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,
counter-terrorist and
proliferation financing,
sanctions compliance and
conduct of business.
The DPA is discussed on
page 120 and the Monitor on
page 27.
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;
• 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 Financial Crime Compliance and
Regulatory Compliance functions, and the results of internal
and external audits and regulatory inspections; and
• managed by establishing and communicating appropriate policies
and procedures, training employees in them, and monitoring activity
to assure their observance. Proactive risk control and/or remediation
work is undertaken where required.
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.
Reputational risk is the risk of
failure to meet stakeholder
expectations as a result of any
event, behaviour, action or
inaction, either by HSBC itself,
its employees or those with
whom it is associated, that
may cause stakeholders to
form a negative view of HSBC.
Reputational risk is:
• measured by reference to our reputation as indicated by our
dealings with all relevant stakeholders, including media, regulators,
customers and employees;
• monitored through a reputational risk management framework,
taking into account the results of the compliance risk monitoring
activity outlined above; and
• 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.
Fiduciary risk (page 200)
The risk of breaching our
fiduciary duties, defined as
any duty where HSBC holds,
manages, oversees or has
responsibilities 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.
Fiduciary risk is part of
operational risk, and arises
from our business activities
where we act in a fiduciary
capacity (‘designated
businesses’) as Trustee,
Investment Manager or
as mandated by law or
regulation.
Fiduciary risk is:
• measured by each designated business monitoring against their
own risk appetite statements and by the operational risk and
control assessment process, which assesses the level of risk and
the effectiveness of the key controls;
• monitored through a combination of testing, key indicators and
other metrics such as client and regulatory feedback; and
• managed within the designated businesses via established
governance frameworks, and comprehensive policies, procedures
and training programmes.
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Report of the Directors: Risk (continued)
Risks managed by HSBC
Description of risks – banking operations (continued)
Risks
Pension risk (page 236)
Arising from
Measurement, monitoring and management of 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 (page 237)
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;
• monitored through the specific risk appetite that has been
developed at both Group and regional levels; and
• 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;
• monitored quarterly by the Risk Management Meeting and monthly
by Group Sustainability Risk management; and
• managed using sustainability risk policies covering project finance
lending and sector-based sustainability polices for sectors with high
environmental or social impacts.
Our insurance manufacturing subsidiaries are separately
regulated from our banking operations. Risks in the
insurance entities are managed using methodologies and
processes appropriate to insurance activities, but remain
subject to oversight at Group level. Our insurance
Description of risks – insurance manufacturing operations
operations are also subject to the operational risks and
the other material risks presented above in relation to
the banking operations, and these are covered by the
Group’s risk management processes.
Risks
Arising from
Measurement, monitoring and management of risk
Financial risks (page 194)
Our ability to effectively match
the liabilities arising under
insurance contracts with the
asset portfolios that back
them are contingent on the
management of financial risks
such as market, credit and
liquidity risks, and the extent
to which these risks are borne
by the policyholders.
Liabilities to policyholders
under unit-linked contracts
move in line with the value of
the underlying assets, and as
such the policyholder bears
the majority of the financial
risks.
Contracts with DPF share the
performance of the underlying
assets between policyholders
and the shareholder in line
with the type of contract and
the specific contract terms.
Exposure to financial risks
arises from:
• market risk of 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 and the
•
potential for financial loss
following the default of
third parties in meeting
their obligations; and
liquidity risk of entities
not being able to make
payments to policyholders
as they fall due as there
are insufficient assets that
can be realised as cash.
Financial risks are:
• measured separately for each type of risk:
− market risk is measured in terms of exposure to fluctuations in
key financial variables;
− credit risk is measured as the amount which could be lost if a
customer or counterparty fails to make repayments; and
−
liquidity risk is measured using internal metrics including stressed
operational cash flow projections.
• monitored within limits approved by individuals within a framework
of delegated authorities; and
• managed through a robust risk control framework which outlines
clear and consistent policies, principles and guidance for risk
managers. 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 within the policy
contracts they issue.
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Risks
Arising from
Measurement, monitoring and management of risk
Insurance risk (page 198)
The risk 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.
Insurance risk is:
• measured in terms of life insurance liabilities;
• monitored by the RBWM Risk Management Committee, which
checks the risk profile of the insurance operations against a
risk appetite for insurance business agreed by the GMB; and
• managed both centrally and locally using product design,
underwriting, reinsurance and claims-handling procedures.
Risk management processes and
procedures
In addition to risk appetite, the following processes are
integral to risk management at HSBC:
• risk identification through our top and emerging risk
process;
• mapping our risk profile; and
• stress testing and scenario analysis.
Risk identification
We identify and monitor risks continuously. This process,
which is informed by analysis of our risk factors and the
results of our stress testing programme, gives rise to
the classification of certain key risks as top or emerging.
Changes in our assessment of top and emerging risks
may result in adjustments to our business strategy and,
potentially, our risk appetite.
Our current top and emerging risks are discussed below.
Mapping our 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
recorded and monitored through our risk map process,
which describes our risk profile by risk type in the
different regions and global businesses.
In addition to our principal banking and insurance risks,
the risk map process identifies and monitors risks such
as model, financial management, capital, Islamic finance
and strategic risks. These risks are regularly assessed
through our risk appetite framework, stress tested and
considered for classification as top and emerging risks.
Stress testing
We conduct stress testing scenarios across the Group on
both an enterprise-wide basis and at a major subsidiary
level, reflecting our business strategy and its resultant
risk exposures. Our stress testing and scenario analysis
programme examines the sensitivities of our capital plans
and unplanned demand for regulatory capital under a
number of scenarios and ensures that top and emerging
risks are appropriately considered. These scenarios
include, but are not limited to, adverse macroeconomic
events, failures at country, sector and counterparty
levels, geopolitical occurrences and a variety of
projected major operational risk events.
The Stress Testing Management Board, which is chaired
by the Group Finance Director, is responsible for stress
testing strategy and stewardship. Stress testing models
are approved through the Group’s Model Oversight
Committee framework. Updates on stress testing are
provided at each meeting of the Risk Management
Meeting of the GMB. The Group Risk Committee is
informed and consulted, and approves, as appropriate.
The development of macroeconomic scenarios is a
critical part of the process. Potential scenarios are
defined and generated by an expert panel comprising
economic experts from various global teams including
Risk and Finance. Variables and assumptions
underpinning the scenarios, including economic
indicators such as yield curves, exchange rates and
volatilities, are expanded and enriched by internal and
external teams. Once approved by the governing
committee, they are circulated to the regional and global
business stress testing teams along with instructions for
the exercise.
Scenarios are translated into financial impacts, such as
on our forecast profitability and RWAs, using a suite of
stress testing models and methodologies. Models are
subject to independent model review and go through a
process of validation and approval. Model overlays may
be considered where necessary.
Stress testing results are subject to a review and
challenge process at regional and Group levels and
action plans are developed to mitigate identified risks.
The extent to which these action plans would be
implemented in the event of particular scenarios
occurring depends on senior management’s evaluation
of the risks and their potential consequences, taking into
account HSBC’s risk appetite.
In addition to the Group-wide risk scenarios, each major
HSBC subsidiary conducts regular macroeconomic and
event-driven scenario analyses specific to their region.
They may also participate in local regulatory stress
testing programmes.
Stress testing is applied to risks such as market risk,
liquidity and funding risk and credit risk to evaluate the
potential effect of stress scenarios on portfolio values,
structural long-term funding positions, income or capital.
Reverse stress testing is run annually on both Group and
subsidiary entity bases. This stress test is conducted by
assuming the business model is non-viable and working
backwards to identify a range of occurrences that could
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Report of the Directors: Risk (continued)
Top and emerging risks
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 or systemic
events or combinations thereof, and/or could imply
failure of the Group’s holding company or one of its
major subsidiaries. They would not necessarily mean
the simultaneous failure of all the major subsidiaries.
Reverse stress testing is used to strengthen our
resilience by helping to inform early-warning triggers,
management actions and contingency plans designed to
mitigate the potential stresses and vulnerabilities which
the Group might face.
HSBC participated in regulatory stress testing
programmes in a number of jurisdictions during 2014,
as outlined on page 125.
Top and emerging
risks
(Unaudited)
T
/
E
Our approach to identifying and monitoring top and
emerging risks is described on page 22.
During 2014, senior management paid particular
attention to a number of top and emerging risks. Our
current top and emerging risks are as follows:
Macroeconomic and geopolitical risks
E
E
E
Economic outlook and government
intervention
Increased geopolitical risk
Economic outlook and government
intervention
Economic growth in both developed and emerging
market countries remained weak in 2014.
Oil and commodity prices have declined significantly
since the middle of 2014 as a result of increasing global
demand-supply imbalances. The precipitous fall in
energy prices over such a short span of time changes
both the nature and the distribution of risks. It sharpens
fiscal and financing challenges for energy exporters,
and although it brings benefits for oil importers, it also
accentuates deflationary risks among some of these
(particularly in the eurozone). In addition, the prospect
of low oil prices for a prolonged period may reduce
investment in exploration and thus poses the danger
of significantly reduced future supply.
The economic recovery in the eurozone is still at risk.
Deflationary pressures persist as a result of low oil prices
and despite much looser monetary policy. Acceleration
in the structural reform agenda could also accentuate
deflationary pressures in the short-term. The eurozone
is discussed further in ‘Areas of special interest’ on
page 126. Japan fell into a technical recession in the
third quarter of 2014 and policy responses may not be
sufficient to support a recovery in economic activity.
Resilience in US economic activity represents an upside
to the world economy.
Emerging markets, particularly those with domestic
vulnerabilities, remain exposed to monetary policy
normalisation in the US and to greater risk aversion.
While high by international standards, mainland China’s
GDP growth in 2014 was the lowest in over two decades
and recent forecasts indicate a lower trajectory than in
recent years. Years of excessive investment, notably in
the property market, has stoked potential financial
bubbles, requiring the implementation of a new
economic growth model.
Potential impact on HSBC
• HSBC’s results could be adversely affected by a
prolonged period of low or negative interest rates,
low inflation levels or deflation and/or low oil prices.
• We earn a significant proportion of our profits from
our operations in emerging markets. Our results could
be adversely affected by a prolonged slowdown in
emerging market growth.
• Global trade and capital flows may contract as a
result of weaker economic growth, the introduction
of protectionist measures, the emergence of
geopolitical risks or increasing redenomination risk.
This may curtail our profitability.
Mitigating actions
• We closely monitor economic developments in key
markets and sectors with the aim of ensuring trends
are identified, the implications for specific customers,
customer segments or portfolios are assessed and
appropriate mitigating action, which may include
revising key risk appetite metrics and limits, is taken
as circumstances evolve.
• We use stress testing, both internal and regulatory
programmes, to assess the effect of changes in
economic conditions on our operations. Regulatory
stress tests are discussed on page 124.
E
Increased geopolitical risk
Our operations are exposed to risks arising from political
instability and civil unrest in many parts of the world,
which may have a wider effect on regional stability and
regional and global economies.
Geopolitical risk increased during 2014. Military escalation
and/or civil war remain a possibility in Ukraine, while
sanctions targeting the Russian government, institutions
and individuals, together with falling oil prices, have had
an adverse effect on the Russian economy.
In the Middle East, the civil war in Syria has been
complicated by the seizure of parts of Iraq and Syria by
Islamic State, a terrorist group. Elsewhere in the region,
chaos in Libya, ongoing tensions between Israel and
Palestine and fraught negotiations over Iran’s nuclear
programme are combining to increase risks to stability.
In Asia, there was no easing in the maritime sovereignty
disputes involving mainland China and its neighbours,
while tensions remain high over the line of control
between India and Pakistan, raising concerns over a
possible wider conflict between the two nuclear-armed
neighbours.
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Civil unrest and demonstrations in a number of countries
during 2014, including Turkey and Hong Kong, have also
contributed to geopolitical risk as governments took
measures to contain them.
A number of emerging and developed markets will hold
elections in 2015, which could lead to further market
volatility. In addition, a sustained period of low oil prices
may affect stability in countries that rely heavily on oil
production as a significant source of revenue.
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 expose our staff to physical risk
and/or result in physical damage to our assets.
Mitigating actions
• We continuously monitor the geopolitical outlook,
in particular in countries where we have material
exposures and/or 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 risk appetite and
mitigate risks as appropriate.
Macro-prudential, regulatory and legal risks
to our business model
T
T
T
Regulatory developments affecting our
business model and Group profitability
Regulatory investigations, fines, sanctions,
commitments and consent orders 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,
often involving the provision of large amounts of data,
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 both on a sector-wide basis and
individually, together with measures to reduce systemic
risk, may significantly alter the competitive landscape
locally, regionally and/or globally for some or all of the
Group’s businesses. These measures may be introduced
as formal requirements in a supra-equivalent manner
and to differing timetables by different regulatory
regimes.
T
Regulatory developments affecting our
business model and Group profitability
Regulatory changes affect our activities, both of the
Group as a whole and of some or all of our principal
subsidiaries. These changes include:
• the UK’s Financial Services (Banking Reform) Act 2013
which requires the ring-fencing of our UK retail
banking activities from wholesale banking, together
with the structural separation of other activities as
envisaged in the legislation and rules adopted in the
US (including the Volcker Rule adopted in December
2013 under the Dodd-Frank Act), measures adopted
in France restricting certain trading activities and
potential further changes under European
Commission proposals for structural measures for
larger EU banks;
• the implementation of extra-territorial laws, including
the US Foreign Account Tax Compliance Act (‘FATCA’)
and other related initiatives to share tax information
such as those being pursued by the OECD more
generally;
• changes in the regime for the operation of capital
markets, notably mandatory central clearing of over
the counter (‘OTC’) derivatives, including under the
Dodd-Frank Act and the EU’s European Market
Infrastructure Regulation (‘EMIR’);
• changes arising from the increasing focus by
regulators on how institutions conduct business,
particularly with regard to the delivery of fair
outcomes for customers and orderly/transparent
markets, promoting effective competition in the
interests of consumers (including the outcome of the
current investigation by the UK Competition and
Markets Authority on the personal current account
and SME banking market in the UK and recent
indications of further FCA focus on UK wholesale
markets);
• the outcome of the Fair and Effective Financial
Markets Review being undertaken by the Bank of
England which will consider changes in the operation
of wholesale financial markets in the UK;
• restrictions on the structure of remuneration imposed
under CRD IV and UK regulations and increasing
requirements to detail management accountability
within the Group to meet the requirements of the
Senior Managers’ Regime in the UK (including the
continued focus in the UK on the progress being
made in implementing wider recommendations
made by the Parliamentary Commission on Banking
Standards on matters relating to institutional
‘culture’, employee conduct and obligations more
generally such as whistleblowing etc.);
• the implementation of CRD IV, notably the UK
application of the capital buffer framework and its
interaction with Pillar 2;
• the effect of proposals for the UK Financial Policy
Committee to be given more powers to impose
leverage constraints on UK banks;
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Report of the Directors: Risk (continued)
Top and emerging risks
• the proposals from the Financial Stability Board
which are subject to consultation and translation
into national regulations but which would require
G-SIB’s to hold minimum levels of capital and
subordinated debt as total loss absorbing capacity
(‘TLAC’);
• requirements flowing from arrangements for the
resolution strategy of the Group and its individual
operating entities, which may have different effects
in different countries;
• the continuing stress tests by supervisory authorities
and the implication for capital requirements and
capital transfers within the Group;
• the tightening by regulators in a number of countries
of credit controls on mortgage lending and unsecured
portfolios; and
• the continued risk of further changes to regulation
relating to taxes affecting financial service providers,
including financial transaction taxes.
Potential impact on HSBC
• Proposed changes in and/or the implementation of
regulations including mandatory central clearing of
OTC derivatives, EMIR, ring-fencing and similar
requirements, the Volcker Rule, recovery
and resolution plans, FATCA and findings from
competition orientated enquiries and investigations
may affect the manner in which we conduct our
activities and how the Group is structured.
• Requirements for higher levels of capital or TLAC may
increase the funding costs for the Group and reduce
our return on equity.
• Mandatory central clearing of OTC derivatives also
brings new risks to HSBC in our role as a clearing
member, as we will be required to underwrite losses
incurred by central clearing counterparties from the
default of other clearing members and their clients.
Hence central clearing brings with it a new element of
interconnectedness between clearing members and
clients which we believe may increase rather than
reduce our exposure to systemic risk.
• Increased regulatory scrutiny of conduct of business
(including incentive structures, remuneration,
product governance and sales processes) and
management accountability may affect the industry in
areas such as employee recruitment and retention,
product pricing and profitability in both retail and
wholesale markets. HSBC’s businesses may be
affected by these developments.
• These measures have the potential to increase our
cost of doing business and curtail the types of
business we can carry out, with the consequent
risk of decreased profitability.
Mitigating actions
• We are engaged closely with governments and
regulators in the countries in which we operate
to help ensure that the new requirements are
considered properly and can be implemented in
an effective manner.
• We have developed and are implementing a global
approach to the management of conduct and have
established a Conduct & Values Committee as a sub-
committee of the Board to oversee the management
of conduct across the Group.
• We have enhanced our governance around central
clearing counterparties and appointed specialists to
manage the associated liquidity and collateral risks.
• We continue to enhance and strengthen governance
and resourcing more generally around regulatory
change management and the implementation of
required measures to actively address this ongoing
and significant agenda of regulatory change.
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Regulatory investigations, fines, sanctions,
commitments and consent orders 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 against financial service firms is increasing,
with a consequent increase also in civil litigation arising
from or relating to issues which are subject to regulatory
investigation, sanction or fine. In addition, criminal
prosecutions of financial institutions for, among other
alleged conduct, breaches of AML and sanctions
regulations, antitrust violations, market manipulation,
aiding and abetting tax evasion, and providing unlicensed
cross-border banking services, have become more
commonplace and may increase in frequency due to
increased media attention and higher expectations from
prosecutors and the public. Moreover, financial service
providers may face similar or broader legal proceedings,
investigations or regulatory actions across many
jurisdictions as a result of, among other things, increased
media attention and higher expectations from regulators
and the public. Any such prosecution or investigation of,
or legal proceeding or regulatory action brought against,
HSBC or one or more of its subsidiaries could result in
substantial fines, penalties and/or forfeitures and could
have a material adverse effect on our results, business,
financial condition, prospects and reputation, including
the potential loss of key licences, requirement to exit
certain businesses and withdrawal of funding from
depositors and other stakeholders.
Regulatory commitments and consent orders
In December 2012, HSBC Holdings, HSBC North America
Holdings Inc. (‘HNAH’) and HSBC Bank USA, N.A. (‘HSBC
Bank USA’) entered into agreements with US and UK
authorities regarding past inadequate compliance with
AML and sanctions laws. Among these agreements, HSBC
Holdings and HSBC Bank USA entered into a five-year
deferred prosecution agreement (‘US DPA’) with the US
Department of Justice (‘DoJ’) and HSBC Holdings entered
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into a two-year DPA with the New York County District
Attorney (the ‘DANY DPA’). HSBC Holdings also entered
into an undertaking with the FSA (the ‘FCA Direction’)
to comply with certain forward-looking obligations
with respect to AML and sanctions requirements. In
addition, HSBC Holdings entered into a cease and desist
order with the US FRB with respect to compliance with
US AML and sanctions requirements.
The agreements with the DoJ and the FRB and the FCA
Direction require us to retain an independent monitor
to evaluate our progress in fully implementing our
obligations and produce regular assessments of the
effectiveness of our Financial Crime Compliance
function. The Monitor is discussed on page 27.
HSBC has fulfilled all of the requirements imposed by the
DANY DPA, which expired by its terms at the end of the
two-year period of that agreement in December 2014.
While we still have significant work to do to build and
improve our AML and sanctions compliance programme,
and our DPA with the DoJ and other settlement
agreements remain in place, the expiration of the
DANY DPA is an important milestone.
HSBC Bank USA is also subject to an agreement entered
into with the Office of the Comptroller of the Currency
(‘OCC’) in December 2012, the Gramm-Leach-Bliley Act
(‘GLBA’) Agreement and other consent orders.
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.
• Our significant involvement in facilitating
international capital flows and trade exposes the
Group to the risk of financial crime or inadvertently
breaching restrictions and sanctions imposed by the
US Office of Foreign Assets Control and other
regulators.
• Breach of the US DPA at any time during its term may
allow the DoJ to prosecute HSBC Holdings or HSBC
Bank USA in relation to the matters which are the
subject of the US DPA.
• The design and execution of AML and sanctions
remediation plans is complex and requires major
investments in people, systems and other
infrastructure. This complexity creates significant
execution risk, which could impact our ability to
effectively manage financial crime risk and remedy
AML and sanctions compliance deficiencies in a timely
manner. This could, in turn, impact HSBC’s ability to
satisfy the Monitor or comply with the terms of the
US DPA, the FCA Direction, or the FRB Cease and
Desist Order, and may require HSBC to take additional
remedial measures in the future.
• Failure to comply with the requirements of consent
orders or the GLBA Agreement within the time
periods specified in them or otherwise as may be
extended, could result in supervisory action. Any such
action could have a material adverse effect on the
consolidated results and operation of HSBC.
Mitigating actions
• Steps to address many of the requirements of the US
DPA, the FCA Direction and the GLBA Agreement
have either already been taken or are under way in
consultation with the relevant regulatory agencies.
These include simplifying the Group’s control
structure, strengthening the governance structure
with new leadership appointments, revising key
policies and implementing Global Standards to
detect, deter and protect against financial crime (see
page 26). In addition, we have substantially increased
spending and staffing in the Financial Crime
Compliance and Regulatory Compliance functions
in the past few years.
• During 2014, we approved a new global strategy for
transaction monitoring. Globally standardised AML
investigations processes have been developed and
are being implemented, starting in priority countries.
Conduct of business
Regulators in the UK and other countries have continued
to increase their focus on ‘conduct’ matters relating to
fair outcomes for customers and orderly/transparent
markets including, for example, attention to sales
processes and incentives, product and investment
suitability, product governance, employee activities
and accountabilities as well as the risks of market abuse
in relation to benchmark, index, other rate setting
processes, wider trading activities and more general
conduct of business concerns.
In the UK, the FCA is 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.
The FCA is also now regulating areas of activity not
previously regulated by them, such as consumer credit,
and considering competition issues in the markets they
regulate. Additionally, the FCA and other regulators
increasingly take actions in response to customer
complaints or where they see poor customer outcomes
and/or market abuses, either specific to an institution or
more generally in relation to a particular product. There
have been examples of this approach by regulators in the
context of the possible mis-selling of PPI, of interest rate
hedging products for SMEs and of wealth management
products.
The Group also remains subject to a number of other
regulatory proceedings including investigations and
reviews by various national regulatory, competition
and enforcement authorities relating to certain past
submissions made by panel banks and the process for
making submissions in connection with the setting
of Libor and other interbank offered and benchmark
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Report of the Directors: Risk (continued)
Top and emerging risks
interest rates. There are also ongoing investigations into
foreign exchange, precious metals and credit default
swap related activities. Details of these investigations
can be found in Note 40 on the Financial Statements.
Potential impact on HSBC
• HSBC may face regulatory censure or sanctions
including fines and/or be exposed to legal
proceedings and litigation.
• Regulators in the UK and other countries may identify
future industry-wide mis-selling, market conduct or
other issues that could affect the Group. This may
lead from time to time to significant direct costs or
liabilities and/or changes in the practices of such
businesses. Also, decisions taken by the Financial
Ombudsman Service in the UK (or similar overseas
bodies) 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.
Mitigating actions
• Programmes to enhance the management of conduct
of business are progressing in all global businesses
and functions.
• Performance management arrangements for
managers and staff are being reviewed, focusing on
reward linked to values-based behaviour and good
conduct.
• Enhancements to surveillance capabilities and
benchmark rate setting processes are ongoing and
HSBC Holdings and its subsidiaries are cooperating
fully with all regulatory investigations and reviews.
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Dispute risk
HSBC is party to legal proceedings and regulatory
matters in a number of jurisdictions arising out of its
normal business operations. Further details are provided
in Note 40 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.
Mitigating actions
• We continue to focus on identifying emerging
regulatory and judicial trends in order to limit
exposure to litigation or regulatory enforcement
action in the future.
• We are enhancing our financial crime and regulatory
compliance controls and resources.
Risks related to our business operations,
governance and internal control systems
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Heightened execution risk
People risk
Internet crime and fraud
Information security risk
Data management
Model risk
Third party risk management
Heightened execution risk
The financial services industry is currently facing an
unprecedented period of scrutiny. Regulatory requests,
legal matters and business initiatives all require a
significant amount of time and resources to implement.
The magnitude and complexity of projects within
HSBC required to meet these demands has resulted
in heightened execution risk. There also remains
heightened risk around the execution of a number
of disposals across the Group in line with our strategy.
Potential impact on HSBC
• These factors may affect the successful delivery of
our strategic priorities.
• The potential risks of disposals include regulatory
breaches, industrial action, loss of key personnel
and interruption to systems and processes during
business transformation. They can have both financial
and reputational implications.
Mitigating actions
• We have strengthened our prioritisation and
governance processes for significant projects and
have invested in our project implementation and IT
capabilities.
• Risks related to disposals are carefully assessed and
monitored and are subject to close management
oversight.
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People risk
The demands being placed on the human capital of the
Group are unprecedented. The cumulative workload
arising from a regulatory reform programme that is often
extra-territorial and still evolving is hugely consumptive
of human resources, placing increasingly complex and
conflicting demands on a workforce where the expertise
is in short supply and globally mobile.
Potential impact on HSBC
• Changes in remuneration policy and practice resulting
from the new regulations under CRD IV apply globally
to all employees of EU headquartered banks. The key
change is the application of a cap on variable pay that
can be paid to any ‘material risk-taker’ (based on
qualitative and quantitative criteria issued by the
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EBA). This presents significant challenges for HSBC
because a significant number of our material risk
takers are based outside the EU.
• The policy statement issued by the PRA extends the
Remuneration Code to require all PRA-authorised
firms to apply clawback to vested/paid variable
remuneration on a Group-wide basis for any material
risk takers receiving variable pay from 1 January 2015.
• The introduction by the PRA and FCA in the UK of the
Senior Managers and Certification regimes and of
the related Rules of Conduct (the detail of which is
currently subject to consultation) are intended to
set clearer expectations of the accountabilities and
behaviour of both senior and more junior employees.
However, there are a number of uncertainties around
the precise impact of these regimes at present
(including on more senior employees, on non-UK
based employees and on non-executive directors).
• Organisational changes to support the Group’s
strategy and/or implement regulatory reform
programmes have the potential to lead to increased
staff turnover.
Mitigating actions
• The changes in remuneration under the new CRD IV
regulations has necessitated a review of our
remuneration policy, especially the balance between
fixed and variable pay, to ensure we can remain
competitive on a total compensation basis and retain
our key talent.
• Risks related to organisational change and disposals
are subject to close management oversight.
• We continue to increase the level of specialist
resources within Financial Crime Compliance,
Regulatory Compliance and stress testing and to
engage with our regulators as they finalise new
regulations.
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Internet crime and fraud
HSBC is increasingly exposed to fraudulent and criminal
activities as a result of increased usage of internet and
mobile services by customers. 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 could result in financial loss and/or
customer data and sensitive information being
compromised. They may also give rise to losses in
service to customers. The same threats apply equally
when we rely on external suppliers or vendors for
services provided to us and our customers.
Mitigating actions
• We continually assess these threats as they evolve
and adapt our controls to mitigate them.
• 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.
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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. HSBC and other
multinational organisations continue to be the targets of
cyber-attacks which may disrupt services including the
availability of our external facing websites, compromise
organisational and customer information or expose
security weaknesses.
Potential impact on HSBC
• Information security risk gives 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.
Mitigating actions
• We have invested significantly in addressing this risk
through increased training to raise staff awareness of
the requirements, enhanced multi-layered controls
protecting our information and technical
infrastructure, heightened monitoring and
management of potential cyber-attacks and
continued vulnerability assessment.
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Data management
HSBC must have a clear data strategy to meet the
volume, granularity, frequency and scale of regulatory
and other reporting requirements. As a G-SIB, HSBC is
also required to comply with the principles for effective
risk data aggregation and risk reporting as set out by the
Basel Committee on Banking Supervision (‘the Basel
Committee’) in its paper.
Potential impact on HSBC
• Ineffective data management could adversely
affect our ability to aggregate and report complete,
accurate and consistent data to regulators, investors
and senior management on a timely basis.
• Financial institutions that fail to meet their Basel
Committee data obligations by the required deadline
may face supervisory measures.
Mitigating actions
• Since the Data Strategy Board was established in
2012, we have set a data strategy for the Group and
defined Group-level principles, standards and policies
to enable consistent data aggregation, reporting and
management.
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Top and emerging risks / Areas of special interest
• A number of key initiatives and projects to implement
our data strategy and work towards meeting our
Basel Committee data obligations are in progress.
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Model risk
HSBC uses models for a range of purposes in managing
its business, including regulatory and economic capital
calculations, stress testing, granting credit, pricing
and financial reporting. Model risk is the potential for
adverse consequences as a result of decisions based on
incorrect model outputs and reports or the use of such
information for purposes for which it was not designed.
Model risk could arise from models that are poorly
developed, implemented or used, or from the modelled
outcome being misunderstood and acted upon
inappropriately by management. The regulatory
environment and supervisory concerns over banks’
use of internal models to determine regulatory capital
further contribute to model risk.
Potential impact on HSBC
• HSBC could incur losses or be required to hold
additional capital as a result of model limitations
or failure.
• Supervisory concerns over the internal models and
assumptions used by banks in the calculation of
regulatory capital have led to the imposition of risk
weight and loss given default floors. Such changes
have the potential to increase our capital
requirement and/or make it more volatile.
Mitigating actions
• We aim to mitigate model risk through appropriate
governance over model development, usage and
validation, together with independent review,
monitoring and feedback.
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Third-party risk management
We have increased our risk management focus on our
use of third-party service providers, in part in response
to increased scrutiny by global regulators. This includes
how outsourcing decisions are made, how the key
relationships are managed and the consistency of risk
management across the range of third parties used. Risks
arising from the use of third-party service providers may
be less transparent and therefore more challenging to
manage or influence.
Potential impact on HSBC
• Any deficiency in the management of third-party
service providers could lead to a variety of risks
including business disruption, regulatory failings, loss
of confidential information and financial crime.
Mitigating actions
• We are enhancing our third-party risk management
capability in line with guidance issued by the OCC and
FRB, strengthening controls over third-party use and
increasing the monitoring and assurance over these
controls.
Areas of special interest
(Unaudited)
During 2014, we considered a number of
particular areas because of the effect they may
have on the Group. Whilst these areas may
already have been identified in top and emerging
risks, further details of the actions taken during
the year are provided below.
Financial crime compliance and regulatory
compliance
In recent years, we have 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. This has
included the matters giving rise to the DPAs reached
with US authorities in relation to investigations regarding
inadequate compliance with anti-money laundering and
sanctions law, and the related undertaking with the FSA
(the ‘FCA Direction’). The work of the Monitor, who
has been appointed to assess our progress against our
various obligations is discussed on page 27.
We continue to respond to a number of investigations by
the FCA into the possible mis-selling in the UK of certain
products, including sales of PPI, of interest rate hedging
products for SMEs and of wealth management products.
In addition, we also remain subject to a number of other
regulatory proceedings including investigations and
reviews by various national regulatory, competition
and enforcement authorities relating to certain past
submissions made by panel banks and the process for
making submissions in connection with the setting
of Libor and other interbank offered and benchmark
interest rates. There are also investigations in progress
into activities related to foreign exchange, precious
metals and credit default swaps. Details of these
investigations and legal proceedings can be found
in Note 40 on the Financial Statements.
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 rise 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.
Further information about the Group’s compliance
risk management may be found on page 189.
Private Bank
Past practices at our Swiss private bank and the financial
affairs of some of our Swiss private banking clients have
been subject to recent media coverage. The media focus
has been on historical events that show the standards to
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which we operate today were not universally in place in
our Swiss operations eight years ago.
Since then, we have fundamentally changed the way
HSBC is run and have established much tighter central
control around who are our customers. We have put in
place tough, world-class financial crime, regulatory
compliance and tax transparency standards, enforced by
a team of over 7,000 compliance staff.
GPB, and in particular its Swiss private bank, has
undergone a radical transformation. We have taken
significant steps over the past several years to
implement reforms and exit clients who did not meet
strict new HSBC standards, including those where we had
concerns in relation to tax compliance. As a result of this
repositioning, HSBC’s Swiss private bank has reduced its
client base by almost 70% since 2007.
We are fully committed to the exchange of information
with relevant authorities and are actively pursuing
measures that ensure clients are tax transparent, even in
advance of a regulatory or legal requirement to do so.
We are also cooperating with relevant authorities
investigating these matters.
Regulatory stress tests
Stress testing is an important tool for regulators to
assess vulnerabilities in the banking sector and in
individual banks, the results of which could have a
significant effect on minimum capital requirements,
risk and capital management practices and planned
capital actions, including the payment of dividends,
going forward.
We are subject to regulatory stress testing in many
jurisdictions. These have increased both in frequency
and in the granularity of information required by
supervisors. They include the programmes of the PRA,
the FRB, the EBA, the ECB, the Hong Kong Monetary
Authority (‘HKMA’) and other regulators. Assessment by
regulators is on both quantitative and qualitative bases,
the latter focusing on portfolio quality, data provision,
stress testing capability, forward-looking capital
management processes and internal management
processes.
In 2014, the Group took part in the first PRA concurrent
stress test exercise involving major UK banks. The
exercise was run on an enterprise-wide basis and
comprised the EBA base scenario and a stress scenario
that predominantly followed the EBA stress scenario
with an additional overlay of variables reflecting the
vulnerabilities facing the UK banking system, including
significant declines in the value of sterling, residential
and commercial property prices and bond and equity
prices, along with a downturn in economic activity and
rising unemployment. HSBC’s submission was made to
the PRA at the end of June 2014. The Group also
participated in the complementary programme of
regular data provision to the Bank of England under
its Firm Data Submission Framework.
The PRA disclosed the results of the 2014 Concurrent
Stress Test on 16 December 2014. The stressed CET1
capital ratio of HSBC was deemed by the PRA to fall
to a minimum of 8.7%, taking into account approved
management mitigating actions. This was above the
target minimum of 4.5%.
The EBA conducted a Europe-wide stress test in the first
half of 2014, administered via the PRA for UK banks. The
base scenario covered a wide range of risks including
credit, market, securitisation, sovereign and funding
risks. The adverse macroeconomic scenario included
country-specific shocks to sovereign bond spreads,
short-term interest rates and residential property
prices, together with a decline in world trade, currency
depreciation in Central and Eastern Europe and slow-
downs or contractions in GDP growth around the world.
The EBA disclosed results of the stress test exercise on
26 October 2014. Our stressed CET1 capital ratio was
projected to fall to a low point of 8.7% at the end of
2015, above the EBA minimum threshold of 5.5%. Our
fully-loaded stressed CET1 ratio was projected to be
9.3% at the end of 2016, which compared favourably
with other major European banks.
The PRA and EBA results demonstrate HSBC’s continued
capital strength.
The ECB conducted its comprehensive assessment in
the first half of 2014, which comprised an Asset Quality
Review and the ECB’s stress testing process, the latter
using the EBA scenarios. HSBC France and HSBC Malta
fell within scope and both passed the exercise, the
results of which were also published in October 2014.
The CET1 ratio for HSBC France was projected to fall
from 12.9% in 2013 to 6.6% by the end of 2016,
remaining above the regulatory minimum. The fall
reflected the impact of stress on HSBC France’s business
model, which includes the Group’s euro Rates trading
business, and the effect of ECB credit loss benchmarks
on the loan portfolio.
HNAH participates in the Comprehensive Capital Analysis
and Review (‘CCAR’) and Dodd-Frank Stress Testing
(‘DFAST’) programmes of the FRB and HSBC Bank USA
in the OCC’s DFAST programme. Both made their first
submissions under these programmes on 6 January
2014. On 26 March 2014, the FRB informed HNAH that
it objected to the submitted capital plan on qualitative
grounds and a resubmission of its capital plan was
required by 5 January 2015, together with improvements
to its stress testing processes. However, the FRB
approved the capital actions included in HNAH’s CCAR
submission and HNAH was allowed to proceed with the
payment of dividends on the outstanding preferred
shares and trust preferred securities of HNAH and its
subsidiaries. HNAH’s stressed CET1 capital ratio was
forecast by the FRB to fall to a minimum of 9.4% under
the supervisory ‘severely adverse’ scenario, above the
regulatory minimum ratio of 4.5%. HNAH made its CCAR
2015 submission, which also served as the required re-
submission for the CCAR 2014, and HSBC Bank USA made
its DFAST 2015 submission, on 5 January 2015.
Disclosure by the FRB and HNAH and HSBC Bank USA of
the results of the exercises, based on the supervisory
scenarios published in November 2014, will be made in
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Report of the Directors: Risk (continued)
Areas of special interest / Credit risk
March 2015. In addition, the FRB will also provide its
non-objection or objection to HNAH’s capital plan and
the capital actions included within its 2015 CCAR
submission.
The Hongkong and Shanghai Banking Corporation
participated in the HKMA stress test exercise in the first
half of 2014. The HKMA stress scenario envisaged a
significant deceleration of growth in mainland China
and a sharper contraction in Hong Kong.
Oil and gas prices
Oil and commodity prices have declined significantly
since the middle of 2014 as a result of increasing global
demand and supply imbalances and changes in market
sentiment. There is considerable uncertainty regarding
the future price levels during 2015 and beyond.
Prolonged depressed oil prices will affect countries,
industries and individual companies differently:
• Country level: net oil importers are likely to benefit
from reduced oil prices. In advanced economies, this
is likely to increase consumer disposable income
while in emerging market countries it is more likely
to benefit the governments’ fiscal position. The
impact on oil exporting countries will depend on the
importance of the oil receipts to fiscal revenues, the
extraction costs and the amount of fiscal reserves
that the countries are able to draw upon.
• Industry level: the oil and gas industry and supporting
services will be affected, though this will vary
depending on the relevant sub-sector. Large
integrated producers are likely to remain resilient.
Within the pure producers sector, the higher
cost pure producers, such as shale and oil sands
producers, are likely to experience higher levels of
stress. Similarly, infrastructure and services providers
are likely to come under stress as producers curtail
capital expenditure. Industries where oil and gas
represent major costs, such as haulage, transport
and shipping, are likely to benefit if prices remain
depressed.
The oil and gas sector has been considered a higher risk
sector for some time and has been under enhanced
monitoring and controls with risk appetite and new
money lending under increased scrutiny.
HSBC has a diversified lending profile to the oil and gas
sector. Lending in GB&M is concentrated predominately
in upstream activities and with large investment-grade
global integrated producers. CMB mainly focuses on
lending to service companies and pure producers. The
exposures are diversified across a number of countries.
The overall portfolio has drawn risk exposures amounting
to about US$34bn, with just over 47% consisting of
exposures to oil service companies and non-integrated
producers. In-depth client reviews have been conducted
on larger clients considered to be potentially vulnerable to
depressed oil prices for a period of one to two years,
particularly, but not exclusively, focusing on oil service
companies, and producers (and their suppliers) reliant on
expensive extraction methods such as shale or oil sands.
Following these reviews, about US$0.5bn of exposures
have been identified as being of sufficient concern to
require close management. Whilst weakening credit is
evident in this population, no new customers were
identified as being impaired at this stage.
Russia
During 2014, tensions have risen between the Russian
Federation (‘Russia’) and western countries (‘the West’) in
respect of Ukraine. The West’s response to date has been
to impose sanctions on a selected list of Russian
individuals, banks and corporates during the course of
2014. Monitoring and action in response to the sanctions
requirements is ongoing and will impose some restrictions
on HSBC’s business in Russia, although the effect on the
Group is not expected to be significant. Our exposures to
counterparties incorporated or domiciled in Ukraine are
not considered material.
The fourth quarter of 2014 saw significant falls in the
value of the Russian rouble and the price of crude oil,
and multiple interest rate rises implemented by Russia’s
central bank. The impact of these developments is being
monitored by management and, combined with the
sanctions, means the outlook for Russia remains highly
uncertain with the economy expected to contract in
2015.
Our exposures to Russia mainly consist of loans and
advances. At 31 December 2014 these amounted to
US$4bn.
In addition to the above, a number of our multinational
clients have indirect exposure to Russia through
majority or minority stakes in Russia-based entities,
via dependency of supply or from reliance on exports.
The operations and businesses of such clients may be
negatively affected should the scope and nature of
sanctions and other actions be widened or the Russian
economy deteriorate. Also, we run operations in
neighbouring countries where the financial system has
strong links to the Russian economy. Management is
monitoring the quantum and potential severity of such
risks.
Eurozone
In recent years the EU has introduced a series of
legislative changes designed to better equip it to deal
with a financial crisis and to reduce the risks of contagion
in the event of an EU member country experiencing
financial difficulties. The outcome of current
negotiations on the terms of the Greek bail out is highly
uncertain. The debt may be rescheduled or Greece
may default on its debts; there is also the possibility that
Greece may eventually exit the euro. Our exposures to
Greece mainly consist of loans and advances and reverse
repos. At 31 December 2014 these amounted to US$4bn
and US$2bn respectively. Included in loans and advances
are US$2bn related to the shipping industry,
denominated in US dollars and booked in the UK. We
believe the shipping industry is less sensitive to the
Greek economy as it is mainly dependent on
international trade.
HSBC HOLDINGS PLC
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Credit risk
Page
App1
Tables
Credit risk
129
206
Credit risk management
Credit exposure
Maximum exposure to credit risk
Other credit risk mitigants
Concentration of exposure
Financial investments
Trading assets
Derivatives
Loans and advances
206
206
130
130
130
132
132
132
132
132
Summary of credit risk
Gross loans to customers and banks over five years
Loan impairment charge over five years
Loan impairment charges by geographical region
Loan impairment charges by industry
Loan impairment allowances over five years
Maximum exposure to credit risk
Loan and other credit-related commitments
Gross loans and advances to customers by industry sector
and by geographical region
Credit quality of financial instruments
Credit quality classification
Past due but not impaired gross financial
133
207
Distribution of financial instruments by credit quality
Past due but not impaired gross financial instruments by
instruments
136
geographical region
Impaired loans
Renegotiated loans and forbearance
Impairment of loans and advances
Impairment assessment
Wholesale lending
Commercial real estate
Other credit risk exposures
Derivatives
137
138
141
144
145
149
149
Ageing analysis of days for past due but not impaired
gross financial instruments
Movement in impaired loans by geographical region
Renegotiated loans and advances to customers by
208
212
geographical region
Movement in renegotiated loans by geographical region
Loan impairment charge to the income statement by
industry sector
Loan impairment charge to the income statement by
assessment type
Charge for impairment losses as a percentage of average
gross loans and advances to customers by
geographical region
Movement in impairment allowances by industry sector
and geographical region
Movement in impairment allowances on loans and
advances to customers and banks
Total wholesale lending
Commercial real estate lending
Commercial real estate loans and advances including loan
commitments by level of collateral
Other corporate, commercial and financial (non-bank)
loans and advances including loan commitments by
level of collateral rated CRR/EL8 to 10 only
Loans and advances to banks including loan commitments
by level of collateral
Notional contract amounts and fair values of derivatives
by product type
OTC collateral agreements by type
Reverse repos – non-trading by geographical
region
Loan Management Unit
151
Reverse repos – non-trading by geographical region
213
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129
130
130
130
130
130
131
131
132
134
136
136
137
139
140
141
141
142
142
143
144
145
147
148
149
150
150
151
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Report of the Directors: Risk (continued)
Credit risk
Personal lending
Mortgage lending
Other personal lending
HSBC Finance loan modifications and re-age
programmes
Collateral and other credit enhancements held
Supplementary information
Page
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Tables
151
152
153
154
156
157
Total personal lending
HSBC Finance US Consumer and Mortgage Lending
residential mortgages
HSBC Finance: foreclosed properties in the US
Trends in two months and over conctractual delinquency
in the US
Gross loan portfolio of HSBC Finance and real estate
secured balances
Number of renegotiated real estate secured accounts
remaining in HSBC Finance’s portfolio
Residential mortgage loans including loan commitments
by level of collateral
Gross loans and advances by industry sector over 5 years
Reconciliation of reported and constant currency impaired
loans, allowances and charges by geographical region
Reconciliation of reported and constant currency loan
impairment charges to the income statement
Loan impairment charges by industry sector over 5 years
Charge for impairment losses as a percentage of average
gross loans and advances to customers
Movement in impairment allowances over 5 years
Gross loans and advances to customers by country
Refinance risk
HSBC Holdings
214
161
HSBC Holdings – maximum exposure to credit risk
Securitisation exposures and other structured
products
161
214
Representations and warranties related to
mortgage sales and securitisation activities
162
1 Appendix to Risk – risk policies and practices.
Overall exposure of HSBC
Carrying amount of HSBC’s consolidated holdings of ABSs
Definitions and classifications of ABSs and CDOs
Page
151
153
153
153
154
154
156
157
158
158
159
159
159
160
161
161
162
214
HSBC HOLDINGS PLC
128
Credit risk
(Unaudited)
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 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 2014.
A summary of our current policies and practices regarding credit
risk is provided in the Appendix to Risk on page 204.
Our maximum exposure to credit risk is presented on
page 131 and credit quality on page 133. While credit
risk arises across most of our balance sheet, losses have
typically been incurred on loans and advances and
securitisation exposures and other structured products.
As a result, our disclosures focus primarily on these two
areas.
This year we have redesigned the ‘Credit risk’ section in
order to enhance clarity and reduce duplication. It now
begins with a summary of credit risk followed by an
overview of our gross exposures. We describe various
measures of credit quality such as past due status,
impaired loans and renegotiated loans before analysing
impairment allowances. There are specific sections on
wholesale lending and personal lending where additional
detail is provided and we cover areas of particular focus
such as our exposure to commercial real estate in
wholesale lending and our Consumer and Mortgage
Lending (‘CML’) portfolio in personal lending. This is
followed by a section describing our securitisation
exposures and other structured products. Information
on our exposures to oil and gas, Russia and Greece is
provided in ‘Areas of special interest’ on page 126.
Following the change in balance sheet presentation
explained on page 347, non-trading reverse repos are
shown separately on the balance sheet and are no longer
included in ‘Loans and advances to customers’ and
‘Loans and advances to banks’. Comparative data have
been re-presented accordingly. As a result, any analysis
that references loans and advances to customers or
banks excludes non-trading reverse repos. The amount
of the non-trading reverse repos to customers and banks
is set out on page 151.
Loan impairment charges, loan impairment allowances
and impaired loans all reduced compared with 2013.
Gross loans and advances decreased by US$28bn
which included adverse foreign exchange movements
of US$51bn; excluding these movements customer
lending grew in 2014.
The commentary that follows is on a constant currency
basis, whilst tables are presented on a reported basis.
Summary of credit risk
(Unaudited)
At year-end
Maximum exposure to
credit risk
Gross loans and advances1
– personal lending
– wholesale lending
Total
Impaired loans
– personal lending
– wholesale lending
Total
Impaired loans as a % of
gross loans and advances
– personal lending
– wholesale lending
– total
Impairment allowances
– personal lending
– wholesale lending
Total
Loans and advances net of
impairment allowances1
For year ended 31 December
Loan impairment charge
– personal lending
– wholesale lending
Total
For footnote, see page 202.
2014
US$bn
2013
US$bn
Page
3,133
3,112
131
393
706
1,099
15
14
29
411
716
1,127
19
18
37
3.9%
2.0%
2.7%
4.6%
2.5%
3.3%
US$bn
US$bn
4.6
7.8
12.4
6.6
8.6
15.2
1,087
1,112
1.8
2.3
4.1
3.1
2.9
6.0
132
132
132
137
137
137
143
143
143
141
141
141
See page 158 for further details in respect of the constant
currency reconciliation. For an analysis of loans and advances by
country see page 160.
Wholesale gross loans and advances increased by
US$21bn. Asia grew by US$16bn and North America by
US$10bn with more modest levels of growth in the
Middle East and North Africa and Latin America. This
was offset by a decrease of US$15bn in Europe. Loan
impairment charges were lower in 2014 as we continued
to benefit from the improvement in various economies
and the low interest rate environment.
Personal lending balances, excluding the planned US
CML portfolio run off, grew by US$7.7bn. This was
primarily driven by increased mortgage and other
lending in Asia and growth in the mortgage portfolio in
both North America and Latin America. The growth was
partially offset by lower lending balances in Europe due
to repayments on the mortgage and credit card portfolio
in the UK. The CML portfolio declined by a further
US$5.7bn during the year. Loan impairment charges
were down as a result of improvements in the US
housing market and the continued run-off of the CML
portfolio.
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Report of the Directors: Risk (continued)
Credit risk
Gross loans to customers and banks over five years1 (US$bn)
(Unaudited)
Impaired
Not impaired
15
15
15
18
14
Credit exposure
Maximum exposure to credit risk
(Audited)
32
27
24
19
15
393
367
391
392
378
620
647
666
698
692
2010 2011 2012 2013 2014 2010 2011 2012 2013 2014
Personal
Wholesale
Loan impairment charge over five years (US$bn)
(Unaudited)
11.2
9.3
5.4
3.1
1.8
2.4
2.2
2.8
2.9
2.3
The table on page 131 provides information on balance
sheet items, offsets and loan and other credit-related
commitments. Commentary on balance sheet
movements is provided on page 58. The offset on
derivatives increased in line with the increase in
maximum exposure amounts.
The offset on corporate and commercial loans to
customers decreased by US$31bn. This reduction was in
the UK where a small number of clients benefit from the
use of net interest arrangements across their overdraft
and deposit positions. During the year, as we aligned our
approach in our Payments and Cash Management
business to be more globally consistent, many of these
clients increased the frequency with which they settled
these balances thereby reducing the amount of offset
available.
2010 2011 2012 2013 2014 2010 2011 2012 2013 2014
‘Maximum exposure to credit risk’ table (page 131)
Personal
Wholesale
Loan impairment charges by geographical region (US$bn)
(Unaudited)
2013
2014
2.6
2.0
1.7
1.1
0.6
0.5
Europe
Asia
–
–
MENA
1.2
0.3
North
America
Latin
America
Loan impairment charges by industry (US$bn)
(Unaudited)
2013
2014
2.5
1.9
2.2
2.0
0.8
0.3
Other
personal
lending
Commercial
real
estate
Other
corporate
commercial
0.6
(0.1)
First lien
residential
mortgages
–
(0.1)
Financial
Loan impairment allowances over five years
(Unaudited)
Loan impairment allowances (US$bn)
Loan impairment allowances as a % of impaired loans
53%
51% 53% 48%
55%
38%
37%
35% 35% 30%
12.3
9.8
8.2
6.6
4.6
7.9
7.9
8.0
8.6
7.8
2010 2011 2012 2013 2014 2010 2011 2012 2013 2014
Personal
Wholesale
For footnote, see page 202.
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, it is
generally the full amount of the committed facilities.
The offset in the table relates to amounts where there is a
legally enforceable right of offset in the event of counterparty
default and where, as a result, there is a net exposure for credit
risk purposes. However, as there is no intention to settle these
balances on a net basis under normal circumstances, they do
not qualify for net presentation for accounting purposes.
In the case of derivatives the offset column also includes
collateral received in cash and other financial assets.
Other credit risk mitigants
While not disclosed as an offset in the ‘Maximum
exposure to credit risk’ table, other arrangements are in
place which reduce our maximum exposure to credit risk.
These include a charge over collateral over borrowers’
specific assets such as residential properties. Other
credit risk mitigants include short positions in securities
and financial assets held as part of linked insurance/
investment contracts where the risk is predominantly
borne by the policyholder. In addition, we hold collateral
in the form of financial instruments that are not
recognised on the balance sheet.
See Note 32 and from page 147 and page 156 respectively on
the Financial Statements for further details on collateral in
respect of certain loans and advances and derivatives.
HSBC HOLDINGS PLC
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Maximum exposure to credit risk
(Audited)
Maximum
exposure
US$m
2014
Offset
US$m
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
– 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
129,957
4,927
27,674
228,944
16,170
141,532
27,581
43,661
9,031
56
8,891
84
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Net
US$m
129,957
4,927
27,674
228,944
16,170
141,532
27,581
43,661
9,031
56
8,891
84
–
Maximum
exposure
US$m
166,599
6,021
25,220
239,301
21,584
141,644
27,885
48,188
12,719
50
12,589
76
4
Derivatives
345,008
(313,300)
31,708
282,265
(252,344)
2013
Offset
US$m
Net
US$m
–
–
–
(1,777)
–
–
–
(1,777)
–
–
–
–
–
(96,726)
(1,348)
(90,215)
(5,163)
166,599
6,021
25,220
237,524
21,584
141,644
27,885
46,411
12,719
50
12,589
76
4
29,921
895,363
402,778
447,707
44,878
(587)
119,459
(22,267)
–
–
–
(22)
(22)
–
–
–
–
157,423
416,785
78,111
338,674
37,302
3,284
11,624
22,394
46,300
587,603
974,660
388,954
535,184
50,522
112,149
161,713
404,773
81,517
323,256
35,264
1,375
10,775
23,114
47,078
651,380
(67,094)
(4,412)
(59,197)
(3,485)
(258)
(5,750)
–
–
–
–
–
–
–
–
–
907,566
384,542
475,987
47,037
111,891
155,963
404,773
81,517
323,256
35,264
1,375
10,775
23,114
47,078
651,380
992,089
404,126
537,922
50,041
120,046
179,690
416,785
78,111
338,674
37,324
3,306
11,624
22,394
46,300
587,603
3,132,558
(386,402)
2,746,156
3,111,962
(373,723)
2,738,239
Europe
US$m
86,247
98,045
26,605
210,897
92,148
91,895
18,930
202,973
Asia4
US$m
96,497
138,366
9,355
244,218
74,445
120,084
8,477
203,006
MENA
US$m
2,995
20,141
711
23,847
2,940
19,045
705
22,690
North
America
US$m
15,636
102,911
23,559
142,106
15,647
92,837
17,478
125,962
Latin
America
US$m
11,679
17,540
1,093
30,312
9,774
21,956
1,242
32,972
Total
US$m
213,054
377,003
61,323
651,380
194,954
345,817
46,832
587,603
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Loans and advances to customers held at
amortised cost1
– personal
– corporate and commercial
– financial (non-bank financial institutions)
Loans and advances to banks held at
amortised cost1
Reverse repurchase agreements – non-trading
Financial investments
– Treasury and other similar bills
– debt securities
Other assets
– assets held for sale
– endorsements and acceptances
– other
Financial guarantees and similar contracts2
Loan and other credit-related commitments3
At 31 December
For footnotes, see page 202.
Loan and other credit-related commitments3
(Unaudited)
Personal
Corporate and commercial
Financial5
At 31 December 2014
Personal
Corporate and commercial
Financial5
At 31 December 2013
For footnotes, see page 202.
Report of the Directors: Risk (continued)
Credit risk
Concentration of exposure
(Unaudited)
Concentrations of credit risk are described in the Appendix to
Risk on page 206.
The geographical diversification of our lending portfolio
and our broad range of global businesses and products
ensured that we did not overly depend on a few markets
to generate growth in 2014. This diversification also
supported our strategy for growth in faster-growing
markets and those with international connectivity.
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 in 2014,
with 15% invested in securities issued by banks and
other financial institutions and 72% in government or
government agency debt securities. We also held assets
backing insurance and investment contracts.
For an analysis of financial investments, see Note 18 on the
Financial Statements.
Trading assets
Trading securities remained the largest concentration
within trading assets at 77% compared with 75% in 2013.
The largest concentration within the trading securities
portfolio was in government and government agency debt
securities. We had significant exposures to US Treasury
and government agency debt securities (US$26bn)
and UK (US$9.3bn) and Hong Kong (US$6.9bn)
government debt securities.
For an analysis of debt and equity securities held for trading, see
Note 12 on the Financial Statements.
Derivatives
Derivative assets were US$345bn at 31 December 2014
(2013: US$282bn). Details of derivative amounts cleared
through an exchange, central counterparty and non-
central counterparty are shown on page 150.
For an analysis of derivatives, see page 150 and Note 16 on the
Financial Statements.
Loans and advances to customers
The following tables analyse loans and advances to
customers by industry sector and by the location of the
principal operations of the lending subsidiary or, in the
case of the operations of The Hongkong and Shanghai
Banking Corporation, HSBC Bank, HSBC Bank Middle East
Limited (‘HSBC Bank Middle East’) and HSBC Bank USA,
by the location of the lending branch. The distribution of
loans across geographical regions and industries
remained similar to last year.
For an analysis of loans and advances by country see page 160.
Gross loans and advances to customers by industry sector and by geographical region
(Audited)
Europe
US$m
178,531
131,000
47,531
210,585
39,456
76,629
28,187
7,126
2,264
56,923
23,103
21,867
1,236
1,938
Asia4
US$m
MENA
US$m
North
America
US$m
Latin
America
US$m
Total
US$m
129,515
93,147
36,368
220,799
37,767
72,814
35,678
34,379
1,195
38,966
13,997
13,410
587
–
6,571
2,647
3,924
20,588
2,413
9,675
579
1,667
1,552
4,702
3,291
3,289
2
–
65,400
55,577
9,823
57,862
15,299
13,484
6,558
8,934
164
13,423
9,034
9,034
–
131
13,537
4,153
9,384
30,722
12,051
8,189
2,291
281
968
6,942
1,393
1,199
194
–
393,554
286,524
107,030
540,556
106,986
180,791
73,293
52,387
6,143
120,956
50,818
48,799
2,019
2,069
As a %
of total
gross
loans
39.9
29.0
10.9
54.8
10.9
18.3
7.4
5.3
0.6
12.3
5.1
4.9
0.2
0.2
Personal
– first lien residential mortgages6
– other personal7
Corporate and commercial
– manufacturing
– international trade and services
– commercial real estate
– other property-related
– government
– other commercial8
Financial
– non-bank financial institutions
– settlement accounts
Asset-backed securities reclassified
Total gross loans and advances to
customers at 31 December 2014 (A)
414,157
364,311
30,450
132,427
45,652
986,997
100.0
Percentage of A by geographical region
42.0%
36.9%
3.1%
13.4%
4.6%
100.0%
–
HSBC HOLDINGS PLC
132
Europe
US$m
192,107
140,474
51,633
239,116
55,920
76,700
31,326
7,308
3,340
64,522
27,872
26,314
1,558
2,578
Asia4
US$m
124,529
92,047
32,482
203,894
30,758
79,368
34,560
27,147
1,021
31,040
9,688
9,359
329
–
MENA
US$m
6,484
2,451
4,033
19,760
3,180
8,629
639
1,333
1,443
4,536
2,532
2,532
–
–
North
America
US$m
Latin
America
US$m
Total
US$m
72,690
60,955
11,735
50,307
11,778
11,676
5,900
8,716
499
11,738
9,055
9,055
–
138
14,918
3,948
10,970
30,188
12,214
8,295
2,421
328
974
5,956
1,376
1,277
99
–
410,728
299,875
110,853
543,265
113,850
184,668
74,846
44,832
7,277
117,792
50,523
48,537
1,986
2,716
As a %
of total
gross
loans
40.8
29.8
11.0
53.9
11.3
18.3
7.4
4.5
0.7
11.7
5.0
4.8
0.2
0.3
Personal
– first lien residential mortgages6
– other personal7
Corporate and commercial
– manufacturing
– international trade and services
– commercial real estate
– other property-related
– government
– other commercial8
Financial
– non-bank financial institutions
– settlement accounts
Asset-backed securities reclassified
Total gross loans and advances to
customers at 31 December 2013 (B)
461,673
338,111
28,776
132,190
46,482
1,007,232
100.0
Percentage of B by geographical region
45.8%
33.6%
2.9%
13.1%
4.6%
100.0%
For footnotes, see page 202.
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 207.
We assess credit quality on all financial instruments
which are subject to credit risk.
The five classifications describing the credit quality of
our lending, debt securities portfolios and derivatives
are defined on page 207 (unaudited). Additional credit
quality information in respect of our consolidated
holdings of ABSs is provided on page 162.
For the purpose of the following disclosure, retail loans
which are past due up to 90 days and are not otherwise
classified as impaired in accordance with our disclosure
convention are not disclosed within the expected loss
(‘EL’) grade to which they relate, but are separately
classified as past due but not impaired.
The overall credit quality of assets remained stable
with ‘Strong’ and ‘Good’ categories making up 84% of
the portfolio, ‘Satisfactory’ 13%, ‘Sub-standard’ and ‘Past
due but not impaired’ 2% and ‘Impaired’ 1%.
HSBC HOLDINGS PLC
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Report of the Directors: Risk (continued)
Credit risk
Distribution of financial instruments by credit quality
(Audited)
Neither past due nor impaired
Strong
US$m
Good Satisfactory
US$m US$m
Sub-
standard
US$m
Past due
but not
impaired
US$m
Impaired
US$m
Total
gross
amount
Impairment
allowances9
US$m
US$m
Total
US$m
certificates of indebtedness
27,674
Trading assets10
168,521
35,042
24,740
Cash and balances at central
banks
Items in the course of collection
from other banks
Hong Kong Government
– treasury and other eligible
bills
– debt securities
– loans and advances:
to banks
to customers
Financial assets designated at
fair value10
– treasury and other eligible
bills
– debt securities
– loans and advances:
to banks
to customers
Derivatives10
Loans and advances to customers
held at amortised cost11
– personal
– corporate and commercial
– financial (non-bank
127,971
1,438
4,515
46
–
195
365
–
13,938
111,138
1,641
17,786
17,492
25,953
4,961
10,654
559
12,305
5,016
6,860
3,017
4,476
1,207
5
3,011
–
4,476
1
–
–
–
–
1,124
83
–
269,490
58,596
15,962
353
1
–
641
32
303
112
194
331
51
280
–
–
960
129,957
129,957
4,927
27,674
228,944
16,170
141,532
27,581
43,661
9,031
56
8,891
84
–
4,927
27,674
228,944
16,170
141,532
27,581
43,661
9,031
56
8,891
84
–
345,008
345,008
487,734 239,136
320,678
32,601
141,375 192,799
196,685
15,109
171,748
20,802
1,130
18,986
13,357
8,876
3,922
29,283
15,160
13,795
986,997
393,554
542,625
(12,337) 974,660
(4,600) 388,954
(7,441) 535,184
financial institutions)
25,681
13,736
9,828
Loans and advances to banks
held at amortised cost
Reverse repurchase agreements
– non-trading
Financial investments
– treasury and other similar
bills
– debt securities
Other assets
– assets held for sale
– endorsements and
acceptances
– accrued income and other
83,766
19,525
7,945
98,470
28,367
347,218
27,373
68,966
278,252
13,015
802
6,294
21,079
7,564
43
1,507
10,706
4,644
2,877
33,283
22,600
4,431
18,169
12,976
79
4,281
8,616
686
914
1,593
5,304
1,826
3,478
631
–
298
333
559
328
50,818
(296)
50,522
1
–
–
–
–
210
2
34
174
47
112,198
(49) 112,149
–
161,713
2,278
404,773
–
2,278
884
465
11
408
81,517
323,256
35,280
1,391
10,775
23,114
– 161,713
404,773
81,517
323,256
(16)
(16)
35,264
1,375
10,775
23,114
At 31 December 2014
1,631,391 421,563
315,958
31,530
13,568
32,492 2,446,502
(12,402) 2,434,100
HSBC HOLDINGS PLC
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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
US$m
Impaired
US$m
Total
gross
amount
US$m
Impairment
allowances9
US$m
Total
US$m
Cash and balances at central
banks
162,017
2,877
265
1,440
166,599
166,599
Items in the course of collection
from other banks
Hong Kong Government
5,590
certificates of indebtedness
25,220
66
–
286
–
79
–
Trading assets10
163,444
39,475
34,868
1,514
6,021
25,220
239,301
21,584
141,644
27,885
48,188
12,719
50
12,589
76
4
6,021
25,220
239,301
21,584
141,644
27,885
48,188
12,719
50
12,589
76
4
17,235
107,831
3,585
16,498
15,804
22,574
5,546
13,846
758
16,167
6,342
11,601
6,608
5,183
50
6,490
–
5,179
68
–
–
4
671
–
664
7
–
6
1,148
193
167
257
–
256
1
–
– treasury and other eligible
bills
– debt securities
– loans and advances:
to banks
to customers
Financial assets designated at
fair value10
– treasury and other eligible
bills
– debt securities
– loans and advances:
to banks
to customers
Derivatives10
Loans and advances to customers
held at amortised cost11
– personal
– corporate and commercial
– financial (non-bank
220,711
47,004
13,425
1,125
282,265
282,265
488,504 243,077
326,269
39,024
132,943 194,966
199,821
14,882
174,905
23,942
1,580
21,281
15,460
10,175
5,009
36,428 1,007,232
410,728
18,798
545,981
16,877
(15,143) 992,089
(6,602) 404,126
(8,059) 537,922
financial institutions)
29,292
9,087
10,034
1,081
276
753
50,523
(482)
50,041
Loans and advances to banks
held at amortised cost
Reverse repurchase agreements
– non-trading
Financial investments
– treasury and other similar
bills
– debt securities
Other assets
– assets held for sale
– endorsements and
acceptances
– accrued income and other
91,498
21,131
6,266
1,123
11
75
120,104
(58) 120,046
111,543
37,878
362,799
27,833
69,364
293,435
5,595
22,238
12,501
1,129
8,028
642
1,976
9,396
4,824
2,562
28,265
17,556
1,856
15,700
14,848
1,050
4,562
9,236
2,004
6,089
1,296
4,793
1,159
351
225
583
–
–
–
–
307
89
19
199
–
179,690
2,508
416,785
– 179,690
416,785
–
2,508
78,111
338,674
592
156
18
418
37,435
3,417
11,624
22,394
78,111
338,674
(111)
(111)
37,324
3,306
11,624
22,394
At 31 December 2013
1,650,435 432,552
316,271
38,732
15,778
39,603 2,493,371
(15,312) 2,478,059
For footnotes, see page 202.
HSBC HOLDINGS PLC
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Report of the Directors: Risk (continued)
Credit risk
Past due but not impaired gross financial
instruments
(Audited)
Past due but not impaired gross financial instruments are
those loans where, although customers have failed to
make payments in accordance with the contractual terms
of their facilities, they have not met the impaired loan
criteria described on page 137.
Overall, past due but not impaired balances decreased by
US$2.2bn, mainly due to continued run-off and loan sales
in the CML portfolio.
Past due but not impaired gross financial instruments by geographical region
(Audited)
Loans and advances to customers held at
amortised cost
– personal
– corporate and commercial
– financial (non-bank financial institutions)
Other financial instruments
At 31 December 2014
Loans and advances to customers held at
amortised cost
– personal
– corporate and commercial
– financial (non-bank financial institutions)
Other financial instruments
At 31 December 2013
For footnote, see page 202.
Europe
US$m
Asia4
US$m
MENA
US$m
North
America
US$m
Latin
America
US$m
2,409
1,159
1,244
6
6
2,415
2,399
1,287
1,092
20
45
2,444
4,260
2,880
1,102
278
52
4,312
4,211
2,764
1,197
250
49
4,260
704
182
508
14
31
735
757
174
580
3
50
807
4,634
3,759
623
252
97
4,731
6,453
4,817
1,635
1
101
6,554
1,350
896
445
9
25
1,375
1,640
1,133
505
2
73
1,713
Ageing analysis of days for past due but not impaired gross financial instruments
(Audited)
Loans and advances to customers held at amortised cost
– personal
– corporate and commercial
– financial (non-bank financial institutions)
Other financial instruments
At 31 December 2014
Loans and advances to customers held at amortised cost
– personal
– corporate and commercial
– financial (non-bank financial institutions)
Other financial instruments
At 31 December 2013
Up to 29
days
US$m
10,427
6,477
3,417
533
130
10,557
11,689
7,170
4,290
229
214
11,903
30-59
days
US$m
2,057
1,717
328
12
33
2,090
2,587
2,124
418
45
55
2,642
60-89
days
US$m
90-179
days
US$m
180 days
and over
US$m
801
676
114
11
18
819
1,057
865
190
2
26
1,083
54
5
48
1
12
66
76
16
60
–
12
88
18
1
15
2
18
36
51
–
51
–
11
62
Total
US$m
13,357
8,876
3,922
559
211
13,568
15,460
10,175
5,009
276
318
15,778
Total
US$m
13,357
8,876
3,922
559
211
13,568
15,460
10,175
5,009
276
318
15,778
HSBC HOLDINGS PLC
136
Impaired loans
(Audited)
Impaired loans and advances are those that meet any of
the following criteria:
• wholesale loans and advances classified as Customer
Risk Rating (‘CRR’) 9 or CRR 10. These grades are
assigned when the bank considers that either the
customer is unlikely to pay their credit obligations
in full, without recourse to security, or when the
customer is more than 90 days past due on any
material credit obligation to HSBC.
• retail loans and advances classified as Expected Loss
(‘EL’) 9 or EL 10. These grades are typically assigned to
retail loans and advances more than 90 days past due
unless individually they have been assessed as not
impaired.
• renegotiated loans and advances that have been
subject to a change in contractual cash flows as a
result of a concession which the lender would not
Movement in impaired loans by geographical region
(Unaudited)
Impaired loans at 1 January 2014
– personal
– corporate and commercial
– financial5
Classified as impaired during the year
– personal
– corporate and commercial
– financial5
Transferred from impaired to unimpaired during
the year
– personal
– corporate and commercial
– financial5
Amounts written off
– personal
– corporate and commercial
– financial5
Net repayments and other
– personal
– corporate and commercial
– financial5
Impaired loans at 31 December 2014
– personal
– corporate and commercial
– financial5
Impaired loans as a percentage of gross loans
– personal
– corporate and commercial
– financial5
Europe
US$m
13,228
2,938
9,714
576
3,367
1,168
2,166
33
(1,661)
(282)
(1,319)
(60)
(2,037)
(631)
(1,201)
(205)
(2,655)
(649)
(1,975)
(31)
10,242
2,544
7,385
313
2.3%
1.4%
3.5%
0.7%
otherwise consider, and where it is probable that
without the concession the borrower would be
unable to meet the 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
renegotiation 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.
For further details of the CRR and the EL scales see page 207.
Asia4
US$m
1,623
526
1,082
15
1,970
857
1,113
–
(230)
(184)
(46)
–
(617)
(470)
(147)
–
(698)
(238)
(457)
(3)
2,048
491
1,545
12
0.5%
0.4%
0.7%
0.0%
MENA
US$m
2,285
317
1,765
203
346
193
153
–
(320)
(178)
(53)
(89)
(111)
(77)
(29)
(5)
(219)
(13)
(140)
(66)
1,981
242
1,696
43
4.8%
3.7%
8.2%
0.3%
North
America
US$m
Latin
America
US$m
15,123
13,669
1,427
27
4,724
4,360
354
10
(2,609)
(2,551)
(57)
(1)
(1,369)
(1,007)
(356)
(6)
(4,175)
(3,645)
(506)
(24)
11,694
10,826
862
6
8.4%
16.6%
1.5%
0.0%
4,244
1,348
2,889
7
3,342
1,958
1,383
1
(730)
(364)
(366)
–
(2,048)
(1,371)
(673)
(4)
(1,443)
(514)
(926)
(3)
3,365
1,057
2,307
1
6.1%
7.8%
7.5%
0.0%
Total
US$m
36,503
18,798
16,877
828
13,749
8,536
5,169
44
(5,550)
(3,559)
(1,841)
(150)
(6,182)
(3,556)
(2,406)
(220)
(9,190)
(5,059)
(4,004)
(127)
29,330
15,160
13,795
375
2.7%
3.9%
2.5%
0.2%
HSBC HOLDINGS PLC
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Report of the Directors: Risk (continued)
Credit risk
Movement in impaired loans by geographical region (continued)
(Unaudited)
Impaired loans at 1 January 2013
– personal
– corporate and commercial
– financial5
Classified as impaired during the year
– personal
– corporate and commercial
– financial5
Transferred from impaired to unimpaired during
the year
– personal
– corporate and commercial
– financial5
Amounts written off
– personal
– corporate and commercial
– financial5
Net repayments and other
– personal
– corporate and commercial
– financial5
Impaired loans at 31 December 2013
– personal
– corporate and commercial
– financial5
Impaired loans as a percentage of gross loans
– personal
– corporate and commercial
– financial5
For footnotes, see page 202.
Europe
US$m
11,145
2,466
8,058
621
4,952
1,176
3,726
50
(1,215)
(265)
(804)
(146)
(1,411)
(423)
(927)
(61)
(243)
(16)
(339)
112
13,228
2,938
9,714
576
2.7%
1.5%
4.0%
1.1%
Asia4
US$m
1,624
611
967
46
1,424
798
623
3
(145)
(137)
(8)
–
(538)
(444)
(91)
(3)
(742)
(302)
(409)
(31)
1,623
526
1,082
15
0.4%
0.4%
0.5%
0.0%
MENA
US$m
2,474
368
1,872
234
419
107
306
6
(166)
(68)
(85)
(13)
(165)
(79)
(75)
(11)
(277)
(11)
(253)
(13)
2,285
317
1,765
203
6.5%
4.9%
8.9%
2.3%
North
America
US$m
Latin
America
US$m
20,345
18,726
1,592
27
6,168
5,319
837
12
(3,198)
(3,172)
(24)
(2)
(1,706)
(1,433)
(270)
(3)
(6,486)
(5,771)
(708)
(7)
15,123
13,669
1,427
27
10.9%
18.8%
2.8%
0.2%
3,188
1,580
1,604
4
4,333
1,872
2,453
8
(642)
(266)
(375)
(1)
(1,957)
(1,456)
(499)
(2)
(678)
(382)
(294)
(2)
4,244
1,348
2,889
7
7.5%
9.0%
9.6%
0.1%
Total
US$m
38,776
23,751
14,093
932
17,296
9,272
7,945
79
(5,366)
(3,908)
(1,296)
(162)
(5,777)
(3,835)
(1,862)
(80)
(8,426)
(6,482)
(2,003)
59
36,503
18,798
16,877
828
3.2%
4.6%
3.1%
0.5%
Impaired loans decreased by US$7.2bn during the year.
Personal impaired loans declined mainly due to the
continued run off and loan sales in the CML portfolio in
North America. In personal lending, ‘Net repayments
and other’ includes US$2.9bn of CML portfolio assets
that were reclassified as held for sale and also sold
during the year.
Impaired loans in wholesale lending declined mainly in
Europe and, to a lesser extent, in North America and
Latin America due to repayments and a reduction in
new impaired loans which reflected improvements in
the economic conditions in these markets. These
decreases were offset by an increase in Asia.
Renegotiated loans and forbearance
(Audited)
Current policies and procedures regarding renegotiated loans
and forbearance are described in the Appendix to Risk on
page 208.
The contractual terms of a loan may be modified for
a number of reasons, including changes in market
conditions, customer retention and other factors not
related to the current or potential credit deterioration
of a customer. ‘Forbearance’ describes concessions
made on the contractual terms of a loan in response to
an obligor’s financial difficulties. We classify and report
loans on which concessions have been granted under
conditions of credit distress as ‘renegotiated loans’
when their contractual payment terms have been
modified, because we have significant concerns about
the borrowers’ ability to meet contractual payments
when due. On renegotiation, where the existing
agreement is cancelled and a new agreement is made
on substantially different terms, or if the terms of an
existing agreement are modified such that the
renegotiated loan is substantially a different financial
instrument, the loan would be derecognised and
recognised as a new loan for accounting purposes.
However, the newly recognised financial asset will
retain the renegotiated loan classification. Concessions
on loans made to customers which do not affect the
payment structure or basis of repayment, such as
waivers of financial or security covenants, do not
directly provide concessionary relief to customers in
terms of their ability to service obligations as they fall
due and are therefore not included in this
classification.
The most significant portfolio of renegotiated loans
remained in North America, substantially all of which
were retail loans held by HSBC Finance.
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.
HSBC HOLDINGS PLC
138
Renegotiated loans and advances to customers by geographical region
(Audited)
Europe
US$m
Asia4
US$m
MENA
US$m
North
America
US$m
Latin
America
US$m
First lien residential mortgages
– neither past due nor impaired
– past due but not impaired
– impaired
Other personal lending7
– neither past due nor impaired
– past due but not impaired
– impaired
Corporate and commercial
– neither past due nor impaired
– past due but not impaired
– impaired
Financial5
– neither past due nor impaired
– past due but not impaired
– impaired
Renegotiated loans at 31 December 2014
– neither past due nor impaired
– past due but not impaired
– impaired
Impairment allowances on renegotiated loans
– renegotiated loans as % of total gross loans
First lien residential mortgages
– neither past due nor impaired
– past due but not impaired
– impaired
Other personal lending7
– neither past due nor impaired
– past due but not impaired
– impaired
Corporate and commercial
– neither past due nor impaired
– past due but not impaired
– impaired
Financial5
– neither past due nor impaired
– past due but not impaired
– impaired
Renegotiated loans at 31 December 2013
– neither past due nor impaired
– past due but not impaired
– impaired
Impairment allowances on renegotiated loans
– renegotiated loans as % of total gross loans
For footnotes, see page 202.
1,605
529
221
855
324
184
40
100
5,469
1,383
68
4,018
413
219
–
194
7,811
2,315
329
5,167
1,458
1.9%
1,820
392
517
911
431
253
39
139
7,270
1,796
193
5,281
235
93
–
142
9,756
2,534
749
6,473
1,867
2.1%
94
63
8
23
292
173
22
97
501
102
–
399
4
–
–
4
891
338
30
523
170
0.2%
117
78
11
28
318
207
24
87
330
134
4
192
2
–
–
2
767
419
39
309
101
0.2%
58
19
1
38
27
16
5
6
1,439
483
31
925
323
305
–
18
1,847
823
37
987
458
6.1%
91
47
3
41
58
33
17
8
1,583
677
126
780
362
265
–
97
2,094
1,022
146
926
460
7.3%
13,540
3,695
1,894
7,951
1,267
453
214
600
427
36
1
390
1
–
–
1
15,235
4,184
2,109
8,942
60
32
5
23
326
14
1
311
1,324
303
1
1,020
1
–
–
1
1,711
349
7
1,355
1,499
11.5%
704
3.7%
16,853
4,332
2,684
9,837
1,277
503
284
490
658
47
34
577
1
–
–
1
18,789
4,882
3,002
10,905
76
32
4
40
531
18
2
511
2,161
493
5
1,663
1
–
–
1
2,769
543
11
2,215
2,285
14.2%
1,014
6.0%
Total
US$m
15,357
4,338
2,129
8,890
2,236
840
282
1,114
9,160
2,307
101
6,752
742
524
–
218
27,495
8,009
2,512
16,974
4,289
2.8%
18,957
4,881
3,219
10,857
2,615
1,014
366
1,235
12,002
3,147
362
8,493
601
358
–
243
34,175
9,400
3,947
20,828
5,727
3.4%
The following table shows movements in renegotiated
loans during the year. Renegotiated loans reduced by
US$6.7bn to US$27bn in 2014. Renegotiated loans in
personal lending reduced by US$4bn. Included within
‘other’ movements is US$1.9bn of CML portfolio assets
that were transferred to held for sale. New renegotiated
loans and write-offs reduced as a result of improvements
in the US housing market and economic conditions.
Renegotiated loans in wholesale lending decreased by
US$2.7bn. The reductions were mainly concentrated in
Europe and Latin America and were the result of
increased write-offs and repayments.
HSBC HOLDINGS PLC
139
t
r
o
p
e
R
c
i
g
e
t
a
r
t
S
i
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e
v
e
R
l
a
i
c
n
a
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i
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e
c
n
a
n
r
e
v
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G
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t
a
r
o
p
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o
C
s
t
n
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m
e
t
a
t
S
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a
i
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a
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r
o
f
n
I
l
r
e
d
o
h
e
r
a
h
S
Report of the Directors: Risk (continued)
Credit risk
Movement in renegotiated loans by geographical region
(Unaudited)
Europe
US$m
Asia4
US$m
Renegotiated loans at 1 January 2014
– personal
– corporate and commercial
– financial
Loans renegotiated in the year without
derecognition
– personal
– corporate and commercial
– financial
Loans renegotiated in the year resulting in
recognition of a new loan
– personal
– corporate and commercial
– financial
Repayments
– personal
– corporate and commercial
– financial
Amounts written off
– personal
– corporate and commercial
– financial
Other
– personal
– corporate and commercial
– financial
At 31 December 2014
– personal
– corporate and commercial
– financial
Renegotiated loans at 1 January 2013
– personal
– corporate and commercial
– financial
Loans renegotiated in the year without
derecognition
– personal
– corporate and commercial
– financial
Loans renegotiated in the year resulting in
recognition of a new loan
– personal
– corporate and commercial
– financial
Repayments
– personal
– corporate and commercial
– financial
Amounts written off
– personal
– corporate and commercial
– financial
Other
– personal
– corporate and commercial
– financial
At 31 December 2013
– personal
– corporate and commercial
– financial
For footnote, see page 202.
9,756
2,251
7,270
235
1,543
433
939
171
500
69
381
50
(2,416)
(635)
(1,757)
(24)
(828)
(88)
(740)
–
(744)
(101)
(624)
(19)
7,811
1,929
5,469
413
9,974
2,817
6,829
328
2,807
264
2,541
2
105
17
88
–
(2,139)
(489)
(1,574)
(76)
(426)
(99)
(303)
(24)
(565)
(259)
(311)
5
9,756
2,251
7,270
235
767
435
330
2
371
83
288
–
5
2
–
3
(246)
(96)
(149)
(1)
(42)
(28)
(14)
–
36
(10)
46
–
891
386
501
4
944
493
447
4
49
8
41
–
113
76
37
–
(233)
(111)
(121)
(1)
(25)
(20)
(5)
–
(81)
(11)
(69)
(1)
767
435
330
2
HSBC HOLDINGS PLC
140
MENA
US$m
2,094
149
1,583
362
296
10
286
–
79
–
61
18
(562)
(47)
(445)
(70)
(23)
(7)
(16)
–
(37)
(20)
(30)
13
1,847
85
1,439
323
2,389
190
1,859
340
101
16
85
–
14
14
–
–
(541)
(64)
(477)
–
(38)
(9)
(29)
–
169
2
145
22
2,094
149
1,583
362
North
America
US$m
Latin
America
US$m
18,789
18,130
658
1
862
774
78
10
–
–
–
–
(1,518)
(1,319)
(189)
(10)
(640)
(568)
(72)
–
(2,258)
(2,210)
(48)
–
15,235
14,807
427
1
26,162
25,474
685
3
1,727
1,335
391
1
–
–
–
–
(1,759)
(1,387)
(370)
(2)
(1,035)
(995)
(40)
–
(6,306)
(6,297)
(8)
(1)
18,789
18,130
658
1
2,769
607
2,161
1
725
310
415
–
92
28
64
–
(1,036)
(288)
(747)
(1)
(510)
(223)
(286)
(1)
(329)
(48)
(283)
2
1,711
386
1,324
1
2,758
781
1,975
2
1,311
507
803
1
62
25
37
–
(707)
(353)
(354)
–
(409)
(233)
(175)
(1)
(246)
(120)
(125)
(1)
2,769
607
2,161
1
Total
US$m
34,175
21,572
12,002
601
3,797
1,610
2,006
181
676
99
506
71
(5,778)
(2,385)
(3,287)
(106)
(2,043)
(914)
(1,128)
(1)
(3,332)
(2,389)
(939)
(4)
27,495
17,593
9,160
742
42,227
29,755
11,795
677
5,995
2,130
3,861
4
294
132
162
–
(5,379)
(2,404)
(2,896)
(79)
(1,933)
(1,356)
(552)
(25)
(7,029)
(6,685)
(368)
24
34,175
21,572
12,002
601
Impairment of loans and advances
(Audited)
A summary of our current policies and practices regarding
impairment assessment is provided in the Appendix to Risk
on page 212. For an analysis of loan impairment charges and
other credit risk provisions by global business, see page 76.
Loan impairment charge to the income statement by industry sector
(Unaudited)
The tables below analyse the impairment allowances
recognised for impaired loans and advances that are
either individually or collectively assessed, and collective
impairment allowances on loans and advances that are
classified as not impaired.
Europe
US$m
Asia4
US$m
MENA
US$m
North
America
US$m
Latin
America
US$m
Total
US$m
1,803
(52)
1,855
2,256
1,251
282
723
(4)
1,095
15
1,080
937
382
176
379
1
2,033
4,055
1,522
11
1,511
1,115
594
322
199
5
3,196
627
2,569
2,974
1,690
826
458
(122)
Total
US$m
1,780
2,824
(930)
(114)
2,275
3,116
(841)
590
738
(90)
(58)
1,443
1,726
(283)
2,033
4,055
623
702
(31)
(48)
2,019
2,253
(234)
2,320
3,440
(911)
(209)
3,728
4,815
(1,087)
Personal
– first lien residential mortgages
– other personal7
Corporate and commercial
– manufacturing and international trade and
services
– commercial real estate and other property-
related
– other commercial8
Financial5
Total loan impairment charge for the year ended
31 December 2014
Personal
– first lien residential mortgages
– other personal7
Corporate and commercial
– manufacturing and international trade and
services
– commercial real estate and other property-
related
– other commercial8
Financial5
Total loan impairment charge for the year ended
31 December 2013
245
(75)
320
790
520
78
192
44
1,079
320
(11)
331
1,467
800
432
235
(55)
1,732
321
6
315
327
197
29
101
(4)
644
345
(7)
352
152
134
(2)
20
(14)
483
25
(24)
49
6
36
(28)
(2)
(32)
(1)
46
(13)
59
(13)
37
(5)
(45)
(77)
(44)
117
26
91
196
116
27
53
(13)
300
963
647
316
253
125
79
49
19
Loan impairment charge to the income statement by assessment type
(Unaudited)
Europe
US$m
Asia4
US$m
MENA
US$m
North
America
US$m
Latin
America
US$m
1,235
2,642
6,048
Individually assessed impairment allowances
– new allowances
– release of allowances no longer required
– recoveries of amounts previously written off
Collectively assessed impairment allowances12
– new allowances net of allowance releases
– recoveries of amounts previously written off
Total loan impairment charge for the year ended
31 December 2014
Individually assessed impairment allowances
– new allowances
– release of allowances no longer required
– recoveries of amounts previously written off
Collectively assessed impairment allowances12
– new allowances net of allowance releases
– recoveries of amounts previously written off
Total loan impairment charge for the year ended
31 December 2013
For footnotes, see page 202.
617
1,112
(486)
(9)
462
757
(295)
1,079
1,376
1,828
(402)
(50)
356
943
(587)
351
542
(171)
(20)
293
426
(133)
644
145
316
(145)
(26)
338
479
(141)
32
134
(95)
(7)
(33)
2
(35)
(1)
(86)
196
(235)
(47)
42
82
(40)
190
298
(88)
(20)
110
205
(95)
300
262
398
(98)
(38)
973
1,058
(85)
1,732
483
(44)
1,235
2,642
6,048
Total loan impairment charges of US$4.1bn were
US$2.0bn lower than in 2013 reflecting reduced
impairment charges in both the personal lending and
the corporate and commercial lending portfolios,
primarily in North America, Europe and Latin America.
HSBC HOLDINGS PLC
141
t
r
o
p
e
R
c
i
g
e
t
a
r
t
S
i
w
e
v
e
R
l
a
i
c
n
a
n
F
i
e
c
n
a
n
r
e
v
o
G
e
t
a
r
o
p
r
o
C
s
t
n
e
m
e
t
a
t
S
l
a
i
c
n
a
n
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F
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i
t
a
m
r
o
f
n
I
l
r
e
d
o
h
e
r
a
h
S
Report of the Directors: Risk (continued)
Credit risk
In North America, loan impairment charges relating to
both first lien mortgages and other personal lending
decreased, which reflected reduced levels of both
delinquency and new impaired loans in the CML portfolio,
and a fall in lending balances from continued run-off and
loan sales. This was partly offset by lower favourable
market value adjustments of underlying properties as
improvements in housing market conditions were less
pronounced in 2014 than in 2013.
In Europe, the reduction in loan impairment charges was
primarily in corporate and commercial lending, as a result
of lower individually assessed impairment allowances
reflecting the improved quality of the portfolio and
economic conditions. Loan impairment charges also
decreased in personal lending, albeit to a lesser extent,
due to lower delinquency levels in the improved economic
environment and as customers continued to reduce
outstanding credit card and loan balances. These factors
were partly offset by an increase in collectively assessed
allowances in the corporate and commercial lending
sector as we revised certain estimates in our collective
corporate loan impairment calculation, and in the financial
industry sector reflecting charges compared with releases
in 2013.
In Latin America, the reduction in loan impairment
charges in the other personal lending and the corporate
and commercial portfolios primarily reflected the prior
year adverse effect of changes to the impairment model
and assumption revisions for restructured loan portfolios
in Brazil. Individually assessed allowances were broadly
stable. There were lower loan impairment charges in
Mexico in the commercial real estate and other property
related sector, in particular relating to certain
homebuilders. In Brazil individually assessed allowances
increased due to an impairment relating to a corporate
customer in the other commercial sector.
Charge for impairment losses as a percentage of average gross loans and advances to customers by geographical region
(Unaudited)
New allowances net of allowance releases
Recoveries
Total charge for impairment losses at 31 December 2014
Amount written off net of recoveries
New allowances net of allowance releases
Recoveries
Total charge for impairment losses at 31 December 2013
Amount written off net of recoveries
For footnote, see page 202.
Europe
%
Asia4 MENA
%
%
America
%
America
%
North
Latin
0.37
(0.08)
0.29
0.49
0.65
(0.17)
0.48
0.42
0.22
(0.04)
0.18
0.13
0.20
(0.05)
0.15
0.12
0.14
(0.14)
–
0.58
0.15
(0.29)
(0.14)
0.38
0.32
(0.09)
0.23
0.97
1.00
(0.09)
0.91
1.10
5.00
(0.72)
4.28
3.59
5.93
(0.57)
5.36
3.69
Total
%
0.53
(0.10)
0.43
0.58
0.81
(0.14)
0.67
0.59
Movement in impairment allowances by industry sector and by geographical region
(Unaudited)
Europe
US$m
5,598
Asia4
US$m
1,214
MENA
US$m
America
US$m
America
US$m
Total
US$m
1,583
4,242
2,564
15,201
North
Latin
Impairment allowances at 1 January 2014
Amounts written off
Personal
– first lien residential mortgages
– other personal7
Corporate and commercial
– manufacturing and international trade and services
– commercial real estate and other property-related
– other commercial8
Financial5
Total amounts written off
Recoveries of amounts written off in previous years
Personal
– first lien residential mortgages
– other personal7
Corporate and commercial
– manufacturing and international trade and services
– commercial real estate and other property-related
– other commercial8
Financial5
Total recoveries of amounts written off in previous years
Charge to income statement
Exchange and other movements13
Impairment allowances at 31 December 2014
(157)
(4)
(153)
(47)
(41)
(6)
–
(8)
(1,030)
(731)
(299)
(346)
(81)
(153)
(112)
(6)
(1,359)
(40)
(1,319)
(684)
(428)
(39)
(217)
(4)
(212)
(1,382)
(2,047)
35
–
35
7
7
–
–
–
42
(1)
(6)
86
40
46
25
6
3
16
4
115
300
(635)
2,640
283
33
250
58
46
1
11
–
341
2,033
(362)
2,529
(3,733)
(813)
(2,920)
(2,425)
(1,368)
(593)
(464)
(221)
(6,379)
818
79
739
128
85
15
28
9
955
4,055
(1,446)
12,386
1,356
1,406
(463)
(17)
(446)
(146)
(86)
(53)
(7)
–
(609)
143
3
140
9
7
–
2
1
153
644
(46)
(724)
(21)
(703)
(1,202)
(732)
(342)
(128)
(203)
(2,129)
271
3
268
29
19
11
(1)
4
304
1,079
(397)
4,455
HSBC HOLDINGS PLC
142
Impairment allowances against banks:
– individually assessed
Impairment allowances against customers:
– individually assessed
– collectively assessed12
Impairment allowances at 31 December 2014
Europe
US$m
Asia4
US$m
MENA
US$m
America
US$m
America
US$m
Total
US$m
North
Latin
31
2,981
1,443
4,455
–
18
–
–
49
812
544
1,356
1,110
278
1,406
276
2,364
2,640
1,016
1,513
2,529
6,195
6,142
12,386
Impairment allowances at 1 January 2013
5,361
1,219
1,811
5,616
2,162
16,169
Amounts written off
Personal
– first lien residential mortgages
– other personal7
Corporate and commercial
– manufacturing and international trade and services
– commercial real estate and other property-related
– other commercial8
Financial5
Total amounts written off
Recoveries of amounts written off in previous years
Personal
– first lien residential mortgages
– other personal7
Corporate and commercial
– manufacturing and international trade and services
– commercial real estate and other property-related
– other commercial8
Financial5
Total recoveries of amounts written off in previous years
Charge to income statement
Exchange and other movements13
Impairment allowances at 31 December 2013
Impairment allowances against banks:
– individually assessed
Impairment allowances against customers:
– individually assessed
– collectively assessed12
Impairment allowances at 31 December 2013
For footnotes, see page 202.
(876)
(83)
(793)
(1,264)
(680)
(289)
(295)
(40)
(2,180)
584
25
559
52
19
6
27
1
637
1,732
48
5,598
35
4,019
1,544
5,598
(461)
(7)
(454)
(96)
(73)
(7)
(16)
(3)
(107)
(2)
(105)
(78)
(64)
(2)
(12)
(10)
(1,330)
(779)
(551)
(277)
(80)
(141)
(56)
(3)
(1,593)
(25)
(1,568)
(514)
(386)
(23)
(105)
(3)
(4,367)
(896)
(3,471)
(2,229)
(1,283)
(462)
(484)
(59)
(560)
(195)
(1,610)
(2,110)
(6,655)
153
4
149
14
7
4
3
–
167
483
(95)
41
–
41
46
2
–
44
–
87
(44)
(76)
1,214
1,583
82
67
15
41
6
18
17
–
123
1,235
(1,122)
4,242
237
23
214
45
27
1
17
–
282
2,642
(412)
2,564
1,097
119
978
198
61
29
108
1
1,296
6,048
(1,657)
15,201
–
18
5
–
58
634
580
1,214
1,131
434
1,583
410
3,827
4,242
878
1,686
2,564
7,072
8,071
15,201
Movement in impairment allowances on loans and advances to customers and banks
(Audited)
Banks
individually
assessed
US$m
Customers
Individually
assessed
US$m
Collectively
assessed
US$m
At 1 January 2014
Amounts written off
Recoveries of loans and advances previously written off
Charge to income statement
Exchange and other movements13
At 31 December 2014
Impairment allowances:
on loans and advances to customers
– personal
– corporate and commercial
– financial
58
(6)
–
4
(7)
49
as a percentage of loans and advances1
0.04%
7,072
(2,313)
114
1,776
(454)
6,195
6,195
468
5,532
195
0.63%
8,071
(4,060)
841
2,275
(985)
6,142
6,142
4,132
1,909
101
0.62%
Total
US$m
15,201
(6,379)
955
4,055
(1,446)
12,386
12,337
4,600
7,441
296
1.13%
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R
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i
g
e
t
a
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t
S
i
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e
v
e
R
l
a
i
c
n
a
n
F
i
e
c
n
a
n
r
e
v
o
G
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t
a
r
o
p
r
o
C
s
t
n
e
m
e
t
a
t
S
l
a
i
c
n
a
n
i
F
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i
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o
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Report of the Directors: Risk (continued)
Credit risk
Movement in impairment allowances on loans and advances to customers and banks (continued)
(Audited)
Banks
individually
assessed
US$m
Customers
Individually
assessed
US$m
Collectively
assessed
US$m
57
(4)
–
5
–
58
0.05%
6,572
(1,937)
209
2,315
(87)
7,072
7,072
589
6,096
387
0.70%
9,540
(4,714)
1,087
3,728
(1,570)
8,071
8,071
6,013
1,963
95
0.80%
Total
US$m
16,169
(6,655)
1,296
6,048
(1,657)
15,201
15,143
6,602
8,059
482
1.35%
banking requirements in key growth markets. The fall in
lending in Europe of US$15bn was mainly driven by
a reduction in corporate overdraft balances. In the UK,
a small number of clients benefited from the use of net
interest arrangements across their overdraft and deposit
positions. During the year, as we aligned our approach
in our Payments and Cash Management business to be
more globally consistent, many of these clients increased
the frequency with which they settled these balances,
reducing their overdraft and deposit balances, which fell
by US$28bn. The Middle East and North Africa and Latin
America grew by US$6bn and US$4bn, respectively.
At 1 January 2013
Amounts written off
Recoveries of loans and advances previously written off
Charge to income statement
Exchange and other movements13
At 31 December 2013
Impairment allowances:
on loans and advances to customers
– personal
– corporate and commercial
– financial
as a percentage of loans and advances1
For footnotes, see page 202.
Wholesale lending
On a reported basis gross loans decreased by US$11bn,
which included adverse foreign exchange movements of
US$32bn, mainly in Europe.
The following commentary is on a constant currency
basis.
Wholesale lending grew by US$21bn in the year. In Asia,
balances grew by US$16bn as we continued to leverage
our position in emerging markets. In North America, we
also experienced strong growth of US$10bn as we
executed our strategy of expanding our core offerings
and proactively targeting companies with international
Total wholesale lending
(Unaudited)
Corporate and commercial (A)
– manufacturing
– international trade and services
– commercial real estate
– other property-related
– government
– other commercial8
Financial (non-bank financial institutions) (B)
Asset-backed securities reclassified
Loans and advances to banks (C)
Europe
US$m
210,585
39,456
76,629
28,187
7,126
2,264
56,923
23,103
1,938
21,978
Asia4
US$m
220,799
37,767
72,814
35,678
34,379
1,195
38,966
13,997
–
62,960
Gross loans at 31 December 2014 (D)
257,604
297,756
Impairment allowances on wholesale lending
Corporate and commercial (a)
– manufacturing
– international trade and services
– commercial real estate
– other property-related
– government
– other commercial
Financial (non-bank financial institutions) (b)
Loans and advances to banks (c)
Impairment allowances at 31 December 2014 (d)
(a) as a percentage of (A)
(b) as a percentage of (B)
(c) as a percentage of (C)
(d) as a percentage of (D)
3,112
529
877
909
203
4
590
221
31
3,364
1.48%
0.96%
0.14%
1.31%
1,089
242
533
44
55
–
215
13
–
1,102
0.49%
0.09%
–
0.37%
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MENA
US$m
20,588
2,413
9,675
579
1,667
1,552
4,702
3,291
–
10,495
34,374
1,171
141
536
147
219
1
127
21
18
1,210
5.69%
0.64%
0.17%
3.52%
North
America
US$m
Latin
America
US$m
57,862
15,299
13,484
6,558
8,934
164
13,423
9,034
131
7,405
30,722
12,051
8,189
2,291
281
968
6,942
1,393
–
9,360
74,432
41,475
608
152
157
101
57
–
141
39
–
647
1.05%
0.43%
–
0.87%
1,461
348
237
476
12
–
388
2
–
1,463
4.76%
0.14%
–
3.53%
Total
US$m
540,556
106,986
180,791
73,293
52,387
6,143
120,956
50,818
2,069
112,198
705,641
7,441
1,412
2,340
1,677
546
5
1,461
296
49
7,786
1.38%
0.58%
0.04%
1.10%
Corporate and commercial (I)
– manufacturing
– international trade and services
– commercial real estate
– other property-related
– government
– other commercial8
Financial (non-bank financial institutions) (J)
Asset-backed securities reclassified
Loans and advances to banks (K)
Gross loans at 31 December 2013 (L)
Impairment allowances on wholesale lending
Corporate and commercial (i)
– manufacturing
– international trade and services
– commercial real estate
– other property-related
– government
– other commercial
Financial (non-bank financial institutions) (j)
Loans and advances to banks (k)
Impairment allowances at 31 December 2013 (l)
(i) as a percentage of (I)
(j) as a percentage of (J)
(k) as a percentage of (K)
(l) as a percentage of (L)
For footnotes, see page 202.
Commercial real estate
Commercial real estate lending
(Unaudited)
Neither past due nor impaired
Past due but not impaired
Impaired loans
Total gross loans and advances at 31 December 2014
Of which:
– renegotiated loans14
Impairment allowances
Neither past due nor impaired
Past due but not impaired
Impaired loans
Total gross loans and advances at 31 December 2013
Of which:
– renegotiated loans14
Impairment allowances
For footnotes, see page 202.
Europe
US$m
239,116
55,920
76,700
31,326
7,308
3,340
64,522
27,872
2,578
24,273
Asia4
US$m
203,894
30,758
79,368
34,560
27,147
1,021
31,040
9,688
–
72,814
293,839
286,396
3,821
618
1,216
1,116
269
3
599
344
35
4,200
1.60%
1.23%
0.14%
1.43%
918
246
428
22
102
–
120
17
–
935
0.45%
0.18%
–
0.33%
MENA
US$m
19,760
3,180
8,629
639
1,333
1,443
4,536
2,532
–
6,419
28,711
1,212
182
502
153
236
10
129
60
18
1,290
6.13%
2.37%
0.28%
4.49%
North
America
US$m
Latin
America
US$m
50,307
11,778
11,676
5,900
8,716
499
11,738
9,055
138
6,420
65,920
769
89
188
202
93
1
196
50
5
824
30,188
12,214
8,295
2,421
328
974
5,956
1,376
–
10,178
41,742
1,339
384
349
396
8
–
202
11
–
1,350
1.53%
0.55%
0.08%
1.25%
4.44%
0.80%
–
3.23%
Europe
US$m
25,860
18
2,309
28,187
1,954
909
909
28,044
95
3,187
31,326
2,590
1,116
Asia4
US$m
35,430
170
78
35,678
19
44
34,433
103
24
34,560
20
22
MENA
US$m
North
America
US$m
Latin
America
US$m
333
47
199
579
183
147
402
18
219
639
229
153
6,136
100
322
6,558
191
101
5,400
29
471
5,900
1,535
28
728
2,291
377
476
2,249
35
137
2,421
280
202
461
396
Total
US$m
543,265
113,850
184,668
74,846
44,832
7,277
117,792
50,523
2,716
120,104
716,608
8,059
1,519
2,683
1,889
708
14
1,246
482
58
8,599
1.48%
0.95%
0.05%
1.20%
Total
US$m
69,294
363
3,636
73,293
2,724
1,677
70,528
280
4,038
74,846
3,580
1,889
Commercial real estate lending includes the financing of
corporate, institutional and high net worth individuals
who are investing primarily in income producing assets
and, to a lesser extent, in their construction and
development. The business focuses mainly on traditional
core asset classes such as retail, offices, light industrial
and residential building projects. The portfolio is globally
diversified with larger concentrations in Hong Kong, the
UK, the US and Canada.
In more developed markets, our exposure mainly
comprises the financing of investment assets, the
redevelopment of existing stock and the augmentation
of both commercial and residential markets to support
economic and population growth. In lesser developed
commercial real estate markets our exposures comprise
lending for development assets on relatively short tenors
with a particular focus on supporting the larger, better
capitalised developers involved in residential construction
or in assets supporting economic expansion.
Many of these markets are beginning to move away from
the rapid construction of recent years with an increasing
focus on investment assets consistent with more
HSBC HOLDINGS PLC
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i
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c
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m
e
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a
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a
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Report of the Directors: Risk (continued)
Credit risk
developed markets. A significant amount of exposure is
centred on cities which are key locations of economic,
political or cultural importance.
real estate sector than applies to other lending. In each
case, the analysis includes off-balance sheet loan
commitments, primarily undrawn credit lines.
Total commercial real estate was US$73bn at
31 December 2014, a reduction of US$1.6bn which
included adverse foreign exchange movements of
US$3.3bn, mainly in Europe.
Refinance risk in commercial real estate
Commercial real estate lending tends to require the
repayment of a significant proportion of the principal at
maturity. Typically, a customer will arrange repayment
through the acquisition of a new loan to settle the
existing debt. Refinance risk is the risk that a customer,
being unable to repay the debt on maturity, fails
to refinance it at commercial rates. Refinance risk
is described in more detail on page 214. We monitor
our commercial real estate portfolio closely, assessing
those drivers that may indicate potential issues with
refinancing. The principal driver is the vintage of the
loan, when origination reflected previous market norms
which do not apply in the current market. Examples
might be higher LTV ratios and/or lower interest cover
ratios. The range of refinancing sources in the local
market is also an important consideration, with risk
increasing when lenders are restricted to banks and
when bank liquidity is limited. In addition, underlying
fundamentals such as the reliability of tenants, the
ability to let and the condition of the property are
important, as they influence property values.
For the Group’s commercial real estate portfolios as a
whole, the behaviour of markets and the quality of
assets did not cause undue concern in 2014. In the UK,
which was subject to heightened concerns in recent
years, the drivers described above are not currently
causing sufficient concern to warrant enhanced
management attention.
Further details on our UK portfolio are as follows: at
31 December 2014, we had US$20bn (2013: US$22bn)
of commercial real estate loans of which US$5.9bn
(2013: US$6.8bn) were due to be refinanced within the
next 12 months. Of these balances, cases subject to close
monitoring in our Loan Management Unit amounted to
US$2.1bn (2013: US$2.4bn). US$1.3bn (2013: US$1.6bn)
were disclosed as impaired with impairment allowances
of US$0.6bn (2013: US$0.6bn). Where these loans are
not considered impaired it is because there is sufficient
evidence to indicate that the associated contractual cash
flows will be recovered or that the loans will not need to
be refinanced on terms we would consider below market
norms.
Collateral on loans and advances
Details of the Group’s practice regarding the use of collateral are
provided in the Appendix to Risk on page 213.
Collateral held is analysed separately below for
commercial real estate and for other corporate,
commercial and financial (non-bank) lending. This
reflects the greater correlation between collateral
performance and principal repayment in the commercial
The collateral measured in the tables below consists of
fixed first charges on real estate and charges over cash
and marketable financial instruments. The values in the
tables represent the expected market value on an open
market basis; no adjustment has been made to the
collateral for any expected costs of recovery. Cash is
valued at its nominal value and marketable securities at
their fair value. The LTV ratios presented are calculated
by directly associating loans and advances with the
collateral that individually and uniquely supports each
facility. When collateral assets are shared by multiple
loans and advances, whether specifically or, more
generally, by way of an all monies charge, the collateral
value is pro-rated across the loans and advances
protected by the collateral.
Other types of collateral which are commonly taken
for corporate and commercial lending such as
unsupported guarantees and floating charges over
the assets of a customer’s business are not measured in
the tables below. While such mitigants have value, often
providing rights in insolvency, their assignable value is
not sufficiently certain and they are therefore assigned
no value for disclosure purposes.
For impaired loans the collateral values cannot be
directly compared with impairment allowances
recognised. The LTV tables below use open market
values with no adjustments. Impairment allowances are
calculated on a different basis, by considering other cash
flows and adjusting collateral values for costs of realising
collateral as explained further on page 212.
Commercial real estate loans and advances
The value of commercial real estate collateral is
determined by using a combination of professional and
internal valuations and physical inspections. Due to the
complexity of valuing collateral for commercial real
estate, local valuation policies determine the frequency
of review on the basis of local market conditions.
Revaluations are sought with greater frequency as
concerns over the performance of the collateral or
the direct obligor increase. Revaluations may also
be sought where customers amend their banking
requirements, resulting in the Group extending further
funds or other significant rearrangements of exposure or
collateral, which may change the customer risk profile.
As a result, the real estate collateral values used for
CRR1-7 might date back to the last point at which such
considerations applied. For CRR 8 and 9-10 almost all
collateral would have been revalued within the last
three years.
In Hong Kong, market practice is typically for lending
to major property companies to be either 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.
HSBC HOLDINGS PLC
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Commercial real estate loans and advances including loan commitments by level of collateral
(Audited)
Rated CRR/EL 1 to 7
Not collateralised
Fully collateralised
Partially collateralised (A)
– collateral value on A
Rated CRR/EL 8
Not collateralised
Fully collateralised
LTV ratio:
– less than 50%
– 51% to 75%
– 76% to 90%
– 91% to 100%
Partially collateralised (B)
– collateral value on B
Rated CRR/EL 9 to 10
Not collateralised
Fully collateralised
LTV ratio:
– less than 50%
– 51% to 75%
– 76% to 90%
– 91% to 100%
Partially collateralised (C)
– collateral value on C
At 31 December 2014
Rated CRR/EL 1 to 7
Not collateralised
Fully collateralised
Partially collateralised (D)
– collateral value on D
Rated CRR/EL 8
Not collateralised
Fully collateralised
LTV ratio:
– less than 50%
– 51% to 75%
– 76% to 90%
– 91% to 100%
Partially collateralised (E)
– collateral value on E
Rated CRR/EL 9 to 10
Not collateralised
Fully collateralised
LTV ratio:
– less than 50%
– 51% to 75%
– 76% to 90%
– 91% to 100%
Partially collateralised (F)
– collateral value on F
At 31 December 2013
For footnote, see page 202.
Europe
US$m
5,351
25,873
1,384
1,032
32,608
34
568
64
222
132
150
365
296
967
369
992
78
593
167
154
1,085
664
2,446
36,021
4,865
24,154
2,664
1,827
31,683
109
793
139
367
173
114
360
281
1,262
564
1,079
275
436
209
159
1,815
1,284
3,458
36,403
Asia4
US$m
16,132
26,323
1,599
901
44,054
MENA
US$m
361
23
–
–
384
7
23
–
11
9
3
–
–
30
48
15
6
2
2
5
15
5
78
44,162
14,164
25,317
2,377
1,688
41,858
10
–
–
–
–
–
2
1
12
–
12
2
6
3
1
5
5
17
41,887
–
–
–
–
–
–
–
–
–
6
7
7
–
–
–
181
89
194
578
192
21
139
24
352
–
72
–
72
–
–
–
–
72
7
31
7
7
17
–
181
89
219
643
North
America
Latin
America
US$m
US$m
87
9,093
1,819
1,199
10,999
9
30
16
10
4
–
7
2
46
1
166
28
91
17
30
37
30
1,719
556
152
47
2,427
2
1
1
–
–
–
–
–
3
499
178
10
43
53
72
50
13
204
11,249
727
3,157
137
8,627
704
303
9,468
935
1,728
484
292
3,147
1
68
15
49
4
–
13
11
82
4
233
39
110
62
22
240
115
477
3
1
–
1
–
–
–
–
4
521
286
32
57
62
135
56
34
863
10,027
4,014
Total
US$m
23,650
61,868
4,954
3,179
90,472
52
622
81
243
145
153
372
298
1,046
923
1,358
129
729
239
261
1,368
801
3,649
95,167
20,293
59,847
6,368
4,134
86,508
123
934
154
489
177
114
375
293
1,432
1,096
1,641
355
616
353
317
2,297
1,527
5,034
92,974
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Report of the Directors: Risk (continued)
Credit risk
Other corporate, commercial and financial
(non-bank loans) are analysed separately below. For
financing activities in other corporate and commercial
lending, collateral value is not strongly correlated to
principal repayment performance. Collateral values are
generally refreshed when an obligor’s general credit
performance deteriorates and we have to assess the
likely performance of secondary sources of repayment
should it prove necessary to rely on them.
Accordingly, the table below reports values only for
customers with CRR 8 to 10, recognising that these
loans and advances generally have valuations which
are comparatively recent.
Other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level of
collateral rated CRR/EL 8 to 10 only
(Audited)
Asia4
US$m
MENA
US$m
North
America
Latin
America
US$m
US$m
Rated CRR/EL 8
Not collateralised
Fully collateralised
LTV ratio:
– less than 50%
– 51% to 75%
– 76% to 90%
– 91% to 100%
Partially collateralised (A)
– collateral value on A
Rated CRR/EL 9 to 10
Not collateralised
Fully collateralised
LTV ratio:
– less than 50%
– 51% to 75%
– 76% to 90%
– 91% to 100%
Partially collateralised (B)
– collateral value on B
At 31 December 2014
Rated CRR/EL 8
Not collateralised
Fully collateralised
LTV ratio:
– less than 50%
– 51% to 75%
– 76% to 90%
– 91% to 100%
Partially collateralised (C)
– collateral value on C
Rated CRR/EL 9 to 10
Not collateralised
Fully collateralised
LTV ratio:
– less than 50%
– 51% to 75%
– 76% to 90%
– 91% to 100%
Partially collateralised (D)
– collateral value on D
At 31 December 2013
For footnote, see page 202.
Europe
US$m
2,051
629
120
293
51
165
105
46
2,785
4,185
615
169
136
168
142
624
341
5,424
8,209
2,411
259
65
103
25
66
435
17
3,105
1,467
1,121
124
161
156
680
1,192
606
3,780
6,885
237
56
13
13
–
9
34
44
17
337
939
143
68
27
16
32
364
169
15
72
–
–
69
3
1
1
88
813
147
25
19
6
97
547
92
1,446
1,783
1,507
1,595
185
51
38
4
8
1
23
5
259
685
161
57
21
53
30
304
150
1,150
1,409
37
1
1
–
–
–
528
398
566
1,089
49
2
47
–
–
770
102
1,908
2,474
320
331
186
72
46
27
148
68
68
799
62
231
48
39
35
109
251
141
544
1,343
328
227
84
47
31
65
345
89
900
26
309
24
29
46
210
359
149
694
1,594
Total
US$m
2,850
1,099
324
371
175
229
304
136
227
11
5
6
–
–
6
4
244
4,253
1,420
124
48
35
26
15
140
46
1,684
1,928
456
70
11
10
5
44
73
18
599
1,615
266
159
49
43
15
290
131
2,171
2,770
7,419
1,260
358
256
251
395
1,926
789
10,605
14,858
3,417
608
199
164
69
176
1,404
527
5,429
4,882
1,906
366
307
298
935
2,915
1,138
9,703
15,132
Loans and advances to banks are typically unsecured.
Collateral values held for customers rated CRR 9 to 10
(i.e. classified as impaired) are separately disclosed.
HSBC HOLDINGS PLC
148
Loans and advances to banks including loan commitments by level of collateral
(Audited)
Rated CRR/EL 1 to 8
Not collateralised
Fully collateralised
Partially collateralised (A)
– collateral value on A
Rated CRR/EL 9 to 10
Not collateralised
At 31 December 2014
Rated CRR/EL 1 to 8
Not collateralised
Fully collateralised
Partially collateralised (B)
– collateral value on B
Rated CRR/EL 9 to 10
Not collateralised
At 31 December 2013
For footnote, see page 202.
Europe
US$m
22,405
104
5
3
22,514
102
22,616
21,225
3,614
68
3
24,907
153
25,060
Asia4
US$m
MENA
US$m
North
America
Latin
America
US$m
US$m
64,210
1,587
–
–
65,797
1
65,798
72,986
1,376
560
389
74,922
–
74,922
10,472
–
–
–
10,472
21
10,493
6,373
–
–
–
6,373
312
6,685
Total
US$m
114,478
1,691
5
3
116,174
9,406
–
–
–
9,406
–
124
9,406
116,298
9,837
266
–
–
117,631
5,256
628
392
7,985
–
–
–
7,985
–
7,985
7,210
–
–
–
7,210
10,103
123,515
14
–
479
7,224
10,103
123,994
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Other credit risk exposures
In addition to collateralised lending, other credit
enhancements are employed and methods used to
mitigate credit risk arising from financial assets. These
are described in more detail below:
• some securities issued by governments, banks and
other financial institutions benefit from additional
credit enhancement provided by government
guarantees that cover the assets.
Details of government guarantees are included in Notes 12,
15 and 18 on the Financial Statements.
• debt securities issued by banks and financial
institutions include ABSs and similar instruments
which are supported by underlying pools of financial
assets. Credit risk associated with ABSs is reduced
through the purchase of credit default swap (‘CDS’)
protection.
Disclosure of the Group’s holdings of ABSs and associated
CDS protection is provided on page 162.
• trading assets include loans and advances held
with trading intent. These mainly consist of cash
collateral posted to satisfy margin requirements on
derivatives, settlement accounts, reverse repos and
stock borrowing. There is limited credit risk on cash
collateral posted since in the event of default of the
counterparty these would be set-off against the
related liability. Reverse repos and stock borrowing
are by their nature collateralised.
Collateral accepted as security that the Group is permitted
to sell or repledge under these arrangements is described in
Note 19 on the Financial Statements.
• the Group’s maximum exposure to credit risk includes
financial guarantees and similar contracts granted, as
well as loan and other credit-related commitments.
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.
For further information on these arrangements,
see Note 37 on the Financial Statements.
Derivatives
HSBC participates in transactions exposing us to
counterparty credit risk. Counterparty credit risk is the
risk of financial loss if the counterparty to a transaction
defaults before satisfactorily settling it. It arises
principally from OTC derivatives and securities financing
transactions and is calculated in both the trading and
non-trading books. Transactions vary in value by
reference to a market factor such as interest rate,
exchange rate or asset price.
The counterparty risk from derivative transactions
is taken into account when reporting the fair value of
derivative positions. The adjustment to the fair value
is known as the credit value adjustment (‘CVA’).
For an analysis of CVA, see Note 13 on the Financial Statements.
The table below reflects by risk type the fair values and
gross notional contract amounts of derivatives cleared
through an exchange, central counterparty and non-
central counterparty.
HSBC HOLDINGS PLC
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Report of the Directors: Risk (continued)
Credit risk
Notional contract amounts and fair values of derivatives by product type
(Unaudited)
Foreign exchange
– exchange traded
– central counterparty cleared OTC
– non-central counterparty cleared OTC
Interest rate
– exchange traded
– central counterparty cleared OTC
– non-central counterparty cleared OTC
Equity
– exchange traded
– non-central counterparty cleared OTC
Credit
– central counterparty cleared OTC
– non-central counterparty cleared OTC
Commodity and other
– exchange traded
– non-central counterparty cleared OTC
Notional
amount
US$m
5,573,415
81,785
18,567
5,473,063
22,328,518
1,432,333
15,039,001
5,857,184
568,932
289,140
279,792
550,197
126,115
424,082
77,565
7,015
70,550
2014
Fair value
Assets
US$m
97,312
229
321
96,762
473,243
112
261,880
211,251
11,694
2,318
9,376
9,340
1,999
7,341
3,884
80
3,804
Liabilities
US$m
95,759
369
349
95,041
468,152
161
264,509
203,482
13,654
3,201
10,453
10,061
2,111
7,950
3,508
23
3,485
Notional
amount
US$m
5,291,003
41,384
16,869
5,232,750
27,347,918
857,562
18,753,836
7,736,520
589,903
274,880
315,023
678,256
104,532
573,724
77,842
6,531
71,311
2013
Fair value
Assets
US$m
80,914
121
415
80,378
458,576
335
285,390
172,851
18,389
8,403
9,986
9,092
1,346
7,746
2,624
182
2,442
Liabilities
US$m
75,798
93
622
75,083
452,531
225
285,375
166,931
22,573
2,949
19,624
8,926
1,409
7,517
1,786
6
1,780
Total OTC derivatives
27,288,354
592,735
587,379
32,804,565
560,554
558,341
– total OTC derivatives cleared by central
counterparties
15,183,683
264,200
266,968
18,875,237
287,151
287,406
– total OTC derivatives not cleared by central
counterparties
12,104,671
328,535
320,411
13,929,328
273,403
270,935
Total exchange traded derivatives
Gross
Offset
Total at 31 December
1,810,273
29,098,627
2,739
595,473
3,755
1,180,357
9,041
3,273
591,134
33,984,922
569,595
561,614
(250,465)
(250,465)
345,008
340,669
(287,330)
(287,330)
282,265
274,284
The purposes for which HSBC uses derivatives are described in
Note 16 on the Financial Statements.
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 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.
We manage the counterparty exposure arising from
market risk on our OTC derivative contracts by using
collateral agreements with counterparties and netting
agreements. Currently, we do not actively manage
our general OTC derivative counterparty exposure
in the credit markets, although we may manage
individual exposures in certain circumstances.
We have historically placed strict policy restrictions
on collateral types and as a consequence the types of
collateral received and pledged are, by value, highly
liquid and of a strong quality, being predominantly cash.
Where a collateral type is required to be approved
outside the collateral policy (which includes collateral
that includes wrong way risks), a submission to one of
three regional Documentation Approval Committees
(‘DAC’s) for approval is required. These DACs require the
participation and sign-off of senior representatives from
regional Global Markets Chief Operating Officers, Legal
and Risk.
The majority of the counterparties with whom we have
a collateral agreement are European. The majority of
our CSAs are with financial institutional clients.
As a consequence of our policy, the type of agreement
we enter into is predominately ISDA CSAs, the majority
of which are written under English law. The table below
provides a breakdown of OTC collateral agreements by
agreement type:
OTC collateral agreements by type
(Unaudited)
ISDA CSA (English law)
ISDA CSA (New York law)
ISDA CSA (Japanese law)
French Master Agreement and CSA equivalent15
German Master Agreement and CSA equivalent16
Others
At 31 December 2014
For footnotes, see page 202.
Number of
agreements
2,434
1,628
18
227
90
205
4,602
HSBC HOLDINGS PLC
150
See page 130 and Note 32 on the Financial Statements for
details regarding legally enforceable right of offset in the event
of counterparty default and collateral received in respect of
derivatives.
Reverse repos – non-trading by geographical
region
Following the change in balance sheet presentation
explained on page 347, non-trading reverse repos are
presented separately on the face of the balance sheet
Reverse repos – non-trading by geographical region
(Audited)
and are no longer included in ‘Loans and advances to
customers’ and ‘Loans and advances to banks’.
Comparative data have been re-presented accordingly.
As a result, any analysis in the Credit Risk section that
references loans and advances to customers or banks
excludes non-trading reverse repos to customers or
banks, respectively. For reference, the amount of non-
trading reverse repos to customers and banks is set out
below.
Europe
US$m
25,841
34,748
60,589
48,091
49,631
97,722
Asia4
US$m
5,409
22,813
28,222
6,448
12,973
19,421
MENA
US$m
North
America
US$m
Latin
America
US$m
–
19
19
–
24
24
35,060
29,008
64,068
33,676
23,744
57,420
–
8,815
8,815
–
5,103
5,103
Total
US$m
66,310
95,403
161,713
88,215
91,475
179,690
With customers
With banks
At 31 December 2014
With customers
With banks
At 31 December 2013
For footnote, see page 202.
Personal lending
We provide a broad range of secured and unsecured
personal lending products to meet customer needs.
Personal lending includes advances to customers for
asset purchases such as residential property where the
loans are secured by the assets being acquired. We also
offer loans secured on existing assets, such as first liens
on residential property, and unsecured lending products
such as overdrafts, credit cards and payroll loans.
Total personal lending
(Unaudited)
First lien residential mortgages (A)
Of which:
– interest only (including offset)
– affordability including ARMs
Other personal lending (B)
– other
– credit cards
– second lien residential mortgages
– motor vehicle finance
Europe
US$m
131,000
44,163
337
47,531
34,567
12,959
–
5
Asia4
US$m
93,147
956
5,248
36,368
25,695
10,289
56
328
Total gross loans at 31 December 2014 (C)
178,531
129,515
Impairment allowances on personal lending
First lien residential mortgages (a)
Other personal lending (b)
– other
– credit cards
– second lien residential mortgages
– motor vehicle finance
Total impairment allowances at 31 December
2014 (c)
(a) as a percentage of A
(b) as a percentage of B
(c) as a percentage of C
306
786
438
347
–
1
1,092
0.2%
1.7%
0.6%
46
208
87
119
–
2
254
–
0.6%
0.2%
MENA
US$m
2,647
–
–
3,924
2,633
897
2
392
6,571
97
97
59
33
–
5
194
3.7%
2.5%
3.0%
North
America
US$m
55,577
276
16,452
9,823
4,328
1,050
4,433
12
Latin
America
US$m
Total
US$m
4,153
286,524
–
–
9,384
4,846
3,322
–
1,216
45,395
22,037
107,030
72,069
28,517
4,491
1,953
65,400
13,537
393,554
1,644
350
43
36
271
–
1,994
3.0%
3.6%
3.0%
36
1,030
672
298
–
60
1,066
0.9%
11.0%
7.9%
2,129
2,471
1,299
833
271
68
4,600
0.7%
2.3%
1.2%
HSBC HOLDINGS PLC
151
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G
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a
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Report of the Directors: Risk (continued)
Credit risk
First lien residential mortgages (D)
Of which:
– interest only (including offset)
– affordability including ARMs
Other personal lending (E)
– other
– credit cards
– second lien residential mortgages
– motor vehicle finance
Europe
US$m
140,474
49,460
508
51,633
37,126
14,496
–
11
Asia4
US$m
92,047
1,115
5,593
32,482
21,636
10,274
91
481
Total gross loans at 31 December 2013 (F)
192,107
124,529
Impairment allowances on personal lending
First lien residential mortgages (d)
Other personal lending (e)
– other
– credit cards
– second lien residential mortgages
– motor vehicle finance
Total impairment allowances at 31 December
2013 (f)
(d) as a percentage of D
(e) as a percentage of E
(f) as a percentage of F
For footnote, see page 202.
439
959
553
403
–
3
1,398
0.3%
1.9%
0.7%
57
222
93
127
–
2
279
0.1%
0.7%
0.2%
MENA
US$m
2,451
–
–
4,033
2,728
915
2
388
6,484
124
169
104
61
–
4
293
5.1%
4.2%
4.5%
North
America
US$m
60,955
Latin
America
US$m
3,948
352
16,274
11,735
5,309
1,145
5,261
20
72,690
2,886
532
59
47
426
–
–
–
10,970
5,651
3,526
–
1,793
14,918
32
1,182
881
217
–
84
3,418
4.7%
4.5%
4.7%
1,214
0.8%
10.8%
8.1%
Total
US$m
299,875
50,927
22,375
110,853
72,450
30,356
5,354
2,693
410,728
3,538
3,064
1,690
855
426
93
6,602
1.2%
2.8%
1.6%
Total personal lending was US$394bn at 31 December
2014, down from US$411bn at the end of 2013
(US$392bn on a constant currency basis). We continued
to run-off our CML portfolio in North America and the
balance declined by a further US$5.7bn during the year.
Personal lending excluding the US CML run-off portfolio
grew by US$7.7bn on a constant currency basis in 2014.
This was mainly due to increased mortgage and other
lending in Asia and growth in the mortgage portfolio in
the US and Brazil. It was partially offset by a reduction in
personal lending in UK.
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 LTV thresholds with the maximum
upper limit for new loans set at 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.
The commentary that follows is on a constant currency
basis
Personal lending excluding the US CML run-off portfolio,
mortgage lending balances increased by US$3.9bn during
the year. Mortgage lending in Asia, excluding the
reclassification to Other Personal lending discussed on
page 153, grew by US$4.8bn. The increases were
primarily attributable to continued growth in Hong Kong
(US$2.9bn) and, to a lesser extent, in Australia (US$0.5bn),
Malaysia (US$0.4bn), and Taiwan (US$0.3bn) as a result
of strong demand and competitive customer offerings.
The quality of our Asian mortgage book remained high
with negligible defaults and impairment allowances.
The average LTV ratio on new mortgage lending in Hong
Kong was 47% compared with an estimated 29% for
the overall portfolio.
In North America, our Canadian mortgage balances
increased by US$0.5bn during the year as a result of a
focused mortgage campaign and process improvements.
The Premier mortgage portfolio in the US also increased
by US$0.9bn during 2014 as we continued to focus on
growth in our core portfolios. Our business in the US
exhibited lower collectively assessed impairment charges
due to continued improvement in the credit quality of
the mortgage portfolio. The US CML portfolio declined by
US$5.7bn in 2014.
Mortgage lending in Brazil increased by US$0.5bn as a
result of improvements to both our process and products
offered and overall growth in the mortgage market in
the country during the year.
In Europe, there was a marginal decline of US$1.4bn or
1% due to decreased lending and effects of repayments,
mainly in the UK mortgage portfolio.
Interest-only products made up US$44bn of total
UK mortgage lending, including US$19bn of offset
mortgages in First Direct. The LTV ratio on new lending
was 60% compared with an average of 43.7% for
the total mortgage portfolio. The credit quality of our
UK mortgage portfolio remained high and both loan
impairment charges and delinquency levels declined
in 2014.
We grew our mortgage book in France by US$0.6bn in
the year due to strong demand.
HSBC HOLDINGS PLC
152
Other personal lending
(Unaudited)
Other personal lending increased by US$3.7bn in
2014. This was driven by growth in personal loans and
revolving credit facilities in Asia, mainly in Hong Kong
(US$3.1bn). We also reclassified US$1.7bn of loans in
mainland China from Residential mortgages to other
personal lending as the supporting collateral over some of
the properties either under construction or completed
was yet to be fully registered. These increases were
partially offset by a reduction in credit card lending of
US$0.7bn in the UK and US$0.3bn in Turkey, due to
repayments. Term lending in North America, primarily
Canada, declined by US$0.7bn during the year. There was
also a US$0.2bn reduction in the auto finance dealers run
off portfolio in Brazil.
HSBC Finance US Consumer and Mortgage Lending –
residential mortgages17
(Unaudited)
2014
US$m
2013
US$m
21,915
27,305
2,509
24,424
1,679
6.9%
3,014
30,319
3,028
10.0%
Residential mortgages:
– first lien
Other personal lending:
– second lien
Total (A) at 31 December
Impairment allowances
– as a percentage of A
For footnote, see page 202.
HSBC Finance
Mortgage lending balances in HSBC Finance declined
by US$5.7bn during 2014. In addition to the continued
loan sales in the CML portfolio, we transferred a further
US$2.9bn to assets held for sale during the year, and
expect to sell these in multiple transactions over the next
12 months.
The decrease in impairment allowances reflected lower
levels of both new impaired loans and loan balances
outstanding as a result of continued liquidation of the
portfolio. This included loan sales and loss estimates due
to lower delinquency and loss severity levels than in
2013.
Across the first and second lien residential mortgages
in our CML portfolio, two months and over delinquent
balances reduced by US$2.5bn to US$2.4bn during 2014
reflecting the continued portfolio run-off and loan sales.
HSBC Finance: foreclosed properties in the US
(Unaudited)
Number of foreclosed properties at
year-end
Number of properties added to
2014
US$m
2013
US$m
2,139
4,254
foreclosed inventory in the period
3,716
9,752
Average (gain)/loss on sale of
foreclosed properties18
Average total loss on foreclosed
properties19
Average time to sell foreclosed
properties (days)
For footnotes, see page 202.
(1%)
51%
189
1%
51%
154
The number of foreclosed properties at 31 December
2014 significantly decreased compared with the end of
2013 as during 2014 more properties were sold than
were added to the foreclosed inventory. We added
fewer properties to the inventory as many of them were
sold prior to taking title as a result of the ongoing sale of
receivables from the CML portfolio.
HSBC Bank USA
In HSBC Bank USA, mortgage balances grew by US$0.9bn
during 2014 as we implemented our strategy to grow the
HSBC Premier customer base. Credit quality improved
further during 2014 and balances which were two
months and over delinquent in our first lien residential
mortgage portfolio declined by US$0.3bn to US$1.1bn at
December 2014. We also continued to sell all agency
eligible new originations in the secondary market as a
means of managing our interest rate risk and improving
structural liquidity.
Trends in two months and over contractual delinquency in the US
(Unaudited)
In personal lending in the US
First lien residential mortgages
– Consumer and Mortgage Lending
– other mortgage lending
Second lien residential mortgages
– Consumer and Mortgage Lending
– other mortgage lending
Credit card
Personal non-credit card
Total at 31 December
As a percentage of the equivalent loans and receivables balances
First lien residential mortgages
Second lien residential mortgages
Credit card
Personal non-credit card
Total at 31 December
HSBC HOLDINGS PLC
153
2014
US$m
3,271
2,210
1,061
216
154
62
17
7
3,511
%
8.6
5.0
2.4
1.4
8.1
2013
US$m
5,931
4,595
1,336
406
276
130
25
25
6,387
%
14.0
8.1
3.4
4.9
13.1
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Report of the Directors: Risk (continued)
Credit risk
Gross loan portfolio of HSBC Finance real estate secured balances
(Unaudited)
Re-aged20
US$m
6,637
8,167
Modified
and re-aged
US$m
6,581
8,213
Total
renegotiated
loans
US$m
Total non-
renegotiated
loans
US$m
Modified
US$m
Total
gross
loans
US$m
Total
impairment
allowances
US$m
Impairment
allowances/
gross loans
%
587
768
13,805
17,148
10,619
13,171
24,424
30,319
1,679
3,028
7
10
At 31 December 2014
At 31 December 2013
For footnote, see page 202.
Number of renegotiated real estate secured accounts remaining in HSBC Finance’s portfolio
(Unaudited)
At 31 December 2014
At 31 December 2013
Number of renegotiated loans (000s)
Re-aged
85
102
Modified
and re-aged
64
78
Modified
6
8
Total number
of loans
(000s)
297
352
Total
155
188
HSBC Finance loan modifications and re-age
programmes
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 characteristics of HSBC Finance’s customer base.
The volume of loans that qualify for modification has
reduced significantly in recent years and we expect this
trend to continue. Volumes of new loan modifications
are decreasing due to improvements in economic
conditions, the cessation of new real estate secured
and personal non-credit card receivables originations,
and the continued run-off and loan sales in the CML
portfolio.
Qualifying criteria
For an account to qualify for renegotiation it must meet
certain criteria, and HSBC Finance retains the right to
decline a renegotiation. The extent to which HSBC
Finance renegotiates accounts that are eligible under its
existing policies varies according to 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 are not eligible for
a subsequent renegotiation for 12 months, with a
maximum of five renegotiations permitted within
a five-year period. Borrowers must be approved for a
modification and, to activate it, must generally make
two minimum qualifying monthly payments within 60
days. In certain circumstances where the debt has been
restructured in bankruptcy proceedings, fewer or no
payments may be required. Real estate secured loans
involving a bankruptcy and accounts whose borrowers
are subject to a Chapter 13 plan filed with a bankruptcy
court generally may be considered current upon receipt
of one qualifying payment, while accounts whose
borrowers have filed for Chapter 7 bankruptcy
protection may be re-aged upon receipt of a signed
reaffirmation agreement. In addition, 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).
2014 compared with 2013
At 31 December 2014, renegotiated real estate secured
accounts in HSBC Finance represented 91% (2013: 91%)
of North America’s total renegotiated loans. US$8.0bn
of renegotiated real estate secured loans were
classified as impaired (2013: US$10bn). During 2014, the
aggregate number of renegotiated loans in HSBC Finance
reduced, due to the run-off and loan sales in the CML
portfolio, despite renegotiation activity continuing.
Within the constraints of our Group credit policy, HSBC
Finance’s policies allow for multiple renegotiations
under certain circumstances. Consequently, a significant
proportion of loans included in the table above have
undergone multiple re-ages or modifications. In this
regard, multiple modifications have remained consistent
at 70% to 75% of total modifications.
The accounts that received second or subsequent
renegotiations during the year do not appear in the
statistics presented. These statistics treat a loan as an
addition to the volume of renegotiated loans on its first
renegotiation only.
HSBC HOLDINGS PLC
154
Types of loan renegotiation programmes in HSBC Finance
• A temporary modification is a change to the contractual terms
of a loan that results in HSBC Finance giving up 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, which lower the amount of interest
income HSBC Finance is contractually entitled to receive in
future periods. Historically, modifications were granted for
terms as low as six months, although, more recent
modifications have a minimum term of two years.
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 HSBC Finance 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 above, 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.
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 on the
basis of 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.
Second lien mortgages in the US
The majority of second lien residential mortgages were taken
up by customers who held 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 liens 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 were 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.
HSBC HOLDINGS PLC
155
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Report of the Directors: Risk (continued)
Credit risk
Collateral and other credit enhancements held
(Audited)
Loans and advances held at amortised cost
Details of the Group’s practice regarding the use of collateral are
provided in the Appendix to Risk on page 213.
The tables below provide a quantification of the value
of fixed charges we hold over specific assets where we
have a history of enforcing, and are able to enforce,
collateral in satisfying a debt in the event of the
borrower failing to meet its contractual obligations, and
where the collateral is cash or can be realised by sale in
an established market. The collateral valuation excludes
any adjustments for obtaining and selling the collateral
and, in particular, loans shown as not collateralised or
partially collateralised may also benefit from other forms
of credit mitigants.
Residential mortgage loans including loan commitments by level of collateral
(Audited)
Non-impaired loans and advances
Fully collateralised
LTV ratio:
– less than 50%
– 51% to 75%
– 76% to 90%
– 91% to 100%
Partially collateralised:
– greater than 100% LTV (A)
– collateral value on A
Impaired loans and advances
Fully collateralised
LTV ratio:
– less than 50%
– 51% to 75%
– 76% to 90%
– 91% to 100%
Partially collateralised:
– greater than 100% LTV (B)
– collateral value on B
Europe
US$m
Asia4
US$m
MENA
US$m
North
America
Latin
America
US$m
US$m
Total
US$m
135,875
99,257
2,431
43,317
3,759
284,639
66,075
56,178
11,856
1,766
537
532
60,315
31,142
6,906
894
99
81
1,324
856
212
39
60
44
14,003
20,872
5,994
2,448
2,209
1,999
1,454
1,777
480
48
167
24
143,171
110,825
25,448
5,195
3,072
2,680
136,412
99,356
2,491
45,526
3,926
287,711
906
232
417
163
94
55
40
961
256
130
90
32
4
7
5
122
53
29
19
21
31
23
263
99,619
153
2,644
8,618
1,291
3,462
2,471
1,394
1,395
1,181
10,013
55,539
154
103
35
10
6
2
1
10,056
1,809
4,033
2,695
1,519
1,490
1,250
156
4,082
11,546
299,257
At 31 December 2014
137,373
Non-impaired loans and advances
Fully collateralised
LTV ratio:
– less than 50%
– 51% to 75%
– 76% to 90%
– 91% to 100%
Partially collateralised:
– greater than 100% LTV (C)
– collateral value on C
Impaired loans and advances
Fully collateralised
LTV ratio:
– less than 50%
– 51% to 75%
– 76% to 90%
– 91% to 100%
Partially collateralised:
– greater than 100% LTV (D)
– collateral value on D
At 31 December 2013
For footnote, see page 202.
146,326
98,332
2,235
44,125
3,749
294,767
55,028
66,452
21,603
3,243
1,410
852
55,479
34,370
6,836
1,647
362
307
749
1,095
348
43
42
37
13,172
20,751
6,933
3,269
4,150
3,681
1,337
1,715
606
91
59
49
125,765
124,383
36,326
8,293
6,023
4,926
147,736
98,694
2,277
48,275
3,808
300,790
1,369
244
452
320
353
104
91
1,473
149,209
254
100
96
49
9
17
4
271
90
15
31
34
10
6
6
96
98,965
2,373
10,128
160
12,001
1,393
4,250
2,809
1,676
2,548
2,272
12,676
60,951
97
47
13
3
8
4
1,849
4,876
3,225
2,051
2,683
2,377
168
3,976
14,684
315,474
HSBC HOLDINGS PLC
156
Supplementary information
Gross loans and advances by industry sector over five years
(Unaudited)
Personal
– first lien residential mortgages6
– other personal7
Corporate and commercial
– manufacturing
– international trade and services
– commercial real estate
– other property-related
– government
– other commercial8
Financial
– non-bank financial institutions
– settlement accounts
Asset-backed securities reclassified
Total gross loans and advances to
customers (A)
Gross loans and advances to banks
Total gross loans and advances
Impaired loans and advances to customers
– as a percentage of A
Impairment allowances on loans and
advances to customers
– as a percentage of A
Loan impairment charge
– new allowances net of allowance
releases
– recoveries
For footnotes, see page 202.
2014
US$m
393,554
286,524
107,030
540,556
106,986
180,791
73,293
52,387
6,143
120,956
50,818
48,799
2,019
2,069
986,997
112,198
1,099,195
29,283
3.0%
12,337
1.2%
4,055
5,010
(955)
Currency
translation
adjustment
US$m
Movement
US$m
2013
US$m
(19,092)
(12,372)
(6,720)
(24,729)
(5,856)
(8,232)
(3,270)
(922)
(395)
(6,054)
(2,303)
(2,180)
(123)
(147)
(46,271)
(4,925)
(51,196)
(1,538)
1,918
(979)
2,897
22,020
(1,008)
4,355
1,717
8,477
(739)
9,218
2,598
2,442
156
(500)
410,728
299,875
110,853
543,265
113,850
184,668
74,846
44,832
7,277
117,792
50,523
48,537
1,986
2,716
26,036
1,007,232
(2,981)
120,104
(5,607)
2012
US$m
415,093
301,862
113,231
513,229
112,149
169,389
76,760
40,532
10,785
103,614
46,871
45,430
1,441
3,891
979,084
117,142
2011
US$m
393,625
278,963
114,662
472,784
96,054
152,709
73,941
39,539
11,079
99,462
44,832
43,888
944
5,280
916,521
139,203
2010
US$m
425,320
268,681
156,639
445,505
91,121
146,567
71,880
34,838
8,594
92,505
41,213
39,651
1,562
5,892
917,930
142,027
23,055
1,127,336
1,096,226
1,055,724
1,059,957
36,428
3.6%
15,143
1.5%
6,048
7,344
(1,296)
38,671
3.9%
41,584
4.5%
46,871
4.8%
16,112
1.6%
17,511
1.9%
8,160
11,505
9,306
(1,146)
12,931
(1,426)
20,083
2.2%
13,548
14,568
(1,020)
(776)
(2,030)
(160)
(1,833)
(158)
(2)
(2,176)
343
The personal lending currency effect on gross loans and
advances of US$19bn was made up as follows: Europe
US$13bn, Asia US$2.6bn, Latin America US$1.8bn, North
America US$1.8bn. The wholesale lending currency effect
on gross loans and advances of US$32bn was made up as
follows: Europe US$21bn, Asia US$4.8bn, Latin America
US$4.7bn, North America US$1.5bn and Middle East and
North Africa US$0.3bn.
HSBC HOLDINGS PLC
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Report of the Directors: Risk (continued)
Credit risk
Reconciliation of reported and constant currency impaired loans, allowances and charges by geographical region
(Unaudited)
Currency
translation
adjustment21
31 Dec 13
as reported
US$m
31 Dec 13
at 31 Dec 14
exchange
rates
US$m
Movement
– constant
currency
basis
US$m
Reported
31 Dec 14
as reported
US$m
Impaired loans
Europe
Asia4
Middle East and North Africa
North America
Latin America
Impairment allowances
Europe
Asia4
Middle East and North Africa
North America
Latin America
Loan impairment charge
Europe
Asia4
Middle East and North Africa
North America
Latin America
For footnotes, see page 202.
13,228
1,623
2,285
15,123
4,244
36,503
5,598
1,214
1,583
4,242
2,564
15,201
1,732
483
(44)
1,235
2,642
6,048
US$m
(1,011)
(54)
(8)
(42)
(425)
(1,540)
(420)
(32)
(4)
(28)
(294)
(778)
62
(17)
–
(15)
(190)
(160)
12,217
1,569
2,277
15,081
3,819
34,963
5,178
1,182
1,579
4,214
2,270
14,423
1,794
466
(44)
1,220
2,452
5,888
(1,975)
479
(296)
(3,387)
(454)
(5,633)
(723)
174
(173)
(1,574)
259
(2,037)
(715)
178
43
(920)
(419)
(1,833)
10,242
2,048
1,981
11,694
3,365
29,330
4,455
1,356
1,406
2,640
2,529
12,386
1,079
644
(1)
300
2,033
4,055
Reconciliation of reported and constant currency loan impairment charges to the income statement
(Unaudited)
31 Dec 13
as reported
US$m
Currency
translation
adjustment21
US$m
31 Dec 13
at 31 Dec 14
exchange
rates
US$m
Movement
– constant
currency
basis
US$m
Reported
31 Dec 14
as reported
US$m
Loan impairment charge
Europe
– new allowances
– releases
– recoveries
Asia4
– new allowances
– releases
– recoveries
Middle East and North Africa
– new allowances
– releases
– recoveries
North America
– new allowances
– releases
– recoveries
Latin America
– new allowances
– releases
– recoveries
Total
– new allowances
– releases
– recoveries
For footnotes, see page 202.
1,732
3,082
(713)
(637)
483
953
(303)
(167)
(44)
408
(365)
(87)
1,235
1,640
(282)
(123)
2,642
3,262
(338)
(282)
6,048
9,345
(2,001)
(1,296)
62
99
(11)
(26)
(17)
(31)
8
6
–
(1)
2
(1)
(15)
(17)
2
–
(190)
(243)
34
19
(160)
(193)
35
(2)
1,794
3,181
(724)
(663)
466
922
(295)
(161)
(44)
407
(363)
(88)
1,220
1,623
(280)
(123)
2,452
3,019
(304)
(263)
5,888
9,152
(1,966)
(1,298)
(715)
(736)
(338)
359
178
193
(23)
8
43
(52)
49
46
(920)
(715)
(213)
8
(419)
(312)
(29)
(78)
(1,833)
(1,622)
(554)
343
1,079
2,445
(1,062)
(304)
644
1,115
(318)
(153)
(1)
355
(314)
(42)
300
908
(493)
(115)
2,033
2,707
(333)
(341)
4,055
7,530
(2,520)
(955)
HSBC HOLDINGS PLC
158
Constant
currency
change22
%
(16)
31
(13)
(22)
(12)
(16)
(14)
15
(11)
(37)
11
(14)
(40)
38
98
(75)
(17)
(31)
Constant
currency
change22
%
(40)
(23)
(47)
54
38
21
(8)
5
98
(13)
13
52
(75)
(44)
(76)
7
(17)
(10)
(10)
(30)
(31)
(18)
(28)
26
change22
%
(23)
26
(13)
(23)
(21)
(20)
(20)
12
(11)
(38)
(1)
(19)
(38)
33
98
(76)
(23)
(33)
change22
%
(38)
(21)
(49)
52
33
17
(5)
8
98
(13)
14
52
(76)
(45)
(75)
7
(23)
(17)
1
(21)
(33)
(19)
(26)
26
Loan impairment charges by industry sector over five years
(Unaudited)
Loan impairment charge/(release)
Personal
Corporate and commercial
Financial5
Year ended 31 December
For footnotes, see page 202.
2014
US$m
1,803
2,256
(4)
4,055
2013
US$m
3,196
2,974
(122)
6,048
2012
US$m
2011
US$m
5,362
2,802
(4)
8,160
9,318
2,114
73
11,505
2010
US$m
11,187
2,198
163
13,548
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
Movement in impairment allowances over five years
(Unaudited)
Impairment allowances at 1 January
Amounts written off
– personal
– corporate and commercial
– financial5
Recoveries of amounts written off in previous years
– personal
– corporate and commercial
– financial5
Loan impairment charge
Exchange and other movements13
Impairment allowances at 31 December
Impairment allowances
– individually assessed
– collectively assessed
Impairment allowances at 31 December
Amount written off net of recoveries as a percentage of average
2014
%
0.53
(0.10)
0.43
0.58
2014
US$m
15,201
(6,379)
(3,733)
(2,425)
(221)
955
818
128
9
4,055
(1,446)
12,386
6,244
6,142
12,386
2013
%
0.81
(0.14)
0.67
0.59
2013
US$m
16,169
(6,655)
(4,367)
(2,229)
(59)
1,296
1,097
198
1
6,048
(1,657)
15,201
7,130
8,071
15,201
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
2012
US$m
2011
US$m
17,636
(9,812)
(6,905)
(2,677)
(230)
1,146
966
172
8
8,160
(961)
16,169
6,629
9,540
16,169
20,241
(12,480)
(10,431)
(2,009)
(40)
1,426
1,175
242
9
11,505
(3,056)
17,636
6,662
10,974
17,636
2010
US$m
25,649
(19,300)
(16,458)
(2,789)
(53)
1,020
846
156
18
13,548
(676)
20,241
6,615
13,626
20,241
gross loans and advances to customers
0.6%
0.6%
1.0%
1.2%
2.2%
For footnotes, see page 202.
HSBC HOLDINGS PLC
159
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Report of the Directors: Risk (continued)
Credit risk
Gross loans and advances to customers by country
(Unaudited)
Europe
UK
France
Germany
Switzerland
Turkey
Other
Asia
Hong Kong
Australia
India
Indonesia
Mainland China
Malaysia
Singapore
Taiwan
Other
Middle East and North Africa (excluding
Saudi Arabia)
Egypt
UAE
Other
North America
US
Canada
Other
Latin America
Argentina
Brazil
Mexico
Other
At 31 December 2014
Europe
UK
France
Germany
Switzerland
Turkey
Other
Asia
Hong Kong
Australia
India
Indonesia
Mainland China
Malaysia
Singapore
Taiwan
Other
Middle East and North Africa (excluding
Saudi Arabia)
Egypt
UAE
Other
North America
US
Canada
Other
Latin America
Argentina
Brazil
Mexico
Other
At 31 December 2013
For footnotes, see page 202.
First lien
residential
mortgages6
US$m
131,000
123,239
2,914
6
298
645
3,898
93,147
56,656
9,154
1,235
64
4,238
5,201
9,521
3,920
3,158
2,647
1
2,263
383
55,577
37,937
16,236
1,404
4,153
15
2,067
1,967
104
286,524
140,474
132,174
2,661
7
364
833
4,435
92,047
53,762
9,468
1,080
69
4,880
5,140
10,283
3,797
3,568
2,451
1
2,082
368
60,955
42,317
17,036
1,602
3,948
20
1,811
2,117
–
Other
personal7
US$m
Property-
related
US$m
Commercial,
international
trade and other
US$m
47,531
21,023
12,820
212
8,149
3,389
1,938
36,368
22,891
815
285
469
1,981
1,750
5,878
626
1,673
3,924
510
1,782
1,632
9,823
5,482
4,085
256
9,384
1,169
5,531
2,642
42
35,313
25,927
7,341
304
225
297
1,219
70,057
52,208
2,130
613
202
6,606
1,988
4,210
118
1,982
2,246
98
1,545
603
15,492
11,461
3,708
323
2,572
93
1,077
1,336
66
200,313
156,577
21,834
7,275
614
4,244
9,769
164,739
82,362
6,360
5,099
5,476
24,875
5,217
11,951
7,057
16,342
21,633
2,272
13,814
5,547
51,535
38,632
11,825
1,078
29,543
2,119
16,814
9,503
1,107
Total
US$m
414,157
326,766
44,909
7,797
9,286
8,575
16,824
364,311
214,117
18,459
7,232
6,211
37,700
14,156
31,560
11,721
23,155
30,450
2,881
19,404
8,165
132,427
93,512
35,854
3,061
45,652
3,396
25,489
15,448
1,319
107,030
125,680
467,763
986,997
51,633
22,913
13,840
218
8,616
4,002
2,044
32,482
19,794
1,236
297
447
300
1,994
5,754
660
2,000
4,033
477
1,842
1,714
11,735
6,257
5,116
362
10,970
1,425
6,466
3,079
–
38,634
28,127
8,442
127
269
305
1,364
61,707
44,904
2,511
425
78
5,808
1,997
3,953
158
1,873
1,972
146
1,331
495
14,616
10,174
3,912
530
2,749
62
1,268
1,398
21
230,932
185,534
23,962
6,361
320
4,059
10,696
151,875
75,547
7,138
4,231
5,361
22,149
5,420
12,188
5,198
14,643
20,320
2,232
12,344
5,744
44,884
30,952
13,079
853
28,815
2,103
17,132
8,994
586
461,673
368,748
48,905
6,713
9,569
9,199
18,539
338,111
194,007
20,353
6,033
5,955
33,137
14,551
32,178
9,813
22,084
28,776
2,856
17,599
8,321
132,190
89,700
39,143
3,347
46,482
3,610
26,677
15,588
607
299,875
110,853
119,678
476,826
1,007,232
HSBC HOLDINGS PLC
160
The above tables analyse loans and advances 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.
HSBC Holdings
(Audited)
Risk in HSBC Holdings is overseen by the HSBC Holdings
Asset and Liability Management Committee (‘HALCO’).
The major risks faced by HSBC Holdings are credit risk,
liquidity risk and market risk (in the form of interest
rate risk and foreign exchange risk), 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
HSBC Holdings – maximum exposure to credit risk
(Audited)
Cash at bank and in hand:
– balances with HSBC undertakings
Derivatives
Loans and advances to HSBC undertakings
Financial investments in HSBC undertakings
Financial guarantees and similar contracts
Loan and other credit-related commitments
At 31 December
Maximum
exposure
US$m
249
2,771
43,910
4,073
52,023
16
103,042
The credit quality of loans and advances and financial
investments, both of which consist of intra-Group
lending, is assessed as ‘strong’ or ‘good’, with 100%
of the exposure being neither past due nor impaired
(2013: 100%).
Securitisation exposures and other
structured products
(Audited)
This section contains information about our exposure
to asset-backed securities (‘ABS’s), some of which are
held through consolidated structured entities and are
summarised in the table below.
A summary of the nature of HSBC’s exposures is provided in
the Appendix to Risk on page 214.
by certain Group operations in the normal conduct
of their business. It is reviewed and managed within
regulatory and internal limits for exposures by our Global
Risk function, which provides high-level centralised
oversight and management of credit risks worldwide.
HSBC Holdings’ maximum exposure to credit risk at
31 December 2014 is shown below. Its financial assets
principally represent claims on Group subsidiaries in
Europe and North America.
All the derivative transactions are with HSBC
undertakings that are banking counterparties (2013:
100%) and for which HSBC Holdings has in place master
netting arrangements. Since 2012, the credit risk
exposure has been managed on a net basis and the
remaining net exposure is specifically collateralised in
the form of cash.
2014
2013
Exposure to
credit risk
(net)
US$m
Maximum
exposure
US$m
249
161
43,910
4,073
52,023
16
407
2,789
53,344
1,210
52,836
1,245
100,432
111,831
Offset
US$m
–
(2,610)
–
–
–
–
(2,610)
Overall exposure of HSBC
(Audited)
Asset-backed securities
– fair value through profit or loss
– available for sale24
– held to maturity24
– loans and receivables
At 31 December
For footnotes, see page 202.
Exposure to
credit risk
(net)
US$m
407
34
53,344
1,210
52,836
1,245
109,076
Offset
US$m
–
(2,755)
–
–
–
–
(2,755)
Carrying amount23
2014
US$bn
2013
US$bn
48.9
3.6
29.7
13.4
2.2
48.9
50.1
3.1
42.7
1.1
3.2
50.2
The following table summarises the carrying amount of
our ABS exposure by categories of collateral and includes
assets held in the GB&M legacy credit portfolio with a
carrying value of US$23bn (2013: US$28bn).
At 31 December 2014, the available-for-sale reserve in
respect of ABSs was a deficit of US$777m (2013: deficit
of US$1,643m). For 2014, the impairment write-back in
respect of ABSs was US$276m (2013: write-back of
US$289m).
HSBC HOLDINGS PLC
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Report of the Directors: Risk (continued)
Credit risk / Liquidity and funding
Carrying amount of HSBC’s consolidated holdings of ABSs23
(Audited)
Trading
US$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
Mortgage-related assets:
Sub-prime residential
US Alt-A residential
US Government agency and sponsored
enterprises:
MBSs
Other residential
Commercial property
Leveraged finance-related assets
Student loan-related assets
Other assets
At 31 December 2014
Mortgage-related assets:
Sub-prime residential
US Alt-A residential
US Government agency and sponsored
enterprises:
MBSs
Other residential
Commercial property
Leveraged finance-related assets
Student loan-related assets
Other assets
At 31 December 2013
For footnote, see page 202.
122
96
82
928
654
172
242
1,264
3,560
178
101
178
618
133
294
196
1,271
2,969
3,081
3,022
10,401
1,220
3,627
3,660
3,545
1,114
–
11
13,436
–
–
–
–
–
29,670
13,447
2,977
3,538
18,661
1,925
5,667
5,011
3,705
1,265
42,749
–
18
1,110
–
–
–
–
–
1,128
–
–
–
–
–
–
–
19
19
–
–
–
–
104
–
–
34
138
Of which
held through
consolidated
SEs
US$m
2,075
2,411
–
652
2,854
2,526
3,284
758
Total
US$m
3,511
3,239
23,919
2,478
4,797
4,050
3,906
3,043
308
110
–
330
516
218
119
646
2,247
48,943
14,560
403
134
3,558
3,791
–
399
669
251
121
1,186
3,163
19,949
2,942
6,573
5,556
4,022
3,756
2,782
2,926
–
1,513
5,146
4,310
3,495
989
50,147
21,161
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 that 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 their securitisation
by HSBC Securities (USA) Inc. (‘HSI’) between 2005
and 2007;
• HSI acting as underwriter for the third-party issuance
of private label mortgage-backed securities (‘MBS’s)
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 selling and securitising mortgage loans, various
representations and warranties may be made to
purchasers of the mortgage loans and MBSs. When
purchasing and securitising mortgages originated by
third parties and underwriting 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, such as
servicers, originators, underwriters, trustees or sponsors
of securitisations, have been the subject of lawsuits and
governmental and regulatory investigations and
inquiries.
At 31 December 2014, a liability of US$27m (2013:
US$99m) was recognised in respect of various
representations and warranties regarding the origination
and sale by HSBC Bank USA of mortgage loans, primarily
to government sponsored entities. 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 its representations and warranties, HSBC Bank USA
may be obliged to repurchase the loans with identified
defects or to indemnify the buyers. The estimated
liability was based on the level of outstanding
repurchase demands, the level of outstanding requests
for loan files and the expected future repurchase
demands in respect of mortgages sold to date which
were either two or more payments delinquent or might
become delinquent at an estimated conversion rate.
Repurchase demands of US$3m were outstanding at
2014 (2013: US$44m).
For further information on legal proceedings and regulatory
matters, see Note 40 on the Financial Statements.
HSBC HOLDINGS PLC
162
Liquidity and funding
Liquidity and funding
Primary sources of funding
Liquidity and funding in 2014
Customer deposit markets
Wholesale senior funding markets
Liquidity regulation
Management of liquidity and funding risk
Inherent liquidity risk categorisation
Core deposits
Advances to core funding ratio
Stressed coverage ratios
Stressed scenario analysis
Liquid assets of HSBC’s principal operating
entities
Net contractual cash flows
Wholesale debt monitoring
Liquidity behaviouralisation
Funds transfer pricing
Contingent liquidity risk arising from committed
lending facilities
Sources of funding
Repos and stock lending
Cross-border intra-Group and cross-currency
liquidity and funding risk
Wholesale term debt maturity profile
Encumbered and unencumbered assets
Collateral
The effect of active collateral management
Off-balance sheet collateral received and pledged
for reverse repo, stock borrowing and derivative
transactions
Analysis of on-balance sheet encumbered and
unencumbered assets
Additional contractual obligations
Contractual maturity of financial liabilities
167
168
169
169
171
171
171
171
173
173
Management of cross-currency liquidity and
funding risk
HSBC Holdings
221
221
174
1 Appendix to Risk – risk policies and practices.
Page
App1
Tables
Page
164
164
164
164
164
165
165
165
215
215
215
215
216
216
216
216
Advances to core funding ratios
Stressed one-month and three-month coverage ratios
166
166
Liquid assets of HSBC’s principal entities
217
217 Net cash inflows/(outflows) for inter-bank loans and
intra-group deposits and reverse repo, repo and short
positions
218
218
219
The Group’s contractual undrawn exposures monitored
under the contingent liquidity risk limit structure
219
Funding sources and uses
Advances to core funding ratios by material currency
Wholesale funding cash flows payable by HSBC under
165
165
166
167
167
168
169
financial liabilities by remaining contractual maturities
170
220
Summary of assets available to support potential future
funding and collateral needs (on and off-balance sheet)
171
220
Analysis of on-balance sheet encumbered and
unencumbered assets
Cash flows payable by HSBC under financial liabilities
by remaining contractual maturities
Cash flows payable by HSBC Holdings under financial
liabilities by remaining contractual maturities
172
173
174
HSBC HOLDINGS PLC
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Report of the Directors: Risk (continued)
Liquidity and funding
Liquidity and funding
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 2014.
Following the change in balance sheet presentation
explained on page 347, the advances to deposits ratio
now excludes non-trading reverse repos and repos
with customers. The change had no effect on the
31 December 2013 ratio as disclosed.
A summary of our current policies and practices regarding
liquidity and funding is provided in the Appendix to Risk on
page 215.
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.
Liquidity and funding in 2014
(Unaudited)
The liquidity position of the Group strengthened in 2014,
and we continued to enjoy strong inflows of customer
deposits and maintained good access to wholesale
markets. Customer accounts increased by 4% (US$47bn)
on a constant currency basis. On a reported basis,
customer account balances decreased marginally by 1%
(US$11bn). Loans and advances to customers increased
by 3% (US$28bn) on a constant currency basis. On a
reported basis, loans and advances to customers
decreased by 2% (US$17bn). These changes resulted in a
small decrease in our advances to deposits ratio to 72%
(2013:73%)
HSBC UK recorded a decrease in its advances to core
funding (‘ACF’) ratio to 97% at 31 December 2014 (2013:
100%), mainly because core deposits increased more
than advances, and due to the disposal of legacy assets.
The Hongkong and Shanghai Banking Corporation
recorded an increase in its ACF ratio to 75% at
31 December 2014 (2013: 72%), mainly because
advances increased more than core deposits.
HSBC USA recorded an increase in its ACF ratio to 100%
at 31 December 2014 (2013: 85%), mainly because of
growth in customer advances.
HSBC UK, The Hongkong and Shanghai Banking Corporation and
HSBC USA are defined in footnotes 26 to 28 on page 202. The
ACF ratio is discussed on page 216.
Customer deposit markets
(On constant currency basis)
Retail Banking and Wealth Management
RBWM customer account balances increased by 4%,
driven by our two home markets of the UK and Hong
Kong and the majority of our priority growth markets.
Commercial Banking
Customer accounts increased by 7% in 2014, driven by
growth in Payments and Cash Management accounts in
our two home markets.
Global Banking and Markets
Customer accounts increased by 2% in 2014, mainly from
a rise in Payments and Cash Management accounts.
Global Private Banking
GPB customer account balances decreased by 10%
compared with the end of 2013 following the continued
repositioning of the GPB business and a client portfolio
disposal.
Wholesale senior funding markets
Conditions in the bank wholesale debt markets were
generally positive in 2014, supporting increased primary
market issuance volumes across the capital structure
from banks when compared with 2013. Periods of
volatility remained, however, particularly during the
latter months of the year when concerns around the
decline in the oil price and growth in Europe combined
with a variety of other factors to leave the outlook
uncertain, with market confidence affected as a result.
In 2014, we issued the equivalent of US$20bn (2013:
US$16bn) of senior term debt securities in the public
capital markets in a range of currencies and maturities
from a number of Group entities.
Liquidity regulation
(Unaudited)
The European adoption of the Basel Committee
framework (legislative texts known as the Capital
Requirements Regulation and Directive – ‘CRR/CRD IV’)
was published in June 2013, and required the reporting
of the liquidity coverage ratio (‘LCR’) and the net stable
funding ratio (‘NSFR’) to European regulators from
January 2014, which was subsequently delayed until
30 June 2014. A significant level of interpretation has
been required to report and calculate the LCR as defined
in the CRR text as certain areas were only addressed by
the finalisation of the LCR delegated act in January 2015,
which will not become a regulatory standard until
1 October 2015. The European calibration of NSFR is still
pending following the Basel Committee’s final
recommendation in October 2014.
HSBC HOLDINGS PLC
164
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 ACF 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 66% (2013: 66%) of the Group’s customer
accounts. Including the other principal entities, the
percentage was 95% (2013: 94%).
Advances to core funding ratio
The table to the right shows the extent to which loans
and advances to customers in our principal banking
entities were financed by reliable and stable sources of
funding.
ACF limits set for principal operating entities at
31 December 2014 ranged between 80% and 120%.
Core funding represents the core component of
customer deposits and any term professional funding
with a residual contractual maturity beyond one year.
Capital is excluded from our definition of core funding.
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.
Advances to core funding ratios25
(Audited)
At 31 December
2014
%
2013
%
HSBC UK26
Year-end
Maximum
Minimum
Average
The Hongkong and Shanghai Banking
Corporation27
Year-end
Maximum
Minimum
Average
HSBC USA28
Year-end
Maximum
Minimum
Average
Total of HSBC’s other principal
entities29
Year-end
Maximum
Minimum
Average
For footnotes, see page 202.
97
102
97
100
75
75
72
74
100
100
85
95
92
94
92
93
100
107
100
104
72
77
70
74
85
85
78
82
93
93
89
91
Stressed coverage ratios
The 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.
The one-month stressed coverage ratio for HSBC UK
increased as certain assets previously treated as realisable
under stress between 1 and 3 months were reassessed as
being either realisable within 1 month or beyond 3
months. The three-month stressed coverage ratio
remained broadly unchanged.
Inflows included in the numerator of the stressed
coverage ratio are generated from liquid assets net of
The stressed coverage ratios for the other entities
remained broadly unchanged.
Stressed one-month and three-month coverage ratios25
(Audited)
Stressed one-month coverage
ratios at 31 December
Stressed three-month coverage
ratios at 31 December
2014
%
2013
%
2014
%
2013
%
HSBC UK26
Year-end
Maximum
Minimum
Average
The Hongkong and Shanghai Banking Corporation27
Year-end
Maximum
Minimum
Average
HSBC USA28
Year-end
Maximum
Minimum
Average
Total of HSBC’s other principal entities29
Year-end
Maximum
Minimum
Average
For footnotes, see page 202.
117
117
102
107
117
119
114
116
111
122
108
115
121
121
114
117
106
114
100
106
119
131
113
119
114
126
110
115
121
128
113
120
109
109
103
104
112
114
111
112
104
111
104
107
108
115
108
110
109
109
101
103
114
126
109
114
110
119
109
112
114
119
109
113
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Report of the Directors: Risk (continued)
Liquidity and funding
Liquid assets of HSBC’s principal operating
entities
loans maturing within three months are not included in
liquid assets, but are treated as contractual cash inflows.
The table below shows the estimated liquidity value
(before assumed haircuts) of assets categorised as liquid
and used for the purposes of calculating the three-month
stressed coverage ratios, as defined under the LFRF.
The level of liquid assets reported reflects the stock of
unencumbered liquid assets at the reporting date,
adjusted for the effect of reverse repo, repo and
collateral swaps maturing within three months as the
liquidity value of these transactions is reflected as a
contractual cash flow reported in the net contractual
cash flow table.
Like reverse repo transactions with residual contractual
maturities within three months, unsecured interbank
Liquid assets of HSBC’s principal entities
(Audited)
HSBC UK26
Level 1
Level 2
Level 3
The Hongkong and Shanghai Banking Corporation27
Level 1
Level 2
Level 3
HSBC USA28
Level 1
Level 2
Level 3
Other
Total of HSBC’s other principal entities29
Level 1
Level 2
Level 3
For footnotes, see page 202.
All assets held within the liquid asset portfolio are
unencumbered.
Liquid assets held by HSBC UK decreased as a result
of switching from central bank reserves to short-term
reverse repo placements. A corresponding improvement
can be seen in HSBC UK’s net repo cash flow shown in
the net contractual cash flow table.
Liquid assets held by The Hongkong and Shanghai
Banking Corporation remained broadly unchanged.
Liquid assets held by HSBC USA increased, mainly due to
a reduction in short-term repos and the reclassification
of some assets as liquid in line with the LFRF.
Net contractual cash flows
The following table quantifies the contractual cash flows
from interbank and intra-Group loans and deposits, and
Liquid assets are held and managed on a stand-alone
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.
For a summary of our liquid asset policy and definitions of the
classifications shown in the table below, see the Appendix to
Risk on page 217.
Estimated liquidity value30
31 December
2014
US$m
31 December
2013
US$m
131,756
4,688
66,011
202,455
109,683
4,854
7,043
121,580
51,969
15,184
197
9,492
76,842
141,659
10,419
13,038
165,116
168,877
1,076
63,509
233,462
108,713
5,191
7,106
121,010
43,446
12,709
5,044
8,000
69,199
144,774
12,419
13,663
170,856
reverse repo, repo (including intra-Group 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 170.
For a summary of our policy and definitions of the classifications
shown in the table below, see the Appendix to Risk on page 218.
HSBC HOLDINGS PLC
166
Net cash inflows/(outflows) for interbank and intra-Group loans and deposits and reverse repo, repo and short positions
(Audited)
At 31 December 2014
At 31 December 2013
Interbank and intra-Group loans and deposits
HSBC UK26
The Hongkong and Shanghai Banking Corporation27
HSBC USA28
Total of HSBC’s other principal entities29
Reverse repo, repo, stock borrowing, stock lending and outright
short positions (including intra-Group)
HSBC UK26
The Hongkong and Shanghai Banking Corporation27
HSBC USA28
Total of HSBC’s other principal entities29
For footnotes, see page 202.
Contingent liquidity risk arising from
committed lending facilities
(Audited)
The Group’s operating entities provide commitments
to various counterparties. In terms of liquidity risk,
the most significant risk relates to committed lending
facilities which, whilst undrawn, give rise to contingent
liquidity risk as they 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 flexible market-based sources of finance
(see page 443), consolidated securities investment
conduits and third-party sponsored conduits.
The consolidated securities investment conduits include
Solitaire Funding Limited (‘Solitaire’) and Mazarin
Funding Limited (‘Mazarin’). They issue asset-backed
commercial paper secured against the portfolio of
securities held by them. At 31 December 2014, HSBC
Cash flows
within 1 month
US$m
Cash flows from
1 to 3 months
US$m
(14,110)
(1,277)
(18,353)
(1,322)
(16,070)
8,139
(4,928)
(22,110)
(2,846)
6,862
1,648
6,158
11,551
8,189
–
(11,120)
Cash flows
within 1 month
US$m
(19,033)
2,314
(24,268)
4,295
(39,064)
12,662
(11,001)
(40,223)
Cash flows from
1 to 3 months
US$m
(5,272)
7,487
729
10,149
149
4,297
–
9,551
UK had undrawn committed lending facilities to these
conduits of US$11bn (2013: US$15bn), of which Solitaire
represented US$9.5bn (2013: US$11bn) and the
remaining US$1.6bn (2013: US$4bn) pertained
to Mazarin. Although HSBC UK provides a liquidity
facility, Solitaire and Mazarin have no need to draw on it
so long as HSBC purchases the commercial paper issued,
which it intends to do for the foreseeable future. At
31 December 2014, the commercial paper issued by
Solitaire and Mazarin was entirely held by HSBC UK.
Since HSBC controls the size of the portfolio of securities
held by these conduits, no contingent liquidity risk
exposure arises as a result of these undrawn committed
lending facilities.
The table below shows the level of undrawn
commitments to customers outstanding for the five
largest single facilities and the largest market sector,
and the extent to which they are undrawn.
The Group’s contractual undrawn exposures at 31 December monitored under the contingent liquidity risk limit structure
(Audited)
HSBC UK26
2014
US$bn
2013
US$bn
HSBC USA28
2014
US$bn
2013
US$bn
HSBC Canada
2014
US$bn
2013
US$bn
The Hongkong and
Shanghai Banking
Corporation27
2014
US$bn
2013
US$bn
Commitments to conduits
Consolidated multi-seller conduits
– total lines
– largest individual lines
Consolidated securities
investment conduits – total
lines
Third party conduits – total lines
Commitments to customers
– five largest31
– largest market sector32
For footnotes, see page 202.
9.8
0.9
11.1
–
2.6
16.6
10.1
0.7
14.8
–
4.4
9.5
2.3
0.5
–
0.1
7.1
10.0
2.5
0.5
–
0.7
6.3
8.2
0.2
0.2
–
–
1.7
3.5
1.0
0.7
–
–
1.5
3.4
–
–
–
–
–
–
–
–
1.5
3.2
2.4
2.7
HSBC HOLDINGS PLC
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Report of the Directors: Risk (continued)
Liquidity and funding
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 below, which
provides a consolidated view of how our balance sheet
is funded, should be read in light of the LFRF, which
requires operating entities to manage liquidity and
funding risk on a stand-alone basis.
The table analyses our consolidated balance sheet
according to the assets that primarily arise from
operating activities and the sources of funding primarily
supporting these activities. The assets and 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. The positive
funding gap was predominantly deployed in 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.
For a summary of sources and utilisation of repos and stock
lending, see the Appendix to Risk on page 219.
Funding sources and uses33
(Audited)
Sources
Customer accounts1
Deposits by banks1
Repurchase agreements –
non-trading1
Debt securities issued
Subordinated liabilities
Financial liabilities designated
at fair value
Liabilities under insurance contracts
Trading liabilities
– repos
– stock lending
– settlement accounts
– other trading liabilities
Total equity
At 31 December
For footnote, see page 202.
2014
US$m
2013
US$m
1,350,642
1,361,297
77,426
86,507
107,432
95,947
26,664
76,153
73,861
190,572
3,798
12,032
17,454
157,288
199,979
164,220
104,080
28,976
89,084
74,181
207,025
17,421
12,218
17,428
159,958
190,459
Uses
Loans and advances to customers1
Loans and advances to banks1
Repurchase agreements –
non-trading1
Trading assets
– reverse repos
– stock borrowing
– settlement accounts
– other trading assets
2014
US$m
974,660
112,149
161,713
304,193
1,297
7,969
21,327
273,600
2013
US$m
992,089
120,046
179,690
303,192
10,120
10,318
19,435
263,319
Financial investments
Cash and balances with central
banks
Net deployment in other balance
sheet assets and liabilities
415,467
425,925
129,957
166,599
100,537
118,288
2,198,676
2,305,829
At 31 December
2,198,676
2,305,829
HSBC HOLDINGS PLC
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Cross-border, intra-Group and cross-currency
liquidity and funding risk
(Unaudited)
The stand-alone operating entity approach to liquidity and
funding mandated by the LFRF restricts the exposure of our
operating entities to the risks that can arise from extensive
reliance on cross-border funding. Operating entities
manage their funding sources locally, focusing
predominantly on the local customer deposit base. The
RBWM, CMB and GPB customer relationships that give rise
to core deposits within an operating entity generally reflect
a local customer relationship with that operating entity.
Access to public debt markets is co-ordinated globally by
the Global Head of Balance Sheet Management and the
Group Treasurer with Group ALCO monitoring all planned
public debt issuance on a monthly basis. As a general
principle, operating entities are only permitted to issue in
their local currency and are encouraged to focus on local
private placements. The public issuance of debt
instruments in foreign currency is tightly controlled and
generally restricted to HSBC Holdings and HSBC Bank.
A central principle of our stand-alone approach to LFRF is
that operating entities place no future reliance on other
Group entities. However, operating entities may, at their
discretion, utilise their respective committed facilities from
other Group entities if necessary. In addition, intra-Group
large exposure limits are applied by national regulators to
individual legal entities locally, which restricts the
unsecured exposures of legal entities to the rest of the
Group to a percentage of the lender’s regulatory capital.
Our LFRF 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 using the
foreign currency swap markets. Where appropriate,
operating entities are required to monitor stressed
coverage ratios and ACF ratios for non-local currencies
and set limits for them. Foreign currency swap markets
in currency pairs settled through the Continuous Link
Settlement Bank are considered to be extremely deep
and liquid and it is assumed that capacity to access these
markets is not exposed to idiosyncratic risks. The table
below shows the ACF ratios by material currencies for
the year ended 31 December 2014.
Advances to core funding ratios by material currency25
(Unaudited)
HSBC UK26
Local currency (sterling)
US dollars
Euros
Consolidated
The Hongkong and Shanghai Banking Corporation27
Local currency (Hong Kong dollars)
US dollars
Consolidated
HSBC USA28
Local currency (US dollars)
Consolidated
Total of HSBC’s other principal entities29
Local currency
US dollars
Consolidated
For footnotes, see page 202.
At 31
December
2014
%
98
100
99
97
81
74
75
100
100
97
101
92
For all HSBC’s operating entities, the only significant foreign
currencies that exceed 5% of Group balance sheet liabilities
are the Hong Kong dollar, euro, sterling and US dollar.
Wholesale term debt maturity profile
(Unaudited)
The maturity profile of our wholesale term debt
obligations is set out in the table on page 170,
‘Wholesale funding principal cash flows payable by HSBC
under financial liabilities by remaining contractual
maturities’.
The balances in the table do not agree directly with
those in the consolidated balance sheet as the table
presents gross cash flows relating to principal payments
and not the balance sheet carrying value, which includes
debt securities and subordinated liabilities measured at
fair value.
HSBC HOLDINGS PLC
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Report of the Directors: Risk (continued)
Liquidity and funding
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HSBC HOLDINGS PLC
170
s
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Encumbered and unencumbered assets
(Unaudited)
The table on page 172, ‘Analysis of on-balance sheet
encumbered and unencumbered assets’, 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. The objective of this disclosure
is to facilitate an understanding of available and
unrestricted assets that could be used to support
potential future funding and collateral needs.
The disclosure is not designed to identify assets which
would be available to meet the claims of creditors or to
predict assets that would be available to creditors in the
event of a resolution or bankruptcy.
An asset is defined as encumbered if it has been pledged
as collateral against an existing liability, and as a result
is no longer available to the Group to secure funding,
satisfy collateral needs or be sold to reduce the funding
requirement. An asset is therefore categorised as
unencumbered if it has not been pledged against an
existing liability. Unencumbered assets are 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’.
At 31 December 2014, the Group held US$1,770bn of
unencumbered assets that could be used to support
potential future funding and collateral needs,
representing 85% of the total assets that can support
funding and collateral needs (on and off-balance sheet).
Of this amount, US$765bn (US$684bn on-balance sheet)
were assessed to be readily realisable.
Summary of assets available to support potential future funding and collateral needs (on and off-balance sheet)
(Unaudited)
Total on-balance sheet assets
Less:
Reverse repo/stock borrowing receivables and derivative assets
Other assets that cannot be pledged as collateral
Total on-balance sheet assets that can support funding and collateral needs
Add off-balance sheet assets:
Fair value of collateral received from reverse repo/stock borrowing/derivatives that is available to sell
or repledge
Total assets that can support funding and collateral needs (on and off-balance sheet)
Less:
On-balance sheet assets pledged
Off-balance sheet collateral received from reverse repo/stock borrowing/derivatives which has been
repledged or sold
Assets available to support future funding and collateral needs at 31 December
2014
US$bn
2,634
(518)
(281)
1,835
257
2,092
(146)
(176)
1,770
2013
US$bn
2,671
(482)
(255)
1,934
265
2,199
(187)
(187)
1,825
For a summary of our policy on collateral management and
definition of encumbrance, see the Appendix to Risk on
page 213.
Collateral
(Unaudited)
Off-balance sheet collateral received and pledged
for reverse repo, stock borrowing and derivative
transactions
The fair value of assets accepted as collateral that we are
permitted to sell or repledge in the absence of default
was US$257bn at 31 December 2014 (2013: US$265bn).
The fair value of any such collateral sold or repledged
was US$176bn (2013: US$187bn). We are obliged to
return equivalent securities. These transactions are
conducted under terms that are usual and customary to
standard reverse repo, stock borrowing and derivative
transactions.
The fair value of collateral received and repledged
in relation to reverse repos, stock borrowing and
derivatives is reported on a gross basis. The related
balance sheet receivables and payables are reported on
a net basis where required under IFRSs offset criteria.
As a consequence of reverse repo, stock borrowing and
derivative transactions where the collateral received
could be but had not been sold or repledged, we
held US$81bn (2013: US$78bn) of unencumbered
collateral available to support potential future funding
and collateral needs at 31 December 2014.
Analysis of on-balance sheet encumbered and
unencumbered assets
The table below presents an analysis of on-balance
sheet holdings only, and shows the amounts of balance
sheet assets on a liquidity and funding basis that are
encumbered. The table therefore excludes any available
off-balance sheet holdings received in respect of reverse
repos, stock borrowing or derivatives.
HSBC HOLDINGS PLC
171
t
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S
Report of the Directors: Risk (continued)
Liquidity and funding
Analysis of on-balance sheet encumbered and unencumbered assets
(Unaudited)
Encumbered
Unencumbered
Assets
pledged as
collateral
US$m
–
–
–
59,162
1,994
46,311
10,857
–
–
–
–
–
–
–
–
178
24,329
–
61,785
3,176
58,609
–
294
–
–
–
–
Readily
realisable
assets
US$m
123,990
–
–
182,305
14,122
94,941
62,855
2,530
7,857
177
–
177
–
–
–
3,573
92,238
–
275,732
75,896
192,411
7,425
6,334
–
22
–
–
Reverse
repos/stock
borrowing
receivables
and derivative
assets
US$m
Cannot
be pledged
as collateral
US$m
Other
realisable
assets
US$m
Total
US$m
425
–
–
17,869
4
23
1,497
4,818
11,527
2,330
52
1,058
1,139
81
–
74,231
840,241
–
22,780
2,167
18,266
2,347
29,780
–
17,875
–
–
–
–
–
9,266
–
–
–
2,781
6,485
–
–
–
–
345,008
762
1,170
161,713
–
–
–
–
–
–
–
–
–
5,542
129,957
4,927
4,927
27,674
35,591
50
257
40
17,452
17,792
26,530
4
7,656
18,867
3
–
33,405
16,682
–
55,170
278
53,970
922
38,768
1,309
284
27,577
7,111
27,674
304,193
16,170
141,532
75,249
27,581
43,661
29,037
56
8,891
20,006
84
345,008
112,149
974,660
161,713
415,467
81,517
323,256
10,694
75,176
1,309
18,181
27,577
7,111
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 and
customers
Derivatives
Loans and advances to banks
Loans and advances to customers
Reverse repurchase agreements – non-trading
Financial investments
– Treasury and other eligible bills
– debt securities
– equity securities
Prepayments, accrued income and
other assets
Current tax assets
Interest in associates and joint ventures
Goodwill and intangible assets
Deferred tax
At 31 December 2014
145,748
684,371
1,005,531
517,919
280,570
2,634,139
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 and
customers
Derivatives
Loans and advances to banks
Loans and advances to customers
Reverse repurchase agreements – non-trading
Financial investments
– Treasury and other eligible bills
– debt securities
– equity securities
Prepayments, accrued income and
other assets
Current tax assets
Interest in associates and joint ventures
Goodwill and intangible assets
Deferred tax
–
–
–
99,326
3,402
83,563
8,373
1,796
2,192
19
–
19
–
–
–
162
32,218
–
54,473
2,985
51,488
–
1,028
–
–
–
–
161,240
–
–
142,211
17,976
57,850
55,156
2,813
8,416
2,706
–
826
1,874
6
–
8,342
102,203
–
289,093
72,849
210,516
5,728
16,788
–
12
–
–
269
–
–
14,654
206
–
363
6,151
7,934
1,883
–
776
1,103
4
–
80,231
854,724
–
31,096
2,052
25,720
3,324
24,619
–
16,356
–
–
–
–
–
20,438
–
–
–
5,263
15,175
–
–
–
–
–
282,265
–
65
179,690
–
–
–
–
–
–
–
–
–
5,090
6,021
25,220
26,563
–
231
–
11,861
14,471
33,822
50
10,968
22,734
70
–
31,311
2,879
–
51,263
226
50,949
88
34,407
985
272
29,918
7,456
166,599
6,021
25,220
303,192
21,584
141,644
63,892
27,884
48,188
38,430
50
12,589
25,711
80
282,265
120,046
992,089
179,690
425,925
78,112
338,673
9,140
76,842
985
16,640
29,918
7,456
At 31 December 2013
187,226
722,595
1,023,832
482,458
255,207
2,671,318
HSBC HOLDINGS PLC
172
The US$24bn (2013: US$32bn) 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 pledged US$121bn (2013: US$150bn)
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 (which are ISDA compliant
CSA contracts and contracts entered for pension
obligations, and exclude the contracts entered for
special purpose vehicles and additional termination
events) and based on the positions at 31 December
2014, we estimate that we could be required to post
additional collateral of up to US$0.5bn (2013: US$0.7bn)
in the event of a one-notch downgrade in credit ratings,
which would increase to US$1.2bn (2013: US$1.2bn) in
the event of a two-notch downgrade.
Contractual maturity of financial liabilities
(Audited)
The balances in the table below do not agree directly
with those in our consolidated balance sheet as the table
incorporates, on an undiscounted basis, all cash flows
relating to principal and future coupon payments (except
for trading liabilities and derivatives not treated as
hedging derivatives). Undiscounted cash flows payable
in relation to hedging derivative liabilities are classified
according to their contractual maturities. Trading
liabilities and derivatives not treated as hedging
derivatives are included in the ‘On demand’ time bucket
and not by contractual maturity.
A maturity analysis of repos and debt securities in issue included
in trading liabilities is presented in Note 31 on the Financial
Statements.
In addition, loans and other credit-related commitments
and financial guarantees and similar contracts are
generally not recognised on our balance sheet. The
undiscounted cash flows potentially payable under
financial guarantees and similar contracts are classified
on the basis of the earliest date they can be called.
Cash flows payable by HSBC under financial liabilities by remaining contractual maturities
(Audited)
On
demand
US$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
Deposits by banks
Customer accounts
Repurchase agreements – non-trading
Trading liabilities
Financial liabilities designated at fair value
Derivatives
Debt securities in issue
Subordinated liabilities
Other financial liabilities
Loan and other credit-related commitments
Financial guarantees and similar contracts
At 31 December 2014
Deposits by banks
Customer accounts
Repurchase agreements – non-trading
Trading liabilities
Financial liabilities designated at fair value
Derivatives
Debt securities in issue
Subordinated liabilities
Other financial liabilities
Loan and other credit-related commitments
Financial guarantees and similar contracts
At 31 December 2013
52,682
1,088,769
8,727
190,572
365
335,168
9
–
41,517
1,717,809
406,561
13,166
2,137,536
56,198
1,097,159
37,117
207,025
18,689
269,554
2,528
55
31,996
1,720,321
377,352
18,039
2,115,712
17,337
187,207
91,542
–
2,201
375
32,513
737
23,228
355,140
101,156
6,306
462,602
22,965
196,048
112,621
–
1,967
456
35,401
391
30,706
400,555
79,599
4,796
484,950
3,600
61,687
6,180
–
9,192
1,257
30,194
1,256
4,740
118,106
64,582
13,753
196,441
3,734
57,243
14,177
–
3,223
1,684
33,695
2,687
6,564
123,007
55,124
12,040
190,171
3,580
15,826
23
–
28,260
4,231
37,842
10,003
1,893
101,658
62,312
9,575
173,545
2,819
15,520
–
–
39,554
6,099
46,141
11,871
2,376
124,380
59,747
7,479
191,606
390
390
1,057
–
39,397
1,517
7,710
42,328
988
93,777
16,769
4,278
114,824
686
726
–
–
64,144
1,638
6,526
44,969
1,300
119,989
16,872
3,988
140,849
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Report of the Directors: Risk (continued)
Liquidity and funding / Market risk
HSBC Holdings
(Audited)
Liquidity risk in HSBC Holdings is overseen by HALCO.
Liquidity risk arises because of HSBC Holdings’ obligation
to make payments to debt holders as they fall due. The
liquidity risk related to these cash flows is managed by
matching debt obligations with internal loan cash flows
and by maintaining an appropriate liquidity buffer that
is monitored by HALCO.
At 31 December 2014, the Group had US$9.2bn of
CRD IV compliant non-common equity capital instruments,
of which US$3.5bn were classified as tier 2 and US$5.7bn
were classified as additional tier 1 (for details on the
additional tier 1 instruments issued during the year
see Note 35 on the Financial Statements).
The balances in the table below do not agree directly
with those on the balance sheet of HSBC Holdings as the
table incorporates, on an undiscounted basis, all cash
flows relating to principal and future coupon payments
(except for derivatives not treated as hedging
derivatives). Undiscounted cash flows payable in relation
to hedging derivative liabilities are classified according to
their contractual maturities. Derivatives not treated as
hedging derivatives are included in the ‘On demand’
time bucket.
In addition, loan commitments and financial guarantees
and similar contracts are generally not recognised on our
balance sheet. The undiscounted cash flows potentially
payable under financial guarantees and similar contracts
are classified on the basis of the earliest date on which
they can be called.
Cash flows payable by HSBC Holdings under financial liabilities by remaining contractual maturities
(Audited)
Amounts owed to HSBC undertakings
Financial liabilities designated at fair value
Derivatives
Debt securities in issue
Subordinated liabilities
Other financial liabilities
Loan commitments
Financial guarantees and similar contracts
At 31 December 2014
Amounts owed to HSBC undertakings
Financial liabilities designated at fair value
Derivatives
Debt securities in issue
Subordinated liabilities
Other financial liabilities
Loan commitments
Financial guarantees and similar contracts
At 31 December 2013
On
demand
US$m
Due within
3 months
US$m
Due between
3 and 12
months
US$m
1,441
–
1,066
–
–
–
2,507
16
52,023
54,546
2,053
–
704
–
–
–
2,757
1,245
52,836
56,838
985
210
–
16
252
1,132
2,595
–
–
2,595
1,759
299
–
37
225
885
3,205
–
–
3,205
42
642
–
50
770
158
1,662
–
–
1,662
2,315
671
–
1,780
676
284
5,726
–
–
5,726
Due between
1 and 5 years
US$m
449
6,345
103
263
5,815
–
12,975
–
–
12,975
857
4,921
–
279
5,699
–
11,756
–
–
11,756
Due after
5 years
US$m
–
19,005
–
1,303
28,961
–
49,269
–
–
49,269
5,654
26,518
–
1,451
24,812
–
58,435
–
–
58,435
HSBC HOLDINGS PLC
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Market risk
Page App1
Tables
Market risk in 2014
Exposure to market risk
Overview of market risk in global businesses
Market risk governance
Market risk measures
Monitoring and limiting market risk exposures
Sensitivity analysis
Value at risk
Stress testing
Trading portfolios
Value at risk of the trading portfolios
176
176
176
176
176
176
176
176
221
221
222
Types of risk by global business
223
223
223
223
224 Market risk stress testing
225
Back-testing
177
224
Gap risk
De-peg risk
ABS/MBS exposures
Non-trading portfolios
Value at risk of the non-trading portfolios
Credit spread risk for available-for-sale debt
securities (including SICs)
Equity securities classified as available for sale
Market risk balance sheet linkages
Structural foreign exchange exposures
Non-trading interest rate risk
Interest rate risk behaviouralisation
Balance Sheet Management
Third-party assets in Balance Sheet Management
Sensitivity of net interest income
178
178
178
179
179
181
181
181
181
181
225
225
225
225
226
226
226
226
226
227
227
Daily VaR (trading portfolios)
Trading VaR
Back-testing of trading VaR against hypothetical
profit and loss for the Group
Daily VaR (non-trading portfolios)
Non-trading VaR
Fair value of equity securities
Balances included and not included in trading VaR
Market risk linkages to the accounting balance sheet
Third-party assets in Balance Sheet Management
Sensitivity of projected net interest income
Sensitivity of reported reserves to interest rate movements
Defined benefit pension schemes
183
228
HSBC’s defined benefit pension schemes
Additional market risk measures
applicable only to the parent company
Foreign exchange risk
Sensitivity of net interest income
Interest rate repricing gap table
1 Appendix to Risk – risk policies and practices.
228
183
183
184
185
HSBC Holdings – foreign exchange VaR
Sensitivity of HSBC Holdings net interest income to
interest rate movements
Repricing gap analysis of HSBC Holdings
HSBC HOLDINGS PLC
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176
177
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178
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180
181
182
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Report of the Directors: Risk (continued)
Market risk
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.
There were no material changes to our policies and
practices for the management of market risk in 2014.
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. The interest rate risk on fixed-rate securities issued
by HSBC Holdings is not included in Group VaR. The
management of this risk is described on page 222.
• 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 225).
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures
while maintaining a market profile consistent with our risk
appetite.
We use a range of tools to monitor and limit market risk
exposures, including:
• Sensitivity analysis includes the sensitivity of net interest
income and the sensitivity of 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 in mainland China
and the potential effects of a sovereign debt default,
including its wider contagion effects.
A summary of our market risk management framework including
current policies is provided in the Appendix to Risk on page 221.
Market risk in 2014
(Unaudited)
Global financial markets were characterised by low
inflation and weak global growth, leading monetary
authorities to maintain accommodative policies, using
measures such as low interest rates and asset purchases.
With US data showing GDP growth, the US Federal
Reserve's asset purchase programme came to an end.
Despite this, US dollar bond yields fell further. Market
focus switched to actions that the ECB can take to
address the issues of low growth and deflation. A
sustained period of deflation would have a severe
detrimental impact on countries already in recession and
with high debt to GDP ratios. 2014 can be characterised
as a period of benign rates and equity markets in the G7
group of countries.
Against this backdrop, we maintained an overall
defensive risk profile in our trading businesses. Defensive
positions are characterised by low net open positions
or the purchase of volatility protection via options
trades. The lower trading VaR from defensive positioning
was offset by an increase caused by lower diversification
and regulatory changes to the calibrations used in
calculating VaR. Non-trading VaR declined during the
year as low interest rates, especially in US dollars, caused
the duration of non-trading assets to decrease.
Trading portfolios
(Audited)
Value at risk of the trading portfolios
Trading VaR predominantly resides within Global
Markets. This was higher at 31 December 2014 than at
31 December 2013 due to an increase in interest rate
trading VaR, the removal of diversification effects within
risk not in VaR (‘RNIV’) and lower portfolio diversification
benefit across asset classes.
The daily levels of total trading VaR over the last year are
set out in the graph below.
HSBC HOLDINGS PLC
176
Daily VaR (trading portfolios), 99% 1 day (US$m)
(Unaudited)
90
70
50
30
10
-10
-30
-50
Dec-13
Feb-14
Apr-14
May-14
Jul-14
Aug-14
Oct-14
Dec-14
The Group trading VaR for the year is shown in the table below.
Trading VaR, 99% 1 day34
(Audited)
Trading VaR
IR trading
FX trading
CS trading
Equity trading
Diversification
incl RNIV
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exchange and
commodity
US$m
9.8
16.9
34.2
16.0
15.2
26.4
Interest
rate
US$m
45.4
39.5
50.6
33.4
33.4
71.9
Equity
US$m
7.3
6.9
15.6
9.2
5.1
14.1
Portfolio
diversification
incl RNIV35
US$m
(14.3)
(17.8)
(20.7)
(20.3)
Credit
spread
US$m
12.5
13.7
20.9
14.2
16.5
25.5
Total36
US$m
60.7
59.2
77.8
52.1
49.9
81.3
At 31 December 2014
Average
Maximum
At 31 December 2013
Average
Maximum
For footnotes, see page 202.
Back-testing
(Unaudited)
In 2014, the Group experienced one loss exception and
two profit exceptions.
The profit exceptions were driven by the tightening of
spreads, and exposures to emerging market foreign
exchange and interest rates. There is no evidence of
model errors or control failures.
The loss exception was due primarily to losses from
increased volatility in foreign exchange currencies and
interest rates in some developed markets combined with
flattening yield curves.
The graph below shows the daily trading VaR against
hypothetical profit and loss for the Group during 2014.
It excludes exceptions that were exempted by the PRA
for regulatory capital purposes.
Back-testing of trading VaR against hypothetical profit and loss for the Group (US$m)
(Unaudited)
USDm
120
70
20
-30
-80
-130
Jan 2014
Feb 2014
Mar 2014
May 2014
Jun 2014
Jul 2014
Sep 2014
Oct 2014
Nov 2014
Dec 2014
Hypothetical profit and loss
VaR (99%)
Back-testing exception
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Report of the Directors: Risk (continued)
Market risk
Non-trading portfolios
(Audited)
Value at risk of the non-trading portfolios
Non-trading VaR of the Group includes contributions
from all global businesses. There is no commodity risk in
the non-trading portfolios. The decrease of non-trading
VaR during 2014 was due primarily to the shortening of
the duration in the non-trading book from lower interest
rates, especially in US dollars. The credit spread risks
component also added to a lower non-trading VaR as a
result of the reduction in the overall position combined
Daily VaR (non-trading portfolios), 99% 1 day (US$m)
(Unaudited)
with lower volatilities and credit spread baselines utilised
in the VaR calculations. This movement included the
reduction in credit spread risks relating to the Group’s
holdings of available-for-sale debt securities (excluding
those held in insurance operations which are discussed
further on page 194.
In the year, the decline in non-trading interest rate and
credit spread VaR components was offset by a decrease
in diversification benefit.
The daily levels of total non-trading VaR over the last
year are set out in the graph below.
280
240
200
160
120
80
40
0
-40
-80
-120
Dec-13
Non-trading VAR
IR non-trading
CS non-trading
Diversification
Feb-14
Apr-14
May-14
Jul-14
Aug-14
Oct-14
Dec-14
The Group non-trading VaR for the year is shown in the table below.
Non-trading VaR, 99% 1 day
(Audited)
At 31 December 2014
Average
Maximum
At 31 December 2013
Average
Maximum
The management of interest rate risk in the banking
book is described further in ‘Non-trading interest rate
risk’ below, including the role of Balance Sheet
Management (‘BSM’).
Non-trading VaR excludes equity risk on available-for-
sale securities, structural foreign exchange risk and
interest rate risk on fixed rate securities issued by HSBC
Holdings, the management of which is described in
the relevant sections below. These sections together
describe the scope of HSBC’s management of market
risks in non-trading books.
Interest
rate
US$m
88.2
103.3
147.7
150.6
145.7
221.7
Credit
spread
US$m
Portfolio
diversification
US$m
62.5
73.3
91.9
80.4
106.6
135.7
(28.5)
(37.4)
(76.4)
(82.1)
Total
US$m
122.2
139.2
189.0
154.6
170.2
252.3
Credit spread risk for available-for-sale
debt securities (including SICs)
The effect of movements in VaR credit spreads on our
available-for-sale debt securities was US$81m (2013:
US$113m) at 31 December 2014. This sensitivity includes
the gross exposure for the securities investment conduits
(‘SICs’) consolidated within our balance sheet based on
credit spread VaR. This sensitivity excludes losses which
would have been absorbed by the capital note holders.
The decrease in this sensitivity at 31 December 2014
compared with 31 December 2013 was due mainly to
reducing the overall positions and lower volatilities
and credit spread baselines observed during the year.
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Equity securities classified as available for sale
Fair value of equity securities
(Audited)
Private equity holdings37
Investment to facilitate ongoing
business38
Other strategic investments
At 31 December
For footnotes, see page 202.
2014
US$bn
2.0
1.2
7.5
10.7
2013
US$bn
2.7
1.2
5.2
9.1
The fair value of equity securities classified as available
for sale can fluctuate considerably. The table above sets
out the maximum possible loss on shareholders’ equity
Balances included and not included in trading VaR
(Unaudited)
At 31 December 2014
Assets
Cash and balances at central banks
Trading assets
Financial assets designated at fair value
Derivatives
Loans and advances to banks
Loans and advances to customers
Reverse repurchase agreements – non-trading
Financial investments
Liabilities
Deposits by banks
Customer accounts
Repurchase agreements – non-trading
Trading liabilities
Financial liabilities designated at fair value
Derivatives
Debt securities in issue
from available-for-sale equity securities. The increase
in other strategic investments was largely due to the
increase in the market value of the Industrial Bank
investment offsetting the decrease in private equity
holdings from the disposal of various direct and private
equity fund investments.
Market risk balance sheet linkages
(Unaudited)
The information below and on page 180 aims to facilitate
an understanding of linkages between line items in the
balance sheet and positions included in our market risk
disclosures, in line with recommendations made by the
Enhanced Disclosure Task Force.
Balance
sheet
US$m
129,957
304,193
29,037
345,008
112,149
974,660
161,713
415,467
77,426
1,350,642
107,432
190,572
76,153
340,669
95,947
Balances
included in
trading VaR
US$m
Balances not
included in
trading VaR
US$m
Primary
market risk
sensitivities
276,419
333,880
170,576
334,199
129,957
27,774
29,037
11,128
112,149
974,660
161,713
415,467
77,426
1,350,642
107,432
19,996
76,153
6,470
95,947
B
A
A
A
B
B
C
A
B
B
C
A
A
A
C
The table represents account lines where there is some exposure to market risk according to the following asset classes:
A Foreign exchange, interest rate, equity and credit spread.
B Foreign exchange and interest rate.
C Foreign exchange, interest rate and credit spread.
The table above splits the assets and liabilities into two
categories:
• those that are included in the trading book and are
measured by VaR; and
• those that are not in the trading book and/or are not
measured by VaR.
The breakdown of financial instruments included and
not included in trading VaR provides a linkage with
market risk to the extent that it is reflected in our risk
framework. However, it is important to highlight that
the table does not reflect how we manage market risk,
since we do not discriminate between assets and
liabilities in our VaR model.
The assets and liabilities included in trading VaR give
rise to a large proportion of the income included in net
trading income. As set out on page 49, HSBC’s net
trading income in 2014 was US$6,760m (2013:
US$8,690m). Adjustments to trading income such as
valuation adjustments do not feed the trading VaR
model.
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Report of the Directors: Risk (continued)
Market risk
Market risk linkages to the accounting balance sheet
Trading assets and liabilities
The Group’s trading assets and liabilities are in almost all cases
originated by GB&M. 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. 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.
Financial liabilities designated at fair value
Financial liabilities designated at fair value within HSBC are
primarily fixed-rate securities issued by HSBC entities for
funding purposes. 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
We undertake derivative activity for three primary purposes;
to create risk management solutions for clients, to manage the
portfolio risks arising from client business and to manage and
hedge our own risks. Most of our derivative exposures arise
from sales and trading activities within 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. They
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 181.
Details of derivatives in fair value and cash flow hedge
accounting relationships are given in Note 16 on the Financial
Statements. Our 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 investments
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
provided in Note 18 on the Financial Statements and by business
activity on page 60. The majority of these securities are mainly
held within Balance Sheet Management (‘BSM’) 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.
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.
Repurchase (repo) and reverse repurchase (reverse repo)
agreements non-trading
Reverse repo agreements, classified as assets, are a form of
collateralised lending. HSBC lends cash for the term of the
reverse repo in exchange for receiving collateral (normally in
the form of bonds).
Repo agreements, classified as liabilities, are the opposite of
reverse repo, allowing HSBC to obtain funding by providing
collateral to the lender.
Both transaction types are treated as non-trading risk for market
risk management and the primary risk is counterparty credit risk.
For information on the accounting policies applied to financial instruments at fair value, see Note 13 on the Financial Statements.
HSBC HOLDINGS PLC
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Structural foreign exchange exposures
(Unaudited)
For our policies and procedures for managing structural foreign
exchange exposures, see page 226 of the Appendix to Risk.
For details of structural foreign exchange exposures see Note 33
on the Financial Statements.
Non-trading interest rate risk
(Unaudited)
For our policies regarding the funds transfer pricing process for
non-trading interest rate risk and liquidity and funding risk, see
pages 226 and 219, respectively, of the Appendix to Risk.
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. Its primary responsibilities are:
• to define the rules governing the transfer of
non-trading interest rate risk from the global
businesses to BSM;
• to define the rules governing the interest rate risk
behaviouralisation applied to non-trading
assets/liabilities (see below);
• to ensure that all market interest rate risk that can be
neutralised 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,
including any market risk that cannot be neutralised.
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 market risk mandate, predominantly
through the use of fixed rate liquid assets
(government bonds) held in available-for-sale
portfolios and/or interest rate derivatives which
are part of fair value hedging or cash flow hedging
relationships. This non-trading interest rate risk is
reflected in non-trading VaR, as well as in our net
interest income (see below) or economic value of
equity (‘EVE’) sensitivity;
• risk which remains outside BSM because it cannot be
hedged or which arises due to our behaviouralised
transfer pricing assumptions. This risk is not reflected
in non-trading VaR, but is captured by our net interest
income or 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. This risk is not
reflected in non-trading VaR, but is captured by our
net interest income or EVE sensitivity. 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 non-trading
VaR, 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.
Interest rate risk behaviouralisation
For our policies regarding interest risk behaviouralisation, see
page 226 of the Appendix to Risk.
Third-party assets in Balance Sheet Management
(Unaudited)
For our BSM governance framework, see page 227 of the
Appendix to Risk.
Third-party assets in BSM decreased by 9% during 2014.
Deposits with central banks reduced by US$31bn,
predominantly in Europe due to a combination of
reduced repo activity and a decrease in balances with
the ECB as deposit rates became negative. Loans and
advances to banks decreased by US$6bn, mainly in Hong
Kong and the rest of Asia. Financial investments reduced
by US$8bn due to foreign exchange movements, net
sales and maturities in Hong Kong and the Americas,
partially offset by the increased deployment of funds
into securities in Asia.
Third-party assets in Balance Sheet Management
(Unaudited)
Cash and balances at central banks
Trading assets
Financial assets designated at fair
value
Loans and advances1:
– to banks
– to customers
Reverse repurchase agreements
Financial investments
Other
At 31 December
For footnote, see page 202.
2014
US$m
103,008
4,610
2013
US$m
134,086
5,547
–
72
53,842
1,931
59,172
306,763
2,470
531,796
59,355
2,146
58,968
314,427
3,700
578,301
Sensitivity of net interest income
(Unaudited)
The table below sets out the effect on our future
accounting net interest income (excluding insurance) 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 2015. The
sensitivities shown represent the change in the base case
projected net interest income that would be expected
under the two rate scenarios assuming that all other
non-interest rate risk variables remain constant, and
there are no management actions. In deriving our base
case net interest income projections the re-pricing rate
of assets and liabilities used is derived from current yield
curves. The interest rate sensitivities are indicative and
based on simplified scenarios. The limitations of this
analysis are discussed in the Appendix to Risk on
page 227.
Assuming no management response, a sequence of such
rises (‘up-shock’) would increase planned net interest
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Report of the Directors: Risk (continued)
Market risk
income for 2015 by US$885m (2014: US$938m), while
a sequence of such falls (‘down-shock’) would decrease
planned net interest income by US$2,089m (2014:
US$1,734m).
The net interest income (‘NII’) sensitivity of the Group
can be split into three key components; the structural
sensitivity arising from the four global businesses
excluding BSM and Markets, the sensitivity of
the funding of the trading book (Markets) and
the sensitivity of BSM.
The structural sensitivity is positive in a rising rate
environment and negative in a falling rate environment.
The sensitivity of the funding of the trading book is
negative in a rising rate environment and positive in a
falling rate environment, and in terms of the impact
on profit the change in net interest income would be
expected to be offset by a similar change in net trading
income. The sensitivity of BSM will depend on its
position. Typically, assuming no management response,
the sensitivity of BSM is negative in a rising rate
environment and positive in a falling rate environment.
The NII sensitivity figures below also incorporate the
effect of any interest rate behaviouralisation applied
and the effect of any assumed repricing across products
under the specific interest rate scenario. They do not
incorporate the effect of any management decision
to change the HSBC balance sheet composition.
Sensitivity of projected net interest income39
(Unaudited)
See page 227 in the Risk Appendix for more information about
interest rate behaviouralisation and the role of BSM.
The NII sensitivity in BSM arises from a combination of
the techniques that BSM use to mitigate the transferred
interest rate risk and the methods they use to optimise
net revenues in line with their defined risk mandate.
The figures in the table below do not incorporate the
effect of any management decisions within BSM, but in
reality it is likely that there would be some short-term
adjustment in BSM positioning to offset the NII effects of
the specific interest rate scenario where necessary.
The NII sensitivity arising from the funding of the trading
book is comprised of the expense of funding trading
assets, while the revenue from these trading assets
is reported in net trading income. This leads to an
asymmetry in the NII sensitivity figures which is
cancelled out in our global business results, where we
include both net interest income and net trading income.
It is likely, therefore, that the overall effect on profit
before tax of the funding of the trading book will be
much less pronounced than shown in the figures below.
The up-shock sensitivity remained broadly unchanged
in 2014. The down-shock sensitivity increased
predominantly due to a change in BSM’s interest
rate risk profile in US dollars.
Change in 2015 projected net interest income
arising from a shift in yield curves of:
+25 basis points at the beginning of each quarter
–25 basis points at the beginning of each quarter
Change in 2014 projected net interest income
arising from a shift in yield curves of:
+25 basis points at the beginning of each quarter
–25 basis points at the beginning of each quarter
For footnote, see page 202.
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
209
(521)
(107)
(291)
(9)
(1)
245
(494)
265
(259)
321
(783)
(146)
(31)
885
(2,089)
12
(23)
327
(412)
236
(233)
598
(761)
(128)
(14)
938
(1,734)
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.
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 below table, does not require revaluation
movements to go to reserves.
HSBC HOLDINGS PLC
182
The table below describes the sensitivity of our reported
reserves to the stipulated movements in yield curves and
the maximum and minimum month-end figures during
the year. The sensitivities are indicative and based on
Sensitivity of reported reserves to interest rate movements
(Unaudited)
simplified scenarios. The change in sensitivity of
reported reserves is predominantly due to a reduction
in the available-for-sale securities portfolio.
At 31 December 2014
+ 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 2013
+ 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
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)
Liabilities (present value)
Assets:
Equities
Debt securities
Other (including property)
At 31 December
2014
US$bn
42.1
%
18
68
14
100
2013
US$bn
40.5
%
18
70
12
100
For details of our defined benefit schemes, see Note 6 on the
Financial Statements, and for pension risk management see
page 200.
Maximum
impact
US$m
Minimum
impact
US$m
(5,212)
(2.7%)
4,915
2.6%
(5,992)
(3.3%)
5,786
3.2%
(3,696)
(1.9%)
3,250
1.7%
(5,507)
(3.0%)
4,910
2.7%
US$m
(3,696)
(1.9%)
3,250
1.7%
(5,762)
(3.2%)
5,634
3.1%
Additional market risk measures applicable
only to the parent company
(Audited)
The principal tools used in the management of market
risk are VaR for foreign exchange rate risk and the
projected sensitivity of HSBC Holdings’ net interest
income to future changes in yield curves and interest
rate gap repricing tables for interest rate risk.
Foreign exchange risk
Total foreign exchange VaR arising within HSBC Holdings
in 2014 was as follows:
HSBC Holdings – foreign exchange VaR
(Audited)
At 31 December
Average
Minimum
Maximum
2014
US$m
29.3
42.1
29.3
50.0
2013
US$m
54.1
51.1
46.7
64.1
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 consolidation.
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Report of the Directors: Risk (continued)
Market risk
Sensitivity of net interest income
(Audited)
HSBC Holdings monitors net interest income sensitivity
over a five year time horizon reflecting the longer-term
perspective on interest rate risk management
appropriate to a financial services holding company.
These sensitivities assume that any issuance where HSBC
Holdings has an option to reimburse at a future call date
is called at this date. The table below sets out the effect
on HSBC Holdings’ future net interest income over a five
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 2015.
Assuming no management actions, a sequence of such
rises would increase planned net interest income for
the next five years by US$600m (2013: increase of
US$602m), while a sequence of such falls would
decrease planned net interest income by US$539m
(2013: decrease of US$464m).
Sensitivity of HSBC Holdings’ net interest income to interest rate movements39
(Audited)
US dollar
bloc
US$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
2014
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
2013
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 202.
78
281
138
(58)
(276)
(138)
104
382
245
(53)
(300)
(243)
9
17
17
(9)
(16)
(17)
(14)
(93)
(101)
13
91
101
2
34
24
(1)
(12)
(12)
2
38
38
(2)
(33)
(38)
89
332
179
(68)
(304)
(167)
92
327
182
(42)
(242)
(180)
The interest rate sensitivities tabulated above
are indicative and 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. 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 take into account
the effect of actions that could be taken to mitigate this
interest rate risk.
Interest rate repricing gap table
The interest rate risk on the fixed-rate securities issued
by HSBC Holdings is not included within the Group VaR
but is managed on a repricing gap basis. The interest
rate repricing gap table below analyses the full-term
structure of interest rate mismatches within HSBC
Holdings’ balance sheet.
HSBC HOLDINGS PLC
184
Repricing gap analysis of HSBC Holdings
(Audited)
Cash at bank and in hand:
– balances with HSBC undertakings
Derivatives
Loans and advances to HSBC undertakings
Financial investments in HSBC undertakings
Investments in subsidiaries
Other assets
Total assets
Amounts owed to HSBC undertakings
Financial liabilities designated at fair values
Derivatives
Debt securities in issue
Other liabilities
Subordinated liabilities
Total equity
Total liabilities and equity
Off-balance sheet items attracting interest rate
sensitivity
Net interest rate risk gap at 31 December 2014
Cumulative interest rate gap
Cash at bank and in hand:
– balances with HSBC undertakings
Derivatives
Loans and advances to HSBC undertakings
Financial investments in HSBC undertakings
Investments in subsidiaries
Other assets
Total assets
Amounts owed to HSBC undertakings
Financial liabilities designated at fair values
Derivatives
Debt securities in issue
Other liabilities
Subordinated liabilities
Total equity
Total liabilities and equity
Off-balance sheet items attracting interest rate
sensitivity
Net interest rate risk gap at 31 December 2013
Cumulative interest rate gap
Total
US$m
249
2,771
43,910
4,073
96,264
597
147 8641
147,864
(2,892)
(18,679)
(1,169)
(1,009)
(1,415)
(17,255)
(105,445)
(
(147,864)
–
–
–
407
2,789
53,344
1,210
92,695
391
150,836
(11,685)
(21,027)
(704)
(2,791)
(1,375)
(14,167)
(99,087)
(150,836)
–
–
–
Up to
1 year
US$m
From over 1
to 5 years
US$m
From over 5
to 10 years
US$m
More than
10 years
US$m
Non-interest
bearing
US$m
–
–
41,603
3,010
–
–
44,613
(1
(1,877)
(850)
–
–
–
(779)
–
(3,506)
(21,525)
19,582
19,582
357
–
49,979
300
–
–
50,636
(10,865)
(1,928)
–
(1,722)
–
–
–
(14,515)
(18,620)
17,501
17,501
–
–
290
–
–
–
290
–
(5,472)
–
–
–
(3,766)
–
(9,238)
7,295
(1,653)
17,929
–
–
290
–
–
–
290
–
(4,655)
–
–
–
(3,030)
–
(7,685)
4,382
(3,013)
14,488
–
–
1,093
731
–
–
1,824
–
(5,400)
–
(1,013)
–
(2,000)
–
(8,413)
7,400
811
18,740
–
–
1,239
731
–
–
1,970
–
(7,810)
–
–
–
(2,066)
–
(9,876)
9,876
1,970
16,458
–
–
–
–
–
–
–
–
(4,263)
–
–
–
(10,195)
–
(14,458)
5,763
(8,695)
10,045
–
–
645
–
–
–
645
–
(4,325)
–
(1,069)
–
(8,912)
–
249
2,771
924
332
96,264
597
101,137
(1,015)
(2,694)
(1,169)
4
(1,415)
(515)
(105,445)
(112,249)
1,067
(10,045)
–
50
2,789
1,191
179
92,695
391
97,295
(820)
(2,309)
(704)
–
(1,375)
(159)
(99,087)
(14,306)
(104,454)
4,421
(9,240)
7,218
(59)
(7,218)
–
HSBC HOLDINGS PLC
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Report of the Directors: Risk (continued)
Operational risk
Operational risk
(Unaudited)
Operational risk
Operational risk management framework
Operational risk in 2014
Frequency and amount of operational risk losses
Compliance risk
Legal risk
Global security and fraud risk
Systems risk
Vendor risk management
Page App1
Tables
Page
Three lines of defence
Operational risk management framework
Frequency of operational risk incidents by risk category
Distribution of operational risk losses in US dollars by
risk category
186
187
189
228
186
186
187
188
189
228
229
229
230
231
231
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.
Responsibility for minimising operational risk lies with
HSBC’s management and staff. Each regional, global
business, country, business unit and functional head is
required to maintain oversight over the operational risks
and internal controls of the business and operational
activities for which they are responsible.
A summary of our current policies and practices regarding
operational risk is provided in the Appendix to Risk on page 228.
Operational risk management framework
The Group Operational Risk function and the operational
risk management framework (‘ORMF’) directs 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. To implement the
ORMF a ‘three lines of defence’ model is used 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 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 diagrammatic representation of the ORMF is presented
on page 187.
Activity to embed the use of our operational risk
management framework continued in 2014. At the same
time, we are streamlining operational risk management
processes and harmonising framework components and
risk management processes. This is expected to lead to a
stronger operational risk management culture and more
forward-looking risk insights to enable businesses to
determine whether material risks are being managed
within the Group’s risk appetite and whether further
action is required. In addition, the Security and Fraud
Risk and Financial Crime Compliance functions have
built a Financial Intelligence Unit (‘FIU’) which provides
intelligence on the potential risks of financial crime
posed by customers and business prospects to enable
better risk management decision-making. The FIU
provides context and expertise to identify, assess and
understand financial crime risks holistically in clients,
sectors and markets.
Articulating our risk appetite for material operational
risks helps the organisation understand the level of risk
HSBC is willing to accept. The Group operational risk
appetite statement is approved annually by the GRC.
The Group risk appetite statement, which includes
operational risk appetite metrics, was approved by the
HSBC Holdings Board. Monitoring operational risk
exposure against risk appetite on a regular basis and
implementing our risk acceptance process drives risk
awareness in a forward-looking manner. It assists
management in determining whether further action
is required.
Operational risk and control assessments (‘RCAs’) are
performed by individual business units and functions.
The risk and control assessment process is designed to
provide business areas and functions with a forward
looking view of operational risks and an assessment of
the effectiveness of controls, and a tracking mechanism
for action plans so that they can proactively manage
operational risks within acceptable levels. Risk and
control assessments are reviewed and updated at least
annually.
HSBC HOLDINGS PLC
186
Operational risk management framework
Operational Risk Standards
• Regulatory Compliance
• Financial Crime Compliance
• Fiduciary
•
Legal
•
Information
• Accounting
• Tax
• External Fraud
•
Internal Fraud
• People
• Political
• Physical
• Business Continuity
• Systems
• Operations
• Project
Risk and Control Assessment
Key Indicators
Incidents/Internal Loss
External Events
Capital Modelling
Risk Awareness and Culture
Scenario
Analysis
Reporting
and
Management
Actions
Governance
Identify
Set Risk
Appetite
Assess
Control
Report
• RCAs are used to inform the evaluation of the effectiveness of controls over top risks.
• Key Indicators are used to help monitor the risks and controls.
• Scenarios provide management with a quantified view of our top and emerging operational risks.
•
• External sources are used to inform the assessment of extreme scenarios.
Internal incidents are used to forecast typical losses.
Appropriate means of mitigation and controls are
considered. These include:
• making specific changes to strengthen the internal
control environment;
• investigating whether cost-effective insurance cover
is available to mitigate the risk; and
• other means of protecting us from loss.
In addition, an enhanced scenario analysis process has
been implemented across material legal entities to
improve the quantification and management of material
risks.
Operational risk in 2014
During 2014, our operational risk profile continued to be
dominated by compliance and legal risks as referred to
under ‘Top and emerging risks’ on page 118. Losses were
realised relating to events that occurred in previous
years. These events included the possible historical
mis-selling of payment protection insurance (‘PPI’)
products in the UK (see Note 29 on the Financial
Statements). A number of mitigating actions continue
to be taken to prevent future mis-selling incidents.
The incidence of regulatory and other 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. We remain
subject to a number of regulatory proceedings including
investigations and reviews by various national regulatory,
competition and enforcement authorities relating to
certain past submissions made by panel banks and the
process for making submissions in connection with the
setting of Libor and other interbank offered and
benchmark interest rates. There are also investigations
into foreign exchange, precious metals and credit default
swap-related activities in progress. In response, we
have undertaken a number of initiatives, including the
restructuring of our Compliance sub-functions, enhancing
our governance and oversight, measures to implement
Global Standards as described on page 26 and other
measures put in place designed to ensure we have
the appropriate people, processes and procedures to
manage emerging risks and new products and business.
For further details see 'Compliance risk' on page 189 and for
details of the investigations and legal proceedings see Note 40
on the Financial Statements.
In November 2014, the UK FCA and the US Commodity
Futures Trading Commission (‘CFTC’) each announced
having concluded regulatory settlements with a number
of banks, including HSBC Bank plc, in connection with
their respective investigations of trading and other
conduct involving foreign exchange benchmark rates.
Under the settlement terms, HSBC Bank plc agreed to
pay a financial penalty to the FCA and a civil monetary
penalty to the CFTC and to undertake various remedial
actions. For further information, see Note 40 on the
Financial Statements.
We have undertaken a review of our compliance with the
fixed-sum unsecured loan agreement requirements of
the UK Consumer Credit Act (‘CCA’). A liability has been
recognised within ‘Accruals, deferred income and other
liabilities’ for the repayment of interest to customers
where annual statements did not remind them of their
right to partially prepay the loan, notwithstanding that
the customer loan documentation did include this right.
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Report of the Directors: Risk (continued)
Operational risk
There is uncertainty as to whether other technical
requirements of the CCA have been met, for which
we have assessed an additional contingent liability. For
further details see Note 40 on the Financial Statements.
We have settled claims by the US Federal Housing
Finance Agency in relation to the purchase of mortgage
backed securities by the Federal National Mortgage
Associations (‘Fannie Mae’) and the Federal Home Loan
Mortgage Association (‘Freddie Mac’) between 2005
and 2007. For further information, see Note 40 on the
Financial Statements.
Other operational risks included:
• fraud risks: the threat of fraud perpetrated by or
against our customers, especially in retail and
commercial banking, may grow during adverse
economic conditions. We increased monitoring,
analysed root causes and reviewed internal controls
to enhance our defences against external attacks and
reduce the level of loss in these areas. In addition,
Group Security and Fraud Risk worked closely with the
global businesses to continually assess these threats
as they evolved and adapt our controls to mitigate
these risks;
• level of change creating operational complexity:
the Global 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. The Global Transactions
Team has developed an enhanced risk management
framework to be applied to the management of
disposal risks;
• information security: the security of our information
and technology infrastructure is crucial for
maintaining our banking services and protecting
our customers and the HSBC brand. A failure of the
control framework which protects this could have
implications for the wider financial sector and result
in direct financial loss and/or the loss of customer
data and other sensitive information which could
undermine both our reputation and our ability to
retain the trust of our customers. Programmes of
work have been ongoing to strengthen internal
security controls to prevent unauthorised access to
our systems which may affect live services or facilitate
data loss or fraud. In common with other banks and
multinational organisations, we continue to be a
target of increasingly sophisticated cyber-attacks
such as ‘distributed denial of service’ attacks which
can affect the availability of customer-facing
websites. In addition, reliance on standard internet
technologies, protocols and services means we are
subject to wide-scale remediation when flaws are
reported in these technologies. Lessons learnt
from attacks experienced within the industry and
information sharing with other financial institutions,
government agencies and external intelligence
providers allows us to develop a better understanding
of our own susceptibilities and to develop scenarios
to test against. They will continue to be a focus
of ongoing initiatives to strengthen the control
environment. Significant investment has already been
made in enhancing controls around data access, the
heightened monitoring of potential cyber-attacks
and continued training to raise staff awareness. This
is an area that will require continual investment in
our operational processes and contingency plans;
• vendor risk management: we continue to focus on the
management of vendor risks including making good
progress with the implementation of the supplier
performance management programme with our most
important suppliers. Additional focus is put on the
screening of suppliers to enable HSBC to identify if
any suppliers are on a sanctions list and to exit such
relationships. Vendor risk management is a core
element of third party risk management; and
• compliance with regulatory agreements and orders:
Failure to implement our obligations under the DPAs
could have a material adverse effect on our results
and operations. Legal proceedings are discussed in
Note 40 on the Financial Statements and further
details regarding compliance risk are set out below.
Other operational risks are also monitored and managed
through the use of the ORMF.
Further information on the nature of these risks is provided in
‘Top and emerging risks’ on page 118.
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.
Operational losses rose in 2014, driven by UK customer
redress programme charges and settlements relating to
legal and regulatory matters.
As in 2013, the operational risk incident profile in 2014
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
as credit card fraud occurred more often than other
types of event, but the amounts involved were often
small in value. By contrast, operational risk incidents in
the compliance category were relatively low frequency
events, but the total cost was significant.
The number of fraud cases was broadly unchanged
during 2014 due to the continued strong control
environment.
Losses due to significant historical events, including the
possible mis-selling of PPI products in the UK and the
incidence of regulatory matters described in Note 40
on the Financial Statements remained substantial in
2014.
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Frequency of operational risk incidents by risk category
(individual loss >US$10k)
Accounting and Tax
Financial Crime Compliance
Regulatory Compliance
1%
1%
0%
0%
Fraud
Legal
Operations and Systems
6%
5%
4%
7%
People
Other
2%
1%
2014
2013
39%
39%
23%
22%
24%
25%
Distribution of operational risk losses in US dollars by risk
category
Accounting and Tax
Financial Crime Compliance
Regulatory Compliance
2%
3%
0%
0%
2014
2013
54%
43%
Fraud
Legal
Operations and Systems
6%
7%
16%
14%
30%
22%
People
Other
1%
2%
0%
0%
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.
In 2014, we completed the restructuring of our
Compliance sub-function within Global Risk into two
new sub-functions: Financial Crime Compliance and
Regulatory Compliance, appropriately supported by
shared Compliance Chief Operating Officer, Assurance
and Reputational Risk Management teams. We continue
to ensure that the Compliance sub-functions, through
their operation and the execution of the Group strategy,
including measures to implement Global Standards, are
well positioned to meet increased levels of regulation
and scrutiny from regulators and law enforcement
agencies. In addition, the measures we have put in place
are designed to ensure we have the appropriate people,
processes and procedures to manage emerging risks and
new products and business.
Enhanced global AML and sanctions policies,
incorporating risk appetite, were approved by the Board
in January 2014. The policies adopt and seek to enforce
the highest or most effective standards globally,
including a globally consistent approach to knowing our
customers.
The policies are being implemented in phases through
the development and application of procedures required
to embed them in our day to day business operations
globally. The overriding policy objective is for every
employee to engage in only ‘the right kind of business,
conducted in the right way’.
HSBC has fulfilled all of the requirements imposed by the
DANY DPA, which expired by its terms at the end of the
two-year period of that agreement in December 2014.
Breach of the US DPA at any time during its term may
allow the DoJ to prosecute HSBC Holdings or HSBC Bank
USA in relation to the matters which are the subject of
the US DPA. For further information, see ‘Regulatory
commitments and consent orders’ on page 120.
In May 2014, the Board approved a globally consistent
approach to the management of regulatory conduct
designed to ensure we deliver fair outcomes for our
customers and conduct orderly and transparent
operations in financial markets. Implementation of the
global conduct approach is managed through the global
lines of business and functions and covers all our
business and operational activities. Examples of these
activities are disclosed in ‘Conduct of business’ on
page 121.
It is clear that the level of inherent compliance risk that
we face will continue to remain high for the foreseeable
future. However, we consider that good progress is being
made and will continue to be made in ensuring that we
are well placed to effectively manage those risks.
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Report of the Directors: Risk (continued)
Risk management of insurance operations
Risk management of insurance operations
(Audited)
Page App1
Tables
Page
HSBC’s bancassurance model
Overview of insurance products
Nature and extent of risks
Risk management of insurance operations
in 2014
Asset and liability matching
231
232
190
191
191
Balance sheet of insurance manufacturing subsidiaries:
– by type of contract
– by geographical region
Movement in total equity of insurance operations
Financial risks
Market risk
194
232
Financial assets held by insurance manufacturing
subsidiaries
194
232
Financial return guarantees
Sensitivity of HSBC’s insurance manufacturing
subsidiaries to market risk factors
Credit risk
196
234
Treasury bills, other eligible bills and debt securities in
Liquidity risk
197
234
HSBC’s insurance manufacturing subsidiaries
Reinsurers’ share of liabilities under insurance contracts
Expected maturity of insurance contract liabilities
Remaining contractual maturity of investment contract
liabilities
Analysis of insurance risk – liabilities under insurance
Insurance risk
Sensitivities to non-economic assumptions
1 Appendix to Risk – policies and practices.
198
198
235
contracts
Sensitivity analysis
191
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193
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197
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1
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 in 2014.
A summary of HSBC’s policies and practice regarding the risk
management of insurance operations and the main contracts we
manufacture is provided in the Appendix to Risk on page 231.
HSBC’s bancassurance model
(Unaudited)
We operate an integrated bancassurance model which
provides insurance products principally for customers
with whom we have a banking relationship. Insurance
products are sold through all global businesses, but
predominantly by RBWM and CMB through our branches
and direct channels worldwide.
The insurance contracts we sell relate to the underlying
needs of our banking customers, which we can
identify from our point-of-sale contacts and customer
knowledge. The majority of sales are of savings and
investment products and term and credit life contracts.
By focusing largely on personal and SME lines of business
we are able to optimise volumes and diversify individual
insurance risks.
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 by keeping
part of the underwriting profit, investment income and
distribution commission within the Group.
Where we do not have the risk appetite or operational
scale to be an effective insurance manufacturer, we
engage with a handful of leading external insurance
companies in order to provide insurance products to
our customers through our banking network and direct
channels. These arrangements are generally structured
with our exclusive strategic partners and earn the Group
a combination of commissions, fees and a share of
profits.
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, the UK, Hong Kong
and Singapore). There are also life insurance
manufacturing subsidiaries in mainland China, Malaysia
and Malta.
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Risk management of insurance operations
in 2014
We measure the risk profile of our insurance
manufacturing businesses using an economic capital
approach, where assets and liabilities are measured on
a market value basis and a capital requirement is held
to ensure that there is less than a 1 in 200 chance of
insolvency over the next year, given the risks that the
businesses are exposed to. In 2014 we aligned the
measurement approach for market, credit and
insurance risks in the economic capital model to the
new pan-European Solvency II insurance capital
regulations, which are applicable from 2016.
The risk profile of our life insurance manufacturing
businesses did not change materially during 2014 and
liabilities to policyholders on these contracts remained
constant at US$74bn (2013: US$74bn). However, a
notable change arose in the UK where HSBC Life (UK) Ltd
entered into an agreement to sell its pensions business.
The full effect will only be recognised once regulatory
approval is received and the portfolio is transferred to
the purchaser.
Asset and liability matching
(Audited)
A principal tool used to manage exposures to both
financial and insurance risk, in particular for life
insurance contracts, is asset and liability matching. In
many markets in which we operate it is neither possible
nor appropriate to follow a perfect asset and liability
matching strategy. For long-dated non-linked contracts,
in particular, this results in a duration mismatch between
assets and liabilities. We therefore structure portfolios to
support projected liabilities from non-linked contracts.
The tables below show the composition of assets
and liabilities by contract and by geographical region and
demonstrate that there were sufficient assets to cover
the liabilities to policyholders in each case at the end
of 2014.
Balance sheet of insurance manufacturing subsidiaries by type of contract
(Audited)
Financial assets
– trading assets
– financial assets designated at
fair value
– derivatives
– financial investments
– other financial assets
Reinsurance assets
PVIF43
Other assets and investment
properties
Total assets
Liabilities under investment
contracts
– designated at fair value
– carried at amortised cost
Liabilities under insurance
contracts
Deferred tax44
Other liabilities
Total liabilities
Total equity
Total liabilities and equity at
31 December 201445
With
DPF
US$m
29,040
–
4,304
12
21,152
3,572
190
–
698
Insurance contracts
Unit-
linked Annuities
US$m
US$m
11,278
–
11,111
1
–
166
262
–
328
1,517
3
533
–
886
95
–
–
23
Investment contracts
Other40
US$m
6,253
–
782
1
5,167
303
617
–
107
With
DPF41
US$m
24,238
–
6,346
101
15,677
2,114
–
–
831
Unit-
linked
US$m
2,561
–
2,223
1
–
337
–
–
7
Other
assets42
US$m
Other
US$m
4,322
–
1,684
10
1,807
821
–
–
5,732
–
1,713
73
3,812
134
2
5,307
Total
US$m
84,941
3
28,696
199
48,501
7,542
1,071
5,307
26
7,383
9,403
29,928
11,868
1,540
6,977
25,069
2,568
4,348
18,424
100,722
–
–
–
29,479
12
–
29,491
–
–
–
–
11,820
–
–
11,820
–
–
–
–
1,473
11
–
1,484
–
–
–
–
6,021
18
–
6,039
–
–
–
–
2,542
2,542
–
4,155
3,770
385
25,068
–
–
25,068
–
–
–
–
–
–
–
2,542
4,155
–
–
10,366
–
–
–
–
1,180
8,577
9,757
6,697
6,312
385
73,861
1,221
8,577
90,356
10,366
29,491
11,820
1,484
6,039
25,068
2,542
4,155
20,123
100,722
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Report of the Directors: Risk (continued)
Risk management of insurance operations
Insurance contracts
Unit-
linked Annuities
US$m
US$m
With
DPF
US$m
26,382
–
3,850
1
19,491
3,040
182
–
13,348
–
13,131
3
–
214
291
–
757
284
1,651
3
532
–
959
157
522
–
23
Investment contracts
Other40
US$m
4,728
–
761
–
3,780
187
439
–
113
With
DPF41
US$m
25,676
–
6,867
215
16,556
2,038
–
–
791
Unit-
linked
US$m
9,720
–
9,293
5
–
422
–
–
19
Other
US$m
4,375
–
1,706
–
1,853
816
–
–
Other
assets42
US$m
5,846
–
1,757
55
3,745
289
2
5,335
Total
US$m
91,726
3
37,897
279
46,384
7,163
1,436
5,335
31
546
2,564
27,321
13,923
2,196
5,280
26,467
9,739
4,406
11,729 101,061
–
–
–
–
–
–
26,920
12
–
13,804
–
–
26,932
13,804
–
–
–
–
–
2,158
17
–
2,175
–
–
–
–
4,872
1
–
4,873
–
–
–
–
9,730
9,730
–
4,209
3,761
448
–
–
–
26,427
–
–
26,427
–
–
–
–
–
–
–
–
1,163
2,048
9,730
4,209
3,211
91,361
–
–
9,700
9,700
13,939
13,491
448
74,181
1,193
2,048
26,932
13,804
2,175
4,873
26,427
9,730
4,209
12,911 101,061
Financial assets
– trading assets
– financial assets designated at
fair value
– derivatives
– financial investments
– other financial assets
Reinsurance assets
PVIF43
Other assets and investment
properties
Total assets
Liabilities under investment
contracts
– designated at fair value
– carried at amortised cost
Liabilities under insurance
contracts
Deferred tax44
Other liabilities
Total liabilities
Total equity
Total liabilities and equity at
31 December 201345
For footnotes, see page 202.
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.
Our exposure to financial risks arising in the above
balance sheet varies depending on the type of contract
issued. For unit-linked contracts, the policyholder bears
the majority of the exposure to financial risks whereas,
for non-linked contracts, the majority of financial risks
are borne by the shareholder (HSBC). For contracts with
DPF, the shareholder is exposed to financial risks to the
extent that the exposure cannot be managed by utilising
any discretionary participation (or bonus) features within
the policy contracts issued.
As noted above, during the year HSBC entered into an
agreement to sell its UK pensions business, and the
related balances are reported as a disposal group held
for sale under IFRS 5 (and are therefore included within
the ‘Other assets’ column in the table above). The
disposal group comprises US$6.8bn of total liabilities,
being liabilities under unit-linked investment contracts,
unit-linked insurance contracts and annuity contracts. It
also comprises US$6.8bn of total assets, being financial
and reinsurance assets backing the liabilities, and the
associated PVIF on these contracts. The transfer is
subject to regulatory approvals and is expected to
complete in the second half of 2015. As part of the
transaction we also entered into a reinsurance
agreement transferring certain risks and rewards of the
business to the purchaser from 1 January 2014 until
completion of the transaction. A gain of US$42m was
recognised on entering into this reinsurance agreement.
HSBC HOLDINGS PLC
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Balance sheet of insurance manufacturing subsidiaries by geographical region46
(Audited)
Financial assets
– trading assets
– financial assets designated at fair value
– derivatives
– financial investments
– other financial assets
Reinsurance assets
PVIF43
Other assets and investment properties
Total assets
Liabilities under investment contracts:
– designated at fair value
– carried at amortised cost
Liabilities under insurance contracts
Deferred tax44
Other liabilities
Total liabilities
Total equity
Total liabilities and equity at 31 December 201445
Financial assets
– trading assets
– financial assets designated at fair value
– derivatives
– financial investments
– other financial assets
Reinsurance assets
PVIF43
Other assets and investment properties
Total assets
Liabilities under investment contracts:
– designated at fair value
– carried at amortised cost
Liabilities under insurance contracts
Deferred tax44
Other liabilities
Total liabilities
Total equity
Total liabilities and equity at 31 December 201345
For footnotes, see page 202.
Movement in total equity of insurance operations
(Audited)
At 1 January
Change in PVIF of long-term insurance business43
Return on net assets
Capital transactions
Disposals of subsidiaries/portfolios
Exchange differences and other
At 31 December
For footnote, see page 202.
Europe
US$m
30,178
–
10,610
172
16,947
2,449
308
711
7,650
38,847
1,585
–
27,312
273
7,932
37,102
1,745
38,847
41,557
–
20,742
272
18,080
2,463
823
1,156
868
44,404
8,760
–
31,786
407
1,474
42,427
1,977
44,404
Asia4
US$m
47,443
–
12,497
27
30,010
4,909
748
4,175
1,145
53,511
4,727
–
39,990
806
460
45,983
7,528
53,511
42,352
–
11,420
7
26,505
4,420
596
3,730
1,101
47,779
4,731
–
35,619
645
371
41,366
6,413
47,779
Latin
America
US$m
7,320
3
5,589
–
1,544
184
15
421
608
8,364
–
385
6,559
142
185
7,271
1,093
8,364
7,817
3
5,735
–
1,799
280
17
449
595
8,878
–
448
6,776
141
203
7,568
1,310
8,878
Total
US$m
84,941
3
28,696
199
48,501
7,542
1,071
5,307
9,403
100,722
6,312
385
73,861
1,221
8,577
90,356
10,366
100,722
91,726
3
37,897
279
46,384
7,163
1,436
5,335
2,564
101,061
13,491
448
74,181
1,193
2,048
91,361
9,700
101,061
Total equity
2014
US$m
9,700
261
1,835
(673)
1
(758)
10,366
2013
US$m
9,989
525
848
(590)
(675)
(397)
9,700
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Report of the Directors: Risk (continued)
Risk management of insurance operations
Financial risks
(Audited)
Details on the nature of financial risks and how they are
managed are provided in the Appendix to Risk on page 232.
Financial risks can be categorised into:
• market risk – risk arising from changes in the fair
values of financial assets or their future cash flows
from fluctuations in variables such as interest rates,
credit spreads, foreign exchange rates and equity
prices;
• credit risk – the risk of financial loss following the
failure of third parties to meet their obligations; and
Financial assets held by insurance manufacturing subsidiaries
(Audited)
• 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.
The following table analyses the assets held in our
insurance manufacturing subsidiaries at 31 December
2014 by type of contract, and provides a view of the
exposure to financial risk. For unit-linked contracts, which
pay benefits to policyholders 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.
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 assets49
Total financial assets at 31 December 201445
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 assets49
Total financial assets at 31 December 201345
For footnotes, see page 202.
Unit-linked
contracts47
US$m
Non-linked
contracts48
US$m
Other
assets49
US$m
–
13,334
–
4,589
8,745
–
–
–
–
2
503
13,839
–
22,424
–
7,809
14,615
–
–
–
–
8
636
23,068
3
13,649
40
3,507
10,102
21,789
22,899
22,899
–
124
6,905
65,369
3
13,716
–
3,910
9,806
21,784
20,855
20,855
–
216
6,238
62,812
–
1,713
16
618
1,079
2,494
1,319
1,290
29
73
134
5,733
–
1,757
50
546
1,161
2,142
1,603
1,594
9
55
289
5,846
Total
US$m
3
28,696
56
8,714
19,926
24,283
24,218
24,189
29
199
7,542
84,941
3
37,897
50
12,265
25,582
23,926
22,458
22,449
9
279
7,163
91,726
Approximately 67% of financial assets were invested in
debt securities at 31 December 2014 (2013: 64%) with
24% (2013: 28%) invested in equity securities.
sale (see page 192) and the transfer of US$2.9bn assets
backing other unit-linked investment contracts to a third
party during the year.
Under unit-linked contracts, 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 16% (2013: 25%) of the
total financial assets of our insurance manufacturing
subsidiaries at the end of 2014. The reduction of
US$9.3bn in the value of assets backing unit-linked
contracts is largely due to the classification of US$6.3bn
of assets relating to the UK pensions business as held for
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.
HSBC HOLDINGS PLC
194
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.
Long-term insurance or investment products may
incorporate benefits that are guaranteed. Fixed
guaranteed benefits, for example for annuities in
payment, are reserved for as part of the calculation
of liabilities under insurance contracts.
The risk of shareholder capital being required to meet
liabilities to policyholders increases in products that
offer guaranteed financial returns where current yields
fall below guaranteed levels for a prolonged period.
Reserves are held against the cost of guarantees,
calculated by stochastic modelling. Where local rules
require, these reserves are held through policyholder
liabilities. Any remainder is accounted for as a deduction
Financial return guarantees45,50
(Audited)
to PVIF on the relevant product. The table below shows
the total reserve held for the cost of guarantees, the
range of investment returns on assets supporting these
products and the implied investment return that would
enable the business to meet the guarantees.
The financial guarantees offered on some portfolios
exceeded the current yield on the assets that back them.
The cost of guarantees increased to US$777m (2013:
US$575m) primarily because of falling yields in France
throughout 2014. As these yields fell, the cost of
guarantees on closed portfolios reported in the 2.1%-
4.0% and 4.1%-5.0% categories increased, driven by
reduced reinvestment yield assumptions. In addition,
there was a closed portfolio in Hong Kong with a
guaranteed rate of 5.0% compared with the current
yield of 4.1%. We reduced short-term bonus rates paid
to policyholders on certain DPF contracts to manage the
immediate strain on the business.
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Investment
returns
implied by
guarantee
%
0.0
0.1 – 2.0
2.1 – 4.0
4.1 – 5.0
0.0 – 6.0
2014
Current
yields
%
0.0 – 3.5
3.6 – 3.6
3.5 – 4.1
3.5 – 4.1
4.7 – 7.5
Investment
returns
implied by
guarantee
%
0.0
0.1 – 2.0
2.1 – 4.0
4.1 – 5.0
0.0 – 6.0
2013
Current
yields
%
Cost of
guarantees
US$m
0.0 – 4.4
4.1 – 4.1
4.2 – 4.4
4.1 – 4.4
6.4 – 6.4
57
9
471
25
13
575
Cost of
guarantees
US$m
81
6
646
30
14
777
Capital
Nominal annual return
Nominal annual return51
Nominal annual return
Real annual return52
At 31 December
For footnotes, see page 202.
In addition to the above, a deduction from PVIF of
US$53m (2013: US$134m) is made in respect of the
modelled cost of guaranteed annuity options attached
to certain unit-linked pension products in Brazil.
The following table illustrates the effects of selected
interest rate, equity price and foreign exchange rate
scenarios on our profit for the year and the total
equity of our insurance manufacturing subsidiaries.
Where appropriate, we include the impact of the stress
on the PVIF in the results of the sensitivity tests. The
relationship between the profit and total equity and
the risk factors is non-linear and, therefore, the results
disclosed should not be extrapolated to measure
sensitivities to different levels of stress. The sensitivities
are stated before allowance for management actions
which may mitigate the effect of changes in market
rates. The sensitivities presented allow for adverse
changes in policyholder behaviour that may arise in
response to changes in market rates.
The effects of +/-100 basis points parallel shifts in yield
curves have increased from 2013 to 2014, driven mainly
by falling yields and a flattening of the yield curve in
France during 2014. In the low yield environment the
projected cost of options and guarantees described
above is particularly sensitive to yield curve movements.
The market value of available-for-sale bonds is also
sensitive to yield curve movements hence the larger
opposite stresses on equity.
Sensitivity of HSBC’s insurance manufacturing subsidiaries to market risk factors
(Audited)
2014
Effect on
profit
after tax
US$m
Effect on
total
equity
US$m
2013
Effect on
profit
after tax
US$m
Effect on
total
equity
US$m
290
(549)
180
(153)
54
(54)
(345)
214
180
(153)
54
(54)
151
(230)
149
(129)
21
(21)
(199)
139
149
(129)
21
(21)
+ 100 basis points parallel shift in yield curves
– 100 basis points parallel shift in yield curves53
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
HSBC HOLDINGS PLC
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Report of the Directors: Risk (continued)
Risk management of insurance operations
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$53bn (2013: US$51bn)
bond portfolio supporting non-linked contracts and
shareholders’ funds.
The sensitivity of the profit after tax of our insurance
subsidiaries to the effects on asset values of increases
in credit spreads was a reduction of US$7m (2013:
US$21m). The sensitivity of total equity was a reduction
of US$9m (2013: US$46m). The sensitivities are relatively
small because the vast majority 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 (or to total equity in the case
of the held-to-maturity securities). We calculate the
sensitivity 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.
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 unit-linked liabilities is predominantly borne
by the policyholder. 84.8% (2013: 83.4%) of the assets
included in the table are invested in investments rated
as ‘strong’.
For a definition of the five credit quality classifications, see page 207.
Treasury bills, other eligible bills and debt securities in HSBC’s insurance manufacturing subsidiaries
(Audited)
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’ funds54
Financial assets designated at fair value
– treasury and other eligible bills
– debt securities
Financial investments – debt securities
Total45
Trading assets – debt securities
Financial assets designated at fair value
– treasury and other eligible bills
– debt securities
Financial investments – debt securities
At 31 December 2014
Supporting liabilities under non-linked insurance and
investment contracts
Trading assets – debt securities
Financial assets designated at fair value
– debt securities
Financial investments – debt securities
Supporting shareholders’ funds54
Financial assets designated at fair value
– treasury and other eligible bills
– debt securities
Financial investments – debt securities
Total45
Trading assets – debt securities
Financial assets designated at fair value
– treasury and other eligible bills
– debt securities
Financial investments – debt securities
At 31 December 2013
For footnotes, see page 202.
Strong
US$m
3
2,550
5
2,545
38,515
41,068
214
–
214
3,378
3,592
3
2,764
5
2,759
41,893
44,660
3
2,780
2,780
36,113
38,896
191
50
141
3,356
3,547
3
2,971
50
2,921
39,469
42,443
Neither past due nor impaired
Satisfactory
US$m
Good
US$m
Sub-standard
US$m
–
530
–
530
4,312
4,842
322
–
322
196
518
–
852
–
852
4,508
5,360
–
691
691
4,596
5,287
298
–
298
176
474
–
989
–
989
4,772
5,761
–
214
–
214
1,662
1,876
30
–
30
154
184
–
244
–
244
1,816
2,060
–
224
224
1,699
1,923
73
–
73
139
212
–
297
–
297
1,838
2,135
–
255
35
220
200
455
69
16
53
54
123
–
324
51
273
254
578
–
215
215
231
446
34
–
34
65
99
–
249
–
249
296
545
Total
US$m
3
3,549
40
3,509
44,689
48,241
635
16
619
3,782
4,417
3
4,184
56
4,128
48,471
52,658
3
3,910
3,910
42,639
46,552
596
50
546
3,736
4,332
3
4,506
50
4,456
46,375
50,884
HSBC HOLDINGS PLC
196
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 below. Our exposure
Reinsurers’ share of liabilities under insurance contracts45
(Audited)
to third parties under the reinsurance agreements
described in the Appendix to Risk on page 235 is included
in this table.
Neither past due nor impaired
Past due but
Satisfactory Sub-standard not impaired
Strong
US$m
Good
US$m
75
751
826
11
72
1,103
1,175
17
185
11
196
6
218
8
226
1
US$m
US$m
US$m
–
10
10
–
–
7
7
–
–
–
–
–
–
–
–
–
–
–
–
21
–
–
–
10
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Total
US$m
260
772
1,032
38
290
1,118
1,408
28
Unit-linked insurance
Non-linked insurance55
At 31 December 2014
Reinsurance debtors
Unit-linked insurance
Non-linked insurance55
At 31 December 2013
Reinsurance debtors
For footnotes, see page 202.
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 2014. The liquidity risk
Expected maturity of insurance contract liabilities45
(Audited)
exposure is borne in conjunction with policyholders
for the majority of our business, and 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 2014 remained comparable
with 2013.
Unit-linked insurance
Non-linked insurance55
At 31 December 2014
Unit-linked insurance
Non-linked insurance55
At 31 December 2013
For footnotes, see page 202.
Expected cash flows (undiscounted)
Within 1 year
US$m
1-5 years
US$m
5-15 years
US$m
709
3,504
4,213
1,106
3,977
5,083
3,280
12,718
15,998
3,609
11,731
15,340
9,243
29,905
39,148
9,757
26,848
36,605
Over 15 years
US$m
14,544
33,108
47,652
13,725
31,306
45,031
Total
US$m
27,776
79,235
107,011
28,197
73,862
102,059
Remaining contractual maturity of investment contract liabilities
(Audited)
Remaining contractual maturity:
– due within 1 year
– due over 1 year to 5 years
– due over 5 years to 10 years
– due after 10 years
– undated56
At 31 December 2014
Remaining contractual maturity:
– due within 1 year
– due over 1 year to 5 years
– due over 5 years to 10 years
– due after 10 years
– undated56
At 31 December 2013
For footnotes, see page 202.
Liabilities under investment contracts issued
by insurance manufacturing subsidiaries46
Unit-linked
investment
contracts
US$m
Investment
contracts
with DPF
US$m
Other
investment
contracts
US$m
151
133
194
766
1,298
2,542
232
778
852
2,254
5,614
9,730
–
–
–
–
25,068
25,068
–
–
–
–
26,427
26,427
389
–
–
–
3,765
4,154
454
–
–
–
3,755
4,209
Total
US$m
540
133
194
766
30,131
31,764
686
778
852
2,254
35,796
40,366
HSBC HOLDINGS PLC
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Report of the Directors: Risk (continued)
Risk management of insurance operations / Other material risks
Insurance risk
Insurance risk is principally measured in terms of
liabilities under the contracts in force.
A principal risk we face 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.
The following table analyses our life insurance risk
exposures by geographical region and by type of
business. The insurance risk profile and related
exposures remain largely consistent with those observed
at 31 December 2013.
Analysis of insurance risk – liabilities under insurance contracts46
(Audited)
Non-linked insurance55
Insurance contracts with DPF57
Credit life
Annuities
Other
Unit-linked insurance
Investment contracts with DPF41,57
Liabilities under insurance contracts at 31 December 2014
Non-linked insurance55
Insurance contracts with DPF57
Credit life
Annuities
Other
Unit-linked insurance
Investment contracts with DPF41,57
Liabilities under insurance contracts at 31 December 2013
For footnotes, see page 202.
Our most significant life insurance products are
insurance contracts with DPF issued in Hong Kong,
investment contracts with DPF issued in France and unit-
linked contracts issued in Latin America, Hong Kong and
the UK.
Sensitivities to non-economic assumptions
(Audited)
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 and total equity to reasonably possible changes in
these non-economic assumptions at that date across all
our insurance manufacturing subsidiaries.
Mortality and morbidity risk is typically associated
with life insurance contracts. The effect on profit of an
increase in mortality or morbidity depends on the type
of business being written. Our largest exposures to
mortality and morbidity risk exist in Brazil, France and
Hong Kong.
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
Europe
US$m
829
367
56
71
335
1,415
25,068
27,312
1,383
380
130
622
251
3,976
26,427
31,786
Asia
US$m
34,261
29,112
87
127
4,935
5,729
–
39,990
30,554
26,540
74
129
3,811
5,065
–
35,619
Latin
America
US$m
1,883
–
–
1,275
608
4,676
–
6,559
2,013
–
–
1,407
606
4,763
–
6,776
Total
US$m
36,973
29,479
143
1,473
5,878
11,820
25,068
73,861
33,950
26,920
204
2,158
4,668
13,804
26,427
74,181
in lapse rates typically has a negative effect on profit
due to the loss of future premium income on the lapsed
policies. However, some contract lapses have a positive
effect on profit due to the existence of policy surrender
charges. Brazil, France, Hong Kong and the UK are where
we are most sensitive to a change in lapse rates.
Expense rate risk is the exposure to a change in the
cost of administering insurance contracts. To the
extent that increased expenses cannot be passed on to
policyholders, an increase in expense rates will have a
negative effect on our profits.
Sensitivity analysis
(Audited)
Effect on profit after tax and
total equity at 31 December
10% increase in mortality and/or
morbidity rates
10% decrease in mortality and/or
morbidity rates
10% increase in lapse rates57
10% decrease in lapse rates57
10% increase in expense rates
10% decrease in expense rates
For footnote, see page 202.
2014
US$m
2013
US$m
(65)
72
(108)
122
(106)
106
(76)
79
(119)
133
(101)
100
HSBC HOLDINGS PLC
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Other material risks
Page
App1
Tables
Page
Reputational risk
Fiduciary risk
Pension risk
The principal plan
Future developments
Defined contribution plans
Sustainability risk
199
200
200
200
201
201
201
235
236
237
1 Appendix to Risk – risk policies and practices.
Reputational risk
(Unaudited)
Reputational risk is the failure to meet
stakeholder expectations as a result of any event,
behaviour, action or inaction, either by HSBC
itself, our employees or those with whom we
are associated, that might cause stakeholders
to form a negative view of HSBC.
Reputational risk relates to perceptions, whether based
on fact or otherwise. Stakeholders’ expectations are
constantly changing and thus reputational risk is dynamic
and varies between geographies, groups and individuals.
As a global bank, HSBC shows unwavering commitment
to operating, and to be seen to be operating, to the high
standards we have set for ourselves in every jurisdiction.
Reputational risk might result in financial or non-financial
impacts, loss of confidence, adverse effects on our ability
to keep and attract customers, or other consequences.
Any lapse in standards of integrity, compliance, customer
service or operating efficiency represents a potential
reputational risk.
A number of measures to address the requirements of the
US DPA and otherwise to enhance our AML, sanctions and
other regulatory compliance frameworks have been taken
and/or are ongoing. These measures, which should also
serve over time to enhance our reputational risk
management, include the following:
• simplifying our business through the progressive
implementation of our Group strategy, including the
adoption of a global financial crime risk filter, which
should help to standardise our approach to doing
business in higher risk countries;
• an increase in reputational risk resources in each
region in which we operate and the introduction of
a central case management and tracking process for
reputational risk and client relationship matters;
• the creation of combined reputational risk and client
selection committees within the global businesses
with a clear process to escalate and address matters
at the appropriate level;
• the continued roll-out of training and communication
about the HSBC Values Programme that defines the
way everyone in the Group should act and seeks to
The principal plan – target asset allocation
Benefit payments (US$m)
200
201
ensure that the Values are embedded into our
operations; and
• the continuous development and implementation
of the Global Standards around financial crime
compliance, which underpin our businesses. This
includes ensuring globally consistent application of
policies that govern AML and sanctions compliance
programmes.
In July 2014, the new reputational risk and customer
selection policies were issued which define a consistent
and structured approach to managing these risks:
• Reputational risk (new policy): defines reputational
risk and sets out HSBC’s approach to managing it;
• Customer selection and business acceptance (new
policy): outlines the risk factors to be considered
when a new customer relationship is identified;
• Customer selection and exit management: establishes
the globally sustainable approach to customer
selection and exit management for all accounts and
relationships in all business lines. This details the
criteria under which escalation or approval is
required; and
• Sixth filter: customers operating in high risk
jurisdictions carry particular financial crime risks and
may require specific approvals, or be considered for
an exit, if the relationship exceeds HSBC’s global risk
appetite.
HSBC has zero tolerance for knowingly engaging in
any business, activity or association where foreseeable
reputational damage has not been considered and
mitigated. There must be no barriers to open discussion
and the escalation of issues that could affect the Group
negatively. While there is a level of risk in every aspect of
business activity, appropriate consideration of potential
harm to HSBC’s good name must be a part of all business
decisions.
Detecting and preventing illicit actors’ access to the
global financial system calls for constant vigilance
and we will continue to cooperate closely with all
governments to achieve success. This is integral to
the execution of our strategy, to HSBC Values and
to preserving and enhancing our reputation.
HSBC HOLDINGS PLC
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Report of the Directors: Risk (continued)
Other material risks
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
a high standard of care and with good faith. A fiduciary
must make decisions and act in the 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 these 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).
Our principal fiduciary businesses (the ‘designated
businesses’) have developed fiduciary risk appetite
statements for their various fiduciary roles and have put
in place key indicators to monitor their related risks.
Pension risk
(Audited)
We operate a number of defined benefit and
defined contribution pension plans throughout
the world. The majority of pension risk arises
from the Group’s defined benefit plans of which
the largest is the HSBC Bank (UK) Pension
Scheme (‘the principal plan’).
During 2014, a new global pension risk framework was
established, with accompanying new global policies on
the management of risks related to defined benefit and
defined contribution plans. In addition, a new Global
Pensions Oversight Committee was established to
oversee the running of all pension plans sponsored by
HSBC around the world.
At 31 December 2014, the Group’s aggregate defined
benefit pension plan obligation was US$42bn and the
net asset was US$2.7bn (2013: US$40bn and US$0.1bn,
respectively). The increase in the net asset was mainly
due to the increase in the principal plan’s assets
exceeding the increase in its benefit obligation. Of the
Group total amounts, the principal plan contributed
US$30bn to the defined benefit obligation and US$4.8bn
to the net asset. The principal plan is the largest
contributor to pension risk in the Group.
The principal plan
(Audited)
The principal plan is overseen by a corporate trustee
who has fiduciary responsibility for the operation of the
pension scheme. The principal plan comprises a defined
benefit section and a defined contribution section.
Unless stated otherwise, this narrative relates to the
defined benefit section.
The investment strategy of the principal plan is to hold
the majority of assets in bonds, with the remainder in
a more diverse range of investments, and includes a
portfolio of interest rate and inflation swaps in order to
reduce interest rate risk and inflation risk (see Note 41 in
the Financial Statements). The target asset allocation of
the principal plan at the year-end is shown below. HSBC
and the trustee have developed a general framework
which, over time, will see the plan’s asset strategy evolve
to be less risky: this is described in further detail below.
The principal plan – target asset allocation
Equities58
Bonds
Alternative assets59
Property
Cash60
At 31 December
For footnotes, see page 202.
2014
%
19.4
64.5
10.6
5.5
–
2013
%
19.4
64.5
10.6
5.5
–
100.0
100.0
The latest actuarial valuation of the principal plan was
made as at 31 December 2011 by C G Singer, Fellow of
the Institute and Faculty of Actuaries, of Towers Watson
Limited. At that date, the market value of the plan’s
assets was £18bn (US$28bn) (including assets relating to
both the defined benefit and defined contribution plans,
and additional voluntary contributions). The market
value of the plan assets represented 100% of the amount
expected to be required, on the basis of the assumptions
adopted, to provide the benefits accrued to members
after allowing for expected future increases in earnings
under the projected unit method. There was therefore
no resulting surplus/deficit and hence no recovery plan
was required.
The expected cash flows from the principal plan were
projected by reference to the Retail Price Index (‘RPI’)
swap break-even curve at 31 December 2011. Salary
increases were assumed to be 0.5% per annum above
RPI and inflationary pension increases, subject to a
minimum of 0% and a maximum of 5% (maximum of 3%
per annum in respect of service accrued since 1 July
2009), were assumed to be in line with RPI. The
projected cash flows were discounted at the Libor
swap curve at 31 December 2011 plus a margin for the
expected return on the investment strategy of 160bps
per annum. The mortality experience of the principal
plan’s pensioners over the six-year period (2006-2011)
was analysed and, on the basis of this analysis, the
mortality assumptions were set, based on the SAPS S1
series of tables adjusted to reflect the pensioner
experience. Allowance was made for future improvements
to mortality rates in line with the Continuous Mortality
Investigation core projections with a long-run
improvement rate set at 2% for males and 1.5% for
females. The benefits expected to be payable from the
defined benefit plan from 2015 are shown in the chart
below.
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Future benefit payments (US$m)
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
5
1
0
2
1
2
0
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7
2
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2
3
3
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3
0
2
5
4
0
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1
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0
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7
5
0
2
3
6
0
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6
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0
2
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8
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2
3
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0
2
9
9
0
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5
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2
As part of the 31 December 2011 valuation, calculations
were also made of the amount of assets that might be
needed to meet the liabilities if the principal plan 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 £26bn (US$41bn) 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.
HSBC and the trustee have developed a general
framework which, over time, will see the principal plan’s
asset strategy evolve to be less risky and further aligned
to the expected future cash-flows, referred to as the
Target Matching Portfolio (‘TMP’). The TMP would
therefore contain sufficient assets, the majority of which
will be bond-like in nature, which are more closely
aligned to the liability profile. Progress towards the
TMP can be achieved by asset returns in excess of that
assumed and/or additional funding. In 2013, HSBC
agreed to make general framework contributions of
£64m (US$100m) in each of the calendar years 2013,
2014 and 2015 as well as £128m (US$200m) in 2016.
Further contributions have been agreed to be made in
future years, which are linked to the continued
implementation of the general framework.
HSBC Bank is also making contributions to the principal
plan in respect of the accrual of benefits of defined
benefit section members. Since April 2013, HSBC has
paid contributions at the rate of 43% of pensionable
salaries (less member contributions).Contribution levels
will be reviewed as part of the next actuarial valuation,
which has an effective date of 31 December 2014. The
results of this valuation are expected to be included in
the Annual Report and Accounts 2015.
Future developments
(Unaudited)
Future service accrual for active members of the defined
benefit section will cease with effect from 30 June 2015.
All active members of the defined benefit section will
become members of the defined contribution section
from 1 July 2015, and their accrued defined benefit
pensions based on service to 30 June 2015 will continue
to be linked to final salary on retirement (underpinned
by increases in CPI). The defined benefit service cost
will therefore reduce to zero from 1 July 2015 and the
defined contribution service cost will increase.
Defined contribution plans
Our global strategy is to move from defined benefit
pension provisions to defined contribution, dependent
on local legislative requirements and emerging practice.
In defined contribution pension plans, the sponsor
contributions are known, while the ultimate benefit
will vary, typically with investment returns achieved by
employee investment choices. While the market risk of
defined contribution plans is significantly less than that
of defined benefit plans, the Bank is still exposed to
operational and reputational risk.
Sustainability risk
(Unaudited)
Assessing the environmental and social impacts
of providing finance to our customers is integral
to our overall risk management processes.
In 2014, we issued new policies on forestry, agricultural
commodities, World Heritage Sites and Ramsar
Wetlands, following an extensive internal and external
review of our previous forestry policy. The results of
two independent reviews into the content and
implementation of our previous policy were published
on www.hsbc.com.
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 235.
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Report of the Directors: Risk (continued)
Footnotes
Footnotes to Risk
Credit risk
1 From 1 January 2014, non-trading reverse repos and repos are presented as separate lines in the balance sheet. Previously, non-
trading reverse repos were included within ‘Loans and advances to banks’ and ‘Loans and advances to customers’ and non-trading
repos were included within ‘Deposits by banks’ and ‘Customer accounts’. Comparative data have been re-presented accordingly.
2 At 31 December 2014, the credit quality of financial guarantees and similar contracts was: US$17bn strong, US$16bn good, US$12bn
satisfactory, and US$2bn sub-standard.
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$71bn
(2013: US$34bn), reflecting the full take-up of loan commitments. The take-up of such offers is generally at modest levels. At
31 December 2014, the credit quality of loan and other credit-related commitments was: US$322bn strong, US$191bn good,
US$127bn satisfactory, US$10bn sub-standard and US$0.8bn impaired.
4 From 1 January 2014, the geographical region ‘Asia’ replaced the geographical regions previously reported as ‘Hong Kong’ and ‘Rest of
Asia-Pacific’ (see Note 23 on the Financial Statements for further details). Comparative data have been re-presented to reflect this
change.
5 ‘Financial’ includes loans and advances to banks.
6 ‘First lien residential mortgages’ include Hong Kong Government Home Ownership Scheme loans of US$3.4bn at 31 December 2014
(2013: US$3.2bn). Where disclosed, earlier comparatives were 2012: US$3.2bn; 2011: US$3.3bn; 2010: US$3.5bn.
7 ‘Other personal lending’ includes second lien mortgages and other property-related lending.
8 ‘Other commercial loans and advances’ include advances in respect of agriculture, transport, energy and utilities.
9 Impairment allowances are not reported for financial instruments, for which the carrying amount is reduced directly for impairment
and not through the use of an allowance account.
10 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’.
11 ‘Loans and advances to customers’ includes asset-backed securities that have been externally rated as strong (2014: US$1.2bn; 2013:
US$1.7bn), good (2014: US$256m; 2013: US$255m), satisfactory (2014: US$332m; 2013: US$200m), sub-standard (2014: US$94m;
2013: US$283m) and impaired (2014: US$128m; 2013: US$252m).
12 ‘Collectively assessed impairment allowances’ are allocated to geographical segments based on the location of the office booking
the allowances or provisions.
13 Included within ‘Exchange and other movements’ is US$0.4bn of impairment allowances reclassified to held for sale (2013: US$0.2bn).
14 Of the US$2,724m (2013: US$3,580m) of renegotiated loans, US$608m (2013: US$716m) were neither past due nor impaired, US$1m
(2013: US$52m) was past due but not impaired and US$2,115m (2013: US$2,812m) were impaired.
15 French Banking Federation Master Agreement Relating to Transactions on Forward Financial Instruments plus CSA equivalent.
16 The German Master Agreement for Financial Derivative Transactions.
17 HSBC Finance lending is shown on a management basis and includes loans transferred to HSBC USA Inc. which are managed by HSBC
Finance.
18 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 gain/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.
19 The average total gain/loss on foreclosed properties includes both the gain/loss on sale of the foreclosed property as discussed in
footnote 18 and the cumulative write-downs recognised on the loans up to the time we took title to the property.
20 Included in this category are loans of US$1.5bn (2013: US$1.9bn) 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.
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 Carrying amount of the net principal exposure.
24 Total includes holdings of ABSs issued by Freddie Mac and Fannie Mae.
Liquidity and funding
25 The most favourable metrics are smaller advances to core funding and larger stressed one-month and three-month coverage ratios.
26 The HSBC UK entity shown comprises four legal entities; HSBC Bank plc (including all overseas branches, and SPEs consolidated by
HSBC Bank plc for Financial Statement purposes), Marks and Spencer Financial Services Limited, HSBC Private Bank (UK) Ltd and HSBC
Trust Company (UK) Limited, managed as a single operating entity, in line with the application of UK liquidity regulation as agreed
with the UK PRA.
27 The Hongkong and Shanghai Banking Corporation represents the Group in Hong Kong, including its overseas branches. Each branch is
monitored and controlled for liquidity and funding risk purposes as a stand-alone operating entity.
28 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.
29 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.
30 Estimated liquidity value represents the expected realisable value of assets prior to management assumed haircuts.
31 The undrawn balance for the five largest committed liquidity facilities provided to customers other than facilities to conduits.
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32 The undrawn balance for the total of all committed liquidity facilities provided to the largest market sector, other than facilities to
conduits.
33 The residual contractual maturity profile of the balance sheet is set out on in Note 31 on the Financial Statements.
Market risk
34 Trading portfolios comprise positions arising from the market-making and warehousing of customer-derived positions.
35 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the
reduction in unsystematic market risk that occurs when combining a number of different risk types, for example, interest rate, equity
and foreign exchange, together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type
and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum occurs on different
days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures. For presentation
purposes, portfolio diversification within the trading portfolio includes VaR-based RNIV.
36 The total VaR is non-additive across risk types due to diversification effects.
37 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.
38 Investments held to facilitate ongoing business include holdings in government-sponsored enterprises and local stock exchanges.
39 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’.
Risk management of insurance operations
40 Other includes term assurance, credit life insurance, universal life insurance and remaining non-life insurance.
41 Although investment contracts with discretionary participation features (‘DPF’) are financial investments, HSBC continues to account
for them as insurance contracts as permitted by IFRS 4.
42 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$6.8bn at
31 December 2014 (31 December 2013: nil). The majority of these assets were debt and equity securities. All liabilities for insurance
businesses classified as held for sale are reported in ‘Other liabilities’ and totalled US$6.8bn at 31 December 2014 (31 December 2013:
nil). The majority of these liabilities were liabilities under insurance contracts and liabilities under investment contracts.
43 Present value of in-force long-term insurance contracts and investment contracts with DPF.
44 Deferred tax includes the deferred tax liabilities arising on recognition of PVIF.
45 Does not include associated insurance company SABB Takaful Company or joint venture insurance company Canara HSBC Oriental
Bank of Commerce Life Insurance Company Limited.
46 HSBC has no insurance manufacturing subsidiaries in the Middle East and North Africa or North America.
47 Comprise unit-linked life insurance contracts and linked long-term investment contracts.
48 Comprise non-linked insurance contracts and non-linked long-term investment contracts.
49 Comprise mainly loans and advances to banks, cash and intercompany balances with other non-insurance legal entities.
50 The cost of guarantees figure presented comprises the modelled cost of guarantees under products manufactured by our insurance
subsidiaries, including both the cost of guarantees reserved for through policyholder liabilities and the amount accounted for as a
deduction to PVIF. This is considered to provide more relevant information than the total liabilities to policyholders established for
guaranteed products manufactured by our insurance subsidiaries as disclosed in prior periods.
51 A block of contracts in France with guaranteed nominal annual returns in the range 1.25%-3.72% are reported entirely in the 2.1%-
4.0% category in line with the average guaranteed return of 2.7% offered to policyholders by these contracts.
52 Real annual return guarantees provide the policyholder a guaranteed return in excess of the rate of inflation, and are supported by
inflation-linked debt securities with yields that are also expressed in real terms.
53 Where a –100 basis point parallel shift in the yield curve would result in a negative interest rate, the effects on profit after tax and
total equity have been calculated using a minimum rate of 0%.
54 Shareholders’ funds comprise solvency and unencumbered assets.
55 Non-linked insurance includes remaining non-life business.
56 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.
57 Insurance contracts and investment contracts with 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.
Pension risk
58 In 2014, option overlay strategies which are expected to improve the risk/return profile of the equity allocation were implemented.
59 Alternative assets includes ABSs, MBSs and infrastructure assets.
60 Whilst there is no target cash allocation, the amount of cash is expected to vary between 0-5% depending upon the liquidity
requirements of the scheme, which will affect the actual allocation of bonds correspondingly.
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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
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 and the Group Risk Committee (‘GRC’) on shaping
the Group’s risk strategy and managing risks effectively. It is supported by a clear policy framework of risk ownership, a
risk appetite process through which the types and levels of risk that we are prepared to accept in executing our strategy
are articulated and monitored, performance scorecards cascaded from the GMB that align business and risk objectives,
and 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, mandatory learning and our
approach to remuneration, helps to foster a disciplined and constructive culture of risk management and control
throughout HSBC.
The executive and non-executive risk governance structures and their interactions are 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.
Governance structure for the management of risk
Authority
Board
Membership
Executive and non-executive Directors
Responsibilities include:
• Approving risk appetite, strategy and performance targets for the
Group
• Approving appointment of chief risk officers of subsidiary
companies
• Encouraging a strong risk governance culture which shapes the
Group’s attitude to risk
GRC
Independent non-executive Directors
• Advising 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
• Overseeing high-level risk related matters
• Reviewing the effectiveness of the Group’s systems of risk
management and internal controls (other than over financial
reporting)
• Overseeing the maintenance and development of a supportive
culture in relation to the management of risk
Financial System
Vulnerabilities Committee
Conduct & Values
Committee
Non-executive Directors, including the
• Overseeing controls and procedures designed to identify areas of
Chairman of the Group
Remuneration Committee, and co-
opted non-director members
exposure to financial crime or system abuse
• Overseeing matters relating to anti-money laundering, sanctions,
terrorist financing and proliferation financing
• Reviewing policies and procedures to ensure continuing obligations
to regulatory and law enforcement agencies are met
Independent non-executive Directors
• Ensuring that in the conduct of its business, HSBC treats all
stakeholders fairly
• Advising the Board on HSBC policies, procedures and standards to
ensure that the Group conducts business responsibly and
consistently adheres to the HSBC Values
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Authority
Membership
Responsibilities include:
Risk Management Meeting
Group Chief Risk Officer
of the GMB
Chief Legal Officer
Group Chief Executive
Group Finance Director
All other Group Managing Directors
Global Risk Management
Group Chief Risk Officer
Board
Chief Risk Officers of HSBC’s global
businesses and regions
Heads of Global Risk sub-functions
• Formulating high-level global risk policy
• Exercising delegated risk management authority
• Overseeing implementation of risk appetite and controls
• Monitoring all categories of risk and determining appropriate
mitigating action
• Promoting a supportive Group culture in relation to risk
management and conduct
Implementing Global Standards throughout the Group
•
• Supporting the Risk Management Meeting and the Group Chief
Risk Officer in providing strategic direction for the Global Risk
function, setting priorities and overseeing their execution
• Overseeing consistent approach to accountability for, and
mitigation of, risk across the Global Risk function
Global Business Risk
Management
Committees
Global Business Chief Risk Officer
Global Business Chief Executive
Global Business Chief Financial Officer
Heads of Global Risk sub-functions, as
• Forward looking assessment of changes in Global Business
activities or the markets in which it operates, analysing the
possible risk impact and taking appropriate action
• Overseeing the implementation of Global Business risk appetite
appropriate
and controls
Regional Risk Management
Regional Chief Risk Officer
Committees
Regional Chief Executive Officer
Regional Chief Financial Officer
Regional Global Business Chief
Heads of Global Risk sub-functions,
as appropriate
Subsidiary board
Independent non-executive directors
committees responsible
for risk-related matters
and global business risk
committees
and/or HSBC employees with no
line or functional responsibility for
the activities of the relevant
subsidiary or global business, as
appropriate
• Monitoring all categories of risk and determining appropriate
mitigating actions
• Promoting a strong risk culture
• Formulating regional specific risk policy
• Overseeing the implementation of regional risk appetite and
controls
• Monitoring all categories of risk and determining appropriate
mitigating actions
• Promoting a strong risk culture
• Providing reports 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
requested
The governance framework also defines the required structure of committees for Risk sub-functions, stress testing and
other key areas at Group, global business, regional and country level.
Risk appetite
(Unaudited)
Our risk appetite framework is underpinned by the following core characteristics. These are applied to define the risk
appetite statements on Group-wide, global business and regional levels.
• Strong capital position: defined by a strong CET1 ratio and overall capital structure, both from a regulatory and
internal perspective, which is not overly leveraged;
• Conservative liquidity management: defined by a diversified funding structure and a conservative discipline whereby
subsidiaries plan their contingency liquidity requirements on the assumption that there is no ‘lender of last resort’,
either in the form of local supervisory intervention or via support from HSBC Holdings;
• Strong balance sheet: core to HSBC’s philosophy, generating a resilient stream of earnings;
• Strong brand: our brand – ‘the world’s leading international bank’ – is of paramount importance as is the Group’s
reputation and the quality of its business ethics;
• Risk must be commensurate with returns: returns should be generated in line with the risk taken and in alignments
with strategic plans and risk management policies;
• Robust Group structure of separate legal entities: the legal entity structure provides the potential for firewalls to
mitigate liquidity and capital contagion in crisis situations;
• The global business mix should produce sustainable long-term earnings growth: our global businesses should be
suitably diversified to provide a stream of non-volatile, predictable earnings;
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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
• Risk diversification: the globally diverse nature of our activities produces significant risk diversification benefits which
must be closely assessed on an ongoing basis and reflected in our capital requirements; and
• Financial crime risk: our overarching approach and appetite to financial crime risk is that the Group will not tolerate
operating without systems and controls in place aimed at preventing and detecting financial crime and will not conduct
business with individuals or entities we believe are engaged in illicit behaviour.
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. 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. There were no significant changes in
2014.
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 207);
• 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 relevant global functions or businesses;
• to report to the Risk Management Meeting, the GRC 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 PRA, local regulators,
rating agencies, analysts and counterparts in major banks and non-bank financial institutions.
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.
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 business. These include portfolio and counterparty limits,
approval and review controls, and stress testing.
Wrong-way risk occurs when a counterparty’s exposures are adversely correlated with its credit quality. There are two
types of wrong-way risk:
• general wrong-way risk occurs when the probability of counterparty default is positively correlated with general risk
factors such as, for example, where the counterparty is resident and/or incorporated in a higher-risk country and seeks
to sell a non-domestic currency in exchange for its home currency; and
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• specific wrong-way risk occurs when the exposure to a particular counterparty is positively correlated with the
probability of counterparty default, such as a reverse repo on the counterparty’s own bonds. It is HSBC policy that
specific wrong-way transactions are approved on a case-by-case basis.
We use a range of tools to monitor and control wrong-way risk, including requiring the business 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.
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 approach under the Basel framework adopted by the Group
to support calculation of our minimum credit regulatory capital requirement. Our credit quality classifications are defined
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 and 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 granular internal credit rating grades
assigned to wholesale and retail lending businesses and the external ratings attributed by external agencies to debt
securities.
Credit quality classification
(Unaudited)
Debt securities
and other bills
External
credit rating
A– and above
BBB+ to BBB–
BB+ to B and
unrated
B- to C
Default
Wholesale lending
and derivatives
Internal
credit rating
CRR21 to CRR2
CRR3
CRR4 to CRR5
CRR6 to CRR8
CRR9 to CRR10
12 month
probability of
default %
0 – 0.169
0.170 – 0.740
0.741 – 4.914
4.915 – 99.999
100
Retail lending
Internal
credit rating1
Expected
loss %
EL31 to EL2
EL3
0 – 0.999
1.000 – 4.999
EL4 to EL5
EL6 to EL8
EL9 to EL10
5.000 – 19.999
20.000 – 99.999
100+ or defaulted4
Quality classification
Strong
Good
Satisfactory
Sub-standard
Impaired
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 136, ‘Past due but not
impaired gross financial instruments’).
2 Customer risk rating.
3 Expected loss.
4 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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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
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. These include 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 accounts include loans and advances classified as
EL9 to EL10, and for those classified EL1 to EL8 they are greater than 90 days past due unless individually they have been assessed as
not impaired; and 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 below).
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.
Each CRR band is associated with an external rating grade by reference to long-run default rates for that grade,
represented by the average of issuer-weighted historical default rates. This mapping between internal and external
ratings is indicative and may vary over time.
The expected loss (‘EL’) 10-grade scale for retail business summarises a more granular underlying EL scale for this
customer segment; this combines obligor and facility/product risk factors in a composite measure.
For debt securities and certain other financial instruments, external ratings have been aligned to the five quality
classifications based upon the mapping of related CRR to external credit grade. The most recent mapping review resulted
in ‘B‘ being mapped to CRR5. Accordingly ‘B‘ ratings are now mapped to ‘Satisfactory’. This represents a change in
disclosure mapping unrelated to changes in counterparty creditworthiness.
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 their loan
and is expected to be able to meet the revised obligations.
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 are 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 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. 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. If 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 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.
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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 current business capabilities, the Group 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. In this instance, actual payment default may
not yet have occurred; and
• absent the modification, the debtor cannot obtain funds from sources other than its 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 a loan’s contractual payment terms 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 212, 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 renegotiation programmes and
portfolios, see pages 154 and 155.
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. Granting a
concession to a customer that we would not otherwise consider, as a result of their financial difficulty, 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 153). 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 a
minimum of two payments which must be received within a 60-day period 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 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 restructuring.
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.
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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
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, individually or in
aggregate, 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;
• 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:
• changes 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 Note 1k on the
Financial Statements.
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.
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 have already materialised, 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 Group
(i.e. due to current credit distress); and
• the Group 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 at which 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.
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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 Group rights of
repricing or acceleration, but they are frequently set at levels where payment capacity has yet to be affected, providing
rights of action at earlier stages of credit deterioration. Such concessions do not directly affect the customer’s ability to
service the original contractual debt and are not reported as renegotiated loans. However, where a customer requests a
non-payment related covenant waiver, the significance of the underlying breach of covenant will be considered together
with any other indicators of impairment, and where there is a degree of severity of credit distress indicating uncertainty of
payment, all available evidence will be considered in determining whether a loss event has occurred. The waiver will not,
however, trigger classification as a renegotiated loan as payment terms have not been modified.
When both payment-related and non-payment related modifications are made together as a result of significant concerns
regarding the payment of contractual cash flows, the loan is treated as a distressed restructuring and disclosed as a
renegotiated loan.
Within corporate and commercial business segments, modifications of several kinds are frequently agreed for a customer
contemporaneously. Transfer to an interest-only arrangement is the most common type of modification granted in the
UK, whether in isolation or in combination with other concessions. Throughout the rest of the world, term extensions
occur more frequently with other types of concession such as interest rate changes occurring less often.
In assessing whether payment-related forbearance is a satisfactory and sustainable strategy, the customer’s entire
exposure and facilities will be reviewed and their 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.
When considering acceptable restructuring terms we consider the ability of the customer to be able to service the revised
interest payments as a necessity. When principal payment modifications are considered, again we require the customer
to be able to comply with the revised terms as a necessary pre-condition for the restructuring to proceed. When principal
payments are modified resulting in permanent forgiveness, or when it is otherwise considered that there is no longer
a realistic prospect of recovery of outstanding principal, the affected balances are written off. When principal repayments
are postponed, it is expected that the customer will be capable of paying in line with the renegotiated terms, including
instances when the postponed principal repayment is expected from refinancing. In all cases, a loan renegotiation is only
granted when the customer is expected to be able to meet the revised terms.
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 allowance 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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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
Impairment assessment
(Audited)
It is our policy that each operating company in HSBC creates impairment allowances for impaired loans promptly and
appropriately, when there is objective evidence that impairment of a loan or portfolio of loans has occurred.
For details of our impairment policies on loans and advances and financial investments, see Note 1k on the Financial
Statements.
Impairment and credit risk mitigation
The existence of collateral has an effect 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. In 2014, we reviewed the impairment
allowance methodology used for retail banking and small business portfolios across the Group to ensure that the
assumptions used in our collective assessment models continued to appropriately reflect the period of time between a
loss event occurring and the account proceeding to delinquency and eventual write-off.
• 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 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 no less than 60 months. The net contractual write-off rate is the actual or
expected amount of loss experienced after realisation of collateral and receipt of recoveries. These historical loss rates are
adjusted by an economic factor which amends 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 which reflects the period between a loss occurring and its identification. The emergence
period is estimated by 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. The emergence period is assessed empirically on a
periodic basis and may vary over time as these factors change.
Write-off of loans and advances
(Audited)
For details of our policy on the write-off of loans and advances, see Note 1k 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. We regularly obtain new appraisals for these
collateral dependent loans (every 180 days) and adjust carrying values to the most recent appraisal if they have improved
or deteriorated as the best estimate of the cash flows that will be received on the disposal of the collateral.
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
HSBC HOLDINGS PLC
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periods may be extended, generally to no more than 360 days past due but, in very exceptional circumstances, to longer
than 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 takes this time.
In retail lending, final write-off should occur within 60 months of the default at the latest.
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.
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.
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.
Loan Management Unit
(Unaudited)
The HSBC Loan Management Unit (‘LMU’) is a front line customer contact department within Wholesale Credit and
Market Risk that assumes responsibility for managing business customer relationships requiring intensive and close
control where the bank's lending is at risk. LMU operates on a regional basis across the Group and is independent of the
originating business management units. It reports locally to the chief credit officer position. Customers are identified and
transferred to LMU by business management or the Wholesale Credit and Market Risk approval teams.
Customers managed by LMU are normally operating outside the Group’s risk appetite. They typically show symptoms of
significant financial difficulty, the management team displays limited experience of managing a business in distress and
the management and financial information provided to the bank is insufficient and unreliable.
The levels of customer exposure under management and the size of the LMU team varies between countries depending
on the breadth of business undertaken locally but LMU will always manage highly distressed situations where individual
customer exposure exceeds US$1.5m.
The primary focus of LMU is to protect the bank's capital and minimise losses by working consensually with customers
to promote and support viable recovery strategies wherever achievable, with the ultimate intention of returning the
customer to front line relationship management. In some cases, rehabilitation is not possible and LMU will consider
a range of options to protect the bank's exposure and solvency of the customer. On occasion, it is not possible to find a
satisfactory solution and the customer may file for insolvency or local equivalent. In all outcomes, LMU seeks to treat
customers fairly, sympathetically and positively, in a professional way with transparent processes and procedures.
Remediation and restructuring strategies available in the business and LMU include granting a customer various types of
concessions while seeking to enhance the ability of the customer to ultimately repay the Group which could include
enhancing the overall security available to the bank. Any decision to approve a concession will be a function of the
region's specific country and sector appetite, the key metrics of the customer, the market environment, the loan structure
and security. Internal reviews on customers managed directly by LMU are performed on a scheduled basis in accordance
with relevant accounting guidelines, credit policies and national banking regulations. Under certain circumstances,
concessions granted may result in the loan being classified as a renegotiated loan.
Collateral and other credit enhancements held
(Audited)
Loans and advances held at amortised cost
The Group’s practice is to lend on the basis of customers’ ability to meet their obligations out of cash flow resources
rather than rely on the value of security offered. Depending on a customer’s standing and the type of product, facilities
may be provided without security. 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.
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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
Depending on its form, collateral can have a significant financial effect in mitigating our exposure to credit risk.
Additionally, risk may be managed 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.
Refinance risk
(Audited)
Many types of lending require the repayment of a significant proportion of the principal at maturity. Typically,
the mechanism of repayment for the customer is through the acquisition of a new loan to settle the existing debt.
Refinance risk arises where a customer is unable to repay such term debt on maturity, or to refinance debt at commercial
rates. When there is evidence that this risk may apply to a specific contract, HSBC may need to refinance the loan on
concessionary terms that it would not otherwise have considered, in order to recoup the maximum possible cash flows
from the contract and potentially avoid the customer defaulting on the repayment of principal. When there is sufficient
evidence that borrowers, based on their current financial capabilities, may fail at maturity to repay or refinance their
loans, these loans are disclosed as impaired with recognition of a corresponding impairment allowance where
appropriate.
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.
Our exposure to non-residential mortgage-related ABSs 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.
Definitions and classifications of ABSs and CDOs
Categories of
ABSs and CDOs
Sub-prime
Definition
Classification
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.
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.
US Home Equity Lines of
Credit (‘HELoC’s)
(categorised within
‘Sub-prime’)
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.
US Alt-A
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 Fannie Mae and Freddie
Mac.
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.
HSBC HOLDINGS PLC
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Categories of
ABSs and CDOs
UK non-conforming
mortgages (categorised
within ‘Sub-prime’)
Definition
Classification
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.
UK non-conforming mortgages are treated as sub-
prime exposures.
Other residential
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.
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 entities’ ALCOs. 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 Risk Management Meeting reviews and agrees annually the list of entities it directly oversees and the composition of
these entities.
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 liquidity and funding risk
(Audited)
Inherent liquidity risk categorisation
We place our operating entities into one of two categories (low and medium) 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 their 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, and forms part of our risk appetite. It is used to determine the prescribed stress scenario that we require our
operating entities to be able to withstand and manage to.
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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
Core deposits
A key element of our internal framework is the classification of customer deposits into core and non-core based on our
expectation of their behaviour during periods of 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 with 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 classified 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 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 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 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 generally assumed not to
generate any cash inflows under stress scenarios and are therefore excluded from the numerator of the stressed coverage
ratio, 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 more 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
(Unaudited)
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 scenario.
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 two 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.
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The two combined market-wide and HSBC-specific scenarios model a more severe scenario than the market-wide
scenario. 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 two 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 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 ongoing 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
(Audited)
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 on the basis of 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 is 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 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.
Internal categorisation
Level 1
Cash inflow recognised
Within one month
Level 2
Within one month but capped
Level 3
From one to three months
Asset classes
• Central government
• Central bank (including confirmed withdrawable reserves)
• Supranationals
• Multilateral development banks
• Coins and banknotes
• Local and regional government
• Public sector entities
• Secured covered bonds and pass-through ABSs
• Gold
• 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.
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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
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 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.
On a case-by-case basis, operating entities are permitted to treat other assets as liquid if these assets are realistically
assessed to be liquid under stress. These liquid assets are reported as ‘Other’, separately from level 1, level 2 and level 3
liquid assets.
Net cash flow arising from interbank and intragroup 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 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.
Wholesale debt monitoring
(Unaudited)
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
(Unaudited)
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 mean different approaches
are applied to assets and liabilities. For example, management may assume a shorter life for liabilities and a longer-term
funding requirement for assets. All core deposits are assumed under the Group’s core/non-core and advances to core
funding frameworks to have a liquidity behaviouralised life beyond one year and to represent a homogeneous source of
core funding. The behaviouralisation of assets is far more granular and seeks to differentiate the period for which we must
assume that we will need to fund the asset.
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Funds transfer pricing
(Unaudited)
Our funds transfer pricing policies give rise to a two-stage funds transfer pricing approach, reflecting the fact that
we separately manage interest rate risk and liquidity and funding risk under different assumptions. They have been
developed to be consistent with our risk management frameworks. Each operating entity is required to apply the Group’s
transfer pricing policy framework to determine for each material currency the most appropriate interest rate risk transfer
pricing curve, a liquidity premium curve (which is the spread over the interest rate risk transfer pricing curve) and a
liquidity recharge assessment (which is the spread under or over the interest rate risk transfer pricing curve).
The interest rate risk transfer pricing policy seeks to ensure that all market interest rate risk arising structurally from non-
trading (banking book) assets and liabilities which is capable of being neutralised externally in the market or neutralised
internally by off-setting transfers, is transferred to BSM to be managed centrally as non-trading market risk. For each
material currency each operating entity employs a single interest rate risk transfer pricing curve. The transfer price curve
used for this purpose reflects how BSM in each operating entity is best able to neutralise the interest rate risk in the
market at the point of transfer. Where basis risk can be identified between the re-pricing basis of an external asset or
external liability and the re-pricing basis of the interest rate risk transfer pricing curve, this basis risk may be transferred
to BSM provided it can neutralise the basis risk in the market.
Liquidity and funding risk is transfer priced independently from interest rate risk because the liquidity and funding risk of
an operating entity is transferred to ALCO to be managed centrally. ALCO monitors and manages the advances to core
funding ratio and delegates the management of the liquid asset portfolio and execution of the wholesale term debt
funding plan to BSM. This assists ALCO in ensuring the Group’s stressed coverage ratios remain above 100% out to three
months.
The liquidity and funding risk transfer price consists of two components:
• Liquidity recharge: the cost of holding the benchmark liquid asset (the yield under the transfer price) to meet stressed
cash outflows. The benchmark liquid asset is decided by ALCO and based on the weighted average duration that can be
achieved by investing in level 1 liquid assets, with a residual duration of up to one year.
• Liquidity premium: the assessed cost/value of term funding (the yield over the transfer price) to pay for term debt and
core deposits.
The assessed cost of holding liquid assets is allocated to the outflows modelled by the Group’s internal stressed coverage
ratio framework.
Liquidity premium is charged to any asset that affects our three-month stressed coverage ratios based on the assessed
behaviouralised liquidity life of the asset, with any asset affecting the Group’s advances to core funding metric required to
have a minimum behaviouralised life of at least one year, and the prevailing liquidity premium curve rate set by ALCO and
calibrated in line with Group’s calibration principles. Core deposits therefore share equally in the liquidity premiums
charged to the assets they support, after deducting the cost of any term funding.
Repos and stock lending
GB&M provides collateralised security financing services to its clients, providing them with cash financing or specific
securities. When cash is provided to clients against collateral in the form of securities, the cash provided is recognised on
the balance sheet as a reverse repo. When securities are provided to clients against cash collateral the cash received is
recognised on the balance sheet as a repo or, if the securities are equity securities, as stock lending.
Each operating entity manages its collateral through a central collateral pool, in line with the LFRF. When specific
securities need to be delivered and the entity does not have them currently available within the central collateral pool,
the securities are borrowed on a collateralised basis. When securities are borrowed against cash collateral the cash
provided is recognised on the balance sheet as a reverse repo or, if the securities are equity securities, as stock borrowing.
Operating entities may also borrow cash against collateral in the form of securities, using the securities available in the
central collateral pool. Repos and stock lending can be used in this way to fund the cash requirement arising from
securities owned outright by Markets to facilitate client business, and the net cash requirement arising from financing
client securities activity.
Reverse repos, stock borrowing, repos and stock lending are reported net when the IFRSs offsetting criteria are met. In
some cases transactions to borrow or lend securities are collateralised using securities. These transactions are off-balance
sheet.
Any security accepted as collateral for a reverse repo or stock borrowing transaction must be of very high quality and its
value subject to an appropriate haircut. Securities borrowed under reverse repo or stock borrowing transactions can only
be recognised as part of the liquidity asset buffer for the duration of the transactions and only if the security received is
eligible under the liquid asset policy within the LFRF.
Credit controls are in place to ensure that the fair value of any collateral received remains appropriate to collateralise the
cash or fair value of securities given.
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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
The effect of active collateral management
Collateral is managed on an operating entity basis, consistent with the approach adopted in managing liquidity and
funding. Available collateral held by each operating entity is managed as a single collateral pool. In deciding which
collateral to pledge, each operating entity seeks 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.
Managing collateral in this manner affects the presentation of asset encumbrance in that 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 is analysed by individual security.
When a particular security is encumbered and we hold the security both on-balance sheet and off-balance sheet with the
right to repledge, we assume for the purpose of this disclosure that the off-balance sheet holding received from the third
party 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 borrowing transaction, but finance the cash lent by pledging a generic
collateral basket, even if the security received is eligible for the collateral basket pledged. It 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.
Encumbered and unencumbered assets
Definitions of the categories included in the table ‘Analysis of on-balance sheet 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 they are not readily realisable in the normal course of business
in their current form.
• Unencumbered – reverse repo/stock borrowing receivables and derivative assets are assets related specifically to reverse repo, stock
borrowing and derivative transactions. They 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 and 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. An example is 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 assets pledged to secure liabilities reported in Note 19 on the Financial Statements may be greater than
the book value of assets reported as being encumbered in the table on page 172. Examples of where such differences
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’.
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Securities reflected on the balance sheet that are pledged as collateral against an existing liability or lent are reflected as
encumbered for the duration of the transaction. When securities are received as collateral or borrowed, and when we
have the right to sell or re-pledge these securities, they are reflected as available and unencumbered for the duration of
the transaction, unless re-pledged or sold. Further analysis regarding the encumbrance of securities resulting from repos
and stock lending and available unencumbered assets arising from reverse repos and stock borrowing is provided under
the heading ‘Encumbered and unencumbered assets’ on page 171.
In the normal course of business we do not seek to utilise repo financing as a source of funding to finance customer
assets, beyond the collateralised security financing activities within Markets described above.
The original contractual maturity of reverse repo, stock borrowing, repo and stock lending is short term with the vast
majority of transactions being for less than 90 days.
Management of cross-currency liquidity and funding risk
(Unaudited)
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 local regulatory capital and banking requirements, statutory reserves, and financial and operating
performance. During 2014 and 2013, none of the Group’s subsidiaries experienced significant restrictions on paying
dividends or repaying loans and advances. Also, there are no foreseen restrictions envisaged by our subsidiaries on paying
dividends or repaying loans and advances. None of the subsidiaries which are excluded from our regulatory consolidation
has capital resources below its minimum regulatory requirement.
Market risk
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.
Market risk exposures (including graphs and tables) are provided under Market Risk on page 175.
Exposure to market risk
(Unaudited)
Exposure to market risk is separated into two portfolios:
• Trading portfolios comprise positions arising from market-making and the 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.
Where appropriate, we apply similar risk management policies and measurement techniques to both trading and non-
trading portfolios. Our objective is to manage and control market risk exposures in order to optimise return on risk while
maintaining a market profile consistent with our status as one of the world’s largest banking and financial services
organisations.
The nature of the hedging and risk mitigation strategies performed across the Group corresponds to the market risk
management instruments available within each operating jurisdiction. These strategies range from the use of traditional
market instruments, such as interest rate swaps, to more sophisticated hedging strategies to address a combination of risk
factors arising at portfolio level.
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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
Overview of market risk in global businesses
(Unaudited)
The diagram below illustrates the main business areas where trading and non-trading market risks reside and market risk
measures to monitor and limit exposures.
Trading risk
Non-trading risk
Risk types
– Foreign exchange & commodities
– Interest rates
– Credit spreads
– Equities
– Structural foreign exchange
– Interest rates1
– Credit spreads
Global businesses
GB&M, incl BSM
GB&M, incl BSM
GPB
CMB
RBWM
Risk measure
VaR | Sensitivity | Stress testing
VaR | Sensitivity | Stress testing
1 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 181.
Market risk governance
(Audited)
Market risk is managed and controlled through limits approved by the Risk Management Meeting of the GMB for HSBC
Holdings and our various global businesses. These limits are allocated across business lines and to the Group’s legal
entities.
HSBC Holdings Board
Chairman/CEO
Risk Management Meeting
of the GMB
Group Traded Risk
Entity Risk
Management Committee
Principal Office Manager
Business/Desk/Trader
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The management of market risk is principally undertaken in Global
Markets, where 77% of the total value at risk of HSBC (excluding
insurance) and almost all trading VaR resides, using risk limits
approved by the GMB. VaR 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 market risk limits are governed according to the
framework illustrated to the left.
Each operating entity is required to assess the market risks arising
on each product in its business and to transfer them to either its
local Markets unit for management, 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. 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 page 224.
Model risk is governed through Model Oversight Committees (‘MOC’s) at the regional and global Wholesale Credit and
Market Risk levels. They have direct oversight and approval responsibility for all traded risk models utilised for risk
measurement and management and stress testing. The MOCs prioritise the development of models, methodologies and
practices used for traded risk management within the Group and ensure that they remain within our risk appetite and
business plans. The Markets MOC reports into the Group MOC, which oversees all model risk types at Group level. Group
MOC informs the Group Risk Management Meeting about material issues at least on a bi-annual basis. The Risk
Management Meeting is the Group’s ‘Designated Committee’ according to regulatory rules and has delegated day-to-day
governance of all traded risk models to the Markets MOC.
HSBC HOLDINGS PLC
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Our control of market risk in the trading and non-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.
Market risk measures
(Audited)
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures while maintaining a market profile consistent with our risk
appetite.
We use a range of tools to monitor and limit market risk exposures including sensitivity analysis, value at risk and stress
testing.
Sensitivity analysis
(Unaudited)
Sensitivity analysis measures the impact of individual market factor movements on specific instruments or portfolios,
including interest rates, foreign exchange rates and equity prices, such as the effect of a one basis point change in yield.
We use sensitivity measures to monitor the market risk positions within each risk type. Sensitivity limits are set
for portfolios, products and risk types, with the depth of the market being one of the principal factors in determining
the level of limits set.
Value at risk
(Audited)
Value at risk (‘VaR’) is a technique that estimates the potential losses on risk positions as a result of movements in market
rates and prices over a specified time horizon and to a given level of confidence. The use of VaR is integrated into market
risk management and is calculated for all trading positions regardless of how we capitalise those exposures. Where there
is not an approved internal model, we use the appropriate local rules to capitalise exposures.
In addition, we calculate VaR for non-trading portfolios in order to have a complete picture of risk. Our models are
predominantly based on historical simulation. VaR is calculated at a 99% confidence level for a one-day holding period.
Where we do not calculate VaR explicitly, we use alternative tools as summarised in the Market Risk Stress Testing table
found in the Stress testing section below.
Our VaR models derive plausible future scenarios from past series of recorded market rates and prices, taking into
account inter-relationships between different markets and rates such as interest rates and foreign exchange rates. The
models also incorporate the effect of option features on the underlying exposures.
The historical simulation models used incorporate the following features:
• historical market rates and prices are calculated with reference to foreign exchange rates and commodity prices,
interest rates, equity prices and the associated volatilities;
• potential market movements utilised for VaR are calculated with reference to data from the past two years; and
• VaR measures are calculated to a 99% confidence level and use a one-day holding period.
The nature of the VaR models means that an increase in observed market volatility will lead to an increase in VaR without
any changes in the underlying positions.
We are committed to the ongoing development of our in-house risk models.
VaR model limitations
Although a valuable guide to risk, VaR should always be viewed in the context of its limitations. For example:
• the use of historical data as a proxy for estimating future events may not encompass all potential events, particularly
those which are extreme in nature;
• the use of a holding period assumes that all positions can be liquidated or the risks offset during that period. This may
not fully reflect the market risk arising at times of severe illiquidity, when the holding period may be insufficient to
liquidate or hedge all positions fully;
• the use of a 99% confidence level, by definition, does not take into account losses that might occur beyond this level of
confidence;
• 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 conditions of significant market movement.
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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
Risk not in VaR framework
(Unaudited)
Our VaR model is designed to capture significant basis risks such as credit default swap versus 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 (‘RNIV’) calculations, and are integrated into our capital framework.
The RNIV framework therefore aims to capture and capitalise material market risks that are not adequately covered in
the VaR model. An example of this is Libor-overnight index swap basis risk for minor currencies. In such instances the RNIV
framework uses stress tests to quantify the capital requirement. On average in 2014, the capital requirement derived
from these stress tests represented 2.6% of the total internal model-based market risk requirement.
Risks covered by RNIV represent 18% of market risk RWAs for models with regulatory approval and include those resulting
from underlying risk factors which are not observable on a daily basis across asset classes and products, such as dividend
risk and correlation risks.
Risk factors are reviewed on a regular basis and either incorporated directly in the VaR models, where possible, or
quantified through the VaR-based RNIV approach or a stress test approach within the RNIV framework. The severity of
the scenarios is calibrated to be in line with the capital adequacy requirements. The outcome of the VaR-based RNIV is
included in the VaR calculation and back-testing; a stressed VaR RNIV is also computed for the risk factors considered in
the VaR-based RNIV approach.
In 2014, we modified our RNIV model on a non-diversified basis across risk factors to comply with new PRA CRD IV
implementation guidelines.
Level 3 assets
The fair values of Level 3 assets and liabilities in trading portfolios are disclosed on page 380, and represent only a small
proportion of the overall trading portfolio. Market risk arising from Level 3 instruments is managed by various market risk
techniques such as stress testing and notional limits. The table on page 384 shows the movement in Level 3 financial
instruments.
Back-testing
We routinely validate the accuracy of our VaR models by back-testing them against both clean and hypothetical profit and
loss against the corresponding VaR numbers. Hypothetical profit and loss excludes non-modelled items such as fees,
commissions and revenues of intra-day transactions.
We would expect on average to see two or three profits and two or three losses in excess of VaR at the 99% confidence
level over a one-year period. The actual number of profits or losses in excess of VaR over this period can therefore be
used to gauge how well the models are performing. To ensure a conservative approach to calculating our risk exposures,
it is important to note that profits in excess of VaR are only considered when back-testing the accuracy of our models and
are not used to calculate the VaR numbers used for risk management or capital purposes.
We back-test our Group VaR at various levels which reflect a full legal entity scope of HSBC, including entities that do not
have local permission to use VaR for regulatory purposes.
Stress testing
(Unaudited)
Stress testing is an important tool that is integrated into our market risk management tool to evaluate the potential
impact on portfolio values of more extreme, although plausible, events or movements in a set of financial variables.
In such abnormal scenarios, losses can be much greater than those predicted by VaR modelling.
Stress testing is implemented at legal entity, regional and overall Group levels. A standard set of scenarios is utilised
consistently across all regions within the Group. Scenarios are tailored to capture the relevant events or market
movements at each level. The risk appetite around potential stress losses for the Group is set and monitored against
referral limits.
Market Risk Stress Testing
Sensitivities
Technical
Hypothetical
Historical
Impact of a single risk
factor e.g. break of a
currency peg
Impact of the largest
move in each risk factor
without consideration
of any underlying
market correlation
Impact of potential
macroeconomic events,
e.g. slowdown in
mainland China
Scenarios that
incorporate historical
observations of market
movements e.g. Black
Monday 1987 for
equities
Reverse
Stress
Testing
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Market risk reverse stress tests are undertaken on 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, provide
management with insights regarding the ‘tail risk’ beyond VaR for which HSBC’s appetite is limited.
Trading portfolios
(Audited)
Gap risk
Certain products are structured in such a way that they give rise to enhanced gap risk, being the risk that loss is incurred
upon occurrence of a gap event. A gap event is a significant and sudden change in market price with no accompanying
trading opportunity. Such movements may occur, for example, when, in reaction to an adverse event or unexpected news
announcement, some parts of the market move far beyond their normal volatility range and become temporarily illiquid.
In 2014 gap risk principally arose from non-recourse loan transactions, mostly for corporate clients, where the collateral
against the loan is limited to the posted shares. Upon occurrence of a gap event, the value of the equity collateral could
fall below the outstanding loan amount.
Given their characteristics, these transactions make little or no contribution to VaR nor to traditional market risk
sensitivity measures. We capture their risks within our stress testing scenarios and monitor gap risk on an ongoing basis.
We did not incur any notable gap loss in 2014.
De-peg risk
For certain currencies (pegged or managed) the spot exchange rate is pegged at a fixed rate (typically to USD or EUR), or
managed within a predefined band around a pegged rate. De-peg risk is the risk of the peg or managed band changing or
being abolished, and moving to a floating regime.
HSBC has considerable experience in managing fixed and managed currency regimes. Using stressed scenarios on spot
rates, we are able to analyse how de-peg events would impact the positions held by HSBC. We monitor such scenarios to
pegged or managed currencies, such as the Hong Kong dollar, renminbi, Middle Eastern currencies and the Swiss franc
with appreciation capped against the euro during 2014, and limit any potential losses that would occur. This complements
traditional market risk metrics, such as historical VaR, which may not fully capture the risk involved in holding positions in
pegged or managed currencies. Historical VaR relies on past events to determine the likelihood of potential profits or
losses. However, pegged or managed currencies may not have experienced a de-peg event during the historical timeframe
being considered.
ABS/MBS exposures
The ABS/MBS exposures within the trading portfolios are managed within sensitivity and VaR limits as described on
page 176, and are included within the stress testing scenarios described above.
Non-trading portfolios
(Audited)
Most of the Group’s 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. There is no commodity market risk in the non-trading portfolios.
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 BSM 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 BSM.
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 scope and management of which are described in the relevant
sections below.
Our control of market risk in the non-trading portfolios is based on transferring the assessed market risk of non-trading
assets and liabilities created outside BSM or Markets, to the books managed by BSM, provided the market risk can be
neutralised. The net exposure is typically managed by BSM through the use of fixed rate government bonds (liquid assets
held in available-for-sale books) and interest rate swaps. The interest rate risk arising from fixed rate government bonds
held within available-for-sale portfolios is reflected within the Group’s non-traded VaR. Interest rate swaps used by BSM
are typically classified as either a fair value hedge or a cash flow hedge and are included within the Group’s non-traded
VaR. Any market risk that cannot be neutralised in the market is managed by local ALCO in segregated ALCO books.
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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
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.
Equity securities classified as available for sale
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 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.
Non-trading interest rate risk
(Unaudited)
Non-trading 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, and the re-pricing behaviour of managed rate products. These assumptions around behavioural
features are captured in our interest rate risk behaviouralisation framework, which is described below.
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.
Analysis of interest rate risk is complicated by having to make assumptions on embedded optionality within certain
product areas such as the incidence of mortgage prepayments.
Our funds transfer pricing policies give rise to a two stage funds transfer pricing approach. For details see page 219.
Interest rate risk behaviouralisation
Unlike liquidity risk, which is assessed on the basis of a very severe stress scenario, non-trading interest rate risk is
assessed and managed according to ‘business-as-usual’ conditions. In many cases the contractual profile of non-trading
assets/liabilities arising from assets/liabilities created outside Markets or BSM does not reflect the behaviour observed.
Behaviouralisation is therefore used to assess the market interest rate risk of non-trading assets/liabilities and this
assessed market risk is transferred to BSM, in accordance with the rules governing the transfer of interest rate risk from
the global businesses to BSM.
Behaviouralisation is applied in three key areas:
• the assessed re-pricing frequency of managed rate balances;
• the assessed duration of non-interest bearing balances, typically capital and current accounts; and
• the base case expected prepayment behaviour or pipeline take-up rate for fixed rate balances with embedded
optionality.
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Interest rate behaviouralisation policies have to be formulated in line with the Group’s behaviouralisation policies and
approved at least annually by local ALCO, regional ALCM and Group ALCM, in conjunction with local, regional and Group
market risk monitoring teams.
The extent to which balances can be behaviouralised is driven by:
• the amount of the current balance that can be assessed as ‘stable’ under business-as-usual conditions; and
• for managed rate balances, the historic market interest rate re-pricing behaviour observed; or
• for non-interest bearing balances, the duration for which the balance is expected to remain under business-as-usual
conditions. This assessment is often driven by the re-investment tenors available to BSM to neutralise the risk through
the use of fixed rate government bonds or interest rate derivatives, and for derivatives the availability of cash flow
hedging capacity.
Balance Sheet Management
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 (which usually meets on a monthly basis). It also manages the non-trading interest rate positions transferred to
it within a Global Markets limit structure.
In executing the management of the liquidity risk on behalf of ALCO, and managing the non-trading interest rate positions
transferred to it, BSM invests in highly-rated liquid assets in line with the Group’s liquid asset policy. 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.
Withdrawable central bank deposits are accounted for as cash balances. Interbank loans, statutory central bank reserves
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.
Statutory central bank reserves are not recognised as liquid assets. The statutory reserves that would be released in line with
the Group’s stressed customer deposit outflow assumptions are reflected as stressed inflows.
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, exposure to central
banks and high quality sovereigns, supranationals or agencies which constitute the majority of BSM’s liquidity portfolio.
BSM does not manage the structural credit risk of any Group entity balance sheets.
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 2014 and 31 December 2013, 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 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 2014 and 2013.
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). This monitoring is undertaken at an entity
level by local ALCOs.
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 BSM or in the business units to mitigate the effect of interest
rate risk. In reality, BSM 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.
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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
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 and, in certain instances, trustees (who act
on behalf of the pension schemes’ beneficiaries) assess these risks using reports prepared by independent external
consultants, take action and, where appropriate, adjust investment strategies and contribution levels accordingly.
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 capital resources for deployment under extraordinary circumstances. It does not take proprietary trading
positions.
The main market risks to which HSBC Holdings is exposed are non-trading 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 capital resources, cash flows and
distributable reserves. Market risk for HSBC Holdings is monitored by HSBC Holdings ALCO in accordance with its risk
appetite statement.
HSBC Holdings uses interest rate swaps and cross currency interest rate swaps to manage the interest rate risk and foreign
currency risk arising from its long-term debt issues.
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 Global Risk, and a formal governance structure provides
oversight over its management. The Global Operational Risk function reports to the Group Chief Risk Officer and supports
the Global Operational Risk Committee. It is responsible for establishing and maintaining the operational risk management
framework (‘ORMF’) and 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 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 describes our approach to identifying,
assessing, monitoring and controlling operational risk and gives 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 Group Operational Risk database and are reported to the Risk
Management Meeting on a monthly basis.
For further details, see the Pillar 3 Disclosures 2014 report.
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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,
standards and Group policies include those relating to anti-money laundering, anti-bribery and corruption, counter-
terrorist and proliferation financing, sanctions compliance, conduct of business, market conduct and other financial
regulations.
The two Compliance sub-functions: Financial Crime Compliance (‘FCC’) and Regulatory Compliance (‘RC’), are
appropriately supported by shared Compliance Chief Operating Officer, Assurance and Reputational Risk Management
teams. The Global Head of Financial Crime Compliance and the Global Head of Regulatory Compliance both report to the
Group Chief Risk Officer.
There are compliance teams in each of the countries where we operate and in all global businesses. These compliance
teams are principally overseen by Heads of Financial Crime Compliance and Regulatory Compliance located in Europe,
the US, Canada, Latin America, Asia and the Middle East and North Africa. The effectiveness of the regional and global
business compliance teams are reviewed by the Assurance team.
Global policies and procedures require the prompt identification and escalation to Financial Crime Compliance or
Regulatory 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 and functions detailing any known breaches as above.
The contents of these escalation and certification processes are reported to the Risk Management Meeting, the Group
Risk Committee and the Board. They are disclosed in the Annual Report and Accounts and Interim Report, as appropriate.
Our focus on compliance and conduct issues is further reinforced by the Financial System Vulnerabilities Committee, which
reports to the Board on matters relating to financial crime and financial system abuse and provides a forward-looking
perspective on financial crime risk. In addition, the Conduct & Values Committee reports to the Board on matters relating
to the responsible conduct of business and adherence to HSBC’s Values.
In 2014, the new enhanced global AML and sanctions policies and a globally consistent approach to the management of
conduct were approved by the Board as described in ‘Compliance risk’ on page 189.
Legal risk
(Unaudited)
Each legal department 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 of a member of HSBC suffering financial loss, legal or regulatory action or reputational
damage because its rights and/or obligations under a contract to which it is a party are technically defective;
• dispute risk, which is the risk of a member of HSBC suffering financial loss or reputational damage due to an adverse
dispute environment or a failure to take appropriate steps to defend, prosecute and/or resolve actual or threatened
legal claims brought against or by a Group member;
• 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 a Group member’s assets are not properly owned or protected or
are infringed by others or the infringement by a Group member of another party’s rights.
Our global legal function assists management in controlling legal risk. There are legal departments in 49 of the countries
in which we operate. In addition to the Group Legal function, there are regional legal functions in each of Europe, North
America, Latin America, the Middle East and North Africa and Asia headed by regional General Counsels, and a global
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 information, fraud, contingency, financial intelligence, physical and geopolitical risks 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 Information Security Risk function is responsible for defining the strategy and policy by which the organisation
protects its information assets and services from compromise, corruption or loss, whether caused deliberately or
inadvertently by internal or external parties. It provides independent advice, guidance and oversight to the business about
the effectiveness of information security controls and practices in place or being proposed.
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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
The Fraud Risk function is responsible for ensuring that effective prevention, detection and investigation 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 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 which, in addition to the use of advanced technology,
includes fraud prevention policies and practices, the implementation of strong internal controls, investigations response
teams and liaison with law enforcement where appropriate.
The Contingency Risk function is responsible for ensuring that the group’s critical systems, processes and functions have
the resilience to maintain continuity in the face of major disruptive events.
Within this wider risk, Business Continuity Management covers the pre-planning for 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,
the integrity of data and documents and meeting regulatory requirements.
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 cyber-attacks. The ORMF 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.
The Financial Intelligence Unit is jointly administered by Security and Fraud Risk and Financial Crime Compliance. It uses
advanced analytics and subject matter expertise to detect indicators of financial crime in the Group’s clients and counter-
parties.
The Physical Security function develops practical physical, electronic and operational counter-measures to ensure that the
people, property and assets managed by the Group are protected from crime, theft, attack and groups hostile to HSBC’s
interests.
Geopolitical risk unit provides both regular and ad hoc reporting to business executives and senior Security and Fraud Risk
management on geopolitical risk profiles and evolving threats in countries in which the Group operates. This both
enhances strategic business planning and provides an early view into developing security risks. Security travel controls and
guidance are also maintained.
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
scenario analysis. Key risk indicators are used to assure a consistent basis of risk evaluation across geographical and line of
business boundaries. Material risks are monitored through the periodic testing of associated key controls.
Business-critical services have been identified through a central, global oversight body. Quantitative scorecards, called risk
appetite statements, are used for monitoring performance, and have been established for each of these services.
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Service Resilience and Systems Continuity Planning functions are in place to ensure systems meet agreed target service
levels and, in the event of major disruptive events, can be recovered within recovery time objectives agreed with the
business.
Vendor risk management
(Unaudited)
Our vendor risk management (‘VRM’) programme 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. Global and regional governance structures have been implemented to oversee vendor third party service
providers.
Risk management of insurance operations
Overview of insurance products
(Audited)
HSBC manufactures the following main classes of contract:
• 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).
We additionally write a small amount of non-life insurance business primarily covering personal and commercial property.
Nature and extent of risks
(Audited)
The majority of the risks in our Insurance business derive from manufacturing activities and can be categorised between
financial risks and insurance risk; financial risks include market risk, credit risk and liquidity risk. Operational and
sustainability risks are also present and are covered by the Group’s respective overall risk management processes.
The following sections describe how financial risks and insurance risk are managed. The assets of insurance manufacturing
subsidiaries are included within the consolidated risk disclosures on pages 111 to 203, although separate disclosures in
respect of insurance manufacturing subsidiaries are provided in the ‘Risk management of insurance operations’ section
on pages 190 to 198.
Insurance manufacturers establish control procedures complying with the guidelines and requirements issued by Group
Insurance and local regulatory requirements. Country level oversight is exercised by local risk management committees.
Country Chief Risk Officers have direct reporting lines into local Insurance Chief Executive Officers and functional
reporting lines into the Group Insurance Chief Risk Officer, who has overall accountability for risk management in
insurance operations globally. The Group Insurance Executive Committee oversees the control framework globally and
is accountable to the RBWM Risk Management Committee on risk matters.
In addition, local ALCOs monitor and review the duration and cash flow matching of insurance assets and liabilities.
All insurance products, whether manufactured internally or by a third party, are subjected to a product approval process
prior to introduction.
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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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
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 closed to new business, 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
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;
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• 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. 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. Exposures are aggregated and reported on a quarterly basis to senior risk management forums in Group
Insurance.
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 and a global assessment presented to the RBWM Risk
Management Committee.
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 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 and risk committees every quarter.
The table, ‘Sensitivity of HSBC’s insurance manufacturing subsidiaries to market risk factors’ on page 195, 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) risk of default by debt security counterparties after investing premiums to generate a return for policyholders and
shareholders; and
(ii) 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 Insurance Credit Risk and Group Credit Risk. Stress testing is performed by Group
Insurance on the investment credit exposures using credit spread sensitivities and default probabilities.
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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
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 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
• 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 for collation and review. 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.
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.
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,
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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 198).
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, and our vendors, conduct themselves.
The Global Head of Financial Crime Compliance and the Global Head of Regulatory Compliance are the risk stewards for
reputational risk. The development of policies, and an effective control environment for the identification, assessment,
management and mitigation of reputational risk, is co-ordinated through 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 Group Risk
Management Meeting for policy or procedural changes to mitigate such risk. Each of the Group’s geographical regions is
required to ensure that reputational risks are also considered at a regional level, either through a special section of their
respective Regional Risk Management Committee meetings, or a Regional Reputational Risk Policy Committee. A summary
of the minutes from the regional meetings is tabled at GRRPC. Significant issues posing reputational risk are reported to
Group Risk Committee and the Holdings Board and, where appropriate, to the Conduct & Values Committee.
In July 2014, the new Reputational Risk and Customer Selection policies were issued which define a consistent and
structured approach to managing these risks. For further details, see ‘Reputational risk’ on page 199. Each of the global
businesses and functions is required to have a procedure to assess and address reputational risks potentially arising from
proposed business transactions and client activity. These are supported by a central team which ensures that issues are
directed to the appropriate forum, that decisions taken are implemented and that management information is collated
and actions reported to senior management. In 2014, the combined Reputational Risk and Client Selection committees
were created within the global businesses with a clear process to escalate and address matters at the appropriate level.
The global functions manage and escalate reputational risks within established operational risk frameworks.
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 Meeting, 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 288), 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.
Fiduciary risk
(Unaudited)
Business activities in which fiduciary risk is inherent are only permitted 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 and activities (‘designated businesses and activities’) are:
• HSBC Securities Services, which is exposed to fiduciary risk via its Funds Services and Corporate Trust and loan agency
activities;
• HSBC Global Asset Management, which is exposed to fiduciary risks via its investment management activities on behalf
of clients;
• HSBC Global Private Banking, which is exposed to fiduciary risks via its private trust division and discretionary
investment management;
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Report of the Directors: Risk (continued)
Appendix to Risk – Policies and practices
• HSBC Insurance, which is exposed to fiduciary risks via the investment management activities it undertakes when
providing insurance products and services;
• RBWM Trust Investment Wrappers, required by regulation for the provision of normal RBWM Wealth Management
products and services; and
• HSBC Employee Pension Scheme activities, where fiduciary duties may arise as part of carrying out a function of
discretion or control over an HSBC employee pension scheme's operations.
The Group’s requirements for the management of fiduciary risk are laid down in the fiduciary section of the Global Risk
Functional Instruction Manual, which is owned by Global 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 policy 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.
Pension risk
(Audited)
We operate a number of pension plans throughout the world, as described in the Pension risk section on page 200 and
below.
In order to fund the benefits associated with defined benefit plans, sponsoring Group companies (and, in some instances,
employees) make regular contributions in accordance with advice from actuaries and in consultation with the 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).
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.
Defined contribution plans result in far less exposure to market risk for the bank, but remain exposed to operational and
reputational risks as they place the responsibility and flexibility more directly with employees. To manage these risks, the
performance of defined contribution investment funds are monitored and local engagement with employees is actively
promoted to ensure they are provided with sufficient information about the options available to them.
Pension plans in the UK
The HSBC Bank (UK) Pension Scheme (the principal plan) has both defined benefit and defined contribution sections. The
defined benefit section accounts for approximately 72% of our total defined benefit obligations around the world. The
defined benefit section was closed to new entrants in 1996 and from 1 July 2015 it will be closed to further accrual for
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current employees who are in that section, who will join the defined contribution section for future pensions. All new
employees have joined the defined contribution section since 1996. The principal plan is overseen by an independent
corporate trustee who has a fiduciary responsibility for the operation of the pension plan. 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 plan.
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, Global 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. Global Corporate Sustainability’s risk
management responsibilities include:
• formulating sustainability risk policies. This includes overseeing our sustainability risk standards, our application of
the Equator Principles and our sustainability policies (covering agricultural commodities, chemicals, defence, energy,
forestry, freshwater infrastructure, mining and metals, and World Heritage Sites and Ramsar Wetlands); 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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Report of the Directors: Capital (continued)
Overview / Risk-weighted assets
Page
App1
Tables
239
Capital ratios
Total regulatory capital and risk-weighted assets
RWAs by risk type
RWAs by global businesses
RWAs by geographical regions
Credit risk exposure – RWAs by geographical region
Credit risk exposure – RWAs by global businesses
RWA movement by geographical regions by key driver –
credit risk – IRB only
RWA movement by global businesses by key driver –
credit risk – IRB only
Counterparty credit risk RWAs
RWA movement by key driver – counterparty
credit risk – advanced approach
Market risk RWAs
RWA movement by key driver – market risk –
internal model based
Capital and RWA movements by major driver – CRD IV
end point basis
257
257
257
257
257
258
258
258
258
259
260
260
260
261
261
Source and application of total regulatory capital
Composition of regulatory capital
Reconciliation of regulatory capital from transitional basis
to an estimated CRD IV end point basis
Reconciliation of balance sheets – financial accounting to
regulatory scope of consolidation
Estimated leverage ratio
261
Capital requirements framework
Page
239
239
240
240
240
240
240
242
242
243
243
244
244
245
245
246
247
249
251
254
Capital
Capital overview
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
Credit risk RWAs
239
240
Counterparty credit risk and market risk RWAs
243
Operational risk RWAs
RWA movement by key driver – basis of
preparation and supporting notes
Credit risk drivers – definitions and quantifications
Counterparty risk drivers – definitions and
quantifications
Market risk drivers – definitions and
quantifications
Capital structure
Regulatory balance sheet
Regulatory and accounting consolidations
Leverage ratio
Leverage ratio: basis of preparation
Regulatory developments
Regulatory capital buffers
Regulatory stress testing
RWA developments
Leverage ratio proposals
Banking structural reform and recovery and
resolution planning
Other regulatory updates
1 Appendix to Capital.
244
245
248
248
251
252
252
254
254
255
255
256
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Our objective in the management of Group
capital is to maintain appropriate levels of capital
to support our business strategy and meet
our regulatory and stress testing related
requirements.
Capital highlights
• The transitional CET1 ratio of 10.9% was up from 10.8% at
the end of 2013 as a result of continued capital generation
and management initiatives offset by RWA growth, foreign
exchange movements and regulatory changes.
• The end point CET1 ratio of 11.1% was up from 10.9% at the
end of 2013 as a result of similar drivers.
Capital overview
(Unaudited)
Capital ratios
(Unaudited)
CRD IV transitional
Common equity tier 1 ratio
Tier 1 ratio
Total capital ratio
CRD IV end point
Common equity tier 1 ratio
Basel 2.5
Core tier 1 ratio
Tier 1 ratio
Total capital ratio
At 31 December
2014
%
10.9
12.5
15.6
11.1
n/a
n/a
n/a
2013
%
10.8
12.0
14.9
10.9
13.6
14.5
17.8
Total regulatory capital and risk-weighted assets
(Unaudited)
CRD IV
CRD IV
transitional
transitional
Basel 2.5 at
estimated at
31 Dec 2014 31 Dec 2013 31 Dec 2013
US$m
US$m
US$m
at
Common equity tier 1
capital
133,200
131,233
Core tier 1 capital
Additional tier 1 capital
Tier 2 capital
19,539
37,991
14,408
35,538
Total regulatory capital
190,730
181,179
149,051
9,104
35,854
194,009
Risk-weighted assets
1,219,765
1,214,939
1,092,653
On 1 January 2014, CRD IV came into force and capital
and RWAs at 31 December 2014 are calculated and
presented on the Group’s interpretation of final CRD IV
legislation and final rules issued by the PRA. Prior to
1 January 2014, RWAs and capital were calculated and
presented in accordance with the previous regime under
CRD III, also referred to as ‘Basel 2.5’. As a result, unless
otherwise stated, comparatives for capital and RWAs at
31 December 2013 are on a Basel 2.5 basis.
The capital and RWAs on a CRD IV basis incorporate
the effect of the PRA’s final rules as set out in the PRA
Rulebook. This transposed various areas of national
discretion within the final CRD IV legislation into UK law.
In its final rules, the PRA did not adopt most of the CRD IV
transitional provisions available, instead opting for an
acceleration of the CRD IV end point definition of
common equity tier 1 (‘CET1’) capital. However, CRD IV
transitional provisions for unrealised gains were applied,
such that unrealised gains on investment property and
available-for-sale securities are not recognised for capital
until 1 January 2015. As a result, our transitional capital
ratio in 2014 is slightly lower than the comparable end
point capital ratio.
In April 2014, the PRA published its rules and supervisory
statements implementing some of the CRD IV provisions
relating to capital buffers, further details of which are
provided in the ‘Regulatory capital buffers’ section on
page 252.
In June 2014, the PRA published its revised expectations
in relation to capital ratios for major UK banks and
building societies, namely that from 1 July 2014 we are
expected to meet a 7% CET1 ratio using the CRD IV end
point definition. This applies alongside CRD IV
requirements.
Despite the rules published to date, there remains
continued uncertainty around the amount of capital that
UK banks will be required to hold. This relates specifically
to the quantification and interaction of capital buffers
and Pillar 2. The PRA is currently consulting on their
revised approach to Pillar 2, the PRA buffer and its
interaction with the CRD IV buffers. Furthermore, there
are a significant number of draft and unpublished EBA
technical and implementation standards due in 2015.
Our approach to managing Group capital is designed to
ensure that we exceed current regulatory requirements
and that we respect the payment priority of our capital
providers. Throughout 2014, we complied with the PRA’s
regulatory capital adequacy requirements, including
those relating to stress testing. We are also well placed to
meet our expected future capital requirements.
During 2014, we managed our capital position to meet
an internal target CET1 ratio on an end point basis
of greater than 10%. This has since been reviewed, and
in 2015 we expect to manage Group capital to meet a
medium-term target for return on equity of more than
10%. This is modelled on a CET1 ratio on an end point
basis in the range of 12% to 13%.
A summary of our policies and practices regarding capital
management, measurement and allocation is provided in
the Appendix to Capital on page 257.
Risk-weighted assets
(Unaudited)
CRD IV contributed to an increased capital requirement.
The key changes introduced were:
• securitisation positions which were previously
deducted 50% from core tier 1 and 50% from total
capital, are now included in RWAs at 1,250%;
• an additional capital charge to cover the risk of mark-
to-market losses on expected counterparty risk
referred to as credit valuation adjustment (‘CVA’) risk;
• deferred tax assets and significant investments,
subject to thresholds, are now risk weighted at 250%;
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Report of the Directors: Capital (continued)
Risk weighted-assets
• increased risk weights on exposures to financial
institutions, referred to as asset value correlation
(‘AVC’); and
• new requirements for exposures to central
counterparties (‘CCP’). There are enhanced incentives
for clearing OTC derivative transactions through CCP.
RWAs by risk type
(Unaudited)
Credit risk
Standardised approach
IRB foundation approach
IRB advanced approach
Counterparty credit risk
Standardised approach
Advanced approach
Market risk
Operational risk
At 31 December
Of which:
US run-off portfolios
Legacy credit in GB&M
US CML and Other
Card and Retail Services1
For footnotes, see page 256.
Credit risk RWAs
(Unaudited)
CRD IV transitional
and end point
2014
US$bn
2013
US$bn
Basel 2.5
basis
2013
US$bn
955.3
356.9
16.8
581.6
90.7
25.2
65.5
56.0
936.5
358.6
13.5
564.4
95.8
36.6
59.2
63.4
864.3
329.5
13.6
521.2
45.8
3.6
42.2
63.4
117.8
119.2
119.2
1,219.8
1,214.9
1,092.7
99.2
44.1
55.1
–
142.3
63.7
78.6
1.1
104.9
26.4
78.5
1.1
RWAs by global businesses
(Unaudited)
Retail Banking and Wealth
Management
Commercial Banking
Global Banking and Markets
Global Private Banking
Other
CRD IV
transitional
and end point
2014
US$bn
205.1
432.4
516.1
20.8
45.4
Basel 2.5
basis
2013
US$bn
233.5
391.7
422.3
21.7
23.5
At 31 December
1,219.8
1,092.7
RWAs by geographical regions2
(Unaudited)
CRD IV
transitional
and end point
2014
US$bn
375.4
499.8
63.0
221.4
88.8
Basel 2.5
basis
2013
US$bn
300.1
430.7
62.5
223.8
89.5
Europe
Asia
Middle East and North Africa
North America
Latin America
At 31 December
1,219.8
1,092.7
For footnote, see page 256.
Credit risk exposure – RWAs by geographical region
Europe
US$bn
Asia3
US$bn
MENA
US$bn
North
America
US$bn
Latin
America
US$bn
CRD IV basis
IRB approach
IRB advanced approach
IRB foundation approach
Standardised approach
RWAs at 31 December 2014
Basel 2.5 basis
IRB advanced approach
IRB foundation approach
Standardised approach
RWAs at 31 December 2013
For footnote, see page 256.
216.1
203.3
12.8
47.1
263.2
157.1
9.8
44.5
211.4
Credit risk exposure – RWAs by global businesses
CRD IV basis
IRB approach
IRB advanced approach
IRB foundation approach
Standardised approach
RWAs at 31 December 2014
Basel 2.5 basis
IRB advanced approach
IRB foundation approach
Standardised approach
RWAs at 31 December 2013
Principal
RBWM
US$bn
RBWM
(US run-off
portfolio)
US$bn
55.9
55.9
–
60.4
116.3
58.4
–
60.6
119.0
47.3
47.3
–
4.8
52.1
72.6
–
3.1
75.7
213.1
213.1
–
186.0
399.1
182.9
–
165.9
348.8
Total
RBWM
US$bn
103.2
103.2
–
65.2
168.4
131.0
63.7
194.7
HSBC HOLDINGS PLC
240
15.6
11.6
4.0
39.0
54.6
11.2
3.8
40.0
55.0
142.0
142.0
–
29.6
171.6
161.5
–
22.7
184.2
11.6
11.6
–
55.2
66.8
8.5
–
56.4
64.9
Total
US$bn
598.4
581.6
16.8
356.9
955.3
521.2
13.6
329.5
864.3
CMB
US$bn
GB&M
US$bn
GPB
US$bn
Other
US$bn
Total
US$bn
217.4
209.4
8.0
181.8
399.2
183.2
6.3
169.3
358.8
255.6
248.1
7.5
70.1
325.7
192.8
5.8
71.6
270.2
10.2
10.0
0.2
6.6
16.8
10.4
0.1
6.9
17.4
12.0
10.9
1.1
33.2
45.2
3.8
1.4
18.0
23.2
598.4
581.6
16.8
356.9
955.3
521.2
13.6
329.5
864.3
Credit risk RWAs are calculated using three approaches,
as permitted by the PRA. For consolidated Group
reporting, we have adopted the advanced internal
ratings-based (‘IRB’) approach for the majority of our
business, with a small proportion being on the
foundation IRB approach and the remaining portfolios
on the standardised approach.
Standardised approach
For portfolios treated under the standardised approach,
credit risk RWAs increased by US$27.4bn, which
reflected a reduction of US$13.6bn due to foreign
exchange movements.
Corporate growth in Asia, Europe, North America and
Latin America, including term and trade-related lending,
increased RWAs by US$25.0bn, of which growth in our
associate, BoCom, accounted for US$6.4bn.
The move to a CRD IV basis increased RWAs on 1 January
2014 by US$7.1bn. This movement mainly comprised
material holdings and deferred tax asset amounts in
aggregate below the capital threshold risk-weighted at
250% US$28.3bn, partially offset by the reclassification of
non-credit obligation assets to the IRB approach for
reporting purposes US$16.3bn and the netting of
collective impairments against exposure at default under
the standardised approach US$3.5bn.
During the year, several individually immaterial
portfolios moved from the IRB approach to the
standardised approach, increasing standardised RWAs by
US$6.0bn and reducing IRB RWAs by US$4.8bn.
The disposal of our operations in Jordan, Pakistan,
Colombia and Kazakhstan reduced RWAs by US$1.0bn.
In Asia, movement in the fair value of our material
holdings, mainly in Industrial Bank, resulted in an
increase in RWAs of US$5.9bn. This was partially offset
by the reclassification of Vietnam Technological and
Commercial Joint Stock Bank from an associate to an
investment, which reduced RWAs by US$1.1bn.
Internal ratings-based approach
Credit risk RWA movements by key driver for portfolios
treated under the IRB approach are set out in the tables
on page 242 and 243. For basis of preparation on Credit
risk, Counterparty credit risk and Market risk RWA flow,
see Annual Reports and Accounts Appendix to Capital on
page 257. For portfolios treated under the IRB approach,
credit risk RWAs increased by US$63.6bn which reflected
a reduction of US$20.1bn due to foreign exchange
movements driven by the strengthening of the US dollar
against other currencies.
Acquisitions and disposals
In GB&M, the sale of ABSs in North America reduced
RWAs by US$4.2bn. Additionally, GB&M continued to
manage down the securitisation positions held through
the sale of certain structured investment conduit
positions, lowering RWAs by US$3.0bn in Europe.
The disposal of our businesses in Kazakhstan, Colombia,
Pakistan and Jordan resulted in a reduction in RWAs of
US$1.2bn in Europe, Latin America, the Middle East and
North Africa.
Book size
Book size movement reflected higher corporate lending,
including term and trade-related lending, increasing
RWAs by US$40.3bn in Asia, Europe and North America
for CMB and GB&M. Sovereign book growth in GB&M
increased RWAs by US$3.3bn, mainly in Asia, Latin
America, the Middle East and North Africa.
In North America, in RBWM, continued run-off of the
US CML retail mortgage portfolios resulted in a RWA
reduction of US$6.9bn.
Book quality
RWAs reduced by US$8.5bn in the US run-off portfolio,
primarily due to continued run-off which resulted in an
improvement in the book quality of the residual
portfolio.
Book quality improvements in the Principal RBWM
business of US$5.9bn related to model recalibrations
reflecting improving property prices in the US and
favourable changes in portfolio mix reducing RWAs
in Europe.
A ratings upgrade for securitisation portfolio resulted in
a decrease in RWAs of US$3.2bn.
This was partially offset by adverse movements in
average customer credit quality in corporate, sovereign
and institutional portfolios in Europe, North America,
Middle East, North Africa, Asia and Latin America
increased RWAs by US$7.6bn.
Model updates
In Europe, a loss given default (‘LGD’) floor applied to UK
corporate portfolios resulted in an increase in RWAs of
US$19.0bn in CMB and GB&M.
This was partially offset by model updates in North
America, primarily the implementation of new risk
models for the US mortgage run-off portfolio, resulting
in a decrease in RWAs of US$6.2bn.
Methodology and policy changes
Methodology and policy updates increased RWAs by
US$52.2bn.
CRD IV impact
The rise related to the implementation of CRD IV rules at
1 January 2014, which increased RWAs by US$48.2bn.
The main CRD IV movements arose from securitisation
positions that were previously deducted from capital and
are now included as a part of credit risk RWAs and risk-
weighted at 1250%, resulting in a US$40.2bn increase in
GB&M, primarily Europe. CRD IV also introduced an
asset valuation correlation multiplier for financial
counterparties, producing a US$9.2bn increase in
RWAs primarily in GB&M in Asia and Europe.
HSBC HOLDINGS PLC
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Report of the Directors: Capital (continued)
Risk-weighted assets
Internal updates
External updates
A decrease in RWAs of US$9.2bn arose from the set-off of
negative AFS reserves against EAD for GB&M legacy credit
portfolios.
In Asia, internal methodology changes associated with
trade finance products accounted for a reduction in
RWAs of US$4.9bn.
Additionally, the transfer of individually immaterial
portfolios moving to the standardised approach reduced
IRB RWAs by US$4.8bn in Principal RBWM and CMB in
most regions and increased RWAs in the standardised
approach by US$6.0bn.
The reclassification of part of the mortgage portfolio led
to a decrease in RWAs of US$4.5bn in North America, of
which US$4.1bn was in the run-off portfolio.
Selected portfolios with a low default history, mainly in
Europe, Asia and North America, were subjected to
external updates with the introduction of LGD floors
applied to corporates and institutions, increasing RWAs
by US$9.8bn. A further RWA floor was introduced on
retail mortgages in Asia, resulting in an increase of
US$1.7bn.
Non-credit obligation assets
The reclassification of non-credit obligation assets from
the standardised to the IRB approach for reporting
purposes increased RWAs under the latter approach
by US$16.3bn and reduced the STD RWAs by the same
amount.
RWA movement by geographical regions by key driver – credit risk – IRB only
(Unaudited)
RWAs at 1 January 2014 on
Basel 2.5 basis
Foreign exchange movement
Acquisitions and disposals
Book size
Book quality
Model updates
New/updated models
Methodology and policy
Internal updates
External updates
CRD IV impact
NCOA moving from STD to IRB
Total RWA movement
RWAs at 31 December 2014 on
CRD IV basis
RWAs at 1 January 2013 on
Basel 2.5 basis
Foreign exchange movement
Acquisitions and disposals
Book size
Book quality
Model updates
Portfolios moving onto IRB approach
New/updated models
Methodology and policy
Internal updates
External updates
Total RWA movement
RWAs at 31 December 2013 on
Basel 2.5 basis
For footnote, see page 256.
Europe
US$bn
166.9
(11.6)
(3.5)
11.4
(1.5)
19.4
19.4
35.0
(11.7)
2.2
37.0
7.5
49.2
Asia
US$bn
182.9
(4.0)
–
19.5
–
0.3
0.3
14.4
(5.2)
8.5
5.7
5.4
30.2
MENA
US$bn
North
America
US$bn
Latin
America
US$bn
15.0
(0.2)
(0.7)
1.8
(0.8)
–
–
0.5
(0.2)
(0.2)
0.4
0.5
0.6
161.5
(2.4)
(4.2)
2.9
(10.3)
(6.1)
(6.1)
0.6
(6.4)
0.7
4.9
1.4
(19.5)
8.5
(1.9)
(0.1)
2.0
1.4
–
–
1.7
(0.1)
0.1
0.2
1.5
3.1
Total
US$bn
534.8
(20.1)
(8.5)
37.6
(11.2)
13.6
13.6
52.2
(23.6)
11.3
48.2
16.3
63.6
216.1
213.1
15.6
142.0
11.6
598.4
150.7
162.3
3.3
(1.5)
2.1
(1.5)
11.6
13.4
(1.8)
2.2
(0.2)
2.4
16.2
(4.5)
–
21.2
5.3
–
–
–
(1.4)
(7.8)
6.4
20.6
12.6
(0.5)
–
1.4
1.3
0.1
–
0.1
0.1
0.1
–
2.4
187.1
11.2
(1.9)
(8.6)
(10.6)
(10.8)
(0.2)
–
(0.2)
6.5
(0.6)
7.1
(25.6)
(1.0)
(1.7)
0.2
(0.3)
–
–
–
0.1
0.1
–
(2.7)
523.9
(4.6)
(11.8)
14.3
(6.0)
11.5
13.4
(1.9)
7.5
(8.4)
15.9
10.9
166.9
182.9
15.0
161.5
8.5
534.8
HSBC HOLDINGS PLC
242
RWA movement by global businesses by key driver – credit risk – IRB only
(Unaudited)
Principal
RBWM
US$bn
RBWM
(US run-off)
US$bn
Total
RBWM
US$bn
CMB
US$bn
GB&M
US$bn
GPB
US$bn
Other
US$bn
Total
US$bn
RWAs at 1 January 2014 on
Basel 2.5 basis
Foreign exchange movement
Acquisitions and disposals
Book size
Book quality
Model updates
New/updated models
Methodology and policy
Internal updates
External updates
CRD IV impact
NCOA moving from STD to IRB
Total RWA movement
RWAs at 31 December 2014 on
CRD IV basis
58.4
(2.6)
–
1.8
(5.7)
0.6
0.6
3.4
(3.0)
1.8
–
4.6
(2.5)
72.6
–
–
(6.9)
(8.6)
(6.2)
(6.2)
(3.6)
(3.9)
–
–
0.3
131.0
(2.6)
–
(5.1)
(14.3)
(5.6)
(5.6)
(0.2)
(6.9)
1.8
–
4.9
(25.3)
(27.8)
189.5
(8.7)
–
23.2
2.8
12.2
12.2
(1.6)
(5.0)
2.5
(0.7)
1.6
27.9
198.5
(8.1)
(8.2)
21.1
(0.2)
7.0
7.0
45.5
(11.2)
6.3
48.6
1.8
57.1
10.6
(0.2)
–
(0.5)
(0.3)
–
–
0.6
(0.5)
0.5
0.2
0.4
(0.4)
5.2
(0.5)
(0.3)
(1.1)
0.8
–
–
7.9
–
0.2
0.1
7.6
6.8
534.8
(20.1)
(8.5)
37.6
(11.2)
13.6
13.6
52.2
(23.6)
11.3
48.2
16.3
63.6
55.9
47.3
103.2
217.4
255.6
10.2
12.0
598.4
RBWM
US$bn
CMB
US$bn
GB&M
US$bn
GPB
US$bn
Other
US$bn
Total
US$bn
RWAs at 1 January 2013 on
Basel 2.5 basis
Foreign exchange movement
Acquisitions and disposals
Book size
Book quality
Model updates
Portfolios moving onto IRB approach
New/updated models
Methodology and policy
Internal updates
External updates
Total RWA movement
RWAs at 31 December 2013 on
Basel 2.5 basis
163.1
(0.4)
(10.1)
(12.7)
(6.4)
(0.2)
–
(0.2)
(2.3)
(2.3)
–
(32.1)
169.0
(1.5)
(0.1)
14.5
3.5
10.1
10.0
0.1
(6.0)
(3.4)
(2.6)
20.5
177.7
(2.7)
(1.6)
13.5
(3.4)
(1.0)
0.8
(1.8)
16.0
(0.6)
16.6
20.8
9.6
0.1
–
(0.7)
0.3
2.6
2.6
–
(1.3)
(2.1)
0.8
1.0
4.5
(0.1)
–
(0.3)
–
–
–
–
1.1
–
1.1
0.7
523.9
(4.6)
(11.8)
14.3
(6.0)
11.5
13.4
(1.9)
7.5
(8.4)
15.9
10.9
131.0
189.5
198.5
10.6
5.2
534.8
Counterparty credit risk and market risk
RWAs
(Unaudited)
Counterparty credit risk RWAs
(Unaudited)
Advanced approach
CCR IRB approach
CVA
Standardised approach
CCR standardised approach
CVA
CCP
RWAs at 31 December
CRD IV basis Basel 2.5 basis
2013
US$bn
2014
US$bn
65.5
62.0
3.5
25.2
4.4
18.0
2.8
90.7
42.2
42.2
–
3.5
3.5
–
–
45.7
RWA movement by key driver – counterparty credit risk –
advanced approach
(Unaudited)
CRD IV basis Basel 2.5 basis
2013
US$bn
2014
US$bn
RWAs at 1 January
Book size
Book quality
Model updates
Methodology and policy
Internal updates
External regulatory updates
CRD IV impact
Total RWA movement
RWAs at 31 December
42.2
0
1.6
(0.6)
0.1
22.2
(3.8)
9.0
17.0
23.3
65.5
45.7
(0.9)
(2.7)
–
0.1
0.1
–
–
(3.5)
42.2
HSBC HOLDINGS PLC
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Report of the Directors: Capital (continued)
Risk-weighted assets / Capital structure
Market risk RWAs
(Unaudited)
Internal model based
VaR
Stressed VaR
Incremental risk charge
Comprehensive risk measure
Other VaR and stressed VaR
Internal model based
Standardised approach
At 31 December
CRD IV basis Basel 2.5 basis
2013
US$bn
2014
US$bn
7.3
10.4
20.1
–
6.8
44.6
11.4
56.0
4.9
9.4
23.1
2.6
12.2
52.2
11.2
63.4
RWA movement by key driver – market risk –
internal model based
(Unaudited)
RWAs at 1 January
Acquisitions and disposals
Movement in risk levels
Model updates
Methodology and policy
Internal updates
External updates
Total RWA movement
RWAs at 31 December
CRD IV basis Basel 2.5 basis
2013
US$bn
2014
US$bn
52.2
(2.2)
(4.2)
–
(1.2)
(3.8)
2.6
(7.6)
44.6
44.5
–
(14.5)
17.6
4.6
4.6
–
7.7
52.2
Counterparty credit risk RWAs
Counterparty credit risk RWAs increased by US$45.0bn,
in 2014. The RWA increase of US$21.7bn
for the standardised approach mainly relates to the
implementation of CRD IV on 1 January 2014, which
introduced CVA and CCP RWAs.
Advanced approach
Book size
The increase in book size was mainly driven by business
movements and the impact of the strengthening of the
US dollar against other currencies on the mark to market
of derivatives contracts.
Model updates
In Europe, an LGD floor applied to UK corporate
portfolios resulted in an increase in RWAs of US$2.2bn.
This was offset by a decrease in RWAs of US$2.0bn due
to model updates to the Internal Model Method (‘IMM’)
used for selected portfolios in London.
Methodology and policy changes
The CVA and AVC multiplier for financial counterparties
introduced by the implementation of CRD IV increased
RWAs by US$6.8bn and US$10.2bn, respectively, on
1 January 2014.
Within external regulatory and policy updates, selected
portfolios were subject to PRA LGD floors, which increased
RWAs by US$7.5bn, mainly in Europe and Asia.
Additionally, guidance received in the fourth quarter
of 2014 led to the application of a ‘potential future
exposure’ charge on sold options, contributing to a
US$1.5bn increase in RWAs.
Decreases in RWAs from internal methodology updates
were mainly driven by additional CVA exemptions
following internal due diligence and review alongside a
more efficient allocation of collateral in Europe, which
decreased RWAs by US$3.8bn.
Market risk RWAs
Total market risk RWAs decreased by US$7.4bn in 2014.
Standardised approach
The market risk RWA movements for portfolios not
within the scope of modelled approaches resulted
in an increase of US$0.2bn. The increase in RWAs of
US$2.6bn related to CRD IV treatment of trading book
securitisation positions that were previously deducted
from capital. This was offset by reductions in RWAs of
US$2.5bn for interest rate position risk, primarily in Latin
America due to the introduction of the scenario matrix
method for options and a general reduction in positions
in Latin America and the US.
Internal model based
Acquisitions and disposals
The sale of our correlation trading portfolio, reduced
comprehensive risk measure RWAs by US$2.0bn.
The disposal of our business in Kazakhstan resulted
in a reduction of US$0.2bn in RWAs.
Movement in risk levels
Movement in risk levels reflected a decrease mainly in
VaR and Stressed VaR as a result of reduced FX and
Equity trading positions.
Methodology and policy changes
The increase in RWAs from external updates related
mainly to the introduction, for collateralised
transactions, of the basis between the currency of
trade and the currency of collateral into the VaR
calculation and the removal of the diversification benefit
from Risks not in VaR (‘RNIV’) calculations, driving an
increase of US$6.7bn.
This was partially offset by decreases in RWAs of
US$4.3bn from Internal updates, mainly due to
refinements in the RNIV calculation for the Equities
and Rates desks.
Further decreases in RWAs following regulatory approval
for a change in the basis of consolidation for modelled
market risk charges delivered a reduction in RWAs of
US$4.1bn.
Operational risk RWAs
The reduction in operational risk RWAs of US$1.4bn was
due to the full amortisation of operational risk RWAs for
the US CRS portfolio disposed of in May 2012, combined
with a lower three-year average operating income.
HSBC HOLDINGS PLC
244
Capital and RWA movements by major driver – CRD IV
end point basis
(Unaudited)
CRD IV end point basis at
1 January 20144
Accounting profit for the period
Regulatory adjustments to
accounting profit
Dividends net of scrip5
Regulatory change: LGD floors
Corporate lending growth
Management initiatives:
– legacy reduction and
run-off
– portfolio and entity
disposals
– RWA initiatives
Exchange differences
Other movements
CRD IV end point basis at
31 December 2014
CET1
capital
US$bn
132.5
13.7
(1.0)
(7.5)
–
2.2
2.2
–
–
(8.4)
4.5
RWAs
US$bn
1,214.9
–
–
–
38.6
64.8
(66.3)
(43.0)
(5.2)
(18.1)
(33.6)
1.4
136.0
1,219.8
Capital structure
Source and application of total regulatory capital
(Audited)
RWAs increased in the year, primarily from corporate
lending growth and regulatory change. These have been
largely offset by management initiatives and foreign
exchange movements. Management initiatives include
legacy reduction and run-off, portfolio and entity disposals
and a number of other initiatives including a better
alignment of VaR scope to management’s view of risk,
improved collateral allocation, increased use of IMM and a
review of product mappings to regulatory categories.
t
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o
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e
t
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t
S
i
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v
e
R
l
a
i
c
n
a
n
F
i
Movement in total regulatory capital
Opening common equity/core tier 1 capital4
Contribution to common equity/core tier 1 capital from profit for the period
Consolidated profits attributable to shareholders of the parent company
Removal of own credit spread net of tax
Debit valuation adjustment
Deconsolidation of insurance entities and SPE entities
Net dividends including foreseeable net dividends5
Dividends net of scrip recognised under Basel 2.5
Update for fourth interim dividend scrip take-up in excess of plan
First interim dividend net of scrip
Second interim dividend net of scrip
Third interim dividend net of scrip
Fourth foreseeable interim dividend
Add back: planned scrip take-up
Decrease in goodwill and intangible assets deducted
Ordinary shares issued
Foreign currency translation differences
Other, including regulatory adjustments
Closing common equity/core tier 1 capital
Opening additional/other tier 1 capital4
Issued hybrid capital securities net of redemptions
Unconsolidated investments
Other, including regulatory adjustments
Closing tier 1 capital
Opening other tier 2 capital4
Issued tier 2 capital securities net of redemptions
Unconsolidated investments
Other, including regulatory adjustments
Closing total regulatory capital
For footnotes, see page 256.
HSBC HOLDINGS PLC
245
CRD IV
transitional
Year to
31 Dec 2014
US$m
Basel 2.5
Year to
31 Dec 2013
US$m
131,233
12,678
13,688
(328)
254
(936)
(7,541)
1,108
(1,766)
(1,686)
(1,835)
(4,131)
769
2,424
267
(8,356)
2,495
138,789
17,124
16,204
920
(6,987)
(6,987)
535
297
(1,294)
587
133,200
149,051
14,408
4,961
17
153
12,259
(1,151)
(2,004)
–
152,739
158,155
35,538
2,414
26
13
29,758
1,609
6,447
(1,960)
190,730
194,009
e
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v
o
G
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t
a
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p
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o
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Report of the Directors: Capital (continued)
Capital structure
Internal capital generation contributed US$5.1bn to
common equity tier 1 capital, being profits attributable
to shareholders of the parent company after regulatory
adjustment for own credit spread, debit valuation
Composition of regulatory capital
adjustment, deconsolidation of insurance entities
and net of dividends. The 2014 fourth interim dividend is
net of planned scrip.
CRD IV transitional
At
31 Dec 2014
(Audited)
US$m
Estimated at
31 Dec 2013
(Unaudited)
US$m
Ref
Basel 2.5
At
31 Dec 2013
(Audited)
US$m
173,449
181,871
(1,405)
(5,851)
(1,166)
4,955
8,588
(2,388)
(488)
(757)
480
1,121
1,037
(518)
(1,281)
121
(29,833)
(25,198)
(1,684)
151
(3,102)
149,051
16,110
1,405
2,388
12,317
(7,006)
(7,157)
151
166,617
190,447
(3,362)
(1,405)
(11,532)
(323)
(7,208)
4,640
9,531
(2,127)
(473)
(851)
(1,440)
(6,309)
(1,378)
767
(197)
(4,069)
(1,375)
(57)
(31,748)
(22,475)
(1,036)
(1,341)
164,057
181,871
(3,005)
(1,405)
(5,851)
(1,166)
(6,387)
3,644
8,588
(2,388)
(488)
(757)
(1,311)
(2,230)
–
1,112
(451)
(1,731)
(1,281)
121
(34,238)
(24,899)
(680)
(2,006)
(1,083)
(677)
(5,813)
133,200
(5,976)
131,233
19,687
1,160
1,955
884
15,688
(148)
(148)
14,573
1,160
1,955
731
10,727
(165)
(165)
152,739
145,641
158,155
Tier 1 capital
Shareholders’ equity
Shareholders’ equity per balance sheet6
Foreseeable interim dividend5
Preference share premium
Other equity instruments
Deconsolidation of special purpose entities7
Deconsolidation of insurance entities
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
Surplus non-controlling interests disallowed in CET1
Regulatory adjustments to the accounting basis
Unrealised (gains)/losses in available-for-sale debt and equities8
Own credit spread9
Debit valuation adjustment
Defined benefit pension fund adjustment10
Reserves arising from revaluation of property
Cash flow hedging reserve
Deductions
Goodwill and intangible assets
Deferred tax assets that rely on future profitability
(excludes those arising from temporary differences)
Additional valuation adjustment (referred to as PVA)
Investments in own shares through the holding of composite products
of which HSBC is a component (exchange traded funds, derivatives
and index stock)
50% of securitisation positions
50% of tax credit adjustment for expected losses
Negative amounts resulting from the calculation of expected loss amounts
Common equity/core tier 1 capital
Additional tier 1 capital
Other tier 1 capital before deductions
Preference share premium
Preference share non-controlling interests
Allowable non-controlling interest in AT1
Hybrid capital securities
Deductions
Unconsolidated investments11
50% of tax credit adjustment for expected losses
Tier 1 capital
a
b
c
a
a
d
e
f
d
g
h
n
i
b
e
d
j
HSBC HOLDINGS PLC
246
Tier 2 capital
Total qualifying tier 2 capital before deductions
Reserves arising from revaluation of property and unrealised gains
in available-for-sale equities
Collective impairment allowances
Allowable non-controlling interest in tier 2
Perpetual subordinated debt
Term subordinated debt
Non-controlling interests in tier 2 capital
Total deductions other than from tier 1 capital
Unconsolidated investments11
50% of securitisation positions
50% negative amounts resulting from the calculation of expected loss
amounts
Other deductions
Total regulatory capital
For footnotes, see page 256.
Ref
k
d
l
m
f
i
CRD IV transitional
At
31 Dec 2014
(Audited)
US$m
Estimated at
31 Dec 2013
(Unaudited)
US$m
Basel 2.5
At
31 Dec 2013
(Audited)
US$m
38,213
35,786
47,812
99
2,218
35,656
240
240
(222)
(222)
86
2,218
33,242
240
(248)
(248)
2,755
2,616
2,777
39,364
300
(11,958)
(7,157)
(1,684)
(3,102)
(15)
190,730
181,179
194,009
The references (a) – (n) identify balance sheet components on page 249 which are used in the calculation of regulatory capital.
Reconciliation of regulatory capital from transitional basis to an estimated CRD IV end point basis
(Unaudited)
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Common equity tier 1 capital on a transitional basis
Unrealised gains arising from revaluation of property
Unrealised gains in available for sale reserves
Common equity tier 1 capital end point basis
Additional tier 1 capital on a transitional basis
Grandfathered instruments:
Preference share premium
Preference share non-controlling interests
Hybrid capital securities
Transitional provisions:
Allowable non-controlling interest in AT1
Unconsolidated investments
Additional tier 1 capital end point basis
Tier 1 capital end point basis
Tier 2 capital on a transitional basis
Grandfathered instruments:
Perpetual subordinated debt
Term subordinated debt
Transitional provisions:
Non-controlling interest in tier 2 capital
Allowable non-controlling interest in tier 2
Unconsolidated investments
Tier 2 capital end point basis
Total regulatory capital end point basis
HSBC HOLDINGS PLC
247
At
31 Dec 2014
US$m
Estimated at
31 Dec 2013
US$m
133,200
1,375
1,378
135,953
19,539
(1,160)
(1,955)
(10,007)
(487)
148
6,078
131,233
1,281
–
132,514
14,408
(1,160)
(1,955)
(10,727)
(366)
165
365
142,031
132,879
37,991
35,538
(2,218)
(21,513)
(240)
396
(148)
14,268
156,299
(2,218)
(21,513)
(240)
345
(165)
11,747
144,626
e
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Regulatory balance sheet
Regulatory and accounting consolidations
(Unaudited)
The basis of consolidation for the purpose of financial
accounting under IFRS, described in Note 1 on the
Financial Statements, differs from that used for
regulatory purposes as described in ‘Structure of the
regulatory group’ on page 13 of the Pillar 3 Disclosures
2014 report. The table below provides a reconciliation of
the financial accounting balance sheet to the regulatory
scope of consolidation.
Interests in banking associates are equity accounted in
the financial accounting consolidation, whereas their
exposures are proportionally consolidated for regulatory
purposes in accordance with PRA’s application of EU
legislation.
Subsidiaries engaged in insurance activities are excluded
from the regulatory consolidation, leaving the investment
to be recorded at cost. In prior years, the investment of
these insurance subsidiaries was recorded at the net
asset value. This change in treatment from 1 January
2014 has been aligned to the capital treatment under
CRD IV where we have excluded post-acquisition
reserves from our CET1 capital and the investment to
be deducted from CET1 (subject to thresholds) valued
at cost.
The regulatory consolidation does not include special
purpose entities (‘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 table 5 of the
Pillar 3 Disclosures 2014 report.
Report of the Directors: Capital (continued)
Regulatory balance sheet
The capital position presented on a CRD IV transitional
basis follows the CRD IV legislation as implemented in
the UK via the PRA’s final rules in the Policy Statement
(‘PS 7/13’) issued in December 2013, and as incorporated
in the PRA Rulebook.
The effects of draft EBA technical standards are not
generally captured in our numbers. These could have
additional effects on our capital position and RWAs.
Whilst CRD IV allows for the majority of regulatory
adjustments and deductions from CET1 to be
implemented on a gradual basis from 1 January 2014 to
1 January 2018, the PRA has largely decided not to make
use of these transitional provisions. Due to the exclusion
of unrealised gains on investment property and
available-for-sale securities which are only capable of
being recognised in CET1 capital from 1 January 2015,
and PRA acceleration of unrealised losses on these items,
our CET1 capital and ratio is lower on a transitional basis
than it is on an end point basis.
For additional tier 1 and tier 2 capital, the PRA followed
the transitional provisions timing as set out in CRD IV
to apply the necessary regulatory adjustments and
deductions. The effect of these adjustments is being
phased in at 20% per annum from 1 January 2014 to
1 January 2018.
Furthermore, non-CRD IV compliant additional tier 1 and
tier 2 instruments benefit from a grandfathering period.
This progressively reduces the eligible amount by 10%
annually, following an initial reduction of 20% on
1 January 2014, until they are fully phased out by
1 January 2022.
Under CRD IV, as implemented in the UK, banks are
required to meet a minimum CET1 ratio of 4.0% of RWAs
(increasing to 4.5% from 1 January 2015), a minimum
tier 1 ratio of 5.5% of RWAs (increasing to 6% from
1 January 2015) and a total capital ratio of 8% of RWAs.
Alongside CRD IV requirements, from 1 July 2014, the
PRA expects major UK banks and building societies
to meet a 7% CET1 ratio using the CRD IV end point
definition. Going forward, as the grandfathering
provisions fall away, we intend to meet these regulatory
minima in an economically efficient manner by
issuing non-common equity capital as necessary.
At 31 December 2014, the Group had US$19.8bn
of CRD IV compliant non-common equity capital
instruments, of which US$3.5bn of tier 2 and US$5.7bn
of additional tier 1 were issued during the year (for
details on the additional tier 1 instruments issued during
the year see Note 35 on the Financial Statements). At
31 December 2014, the Group also had US$37.1bn of
non-common equity capital instruments qualifying as
eligible capital under CRD IV by virtue of the application
of the grandfathering provisions, after applying the 20%
reduction outlined above.
HSBC HOLDINGS PLC
248
Reconciliation of balance sheets – financial accounting to regulatory scope of consolidation
(Unaudited)
At 31 December 2014
Accounting
balance
sheet
US$m
Deconsolidation
of insurance/
other entities
US$m
Consolidation
of banking
associates
US$m
Ref
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
of which:
– impairment allowances on IRB portfolios
– impairment allowances on standardised portfolios
Reverse repurchase agreements – non-trading
Financial investments
Capital invested in insurance and other entities
Current tax assets
Prepayments, accrued income and other assets
of which:
– goodwill and intangible assets of disposal groups
held for sale
– retirement benefit assets
– impairment allowances on assets held for sale
of which:
– IRB portfolios
– standardised portfolios
Interests in associates and joint ventures
of which:
– positive goodwill on acquisition
Goodwill and intangible assets
Deferred tax assets
Total assets
Liabilities and equity
Hong Kong currency notes in circulation
Deposits by banks
Customer accounts
Repurchase agreements – non-trading
Items in course of transmission to other banks
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
Derivatives
Debt securities in issue
Current tax liabilities
Liabilities under insurance contracts
Accruals, deferred income and other liabilities
of which:
– retirement benefit liabilities
– contingent liabilities and contractual commitments
of which:
– credit-related provisions on IRB portfolios
– credit-related provisions on standardised portfolios
Provisions
Deferred tax 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
i
h
g
i
h
h
n
m
j
i
j
l
m
129,957
4,927
27,674
304,193
29,037
345,008
112,149
974,660
(6,942)
(5,395)
161,713
415,467
–
1,309
75,176
8
(5,028)
(16)
(16)
18,181
621
27,577
7,111
–
–
–
(720)
(28,791)
(94)
(2,727)
(10,809)
–
–
(30)
(50,420)
2,542
(16)
(5,295)
–
–
–
–
–
–
–
(5,593)
163
30,731
80
–
2,357
3,312
353
7,992
116,484
–
(2,744)
7,510
33,123
–
–
8,501
–
–
–
–
–
(17,479)
(606)
571
474
Regulatory
balance
sheet
US$m
160,688
5,007
27,674
305,830
3,558
345,267
117,414
1,080,335
(6,942)
(8,139)
169,193
398,170
2,542
1,293
78,382
8
(5,028)
(16)
(16)
702
15
22,555
7,748
2,634,139
(101,790)
194,009
2,726,358
27,674
77,426
1,350,642
107,432
5,990
190,572
76,153
21,822
1,495
340,669
95,947
1,213
73,861
53,396
3,208
234
132
102
4,998
1,524
26,664
2,761
2,773
21,130
–
(21)
(535)
–
(3)
(42)
(6,317)
–
–
37
(7,797)
(138)
(73,861)
(3,659)
(2)
–
–
–
(63)
(1,009)
–
–
–
–
–
40,530
141,858
–
–
50
–
27,674
117,935
1,491,965
107,432
5,987
190,580
69,836
–
–
331
3,720
317
–
5,145
56
–
–
–
–
2
2,056
–
–
–
21,822
1,495
341,037
91,870
1,392
–
54,882
3,262
234
132
102
4,935
517
28,720
2,761
2,773
21,130
HSBC HOLDINGS PLC
249
t
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o
p
e
R
c
i
g
e
t
a
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t
S
i
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R
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a
i
c
n
a
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F
i
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c
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a
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G
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a
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C
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Report of the Directors: Capital (continued)
Regulatory balance sheet / Leverage ratio
Total shareholders’ equity
of which:
– other equity instruments included in tier 1 capital
– preference share premium included in tier 1 capital
Non-controlling interests
of which:
– non-cumulative preference shares issued by subsidiaries
included in tier 1 capital
– non-controlling interests included in tier 2 capital, cumulative
preferred stock
Ref
a
c, j
b
d
e
f
– non-controlling interests attributable to holders of
ordinary shares in subsidiaries included in tier 2 capital
f, m
Accounting
balance
sheet
US$m
190,447
11,532
1,405
9,531
2,127
300
173
At 31 December 2014
Deconsolidation
of insurance/
other entities
US$m
Consolidation
of banking
associates
US$m
(7,531)
–
–
(851)
–
–
–
–
–
–
–
–
–
–
Regulatory
balance
sheet
US$m
182,916
11,532
1,405
8,680
2,127
300
173
Total liabilities and equity at 31 December 2014
2,634,139
(101,790)
194,009
2,726,358
At 31 December 2013
Assets
Trading assets
Loans and advances to customers
of which:
– impairment allowances on IRB portfolios
– impairment allowances on standardised portfolios
Financial investments
Capital invested in insurance and other entities
Interests in associates and joint ventures
of which:
– positive goodwill on acquisition
Goodwill and intangible assets
Other assets
of which:
– goodwill and intangible assets of disposal groups held for sale
– retirement benefit assets
– impairment allowances on assets held for sale
of which:
– IRB portfolios
– standardised portfolios
Total assets at 31 December 2013
Liabilities and equity
Deposits by banks
Customer accounts
Trading liabilities
Financial liabilities designated at fair value
of which:
– term subordinated debt included in tier 2 capital
– hybrid capital securities included in tier 1 capital
Debt securities in issue
Retirement benefit liabilities
Subordinated liabilities
of which:
– hybrid capital securities included in tier 1 capital
– perpetual subordinated debt included in tier 2 capital
– term subordinated debt included in tier 2 capital
Other liabilities
of which:
– contingent liabilities and contractual commitments
of which:
– credit-related provisions on IRB portfolios
– credit-related provisions on standardised portfolios
i
k
h
h
h
g
i
k
m
j
g
j
l
m
i
k
Ref
Accounting
balance
sheet
US$m
303,192
1,080,304
Deconsolidation
of insurance/
other entities
US$m
Consolidation
of banking
associates
US$m
Regulatory
balance
sheet
US$m
32
(13,182)
1,686
110,168
304,910
1,177,290
–
–
(52,680)
9,135
–
–
(5,369)
(37,634)
–
–
–
–
–
–
(2,465)
31,430
–
(15,982)
(593)
631
57,477
–
–
–
–
–
(9,476)
(8,132)
404,675
9,135
658
15
25,180
835,182
3
2,140
(111)
–
(111)
(9,476)
(5,667)
425,925
–
16,640
608
29,918
815,339
3
2,140
(111)
–
(111)
2,671,318
(99,698)
185,410
2,757,030
129,212
1,482,812
207,025
89,084
18,230
3,685
104,080
2,931
28,976
2,873
2,777
23,326
436,739
177
155
22
(193)
(711)
(129)
(13,471)
–
–
(9,692)
(11)
2
–
–
–
(73,570)
–
–
–
33,296
142,924
161
–
162,315
1,625,025
207,057
75,613
–
–
1,021
56
2,961
–
–
–
4,991
–
–
–
18,230
3,685
95,409
2,976
31,939
2,873
2,777
23,326
368,160
177
155
22
HSBC HOLDINGS PLC
250
Total shareholders’ equity
of which:
– other equity instruments included in tier 1 capital
– preference share premium included in tier 1 capital
Non-controlling interests
of which:
– non-cumulative preference shares issued by subsidiaries
included in tier 1 capital
– non-controlling interests included in tier 2 capital, cumulative
preferred stock
Ref
a
c, j
b
d
e
f
– non-controlling interests attributable to holders of
ordinary shares in subsidiaries included in tier 2 capital
f, m
Accounting
balance
sheet
US$m
181,871
5,851
1,405
8,588
2,388
300
188
At 31 December 2013
Deconsolidation
of insurance/
other entities
US$m
Consolidation
of banking
associates
US$m
(1,166)
–
–
(757)
–
–
–
–
–
–
–
–
–
–
Regulatory
balance
sheet
US$m
180,705
5,851
1,405
7,831
2,388
300
188
Total liabilities and equity at 31 December 2013
2,671,318
(99,698)
185,410
2,757,030
The references (a) – (n) identify balance sheet components which are used in the calculation of regulatory capital on page 246.
Leverage ratio
(Unaudited)
For a detailed basis of preparation of the leverage ratio, see the Appendix to Capital, page 261.
Estimated leverage ratio
(Unaudited)
Total assets per accounting balance sheet
Deconsolidation of insurance/other entities
Capital invested in insurance entities
Consolidation of banking associates
Total assets per regulatory/accounting balance sheet
Adjustment to reverse netting of loans and deposits allowable under IFRS
Reversal of accounting values:
Derivatives
Repurchase agreement and securities finance
Replaced with values after applying regulatory rules:
Derivatives:
Mark-to-market value
Deductions of receivables assets for cash variation margin
Add-on amounts for potential future exposure
Exposure amount resulting from the additional treatment for written credit derivatives
Repurchase agreement and securities finance:
Gross securities financing transactions assets
Netted amounts of cash payables and cash receivables of gross securities financing
transactions assets
Securities financing transactions assets netted under Basel III 2010 framework
Measurement of counterparty risk
Addition of off balance sheet commitments and guarantees:
Guarantees and contingent liabilities
Commitments
Other
Exclusion of items already deducted from the capital measure
Exposure measure after regulatory adjustments
Tier 1 capital under CRD IV (end point)
Estimated leverage ratio (end point)
EU Delegated Act
basis at
31 Dec 2014
US$bn
2,634
(104)
2
194
2,726
38
(525)
(345)
(180)
166
81
(82)
148
19
188
269
(89)
8
396
67
321
8
(36)
Basel III 2010
basis at
31 Dec 2013
US$bn
2,671
2,671
93
(482)
(282)
(200)
239
69
170
147
147
388
85
295
8
(28)
2,953
142
4.8%
3,028
133
4.4%
In January 2014, the Basel Committee published its
finalised leverage ratio framework, along with public
disclosure requirements applicable from 1 January 2015,
updating its 2010 recommendations.
In June 2014, the PRA published its revised expectations
in relation to the leverage ratio for major UK banks and
building societies, namely that from 1 July 2014, we are
expected to meet a 3% end point tier 1 leverage ratio,
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Report of the Directors: Capital (continued)
Regulatory developments
calculated using the CRD IV definition of capital for the
numerator and the Basel 2014 exposure measure for
the denominator.
In October 2014, the European Commission adopted a
delegated act to establish a common definition of the
leverage ratio for EU banks (based on the Basel revised
definition). This was published in the EU’s Official Journal
in January 2015.
Under CRD IV, the legislative proposals and final
calibration of the leverage ratio are expected to be
determined following a review of the revised Basel
proposals and the basis of the EBA’s assessment of the
impact and effectiveness of the leverage ratio during a
monitoring period between 1 January 2014 and 30 June
2016.
In January 2015, the PRA issued a letter setting out the
approach to be taken for calculating the leverage ratio
for 2014 year end disclosures. While the numerator
continues to be calculated using the final CRD IV end
point tier 1 capital definition, the exposure measure is
now calculated based on the EU delegated act (rather
than the Basel 2014 definition used in the Interim
Report 2014). Reporting on the basis of the EU Delegated
Act (rather than the Basel 2014 definition) results in an
immaterial 2bps positive difference.
Our leverage ratio for 2013 as disclosed above and in
our Annual Report and Accounts 2013 was based on the
Basel 2010 text at the direction of the PRA. The change
to reporting on the EU Delegated Act from the Basel
2010 text contributes a US$115bn increase in the
exposure measure. Key changes include:
• A change to the regulatory scope of consolidation
increases the exposure measure by US$132bn.
• The netting of securities financing transactions
(‘SFT’s) is based on the accounting criteria and an
additional add-on for counterparty risk increases the
exposure measure by US$66bn.
• The inclusion of written credit derivatives at a
notional amount increases the exposure measure
by US$23bn.
• Revision to permit the offsetting of cash variation
margin against derivative assets and liabilities results
in a decrease in the exposure measure of US$65bn.
• A change to the Credit Conversion Factors (‘CCF’s)
applied to off-balance sheet exposures decreases the
exposure measure by US$41bn.
For further details on the basis of preparation, see page 261.
It should be noted that the UK specific leverage ratio
proposals published in October 2014 by the Financial
Policy Committee (‘FPC’) are conceptually different to
the Basel and CRD IV leverage frameworks and are not
yet in place. Further details of the UK proposals can be
found under ‘Leverage ratio proposals’ on page 255.
Regulatory developments
(Unaudited)
Regulatory capital buffers
CRD IV establishes a number of capital buffers, to be
met with CET1 capital, broadly aligned with the Basel III
framework. CRD IV contemplates that these will be
phased in from 1 January 2016, subject to national
discretion.
Automatic restrictions on capital distributions apply if
a bank’s CET1 capital falls below the level of its CRD IV
combined buffer. This is defined as the total of the
capital conservation buffer (‘CCB’), the countercyclical
capital buffer (‘CCyB’), the global systemically important
institutions (‘G-SII’s) buffer and the systemic risk buffer
(‘SRB’) as these become applicable. The PRA have
proposed that the use of the PRA buffer will not result
in automatic restrictions on capital distributions.
In April 2014, HM Treasury published the statutory
instrument ‘Capital Requirements (Capital Buffers
and Macro-Prudential Measures) Regulations 2014’
transposing into UK legislation the main provisions in
CRD IV related to capital buffers, with the exception
of the SRB. In January 2015, HM Treasury published
amendments to this statutory instrument in order to
transpose the SRB.
The PRA is the designated authority for the G-SIIs buffer,
the other systemically important institutions (‘O-SII’s)
buffer and the CCB. In April 2014, they published rules
and supervisory statements implementing the main
CRD IV provisions in relation to these buffers. The Bank
of England is the designated authority for the CCyB and
other macro prudential measures. Whilst the PRA is the
designated authority for applying and determining the
SRB, the FPC is responsible for creating the SRB
framework for calibration.
G-SII buffer
The G-SII buffer (which is the EU implementation of
the Basel G-SIB buffer) is to be met with CET1 capital and
will be phased in from 1 January 2016. In October 2014,
finalised technical standards on the methodology for
identification of G-SIIs were published in the EU’s Official
Journal and came into effect from 1 January 2015.
In November 2014, the FSB and the Basel Committee
updated the list of G-SIBs, using end-2013 data. The
add-on of 2.5% previously assigned to HSBC was left
unchanged.
Following direction from the PRA to UK banks in its
Supervisory Statement issued in April 2014, and in
accordance with the EBA final draft Implementing
Technical Standards (‘ITS’) and guidelines published in
June 2014, we published the EBA template in July 2014.
This disclosed the information used for the identification
and scoring process which underpins our G-SIB
designation. The final ITS for disclosure requirements
were published in September 2014, and will form the
basis of our future 2015 disclosure of G-SII indicators.
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Capital conservation buffer
The CCB was designed to ensure banks build up capital
outside periods of stress that can be drawn down when
losses are incurred and is set at 2.5% of RWAs. The
PRA will phase-in this buffer from 1 January 2016 to
1 January 2019.
Countercyclical and other macro-prudential
buffers
CRD IV contemplates a countercyclical buffer in line
with Basel III, in the form of an institution-specific CCyB
and the application of increased requirements to address
macro-prudential or systemic risk.
In January 2014, the FPC issued a policy statement on its
powers to supplement capital requirements, through the
use of the CCyB and the Sectoral Capital Requirements
(‘SCR’) tools. The CCyB is expected to be set in the range
of 0-2.5% of relevant credit exposures RWAs, although it
is uncapped. Under UK legislation, the FPC is required to
determine whether to recognise any CCyB rates set by
other EEA countries before 2016.
In June 2014, the FPC set the CCyB rate for UK exposures
at 0%. At its September 2014 meeting, the FPC left the
CCyB rate for UK exposures unchanged at 0% and
recognised the 1% CCyB rates introduced by Norway and
Sweden to become effective from 3 October 2015. In
January 2015, the HKMA announced the application of a
CCyB rate of 0.625% to Hong Kong exposures, to apply
from 1 January 2016. In accordance with UK legislation
and PRA supervisory statement PS 3/14, this rate will
directly apply to the calculation of our institution-specific
CCyB rate from 1 January 2016.
The institution-specific CCyB rate for the Group will be
based on the weighted average of the CCyB rates that
apply in the jurisdictions where relevant credit exposures
are located. Currently the Group’s institution specific
CCyB is zero. The SCR tool is not currently deployed in
the UK.
Systemic risk buffer
In addition to the measures above, CRD IV sets out an
SRB for the financial sector as a whole, or one or more
sub-sectors, to be deployed as necessary by each EU
member state with a view to mitigating structural
macro-prudential risk.
In January 2015, the legislative changes necessary to
transpose the SRB were implemented. The SRB is to be
applied to ring fenced banks and building societies (over
a certain threshold), which are together defined as ‘SRB
institutions’. The SRB can be applied on an individual,
sub-consolidated or consolidated basis and is applicable
from 1 January 2019. By 31 May 2016, the FPC is
required to create a framework for identifying the extent
to which the failure or distress of SRB institutions will
pose certain long-term non-cyclical systemic or macro-
prudential risks. The PRA will apply this framework to
determine whether specific SRB institutions would be
subject to an SRB rate, and the level at which the buffer
would be applied, and is able to exercise supervisory
judgement to determine what the rate should be. Where
applicable, the buffer rate must be set in the range of
1% to 3%. The buffer rate would apply to all the SRB
institution’s exposures unless the PRA has recognised
a buffer rate set in another member state. If the SRB is
applied on a consolidated basis it is expected that the
higher of the G-SII or SRB would apply, in accordance
with CRD IV.
Pillar 2 and the ‘PRA buffer’
Under the Pillar 2 framework, banks are already required
to hold capital in respect of the internal capital adequacy
assessment and supervisory review which leads to a final
determination by the PRA of individual capital guidance
under Pillar 2A and Pillar 2B. Pillar 2A was previously met
by total capital, but since 1 January 2015, in accordance
with the PRA supervisory statement SS 5/13, is met with
at least 56% CET1.
Pillar 2A guidance is a point in time assessment of the
amount of capital the PRA considers that a bank should
hold to meet the overall financial adequacy rule. It is
therefore subject to change pending annual assessment
and the supervisory review process. During 2014, the
Group Pillar 2A guidance amounted to 1.5% of RWAs, of
which 0.9% was to be met by CET1. In February 2015, this
was revised to 2.0% of RWAs, of which 1.1% is to be met
by CET1 and is effective immediately.
In January 2015, the PRA published a consultation on the
Pillar 2 Framework. This set out the methodologies that
the PRA proposed to use to inform its setting of firms’
Pillar 2 capital requirements, including proposing new
approaches for determining Pillar 2 requirements for
credit risk, operational risk, credit concentration risk
and pension obligation risk.
As part of CRD IV implementation, the PRA proposed to
introduce a PRA buffer, to replace the capital planning
buffer (‘CPB’) (known as Pillar 2B), also to be held in the
form of CET1 capital. This was reconfirmed in the recent
PRA consultation on the Pillar 2 framework. It is
proposed that a PRA buffer will avoid duplication with
CRD IV buffers and will be set for a particular firm
depending on its vulnerability in a stress scenario or
where the PRA has identified risk management and
governance failings. In order to address weaknesses in
risk management and governance, the PRA propose a
scalar applied to firms’ CET1 Pillar 1 and Pillar 2A capital
requirements. Where the PRA considers there is overlap
between the CRD IV buffers and the PRA buffer
assessment, the PRA proposes to set the PRA buffer as
the excess capital required over and above the CCB and
relevant systemic buffers. The PRA buffer will, however,
be in addition to the CCyB and sectoral capital
requirements.
The PRA expects to finalise the Pillar 2 framework in July
2015, with implementation expected from 1 January
2016. Until this consultation is finalised and revised rules
and guidance issued, there remains uncertainty as to the
exact buffer rate requirements, and their ultimate capital
impact.
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Report of the Directors: Capital (continued)
Regulatory developments
Overall capital requirements
Following the developments outlined above, details
are beginning to emerge of the various elements of the
capital requirements framework. However, there
remains residual uncertainty as to what HSBC’s precise
end point CET1 capital requirement will be. Elements
of the capital requirements that are known or quantified
to date are set out in the diagram below. Time-varying
elements such as the macro-prudential tools, the Pillar 2
requirements, and systemic buffers are subject to
change.
Capital requirements framework (end point)
PRA buffer (illustrative)
Capital
conservation
buffer
Systemic
buffers
(SRB/G-SIIB)
2.5%
2.5%
(
C
E
T
1
)
(
C
E
T
1
)
(
C
E
T
1
)
PRA buffer
assessment
(replaces CPB)
Macro-prudential tools
(Countercyclical capital buffer/
sectoral capital requirements)
2.0%
(of which 1.1% CET1)
Pillar 2A/ICG
T
2
)
a
n
d
A
T
1
(
C
E
T
1
)
(
C
E
T
1
,
8%
(of which 4.5% CET1)
Pillar 1
a
n
d
T
2
)
(
C
E
T
1
,
A
T
1
In addition to the capital requirements tabulated above,
we will need to consider the effect of FSB proposals
published in November 2014 in relation to total loss
absorbing capacity (‘TLAC’) requirements. For further
details, see page 256.
Regulatory stress testing
The Group is subject to supervisory stress testing in
many jurisdictions. These supervisory requirements are
increasing in frequency and in the granularity with which
results are required. As such, stress testing represents a
key focus for the Group.
In October 2013, the Bank of England published an initial
discussion paper ‘A framework for stress testing the UK
banking system’. The framework replaces the current
stress testing for the capital planning buffer with annual
concurrent stress tests, the results of which are expected
to inform the setting of the PRA buffer, the CCyB, sectoral
capital requirements and other FPC recommendations to
the PRA. In April 2014, the Bank of England published
details of the UK stress testing exercise, which the Group
subsequently participated in. The results of this exercise
were published in December 2014.
Throughout 2014, the Group participated in various
stress testing exercises in a number of different
jurisdictions. For further details on all stress testing
exercises, see page 122.
RWA developments
Throughout 2014, regulators issued a series of
recommendations and consultations designed to revise
the various components of the RWA regime and increase
related reporting and disclosures.
UK
In March 2014, the FPC published that it was minded to
recommend that firms report and disclose capital ratios
using the standardised approach to credit risk as soon
as practicable in 2015 following a Basel review of the
standardised approach.
In June 2014, the PRA issued its consultation CP12/14,
which proposed changes to the credit risk rules in two
areas. Firstly, a proposal that exposures on the advanced
internal ratings-based (‘AIRB’) approach for central
governments, public sector entities, central banks
and financial sector entities would be moved to the
foundation approach from June 2015. Secondly, a
proposal to introduce stricter criteria for the application
of the standardised risk weight for certain commercial
real estate (‘CRE’) exposures located in non-EEA
countries, which would be dependent upon loss rates
in these jurisdictions over a representative period. In
October, the PRA published a policy statement (‘PS
10/14’) containing final rules on the second proposal,
which introduces more stringent criteria for the
application of risk weights to non-EEA CRE exposures
from April 2015.
EU
In May 2014, the EBA published a consultation on
benchmarks of internal approaches for calculating own
funds requirements for credit and market risk exposures
in RWAs. This follows a series of benchmarking exercises
run in 2013 to better understand the drivers of
differences observed in RWAs across EU institutions.
The future annual benchmarking exercise outlined in the
consultation paper aims to improve the comparability of
capital requirements calculated using internal modelled
approaches and will be used by regulators to inform
their policy decisions.
In June 2014, the EBA published a consultation on
thresholds for the application of the standardised
approach for exposures treated under permanent partial
use and the IRB roll-out plan. The finalised Regulatory
Technical Standards (‘RTS’) is yet to be published.
In December 2014, the list of non-EEA countries deemed
to have equivalent regulatory regimes for CRD IV
purposes was published in the EU’s Official Journal, and
became effective on 1 January 2015. This equivalence
evaluation affects the treatment of exposures across
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a number of different areas in CRD IV, such as the
treatment of exposures to third country investment
firms, credit institutions and exchanges; standardised
risk weights applicable to exposures to central
governments, central banks, regional governments,
local authorities and public sector entities; and the
calculation of RWAs for exposures to corporates,
institutions, central governments and central banks
under the IRB approach.
International
Throughout 2014, the Basel Committee published
proposals across all Pillar 1 risk types, to update
standardised, non-modelled approaches for calculating
capital requirements and to provide the basis for the
application of a capital floor.
In particular, in March 2014, the Basel Committee
published finalised proposals for the standardised
approach for calculating counterparty credit risk
exposures for OTC derivatives, exchange traded
derivatives and long settlement transactions. Following
this, another technical paper on the foundations of the
new standard was published in August 2014. The new
approach is proposed to replace both the current
exposure measure and the standardised method and
is expected to come into effect on 1 January 2017.
In October 2014, the Basel Committee also published
a consultation and a Quantitative Impact Study (‘QIS’)
to revise the standardised approach for calculating
operational risk. The proposals seek to establish a new
unitary standardised approach to replace the current
non-model-based approaches, which comprise the
basic indicator approach and the standardised approach,
including its variant the alternative standardised
approach. An implementation date is yet to be proposed.
In December 2014, the Basel Committee undertook a
further consultation on its fundamental review of the
trading book. This included revisions to the market
risk framework that was published for consultation in
October 2013. The Committee intends to carry out a
further QIS in early 2015 to inform finalised proposals
expected at the end of 2015.
In December 2014, the Basel Committee published a
revised framework for securitisation risk, which will
come into effect on 1 January 2018.
In December 2014, the Basel Committee also published
a consultation paper on revisions to the Standardised
Approach for credit risk. Proposals include a reduced
reliance on external credit ratings; increased granularity
and risk sensitivity; and updated risk weight calibrations.
Proposed calibration for risk weights are indicative only
and will be further informed by responses from this
consultation and results from a QIS.
Additionally, in December 2014, the Basel Committee
published a consultation on the design of a capital floor
framework, which will replace the Basel I floor. The
calibration of the floor is, however, outside the scope of
this consultation. The Committee has stated its intention
to publish final proposals including calibration and
implementation timelines by the end of 2015.
All finalised Basel Committee proposals for standardised
approaches for calculating risk requirements and the
introduction of a revised capital floor would need to be
transposed into EU requirements before coming into
legal effect.
Leverage ratio proposals
In October 2014, the FPC published final recommendations
on the design of a UK specific leverage ratio framework
and calibration. This followed an earlier FPC consultation
in July 2014 on the design of the framework. The FPC
finalised recommendations included a minimum leverage
ratio of 3% to be implemented as soon as practicable for
UK G-SIBs and major UK banks and building societies,
a supplementary leverage ratio buffer applied to
systemically important firms of 35% of the relevant
risk-weighted systemic risk buffer rates, and a further
countercyclical leverage ratio buffer (‘CCLB’) of 35% of
the relevant risk-weighted CCyB. The minimum leverage
ratio is to be met 75% with CET1 and 25% with AT1, and
both the supplementary leverage ratio buffer and CCLB
are to be met 100% with CET1. The FPC recommended
that HM Treasury provide the FPC with the necessary
powers to direct the PRA to set leverage ratio
requirements implementing the above mentioned
calibration and framework.
HM Treasury published a consultation paper in
November 2014, which responded to and agreed with
the FPC recommendations in relation to the design of
the leverage ratio framework. Specifically, HM Treasury
agreed that the FPC should be granted powers to direct
the PRA on a minimum requirement, additional leverage
ratio buffer (for G-SIBs, major UK banks and building
societies, including ring fenced banks) and a CCLB. HM
Treasury did not, however, provide any views on the
calibration. The consultation paper included legislative
changes to provide the FPC with new powers. In
February 2015, HM Treasury published a summary of
responses, alongside the draft instrument which was
laid before Parliament.
Banking structural reform and recovery and
resolution planning
In the EU, the Bank Recovery and Resolution Directive
(‘BRRD’) was finalised and published in June 2014. This
came into effect from 1 January 2015, with the option to
delay implementation of bail-in provisions until 1 January
2016. Regardless of this, the UK introduced bail-in
powers from 1 January 2015. The UK transposition of the
BRRD builds on the resolution framework already in
place in the UK. In January 2015, the PRA published a
policy statement containing updated requirements for
recovery and resolution planning which revises PRA rules
that have been in force since 1 January 2014. In addition,
the EBA has produced a number of RTS, some of which
are yet to be finalised, that will further inform the BRRD
requirements.
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Report of the Directors: Capital (continued)
Regulatory developments / Appendix to Capital
In December 2013, the UK’s Financial Services (Banking
Reform) Act 2013 received royal assent, which implements
ring-fencing recommendations of the ICB. This has been
supplemented though secondary legislation which
was finalised in July 2014. In October 2014, the PRA
published a consultation paper on ring-fencing rules.
The PRA intends to undertake further consultation
and finalise ring-fencing rules in due course, with
implementation by 1 January 2019.
In January 2014, the European Commission also
published legislative proposals on ring-fencing trading
activities from deposit taking and a prohibition on
proprietary trading in financial instruments and
commodities. This is currently under discussion in
the European Parliament and the Council.
For further details of the policy background and the Group’s
approach to recovery and resolution planning, see page 14.
Total loss absorbing capacity proposals
In November 2014, as part of the ‘too big to fail’ agenda,
the FSB published proposals for total loss absorbing
capacity (‘TLAC’) for G-SIBs.
The FSB proposals include a minimum TLAC requirement
in the range of 16-20% of RWAs and a TLAC leverage
ratio of at least twice the Basel III tier 1 leverage ratio.
The TLAC requirement is to be applied in accordance
with individual resolution strategies, as determined by
the G-SIB’s crisis management group. A QIS is currently
underway, the results of which will inform finalised
proposals. The conformance period for the TLAC
requirement will also be influenced by the QIS, but
will not be before 1 January 2019. Once finalised, it is
expected that any new TLAC standard should be met
alongside the Basel III minimum capital requirements.
The draft proposals require G-SIBs to be subject to
a minimum TLAC requirement with the precise
requirement to be informed by the QIS. There are
a number of requirements relating to the types
of liabilities which can be used to meet the TLAC
requirement, the composition of TLAC, and the
location of liabilities within a banking group, in
accordance with its resolution strategy. The TLAC
proposals are expected to be finalised in 2015 and will
then need to be implemented into national legislation.
Other regulatory updates
In January 2015, the EBA published revised final draft
RTS on prudent valuation. Finalised requirements will
need to be adopted by the European Commission and
published in the EU’s Official Journal before coming
into effect.
In June 2014, the EBA and Basel Committee each
issued a consultation on the Pillar 3 disclosures. The
final EBA guidelines were issued in December 2014 and
entail additional process and governance around the
Pillar 3 report, as well as semi-annual or quarterly
disclosure of key capital, ratio, RWA, leverage and risk
model information, exceeding the scope of our current
interim disclosures. The guidelines are subject to
implementation by national supervisors and are
expected to enter into force in 2015.
The final Basel standards on ‘Revised Pillar 3 disclosure
requirements’ were issued in January 2015. They
mandate extensive use of standardised templates to
enhance comparability between banks’ disclosures as
well as requiring a considerable volume of disclosures
to be produced semi-annually, rather than annually as
hitherto. The revised framework calls for disclosure at
the latest from 2016 year-ends, concurrently with
financial reports.
Footnotes to Capital
1 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 removed immediately on disposal, but diminish over a period of time. The RWAs for the CRS
business represent the remaining operational risk RWAs for the business.
2 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.
3 From 1 January 2014, the geographical region ‘Asia’ replaced the geographical regions previously reported as ‘Hong Kong’ and ‘Rest of Asia-
Pacific’ (see Note 23 on the Financial Statements for further details). Comparative data have been re-presented to reflect this change.
4 CRD IV opening balances as at December 2013 were estimated based on the Group’s interpretation of final CRD IV legislation and final rules
issued by the PRA, details of which can be found in the basis of preparation on page 324 of the Annual Report and Accounts 2013.
5 This includes dividends on ordinary shares, quarterly dividends on preference shares and coupons on capital securities, classified as equity.
6 Includes externally verified profits for the year to 31 December 2014.
7 Mainly comprise unrealised gains/losses in available-for-sale debt securities related to SPEs.
8 Unrealised gains/losses in available-for-sale securities are net of tax.
9 Includes own credit spread on trading liabilities.
10 Under Basel 2.5 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.
11 Mainly comprise investments in insurance entities.
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Appendix to Capital
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. Given
that CRD IV has been in effect since 1 January 2014, during 2014 we managed our internal capital ratio target on an end
point CRD IV CET1 basis of greater than 10%. We have since reviewed this and in 2015 expect to manage group capital to
meet a medium-term target for return on equity of more than 10%. This is modelled on CET1 ratio on an end point basis in
the range of 12% to 13%.
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 PRA 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, pensions, insurance, structural foreign exchange risk and residual risks.
Stress testing
In addition to our internal stress tests, the Group is subject to supervisory stress testing in many jurisdictions. Supervisory
requirements are increasing in frequency and in the granularity with which the results are required. These exercises
include the programmes of the PRA, the FRB, the EBA, the ECB and the HKMA, as well as stress tests undertaken in other
jurisdictions. 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 our CET1
capital ratio. In addition, other risks may be identified which 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 meet the
Group’s management objectives. 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.
Risk-weighted asset targets
RWA targets for our global businesses are established in accordance with the Group’s strategic direction and risk appetite,
and approved through the Group’s annual planning process. 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 accuracy and allocation initiatives and risk
mitigation. Our capital management process is articulated in the annual Group capital plan which forms part of the Annual
Operating Plan that is approved by the Board.
Business performance against RWA targets 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.
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Report of the Directors: Capital (continued)
Appendix to Capital
Analysis is undertaken within 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 PRA 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 2013, we calculated capital at a Group level
using the Basel II framework as amended for CRD III, commonly known as Basel 2.5, and also estimated capital on an end
point CRD IV basis. From 1 January 2014, our capital at Group level is calculated under CRD IV and supplemented by PRA
rules to effect the transposition of directive requirements.
Our policy and practice in capital measurement and allocation at Group level is underpinned by the CRD IV rules.
However, local regulators are at different stages of implementation and some local reporting is still on a Basel I basis,
notably in the US for the reporting of RWAs for some institutions during 2014. In most jurisdictions, non-banking financial
subsidiaries are also subject to the supervision and capital requirements of local regulatory authorities.
The Basel III framework, similarly to Basel II, is structured around three ‘pillars’: minimum capital requirements,
supervisory review process and market discipline. The CRD IV legislation implemented Basel III in the EU and, in the UK,
the ‘PRA rulebook CRR Firms Instrument 2013’ transposed the various national discretions under the CRD IV legislation
into UK law. The CRD IV and PRA legislation came into force on 1 January 2014.
Regulatory capital
For regulatory purposes, our capital base is divided into three main categories, namely common equity tier 1, additional
tier 1 and tier 2, depending on their characteristics.
• Common equity tier 1 capital is the highest quality form of capital, comprising shareholders’ equity and related non-
controlling interests (subject to limits). Under CRD IV various capital deductions and regulatory adjustments are made
against these items which are treated differently for the purposes of capital adequacy – these include deductions for
goodwill and intangible assets, deferred tax assets that rely on future profitability, negative amounts resulting from the
calculation of expected loss amounts under IRB, holdings of capital securities of financial sector entities and surplus
defined benefit pension fund assets.
• Additional tier 1 capital comprises eligible non-common equity capital securities and any related share premium; it also
includes qualifying securities issued by subsidiaries subject to certain limits. Holdings of additional tier 1 securities of
financial sector entities are deducted.
• Tier 2 capital comprises eligible capital securities and any related share premium and qualifying tier 2 capital securities
issued by subsidiaries subject to limits. Holdings of tier 2 capital securities of financial sector entities are deducted.
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
CRD IV 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.
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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 CRD IV rollout plans, a number of our Group companies and portfolios are in transition to advanced
IRB approaches. At the end of 2014, global models for sovereigns, banks, large corporates and portfolios in most of
Europe, Asia and North America were on advanced IRB approaches. Others remain on the standardised or foundation
approaches pending definition of local regulations or model approval, or under exemptions from IRB treatment. In some
instances, regulators have allowed us to transition from advanced to standardised approaches for a limited number of
portfolios.
• Counterparty credit risk
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 CRD IV: 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.
In addition, CRD IV applies a capital requirement for CVA risk. 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.
• Securitisation
Securitisation positions are held in both the trading and non-trading books. For non-trading book securitisation
positions, CRD IV 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%.
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 PRA.
Market risk capital requirement
The market risk capital requirement is measured using internal market risk models where approved by the PRA, or the
standard rules of the EU Capital Requirement Regulation. Our internal market risk models comprise VaR, stressed VaR and
the incremental risk charge. Since the sale of our correlation portfolio in September 2014, there is no market risk capital
requirement associated with the comprehensive risk measure.
Operational risk capital requirement
CRD IV 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 PRA 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 our capital
planning buffer where required.
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Report of the Directors: Capital (continued)
Appendix to Capital
Pillar 3 disclosure requirements
Pillar 3 of the Basel regulatory framework is related to market discipline and aims to make firms more transparent by
requiring them to publish, at least annually, wide-ranging information on their risks and capital, and how these are
managed. Our Pillar 3 Disclosures 2014 are published on our website, www.hsbc.com, under Investor Relations.
RWA movement by key driver – basis of preparation and supporting notes
(Unaudited)
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. 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 hedge structural foreign exchange exposures only in limited circumstances.
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 effect of new or updated models on the portfolio at the point of 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 regulatory updates
This captures the effect on RWAs of changing the internal treatment of exposures. This may include, but is not limited to,
a portfolio or a part of one moving from an existing IRB model onto a standardised model, identification of netting and
credit risk mitigation.
External regulatory updates
This specifies the effect of 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.
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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 2014 this calculation was performed
for each HSBC company with an IRB portfolio by global businesses, split by the main Basel categories of credit exposures,
as described in the table below:
Central governments and central banks
Corporate foundation IRB
Qualifying revolving retail exposures
Basel categories of IRB credit exposures within HSBC
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.
Counterparty risk drivers – definitions and quantification
The RWA movement by key driver for counterparty credit risk calculates the credit risk drivers 5 and 6 at a more granular
level, by using transaction level details provided by regional sites. ‘Foreign exchange movement’ is not a reported layer for
counterparty risk drivers, as there is cross currency netting across the portfolio.
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’.
Leverage ratio: basis of preparation
(Unaudited)
The numerator, capital measure, is calculated using the ‘end point’ definition of tier 1 capital applicable from 1 January
2022, which is set out in the final CRD IV rules. This is supplemented with the EBA’s Own Funds’ RTS to the extent that
these have been published in the EU’s Official Journal of the European Commission as at the reporting date, as well as
making reference to the PRA Rulebook where appropriate. The denominator, exposure measure, is calculated on the basis
of the Leverage Ratio Delegated Act adopted by the European Commission in October 2014 and published in the EU’s
Official Journal in January 2015, which is aligned to the Basel 2014 leverage ratio framework. This follows the same scope
of regulatory consolidation used for the risk-based capital framework, which differs to the 2010 Basel text that required
banks to include items using their accounting balance sheet. The exposure measure generally follows the accounting
value, adjusted as follows:
• on-balance sheet, non-derivative exposures are included in the exposure measure net of specific provisions or
accounting valuation adjustments (e.g. accounting credit valuation adjustments);
• loans are not netted with deposits;
• the scope of netting for derivatives is extended to all scenarios where we would recognise a netting agreement for
regulatory purposes;
• the scope for offsetting of cash variation margin against derivative assets and liabilities is extended subject to certain
additional conditions including the requirement that the margin be exchanged daily and be in the same currency as the
currency of settlement of the derivative contract. For these purposes we have considered this to include any currency
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Report of the Directors: Capital / Corporate Governance
Appendix to Capital / Letter from the Group Chairman
that can be used to make payments under the derivative contract, the governing qualifying master netting agreement,
or its associated credit support annex. Such offsetting is not permitted under the Basel 2010 text;
• the approach to netting securities financing transactions (‘SFT’s) is aligned to that permitted under IFRS, though for the
purposes of the leverage ratio there is an additional counterparty credit risk add-on to the extent that an SFT is under
collateralised. This represents a stricter requirement compared with the Basel 2010 text;
• there is an add-on for potential future exposure for both OTC and exchange-traded derivatives;
• the notional amount of written credit derivatives is included in the exposure measure, subject to offsets for purchased
protection. This represents a stricter requirement compared with the Basel 2010 text;
• off-balance sheet items are converted into credit exposure equivalents through the use of credit conversion factors
(‘CCF’s). Depending on the risk category of the exposure a CCF of 10%, 20%, 50% or 100% is applied. In contrast, the
Basel 2010 text requires that off-balance sheet items are included in full except for commitments that are
unconditionally cancellable at any time by HSBC without prior notice, where only 10% of the exposures are included;
and
• items deducted from the end point tier 1 capital such as goodwill and intangible assets, are excluded.
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Corporate Governance Page
App1
Corporate Governance Report
Letter from the Group Chairman
Directors
Secretary
Group Managing Directors
Board of Directors
Directors
Corporate governance codes
Board committees
Group Management Board
Group Audit Committee
Group Risk Committee
Financial System Vulnerabilities Committee
Group Remuneration Committee
Nomination Committee
Conduct & Values Committee
Chairman’s Committee
Philanthropic and Community Investment
Oversight Committee
Internal control
Going concern
Employees
Reward
Employee relations
Diversity and inclusion
Employee development
Employment of disabled persons
Health and safety
Remuneration policy
Employee share plans
Other disclosures
Share capital
Directors’ interests
Dividends and shareholders
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1 Appendix to Report of the Directors.
Corporate Governance
Report
The statement of corporate governance practices set
out on pages 263 to 333 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.
Letter from the Group
Chairman
Dear Shareholder
This year, 2015, marks the 150th anniversary of our foundation
in Hong Kong and Shanghai. In these days of companies
ascending to the top ranks of valuation within a decade or so of
being formed and often descending as rapidly, we should reflect
positively on the enormous skill and foresight of those who built
this firm sustainably from modest beginnings to its position as
one of the leading international banking groups in the world.
Given the history of the world over this period and the episodic
intensity of financial market crises, this could not have been
achieved without strong governance and a prudent character. It
is among the Board’s primary responsibilities to ensure that the
firm’s governance and character are such as to underpin its
continuing success. Describing what good governance and a
prudent character look like is relatively simple; understanding
how to embed these and to measure success in so doing is the
greater challenge and one which lies firmly within the Board’s
accountability.
At the heart of good governance lie three responsibilities
reserved to the Board. Firstly, selection of the appropriate
business model and countries within which to pursue all or
elements of that model; secondly, determining the appropriate
risk appetite of the firm across the variety of risks to which each
business line is exposed; and finally, and most importantly,
ensuring that the composition of the management team is best
placed to deliver the right outcome for all stakeholders, is
aligned in its incentives with the interests of shareholders and is
committed to building long-term sustainable success, including
in planning for its own succession.
Over the last four years, as the industry emerged from the
global financial crisis and fresh regulatory requirements were
determined, the Board has engaged actively with management
on all these areas. Through this governance process, the Board
has been able to endorse the progressive redefinition and
clarity brought to HSBC’s business model, its geographic
representation and its risk appetite proposed by Stuart Gulliver
and his management team. At the same time, the Board has
been able to assess the composition and quality of the most
senior management team; the Board continued to be impressed
by their dedication and commitment as well as their success in
meeting the objectives set for them by the Board.
The Board also has a critical role in overseeing the performance
of management, including oversight of the transformation
agenda which is underway to simplify and control more
effectively the management of the Group. This agenda reflects
HSBC’s three strategic priorities: to implement Global
Standards, grow the business and simplify and streamline
processes. At each of its meetings and through its committees,
the Board reviews progress made on implementation of this
agenda, challenging management over the speed of delivery
against agreed milestones and seeking insight into options
considered but rejected.
Finally, governance is also about ensuring that the lessons of
unexpected outcomes, of mistakes and of control failings are
both acknowledged and responded to in a timely and effective
manner. More importantly, it imposes a responsibility to ensure
actions are taken to ensure that repetition is remote and that
pre-emptive controls are established to warn, so far as is
possible, of emerging areas of concern.
During 2014, regrettably, there were further instances of legal
and regulatory proceedings that reinforced the need for greater
governance oversight over conduct and financial crime risk.
Indeed 2014 saw a sustained focus on conduct and behaviour
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Report of the Directors: Corporate Governance (continued)
Biographies
risks with the establishment of the Banking Standards Review
Council, the setting up of an enquiry by the UK Chancellor into
Fair and Effective Markets and an update statement by former
members of the Parliamentary Commission on Banking
Standards.
HSBC has progressively enhanced its own governance oversight
capabilities in these areas through the establishment in 2013
of the Financial System Vulnerabilities Committee to address
financial crime matters and, in 2014, the Conduct & Values
Committee, demonstrating the importance we place on
adhering to high behavioural standards and ‘doing the right
thing’. Reports from these committees can be found on pages
282 to 283 and 286 to 287, respectively.
Ensuring we have a diverse balance of skills, knowledge and
experience on the Board is a fundamental aspect of successful
corporate governance. Since my letter of last year the Board
was strengthened by the appointments during 2014 of Jonathan
Symonds and Heidi Miller as non-executive Directors on 14 April
and 1 September, respectively, and Phil Ameen as of 1 January,
2015. These fresh appointments have added considerable
experience in financial and governance matters and also in the
case of Heidi Miller detailed banking expertise at the top level
gained over more than 30 years in the industry. Biographies for
all Directors can be found on pages 264 to 268.
Good governance has to extend throughout the Group, not just
at the top company level. We address this by bringing together
annually non-executives from our major subsidiaries in an NED
forum to discuss governance issues and share best practices.
Additionally, the chairmen of HSBC’s principal subsidiary
company committees with responsibility for non-executive
oversight of financial reporting and risk-related matters meet
each year to share issues and to reinforce consistent standards.
As we view the year ahead, we will see finalisation of the new
Senior Managers Regime brought in by the Financial Services
(Banking Reform) Act 2013, which is likely to include specific
responsibilities in respect of non-executive Directors. Also in
this coming year, an update to the UK Corporate Governance
Code will apply encompassing certain changes to its principles
and provisions relating to remuneration, engagement with
shareholders, risk management and going concern. The
Board unreservedly supports the evolution of best practice,
recognising that good governance is key both to sustainable
success and to capturing the business growth opportunities
that our distinctive business model affords us.
Douglas Flint
Group Chairman
23 February 2015
Directors
Douglas Flint, CBE, 59
Group Chairman
Skills and experience: Douglas has extensive board-level
experience and knowledge of governance, including
experience gained through membership of the Boards
of HSBC and BP p.l.c. He has considerable knowledge
of finance and risk management in banking,
multinational financial reporting, treasury and securities
trading operations. He joined HSBC as Group Finance
Director in 1995.
He is a member of the Institute of Chartered Accountants
of Scotland and the Association of Corporate Treasurers
and also a fellow of the Chartered Institute of
Management Accountants. In 2006 he was honoured
with a CBE in recognition of his services to the finance
industry.
Appointed to the Board: 1995. Group Chairman since
2010.
Current appointments include: Douglas is a director of
The Hong Kong Association and Chairman of the Institute
of International Finance. He is 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 the International Advisory
Board of the China Europe International Business School,
Shanghai. He is also an independent external member
of the UK Government’s Financial Services Trade and
Investment Board, a British Business Ambassador and
was appointed a director of the Peterson Institute for
International Economics on 10 December 2014.
Former appointments include: Douglas was formerly
Group Finance Director, Chief Financial Officer and
Executive Director, Risk and Regulation of HSBC and non-
executive director and Chairman of the Audit Committee
of BP p.l.c. He has chaired and been a member of highly
influential bodies which set standards for taxation,
governance, accounting and risk management. Douglas
served as a partner in KPMG.
Stuart Gulliver, 55
Group Chief Executive
Chairman of the Group Management Board
Skills and experience: Stuart joined HSBC in 1980. He
is a career banker with over 30 years’ international
experience. He 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. Stuart played a leading role in developing and
expanding Global Banking and Markets.
Appointed to the Board: 2008. Group Chief Executive
since 2011.
Current appointments include: Stuart is Chairman of
The Hongkong and Shanghai Banking Corporation
Limited and of the Group Management Board. He is
a member of the Monetary Authority of Singapore
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International Advisory Panel and the International
Advisory Council of the China Banking Regulatory
Commission.
Former appointments include: Stuart served as
Chairman of Europe, Middle East and Global Businesses
and of HSBC Bank plc, HSBC Bank Middle East Limited,
HSBC Private Banking Holdings (Suisse) SA and HSBC
France and Deputy Chairman of HSBC Trinkaus &
Burkhardt AG and a member of its supervisory board. He
was Head of Global Banking and Markets; Co-Head
of Global Banking and Markets; Head of Global Markets;
and Head of Treasury and Capital Markets in Asia-Pacific.
Phillip Ameen, 66
Independent non-executive Director
Member of the Group Audit Committee with effect from
1 January 2015.
Skills and experience: As a Certified Public Accountant
with extensive financial and accounting experience, Phil
served as Vice President, Comptroller, and Principal
Accounting Officer of General Electric Capital Co. Prior to
joining GE, he was a partner of KPMG. He also has a
depth of technical knowledge from his participation in
accounting standards setting.
Appointed to the Board: 1 January 2015
Current appointments include: A non-executive director
of HSBC North America Holdings Inc., HSBC Bank USA,
HSBC Finance Corporation and HSBC USA Inc. He is a
non-executive director of Skyonic Corporation and R3
Fusion, Inc. and is a member of the Advisory Board of
the Business School, University of North Carolina.
Former appointments include: Vice President,
Comptroller and Principal Accounting Officer of General
Electric Corp; a technical audit partner at Peat Marwick
Mitchell & Co (now KPMG). He served on the
International Financial Reporting Interpretations
Committee of the International Accounting Standards
Board, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants,
the Financial Accounting Standards Board Emerging
Issues Task Force, was Chair of the Committee on
Corporate Reporting of Financial Executives International
and was a Trustee of the Financial Accounting
Foundation.
Kathleen Casey, 48
Independent non-executive Director
Member of the Group Audit Committee and the Financial System
Vulnerabilities Committee.
Skills and experience: Kathleen has extensive financial
regulatory policy experience. She is a former
Commissioner of the US Securities and Exchange
Commission, acting as the regulator’s principal
representative in multilateral and bilateral regulatory
dialogues, the G-20 Financial Stability Board and the
International Organisation of Securities Commissions.
Appointed to the Board: 1 March 2014
Current appointments include: Kathleen is the Chairman
of the Alternative Investment Management Association
and a senior adviser to Patomak Global Partners. She is a
member of the Board of Trustees of Pennsylvania State
University, the Trust Fund Board of the Library of
Congress and the Advisory Council of the Public
Company Accounting Oversight Board.
Former appointments include: Kathleen was a Staff
Director and Counsel of the United States Senate
Committee on Banking, Housing, and Urban Affairs and
Legislative Director and Chief of Staff for a US Senator.
Safra Catz, 53
Independent non-executive Director
Skills and experience: Safra has 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: Safra was appointed
joint Chief Executive Officer of Oracle Corporation on
18 September 2014, having previously been President
and Chief Financial Officer. She joined Oracle in 1999 and
was appointed to the board of directors in 2001.
Former appointments include: Safra was Managing
Director of Donaldson, Lufkin & Jenrette.
Laura Cha, GBS, 65
Independent non-executive Director
Chairman of the Philanthropic and Community Investment
Oversight Committee since 5 December 2014 and a member of
the Conduct & Values Committee and the Nomination
Committee.
Skills and experience: Laura has extensive regulatory and
policy making experience in the finance and securities
sector in Hong Kong and mainland China. She is the
former 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. Laura was
awarded Gold and Silver Bauhinia Stars by the Hong Kong
Government for public service.
Appointed to the Board: 2011
Current appointments include: Laura is a non-executive
Deputy Chairman of The Hongkong and Shanghai
Banking Corporation Limited and non-official member
of the Executive Council of Hong Kong SAR. She is a
Hong Kong Delegate to the 12th National People’s
Congress of China and a non-executive director of China
Telecom Corporation Limited, Unilever PLC and Unilever
N.V. Laura is also a Senior International Adviser for
Foundation Asset Management Sweden AB and a
member of the State Bar of California and the China
Banking Regulatory Commission’s International Advisory
Council. She is Chairman of the Financial Services
Development Council of Hong Kong SAR and Vice
Chairman of the International Advisory Council of the
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Biographies
China Securities Regulatory Commission.
Former appointments include: Laura was a non-
executive director of Bank of Communications Co., Ltd.,
Baoshan Iron and Steel Co. Limited, Johnson Electric
Holdings Limited, Hong Kong Exchanges and Clearing
Limited and Tata Consultancy Services Limited. She
served as Chairman of the University Grants Committee
in Hong Kong and the ICAC Advisory Committee on
Corruption. Laura also served as Deputy Chairman of the
Securities and Futures Commission in Hong Kong and was
a member of the Advisory Board of the Yale School of
Management.
Lord Evans of Weardale, 57
Independent non-executive Director
Chairman of the Financial System Vulnerabilities Committee and
a member of the Conduct & Values Committee and Philanthropic
and Community Investment Oversight Committee since
5 December 2014.
Skills and experience: Jonathan has extensive experience
in national security policy and operations. Formerly
Director General of MI5 with responsibility for
the leadership, policy and strategy of the Security
Service, including international and domestic counter-
terrorism, counter-espionage and counter-proliferation
activities and cyber security.
Appointed to the Board: 2013
Current appointments include: Jonathan is a non-
executive director of the UK National Crime Agency and
a Senior Adviser of Accenture plc. He is a member of the
advisory board of Darktrace Limited and of Facewatch
Limited.
Former appointments include: Jonathan has held various
positions in the UK Security Service over a 30-year career
with responsibility for the oversight of the Joint Terrorist
Analysis Centre and the Centre for the Protection of
National Infrastructure and attended the National
Security Council.
Joachim Faber, 64
Independent non-executive Director
Chairman of the Group Risk Committee.
Skills and experience: Joachim has experience in banking
and asset management with significant international
experience, having worked in Germany, Tokyo, New York
and London. He is a former Chief Executive Officer
of Allianz Global Investors AG and member of
the management board of Allianz SE. He has 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.
Appointed to the Board: 2012
Current appointments include: Joachim is Chairman of
the supervisory board of Deutsche Börse AG and of the
Shareholder Committee of Joh A. Benckiser SARL. He is
an independent director of Coty Inc. and a director
of Allianz France S.A. Joachim is also a member of the
advisory board of the European School for Management
and Technology; and council member of The Hongkong –
Europe Business Council.
Former appointments include: Joachim served as
Chairman of various Allianz subsidiaries. He was a
member of the supervisory board of Bayerische Bӧrse
AG, and of the supervisory board and Chairman of the
audit and risk committee of OSRAM Licht AG. He was
also a member of the German Council for Sustainable
Development and a member of the advisory board of the
Siemens Group Pension Board.
Rona Fairhead, CBE, 53
Independent non-executive Director
Member of the Financial System Vulnerabilities Committee and
the Nomination Committee.
Skills and experience: Rona has a background in
international industry, publishing, finance and general
management. She was a former Chairman and Chief
Executive Officer of the Financial Times Group Limited
responsible for its strategy, management and operations
and 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.
Appointed to the Board: 2004
Current appointments include: Rona is Chairman of
HSBC North America Holdings Inc. She is a non-executive
director of PepsiCo Inc. Rona is also a British Business
Ambassador and, since 8 October 2014, Chairman of the
BBC Trust.
Former appointments include: Rona was an Executive
Vice President, Strategy and Group Control of Imperial
Chemical Industries plc and Chairman and director of
Interactive Data Corporation. She was a member of
the board of the UK Government’s Cabinet Office until
1 September 2014 and a non-executive director of The
Economist Newspaper Limited until 1 July 2014.
Sam Laidlaw, 59
Independent non-executive Director
Member of the Group Remuneration Committee and the
Nomination Committee.
Skills and experience: Sam has international experience,
particularly in the energy sector, having had responsibility
for businesses in four continents. He is a qualified solicitor
with a Master’s in Business Administration.
Appointed to the Board: 2008
Former appointments include: Sam was the Chief
Executive Officer of Centrica plc and the lead non-
executive board member of the UK Department for
Transport until 31 December 2014. Sam was also an
Executive Vice President of Chevron Corporation, non-
executive director of Hanson PLC, Chief Executive Officer
of Enterprise Oil plc, President and Chief Operating
Officer of Amerada Hess Corporation, and a member
of the UK Prime Minister’s Business Advisory Group.
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John Lipsky, 68
Independent non-executive Director
Iain Mackay, 53
Group Finance Director
Member of the Group Risk Committee, the Nomination
Committee and the Group Remuneration Committee.
Skills and experience: John has international
experience having worked in Chile, New York,
Washington and London and interacted with financial
institutions, central banks and governments in many
countries. He served at the International Monetary Fund
as First Deputy Managing Director, Acting Managing
Director and as Special Adviser.
Appointed to the Board: 2012
Current appointments include: John is a Senior Fellow,
Foreign Policy Institute at the Paul H. Nitze School of
Advanced International Studies, Johns Hopkins
University. He is co-chairman of the Aspen Institute
Program on the World Economy and a director of the
National Bureau of Economic Research and the Center
for Global Development. John is a member of
the advisory board of the Stanford Institute for Economic
Policy Research and the Council on Foreign Relations. He
is Chairman of the World Economic Forum’s Global
Agenda Council on the International Monetary System.
Former appointments include: John served as Vice
Chairman of JPMorgan Investment Bank; a director of the
American Council on Germany and the Japan Society; a
trustee of the Economic Club of New York, and a Global
Policy Adviser for Anderson Global Macro, LLC.
Rachel Lomax, 69
Independent non-executive Director
Chairman of the Conduct & Values Committee and a member of
the Group Audit Committee and the Group Risk Committee.
Skills and experience: Rachel has 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: Rachel is Chairman of the
International Regulatory Strategy Group. She is a director
of TheCityUK and Bruegel, a Brussels-based European
think tank; a non-executive director of Arcus European
Infrastructure Fund GP LLP and Heathrow Airport Holdings
Limited. Rachel is also a member of the Council of Imperial
College, London and President of the Institute of Fiscal
Studies, a Trustee of the Ditchley Foundation, and a non-
executive director and chairman of the corporate
responsibility committee of Serco Group plc.
Former appointments include: Rachel served as 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. She was a non-executive director of
Reinsurance Group of America Inc. and The Scottish
American Investment Company PLC.
Skills and experience: Iain joined HSBC in 2007 as Chief
Financial Officer of HSBC North America Holdings Inc.
He has extensive financial and international experience,
having worked in London, Paris, US, Africa and Asia. Iain
is a member of the Institute of Chartered Accountants of
Scotland.
Appointed to the Board: 2010
Current appointments include: Iain is a member of the
Group Management Board and was also appointed as
a member of the audit committee of the British Heart
Foundation on 4 December 2014.
Former appointments include: Iain served as a director
of Hang Seng Bank Limited, Chief Financial Officer, Asia-
Pacific, Vice President and Chief Financial Officer of GE
Global Consumer Finance and Vice President and Chief
Financial Officer of GE Healthcare – Global Diagnostic
Imaging.
Heidi Miller, 61
Independent non-executive Director
Member of the Group Risk Committee and Conduct & Values
Committee since 1 September 2014.
Skills and experience: Heidi has extensive international
banking and finance experience. She is a former
President of International at JPMorgan Chase, and
was responsible for leading the global expansion and
international business strategy across the investment
bank, asset management, and treasury and securities
services divisions.
Appointed to the Board: 1 September 2014
Current appointments include: Heidi is a non-executive
director of First Data Corporation and General Mills Inc.
She is a Trustee of the International Financial Reporting
Standards Foundation.
Former appointments include: Heidi served as non-
executive director of Merck & Co. Inc. and also
Progressive Corp until 1 August 2014. She was an
Executive Vice President and Chief Executive Officer,
Treasury and Securities Services at JPMorgan Chase &
Co.; Executive Vice President and Chief Financial Officer
of Bank One Corporation; Senior Executive Vice President
of Priceline.com Inc.; and Executive Vice President and
Chief Financial Officer of Citigroup Inc.
Marc Moses, 57
Group Chief Risk Officer
Skills and experience: Marc joined HSBC in 2005 as Chief
Financial and Risk Officer, Global Banking and Markets.
He has extensive risk management and financial
experience. Marc is a member of the Institute of
Chartered Accountants in England and Wales.
Appointed to the Board: 1 January 2014
Current appointments include: Marc is a member of the
Group Management Board. A director of HSBC Private
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Biographies
Bank (Suisse) SA and of HSBC Private Banking Holdings
(Suisse) SA.
Former appointments include: Marc served as Chief
Financial and Risk Officer, Global Banking and Markets
and a director of HSBC Insurance (Bermuda) Limited. He
was a European chief financial officer at JP Morgan and
audit partner at PricewaterhouseCoopers.
Sir Simon Robertson, 73
Deputy Chairman and senior independent
non-executive Director
Chairman of the Nomination Committee and the Group
Remuneration Committee. Member of the Financial System
Vulnerabilities Committee.
Skills and experience: Simon has a background in
international corporate advisory work with a wealth
of experience in mergers and acquisitions, merchant
banking, investment banking and financial markets. He
was honoured with a knighthood in recognition of his
services to business. Simon has extensive international
experience having worked in France, Germany, the UK
and the US.
Appointed to the Board: 2006. Senior Independent non-
executive Director since 2007 and Deputy Chairman since
2010.
Current appointments include: Simon is the founding
member of Simon Robertson Associates LLP. He is a
non-executive director of Berry Bros. & Rudd Limited,
The Economist Newspaper Limited and Troy Asset
Management. He is also a trustee of the Eden Project
Trust and the Royal Opera House Endowment Fund.
Former appointments include: Simon served as non-
executive Chairman of Rolls-Royce Holdings plc,
Managing Director of Goldman Sachs International,
Chairman of Dresdner Kleinwort Benson, and non-
executive director of Royal Opera House, Covent Garden
Limited and NewShore Partners Limited.
Jonathan Symonds, CBE, 55
Independent non-executive Director
Chairman of the Group Audit Committee since 1 September
2014. A member of the Group Remuneration Committee from
14 April 2014 until 1 September 2014 and a member of the
Conduct & Values Committee.
Skills and experience: Jonathan has extensive
international financial experience, having worked in the
UK, US and Switzerland. He served as Chief Financial
Officer of Novartis AG and AstraZeneca plc. Jonathan is a
Fellow of the Institute of Chartered Accountants in
England and Wales.
Appointed to the Board: 14 April 2014
Current appointments include: Jonathan is Chairman of
HSBC Bank plc and of Innocoll AG. He is a non-executive
director of Genomics England Limited and of Proteus
Digital Health Inc.
Former appointments include: Jonathan was a partner
and managing director of Goldman Sachs, and a partner
of KPMG. He was a non-executive director and Chairman
of the Audit Committee of Diageo plc.
Secretary
Ben Mathews, 48
Group Company Secretary
Ben joined HSBC in June 2013 and became Group
Company Secretary in July 2013. He is a Fellow of the
Institute of Chartered Secretaries and Administrators.
Former appointments include: Group Company Secretary
of Rio Tinto plc and of BG Group plc.
Group Managing Directors
Ann Almeida, 58
Group Head of Human Resources and Corporate Sustainability
(due to retire 31 May 2015)
Ann 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.
Samir Assaf, 54
Chief Executive, Global Banking and Markets
Samir joined HSBC in 1994. A Group Managing Director
since 2011. He is Chairman of the Global Financial
Markets Association and of HSBC France, a director
of HSBC Trinkaus & Burkhardt AG and of HSBC Bank plc
since 28 March 2014. Former appointments include:
director of HSBC Global Asset Management Limited and
of HSBC Bank Egypt S.A.E., Head of Global Markets, and
Head of Global Markets for Europe, Middle East and
Africa.
Peter Boyles, 59
Chief Executive of Global Private Banking
Peter joined HSBC in 1975. A Group Managing Director
since October 2013. He is Chairman of HSBC Private Bank
(Monaco) SA. Former appointments include: Chief
Executive of HSBC France and Continental Europe. A
director of HSBC Bank plc, HSBC Bank Malta p.l.c. and of
HSBC Trinkaus & Burkhardt AG. Peter ceased to be a
director of HSBC Global Asset Management Limited on
29 September 2014.
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Simon Cooper, 47
Chief Executive, Global Commercial Banking
Stuart Levey, 51
Chief Legal Officer
Simon joined HSBC in 1989. A Group Managing Director
and Chief Executive of Global Commercial Banking since
October 2013. He is a director of HSBC Bank plc. Former
HSBC appointments include: Chairman of HSBC Bank
Egypt S.A.E. and of HSBC Bank Oman; Chairman and
Chief Executive of HSBC Bank Middle East and Chief
Executive of HSBC Korea. Head of Corporate and
Investment Banking of HSBC Singapore. A director of The
Saudi British Bank and of HSBC Bank Middle East Limited.
John Flint, 46
Chief Executive, Retail Banking and Wealth Management
John joined HSBC in 1989. A Group Managing Director
since January 2013. He is a director of HSBC Private
Banking Holdings (Suisse) SA. Former appointments
include: a Director of HSBC Bank Canada, Chief of Staff to
the Group Chief Executive and Group Head of Strategy
and Planning, Chief Executive Officer, HSBC Global Asset
Management, Group Treasurer, and Deputy Head of
Global Markets.
Pam Kaur, 51
Group Head of Internal Audit
Pam joined HSBC and became a Group Managing
Director in April 2013. She is a co-opted member of
The Institute of Chartered Accountants in England
& Wales. Former appointments include: Global Head
of Group Audit for Deutsche Bank AG, Chief Financial
Officer and Chief Operating Officer, Restructuring and
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.
Alan Keir, 56
Chief Executive, HSBC Bank plc
Alan joined HSBC in 1981. A Group Managing Director
since 2011. He is a director of HSBC Bank Middle East
Limited, HSBC Trinkaus & Burkhardt AG and of HSBC
France. Alan is a member of the Advisory Council of
TheCityUK and of the Advisory Board of Bradford
University School of Management. Former appointments
include: Global Head, Global Commercial Banking;
director of HSBC Bank A.S. and HSBC Bank Polska S.A.
Stuart joined HSBC and became a Group Managing
Director in 2012. Former appointments include: Under
Secretary for Terrorism and Financial Intelligence in the
US Department of the 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.
Antonio Losada, 60
Chief Executive, Latin America
Antonio joined HSBC in 1973. A Group Managing Director
since December 2012. He is a director of HSBC Latin
America Holdings (UK) Limited, HSBC Bank Argentina
S.A., HSBC Argentina Holdings S.A., HSBC Mexico, S.A.,
Institucion de Banca Multiple, Grupo Financiero HSBC,
Grupo Financiero HSBC, S.A. de C.V. and of HSBC North
America Holdings Inc. Former appointments include:
Chief Executive Officer, HSBC Argentina; Chairman of
HSBC Bank (Panama) S.A. and of HSBC Argentina
Holdings S.A., and Deputy Head, Personal Financial
Services, Brazil.
Sean O’Sullivan, 59
Group Chief Operating Officer
(due to retire 31 March 2015)
Sean joined HSBC in 1980. A Group Managing Director
since 2011. Former 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.
Peter Wong, 63
Deputy Chairman and Chief Executive, The Hongkong and
Shanghai Banking Corporation Limited
Peter joined HSBC in 2005. A Group Managing Director
since 2010. He is Chairman of HSBC Bank (China)
Company Limited and HSBC Bank Malaysia Berhad, and a
non-executive director of Hang Seng Bank Limited, Shek
O Development Company Limited and Bank of
Communications Co. Ltd. He is also an independent
non-executive director of Cathay Pacific Airways Limited.
Former appointments include: Vice Chairman of HSBC
Bank (Vietnam) Ltd, director of HSBC Bank Australia
Limited and of Ping An Insurance (Group) Company
of China, Ltd.
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Report of the Directors: Corporate Governance (continued)
Board of Directors
Board of Directors
The Board of Directors of HSBC Holdings (the ‘Board’)
exists to promote the long-term success of the Company
and deliver sustainable value to our shareholders. Led
by the Group Chairman, it 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. Implementation
of the strategy is delegated to the Group Management
Board (‘GMB’) which, in turn, 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. The Directors who served during the
year were Kathleen Casey (appointed 1 March 2014),
Safra Catz, Laura Cha, Marvin Cheung (retired 1 August
2014), John Coombe (retired 23 May 2014), Lord
Evans of Weardale, Joachim Faber, Rona Fairhead,
Renato Fassbind (retired 1 September 2014), Douglas
Flint, Stuart Gulliver, James Hughes-Hallett (retired
23 May 2014), Sam Laidlaw, John Lipsky, Rachel Lomax,
Iain Mackay, Heidi Miller (appointed 1 September 2014),
Marc Moses (appointed 1 January 2014), Sir Simon
Robertson and Jonathan Symonds (appointed 14 April
2014).
Phillip Ameen was appointed with effect from 1 January
2015.
At the date of approval of the Annual Report and
Accounts 2014, the Board comprised the Group
Chairman, Group Chief Executive, Group Finance
Director, Group Chief Risk Officer and 13 non-executive
Directors.
The names and brief biographical details of the Directors
are included on pages 264 to 268.
Executive Directors
The Group Chairman, Group Chief Executive, Group
Finance Director and Group Chief Risk Officer are HSBC
employees.
Non-executive Directors
Non-executive Directors are not HSBC employees and
do not participate in the daily management of HSBC;
they bring an independent perspective, constructively
challenge and help develop proposals on strategy,
scrutinise the performance of management in meeting
agreed goals and objectives and monitor the Group’s risk
profile and the reporting of performance. The non-
executive Directors bring a wide variety of experience
from the public and private sectors, including the
leadership of large complex multinational enterprises.
Non-executive Directors’ terms of appointment
The Board has determined the minimum time
commitment expected of non-executive Directors to be
about 30 days per annum. Time devoted to the Company
could be considerably more, particularly if serving on
Board committees.
Non-executive Directors are appointed for an initial
three-year term and, subject to re-election by
shareholders at annual general meetings, are typically
expected to serve two three-year terms. The Board may
invite a director to serve additional periods. All Directors
are subject to annual election by shareholders.
Letters setting out the terms of appointment of each of
the non-executive Directors are available for inspection
at the Company’s registered office.
Group Chairman and Group Chief Executive
The roles of Group Chairman and Group Chief Executive
are separate, with a clear division of responsibilities
between the running of the Board and the executive
responsibility for running HSBC’s business. Descriptions
of the roles and responsibilities of the Group Chairman
and the Group Chief Executive are available at
www.hsbc.com/investor-relations/governance/board-
committees. Their key responsibilities are set out below.
Key responsibilities
Group Chairman – Douglas Flint
• 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.
Group Chief Executive – Stuart Gulliver
• 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.
Deputy Chairman and senior independent
non-executive Director
A description of the roles and responsibilities of
the Deputy Chairman and senior independent non-
executive Director, which has been approved by
the Board, is available at www.hsbc.com/investor-
relations/governance/board-committees. His key
responsibilities are set out below.
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Key responsibilities
Deputy Chairman and senior independent non-executive
Director – Sir Simon Robertson
• Deputises for the Group Chairman at meetings of the Board
or shareholders and 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.
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 be less than five or exceed 25. Any
Director so appointed by the Board shall retire at the
Annual General Meeting following his or her appointment
and shall be eligible for election but would not be taken
into account in determining the 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 or her period of office. On the
recommendation of the Nomination Committee and in
compliance with 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 election or re-election.
Powers of the Board
The Board is responsible for overseeing the management
of HSBC globally and, in so doing, may exercise its
powers, subject to any relevant laws and regulations
and to the Articles. The Board has adopted terms of
reference which are available at www.hsbc.com/1/2/
about/board-of-directors. The Board reviews its terms
of reference annually.
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 executive Director
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 day-to-day management of
HSBC Holdings to the GMB but reserves to itself approval
of certain matters including operating plans, risk appetite
and performance targets, procedures for monitoring
and controlling operations, 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.
HSBC Holdings was registered in Hong Kong under part XI
of the Companies Ordinance on 17 January 1991.
Board meetings
Eight Board meetings and two one-day strategy meetings
were held in 2014. At least one Board meeting each year
is held in a key strategic location outside the UK. During
2014, Board meetings were held in Hong Kong and
Beijing.
The table below shows each Director’s attendance at
meetings of the Board during 2014.
During 2014, the non-executive Directors and the Group
Chairman met once without the other executive
Directors. The non-executive Directors also met four
times without the Group Chairman, including to appraise
the Group Chairman’s performance.
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Report of the Directors: Corporate Governance (continued)
Board of Directors
2014 Board attendance record
Kathleen Casey1,8
Safra Catz
Laura Cha
Marvin Cheung2
John Coombe3
Lord Evans of Weardale8
Joachim Faber
Rona Fairhead8
Renato Fassbind4
Douglas Flint
Stuart Gulliver
James Hughes-Hallett3
Sam Laidlaw
John Lipsky8
Rachel Lomax
Iain Mackay
Heidi Miller5,8
Marc Moses6
Sir Simon Robertson
Jonathan Symonds7
Meetings held in 20148
Meetings
eligible to
attend as
a Director
Meetings
attended
5
8
8
4
4
7
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7
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1 Appointed a Director on 1 March 2014.
2 Retired as a Director on 1 August 2014.
3 Retired as a Director on 23 May 2014.
4 Retired as a Director on 1 September 2014.
5 Appointed a Director on 1 September 2014.
6 Appointed a Director on 1 January 2014.
7 Appointed a Director on 14 April 2014.
8 A meeting was called at short notice. Those Directors not able to
attend were briefed prior to the meeting.
Board balance and independence of Directors
The Board comprises a majority of independent non-
executive Directors. The size of the Board is considered
to be appropriate given the complexity and geographical
spread of our business and the significant time demands
placed on the Directors.
The Nomination Committee regularly reviews the
structure, size and composition of the Board (including
skills, knowledge, experience, independence and
diversity) and makes recommendations to the Board
with regard to any changes.
The Board has 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. Further
information on the Board diversity policy can be found
on page 285.
The Board considers all of the non-executive Directors 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 election by shareholders following their appointment
as a Director of HSBC Holdings. Rona Fairhead has served
on the Board for more than nine years and, in that
respect only, does not meet the usual criteria for
independence set out in the UK Corporate Governance
Code. The Board has determined Rona Fairhead
to be independent in character and judgement,
notwithstanding her length of service, taking into
account her continuing level of constructive challenge
of management and strong contribution to Board
discussions. Rona Fairhead will stand for re-election at
the 2015 Annual General Meeting. It is our view that the
experience of current and previous service on an HSBC
subsidiary company board can be a considerable benefit
but that such service does not detract from a non-
executive Director’s independence. The Board has
concluded that there are no relationships or
circumstances which are likely to affect a non-executive
Director’s judgement and any relationships
or circumstances which could appear to do so are not
considered to be material.
In accordance with the Rules Governing the Listing of
Securities on the Stock Exchange of Hong Kong Limited,
each non-executive Director determined by the Board to
be independent has provided an annual confirmation of
his or her independence.
Information and support
The Board regularly reviews reports on performance
against financial and other strategic 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 on the Group’s risk
appetite, top and emerging risks, risk management,
credit exposures and the Group’s loan portfolio, asset
and liability management, liquidity, litigation, financial
and regulatory compliance and reputational issues.
The Directors have free and open contact with
management at all levels. When attending Board
offsite meetings and when travelling for other reasons,
non-executive Directors are encouraged to take
opportunities to see local business operations at first
hand and to meet local management.
Role of the Group Company Secretary
All Directors have access to the advice and services of
the Group Company Secretary, who is responsible to
the Board for ensuring that Board procedures and all
applicable rules and regulations are complied with.
Under the direction of the Group Chairman, the Group
Company Secretary’s responsibilities include ensuring
good information flows within the Board and its
committees and between senior management and non-
executive Directors, as well as facilitating induction and
assisting with professional development as required.
The Group Company Secretary is responsible for advising
the Board through the Group Chairman on corporate
governance matters.
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
HSBC HOLDINGS PLC
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timely access to all relevant information and may take
independent professional advice if necessary at HSBC
Holdings’ expense.
Induction
Formal, tailored induction programmes are arranged for
newly appointed Directors. The programmes are based
on an individual Director’s needs and vary according
to the skills and experience of each Director. Typical
induction programmes consist of a series of meetings
with other Directors and senior executives to enable new
Directors to familiarise themselves with the business.
Directors also receive comprehensive guidance from
the Group Company Secretary on directors’ duties and
liabilities.
Training and development
We provide training and development for Directors with
sessions often arranged in conjunction with scheduled
Board meetings. Executive Directors develop and
refresh their skills and knowledge through day-to-day
Training and development
Executive Directors
Douglas Flint
Stuart Gulliver
Iain Mackay
Marc Moses
Non-executive Directors
Kathleen Casey
Safra Catz
Laura Cha
Lord Evans of Weardale
Joachim Faber
Rona Fairhead
Sam Laidlaw
John Lipsky
Rachel Lomax
Heidi Miller
Sir Simon Robertson
Jonathan Symonds
interactions and briefings with senior management of
the Group’s businesses and functions. Non-executive
Directors have access to internal training and
development resources and personalised training is
provided where necessary. All newly appointed Directors
attended a tailored induction programme. The Chairman
regularly reviews the training and development of each
Director.
During the year, Directors received training on the
following topics:
• The Dodd-Frank Act;
• UK Financial Services (Banking Reform) Act 2014
including Senior Managers Regime; and
• the changing financial and regulatory reporting
landscape.
The table below shows a summary of training and
development undertaken by each Director during 2014.
Training areas
Regulatory
updates
Corporate
Governance
Financial
industry
developments
Briefings on
Board committee
related topics
Board performance evaluation
The Board is committed to regular evaluation of its own
effectiveness and that of its committees. In 2012 and
2013, the review of the effectiveness of the Board and
its committees was undertaken by Bvalco Ltd1, an
independent third-party firm. The 2013 review process
mirrored that of 2012 with Bvalco conducting in-depth
interviews with the members of the Board and a number
of other senior executives. The findings of the 2013
review were presented to the Board, an action plan
developed and progress against these actions reported
to the Board during 2014. The 2013 review concluded
that the Board continues to operate effectively and is
well positioned to address the challenges faced by the
Group. Themes emerging from the 2013 review and the
actions taken included:
1 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.
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Report of the Directors: Corporate Governance (continued)
Board of Directors
2013 Review of Board effectiveness
Theme
Ensuring an appropriate balance between regulatory, business and
strategic issues at Board meetings.
Action taken
Key issues have been further prioritised.
More time has been provided for the debate of these issues at Board
meetings.
Providing further opportunities for the executive and non-executive
Directors to meet outside of the formal setting of the boardroom.
Informal executive and non-executive Directors’ events have been planned
around Board meetings providing additional forums for discussion.
Non-executive Directors have been invited to a number of events attended
by executive Directors.
Arrangements made for non-executive Directors to meet senior members
of local management teams in HSBC local offices when travelling.
Ensuring increased time and opportunity for non-executive Director
meetings.
Non-executive Director-only sessions are scheduled around Board
meetings.
Maintaining focus on succession planning.
A third and final review was facilitated by Bvalco during
the year, providing continuity and allowing for progress
against prior year themes to be evaluated.
Director performance evaluation
Evaluation of the individual performance of each non-
executive Director is undertaken annually by the Group
Chairman. During this evaluation, the Group Chairman
discusses the individual contribution of the Director,
explores training and development needs, seeks input
on areas where the Director feels he or she could make
a greater contribution and discusses whether the time
commitment required of the Director can continue to
be delivered. Based upon their individual evaluation,
the Group Chairman has confirmed that all of the non-
executive Directors continue to perform effectively,
contribute positively to the governance of HSBC and
demonstrate full commitment to their roles.
Evaluation of the individual performance of each
executive Director is undertaken as part of the
performance management process for all employees,
the results of which are considered by the Group
Remuneration Committee when determining variable
pay awards each year.
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.
The Board monitors the implementation of actions
arising from each performance evaluation.
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
independent external input to the process, as
appropriate, at least every third year.
A number of informal non-executive Director events were organised
throughout the year.
Succession planning remains a key area of focus with formal governance
processes in place.
Those named in succession plans are scheduled to present to Board
meetings.
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. The Board also receives regular
reports from one of our corporate brokers.
The Group’s shareholder communication policy is
available on www.hsbc.com/governance.
On several occasions during 2014, non-executive
Directors, including the Deputy Chairman and senior
independent non-executive Director, met or
corresponded with institutional investors and their
representatives to discuss corporate governance topics
and executive remuneration.
As Deputy Chairman and 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, Group Chief Risk
Officer, or other executives cannot resolve or for which
such contact would be inappropriate. He may be
contacted through the Group Company Secretary at
8 Canada Square, London E14 5HQ.
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Conflicts of interest, indemnification of Directors
and contracts of significance
The Board has adopted a policy and procedures relating
to Directors’ conflicts and potential conflicts of interest
and can determine the 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 are undertaken by the Board
annually.
The 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 provisions have been in place
during the financial year but have not been utilised by
the Directors. All Directors have the benefit of directors’
and officers’ liability insurance.
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. During 2014, HSBC has complied with the
applicable code provisions of: (i) The UK Corporate
Governance Code issued by the Financial Reporting
Council in September 2012; and (ii) the Hong Kong
Corporate Governance Code set out in Appendix 14 to
the Rules Governing the Listing of Securities on The Stock
Exchange of Hong Kong Limited, save that the Group Risk
Committee 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. 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 FCA and with The Model Code for Securities
Transactions by Directors of Listed Issuers (‘Hong Kong
Model Code’) 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.
All Directors are routinely reminded of their obligations
under the code of conduct for transactions in HSBC Group
securities.
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Report of the Directors: Corporate Governance (continued)
Board committees
Board committees
HSBC Holdings plc
Board of Directors
Group Risk
Committee
Group Audit
Committee
Group Remuneration
Committee
Nomination
Committee
Non-executive responsibility
for oversight of, and advice
to the Board on, high level
risk-related matters
and risk governance.
Non-executive responsibility
for oversight of, and advice
to the Board on, matters
relating to financial
reporting and of internal
controls over financial
reporting.
Non-executive responsibility
for setting the overarching
principles, parameters and
governance framework
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 appointment
to the Board.
Group Management
Board
Executive management
committee which
is responsible for
management and
day-to-day running of
HSBC under the direct
authority of the Board.
Financial System
Vulnerabilities
Committee
Conduct & Values
Committee1
Philanthropic and
Community Investment
Oversight Committee2
Chairman’s
Committee
Non-executive responsibility
for oversight of, and advice
to the Board on, HSBC
policies, procedures
and standards to ensure
that the Group conducts
business responsibly and
consistently adheres to
HSBC Values.
Non-executive responsibility
for the oversight of HSBC’s
philanthropic and
community investment
activities in support
of the Group’s corporate
sustainability objectives.
Acts on behalf of the Board
between scheduled Board
meetings to facilitate ad hoc
unforeseen business
requiring urgent Board
approval.
Non-executive responsibility
for oversight of (i) controls
and procedures to identify
areas where HSBC and the
financial system more
broadly 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 enforcement
agencies are met.
1 Established on 17 January 2014.
2 Established on 5 December 2014.
The Board has established a number of committees
consisting of Directors, Group Managing Directors
and, in the case of the Financial System Vulnerabilities
Committee, co-opted non-director members. The
key roles of the Board 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.
Group Management Board
Role and members
The GMB exercises all of the powers, authorities and
discretions of the Board of Directors in so far as they
concern the management and day-to-day running of the
Company and its subsidiaries.
Members
Stuart Gulliver (Chairman), Iain Mackay and
Marc Moses who are executive Directors,
and Ann Almeida, Samir Assaf, Peter Boyles,
Simon Cooper, John Flint, Pam Kaur (non-
voting), Alan Keir, Stuart Levey, Antonio Losada,
Sean O’Sullivan and Peter Wong, all of whom
are Group Managing Directors.
The Group Chief Executive chairs the GMB. 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 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 Chairman of the GMB reports to each meeting of the
Board on the activities of the GMB.
The Group Chief Risk Officer chairs regular Risk
Management Meetings of the GMB. The Risk
Management Meetings provide strategic direction and
oversight of enterprise-wide management of all risks
and establish, maintain and periodically review the policy
and guidelines for the management of risk within the
Group. The Risk Management Meeting also reviews the
development and implementation of Global Standards
reflecting best practices which must be adopted and
adhered to consistently throughout the Group. The Head
of Group Financial Crime Compliance and Group Money
Laundering Reporting Officer attends this section of the
Risk Management Meeting.
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Group Audit Committee
Chairman’s Statement
The GAC has non-executive responsibility for oversight of and
provision to the Board of advice on matters relating to financial
reporting and internal controls over financial reporting. This
report sets out the activities of the GAC that underpin this work
and issues faced by the committee during the year.
Key areas of GAC activity during the year include: overseeing
the external auditor transition from KPMG Audit Plc (‘KPMG’) to
PricewaterhouseCoopers LLP (‘PwC’); considering provisioning
for conduct-related legal and regulatory issues; and integrating
the approach to financial reporting and internal controls to
ensure consistency across committees of the Board.
In 2015, an area of focus for the GAC will be to monitor the
implementation of recovery and resolution plans, which are
designed to ensure that the effects of a banking failure are
mitigated, thus avoiding severe systemic disruption, while
protecting the economic functions provided by the relevant
banking entity. The GAC will also monitor the financial control
and reporting implications of ring-fencing the retail banking
operations in the UK and the establishment of operating
companies globally. A further area of focus in 2015 will be the
implementation of revised International Financial Reporting
Standard 9 ‘Financial Instruments’ concerning the classification
and measurement of financial instruments (‘IFRS 9’). This is of
particular significance given the potential impact IFRS 9 will
have on how we classify and measure financial assets.
Kathleen Casey joined the GAC in March 2014 and Phillip
Ameen joined the GAC on 1 January 2015, bringing with them
extensive experience in US financial regulatory policy and
accounting standards setting and reporting, respectively.
Further details are provided in Kathleen’s and Phillip’s
biographies on page 265.
Finally, I would like to thank Renato Fassbind, whom I
succeeded as Chairman of the GAC, John Coombe and the late
Marvin Cheung, all of whom stepped down from the GAC
during the year, for their respective contributions to the work
of the committee.
Jonathan Symonds
Chairman, Group Audit Committee
23 February 2015
Role and membership
The key areas of responsibility for the GAC include:
• monitoring the integrity of financial statements;
• overseeing the internal controls systems over
financial reporting;
• monitoring and reviewing the effectiveness of the
Internal Audit function;
• reviewing the Company’s financial and accounting
policies and practices; and
• oversight and remuneration of the external auditor
and advising the Board on the appointment of the
external auditor.
Members1
Jonathan Symonds (Chairman)2,7
John Coombe3
Renato Fassbind4
Kathleen Casey5,7
Marvin Cheung6
Rachel Lomax7
Meetings held in 2014
Meetings
attended
Meetings
eligible
to attend
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4
5
4
4
7
2
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7
1 All members are independent non-executive Directors.
2 Appointed as a member and Chairman on 1 September 2014.
3 Retired as Chairman and member on 23 May 2014.
4 Appointed Chairman on 23 May 2014 and retired as a member
and Chairman on 1 September 2014.
5 Appointed as a member on 1 March 2014.
6 Retired as a member on 1 August 2014.
7 The Board has determined member to be 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.
Governance
The table below sets out the governance structure
for the Board Committees whose duties relate to the
integrity of HSBC’s reporting to shareholders and
other investors. Each major operating subsidiary has
established a board committee with non-executive
responsibility for oversight of matters relating to
financial reporting.
A forum for the chairmen of our principal subsidiary
company committees with non-executive oversight
responsibility for financial reporting and risk-related
matters was held in June 2014 to share views and to
facilitate a consistent approach to the way in which
these subsidiary company committees operate. The next
forum is scheduled to be held in June 2015.
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Report of the Directors: Corporate Governance (continued)
Board committees
Governance structure for the oversight of financial reporting
Authority
Membership
Responsibilities include:
Board
Disclosure
Committee
Executive and non-executive
Directors
Representatives from global
businesses, functions and
certain Group companies
Subsidiary board
committees
responsible for
oversight of
financial reporting
and global business
audit committees
Independent non-executive
directors and/or HSBC Group
employees with no line of
functional responsibility for
the activities of relevant
subsidiary or global business,
as appropriate
• Financial reporting
• Appointing senior financial officers
• Reviewing the Group’s material communications with investors
• Assisting the Group Chief Executive and Group Finance Director to discharge their
obligations relating to financial reporting under the Securities Exchange Act of 1934
• Monitoring and reviewing the effectiveness of controls and procedures established
to ensure that information is disclosed appropriately and on a timely basis
• Reporting findings and making recommendations to the Group Chief Executive,
Group Finance Director and the GAC
• Providing reports to the GAC on financial statements and internal controls over
financial reporting of relevant subsidiaries or businesses, as requested
How the Committee discharged its
responsibilities
Throughout the year, the GAC received regular reports
on a number of matters including internal audit findings
and follow-up work, accounting issues and judgements,
and legal and regulatory matters. The GAC received
presentations from a number of members of the senior
management including the Group Finance Director,
Group Chief Accounting Officer and Group Head of
Internal Audit. The Chairman of the GAC also had
meetings with a number of these individuals separately,
providing an additional forum to discuss specific issues.
During the year, the GAC held meetings with the Group
Head of Internal Audit and with the external auditors in
the absence of management.
In discharging its responsibilities the GAC undertakes the
following principal activities:
• oversight and challenge of the effectiveness of
internal control processes that form the internal
control framework for financial reporting and also of
those internal controls processes that relate to the
Sarbanes-Oxley Act. The Group Head of Internal Audit
and the external auditor regularly report to the GAC
without management present. During the year,
the GAC confirmed that the Finance function was
adequately resourced and that qualifications and
experience of staff in that function were appropriate.
Further details on internal control can be found on
pages 288 to 290;
•
the adoption for full implementation in 2015 of the
revised Committee of Sponsoring Organisations of
the Treadway Commission (‘COSO’) framework, an
integrated internal control framework to meet our
internal controls obligations under the Sarbanes-
Oxley Act and also under the UK and Hong Kong
corporate governance codes;
• review of HSBC’s financial and accounting policies and
their application to the reporting of the Group’s
activities and financial performance. Further details of
this area of the GAC’s work are provided in the
‘Principal activities and significant issues considered’
table on page 279;
• monitoring of the legal and regulatory environment;
the GAC received regular reports on litigation and
on the application of changes in law, regulation,
accounting policies and practices including reports
on developments in programmes to implement IFRSs,
Basel III/CRD IV and the recommendations of the
Parliamentary Commission on Banking Standards,
particularly as they relate to accounting policies and
financial reporting;
• review of the effectiveness of the Internal Audit
function. The GAC’s effectiveness review
encompassed the scope of the Internal Audit
function’s work and the adequacy of the skills of the
internal audit team. The GAC found the Internal Audit
function remained effective and this conclusion was
supported by the findings of a quality assurance
review of the Internal Audit function undertaken by
PwC. During the year, the GAC terms of reference and
the audit charter of internal audit were updated to
clarify the GAC’s responsibility for the oversight of the
governance of the Internal Audit function and the
reporting line of the Group Head of Internal Audit to
the Chairman of the GAC. The Audit Charter is
available on the HSBC website at www.hsbc.com/
investor-relations/governance/internal-control.
• an annual assessment of the effectiveness of the
external auditor which includes assessments by
the Group’s chief financial officers of its major
geographical regions. The GAC also considered the
level of scrutiny applied during the audit and the
interaction of the auditor with senior management.
Following this review the GAC was satisfied that
KPMG continued to perform effectively as external
auditor; and
• an annual review of the independence of the external
auditor. All services provided by KPMG during the
2014 were pre-approved by the GAC and were
entered into under the pre-approval policies
established by the GAC. The pre-approved services
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relate to regulatory reviews, agreed-upon procedures
reports, other types of attestation reports, the
provision of advice and other non-audit services
allowed under the SEC independence rules. The
services fall into the categories of audit services,
audit-related services, tax services and other services.
Following its review, the GAC confirmed that it
considered KPMG to be independent and KPMG, in
accordance with industry standards, has provided the
GAC with written confirmation of its independence for
the duration of the financial year ended 31 December
2014. The GAC approved the remuneration and terms
of engagement and recommended to the Board the
re-appointment of KPMG for the financial year ended
31 December 2014.
The GAC’s oversight of the audit tender process in 2013
resulted in the GAC’s recommendation to the Board
that PwC be appointed as the Group’s auditor for the
financial year beginning on 1 January 2015. The GAC has
recommended to the Board that PwC be appointed at
the forthcoming Annual General Meeting. PwC provided
written confirmation of its independence from HSBC
prior to its appointment. During 2014, regular meetings
were held with PwC’s audit engagement team to assist
in developing the 2015 external audit plan.
Principal activities and significant issues considered include:
The Board has approved, on the recommendation of the
GAC, a policy for the employment by HSBC of former
employees of KPMG and PwC. The GAC receives an
annual report on such former employees who are
employed and the number in senior positions. This
report enables the GAC 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. 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 7 on the Financial Statements.
In addition to addressing the matters noted above,
the GAC considered the significant accounting
issues described below. The GAC considered the
appropriateness of management’s judgements and
estimates, where appropriate discussing these with
KPMG, the external auditors, and reviewing the matters
referred to in the external auditor’s report as risks of
material mis-statement.
The GAC undertakes an annual review of its own terms
of reference and effectiveness. The terms of reference
can be found on our website at www.hsbc.com/
investor-relations/governance/ board-committees.
Key area
Appropriateness of
provisioning for legal
proceedings and
regulatory matters
Loan impairment,
allowances and charges
Action taken
The GAC received reports from management on the recognition and amounts of provisions, the existence of
contingent liabilities, and the disclosures relating to provisions and contingent liabilities, for legal proceedings
and regulatory matters. Specific areas addressed included the legal action brought by the US Federal Housing
Finance Agency in respect of mortgage-backed securities offerings, and provisioning arising from
investigations conducted by the UK Financial Conduct Authority and US regulators and law enforcement
agencies relating to trading activities in the foreign exchange market. In 2015, the GAC considered reports and
disclosures concerning potential liabilities in connection with investigations of HSBC’s Swiss Private Bank by a
number of tax administration, regulatory and law enforcement authorities.
The GAC reviewed loan impairment allowances for personal and wholesale lending. Significant judgements
and estimates reviewed included a review of loss emergence periods across our wholesale loan portfolios,
consideration of the effect of falling oil prices on potential wholesale loan impairments, notable individual
cases of impairment in wholesale lending and the adequacy of collective impairment allowances on personal
lending portfolios.
UK customer remediation The GAC considered the provisions for redress for mis-selling of payment protection insurance policies,
Valuation of financial
instruments
Bank of Communications
Co., Limited (‘BoCom’)
impairment testing
provisions for mis-selling of interest rate hedging products, and liabilities in respect of breaches of the UK
Consumer Credit Act.
The GAC reviewed developments in market practice regarding accounting for funding costs in the valuation of
uncollateralised derivatives. In line with evolving market practice, in the fourth quarter of 2014 we adopted
an FFVA to account for the impact of incorporating the cost of funding into the valuation of uncollateralised
derivatives.
During the year the GAC considered the regular impairment reviews of HSBC’s investment in BoCom and
management’s conclusions that the investment is not impaired. When testing investments in associates for
impairment, IFRS requires the carrying amount to be compared with the higher of fair value and value in use.
The GAC reviewed a number of aspects of management’s work in this area including the sensitivity of the
result of the impairment review to estimates and assumptions of projected future cash flows and the
discount rate.
Goodwill impairment
testing
No impairment was identified as a result of the annual goodwill impairment test, and the review for indicators
of impairment as at 31 December 2014 identified no indicators of impairment. The result for GPB Europe is
sensitive to key assumptions and is subject to enhanced disclosure.
Recognition of deferred
tax assets
In considering the recoverability of the Group’s deferred tax assets, the GAC reviewed the recognition of
deferred tax assets in the USA, Brazil and Mexico, and the associated projections of future taxable income.
Non-GAAP financial
measures
The GAC considered the change in the non-GAAP financial measures presented from ‘underlying
performance’ to an ‘adjusted performance’ measure in the 2014 ARA.
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Report of the Directors: Corporate Governance (continued)
Board committees
Group Risk Committee
Chairman’s Statement
The Group Risk Committee (‘GRC’) oversees and advises the
Board on high level risk-related matters and internal control,
other than internal financial controls, which are overseen by
the Group Audit Committee. The GRC is responsible for
ensuring that Group risk profile and underlying business activity
is in line with risk appetite as approved by the Board.
The tone from the top of the Group, which is set by senior
management, is critical to effective risk management. During
the year the GRC continued to focus on steps taken to
communicate and reinforce the Group’s commitment to ‘doing
the right thing’. This focus is reflected in the advice the GRC
provides to the Group Remuneration Committee in connection
with executive pay.
The implications of an evolving legal and regulatory framework
for financial institutions present an ongoing challenge. The
2014 PRA and EBA stress testing programmes were a particular
area of focus for the GRC during the year. The nature and pace
of legal and regulatory change in 2014 has also led to increased
scrutiny by the GRC of the Group’s risk appetite profile and
management actions to mitigate legal and regulatory risks and
exposures.
Geopolitical risk has remained an ongoing theme for the GRC,
and during the year, the GRC held a joint meeting with the
Group Audit Committee to consider key risks in China and the
Asia Pacific region. It is expected that geopolitical risk will also
be a theme for the GRC throughout 2015.
Heidi Miller joined the GRC in September 2014 and brings with
her significant global financial services experience. Heidi has
held a range of senior financial services sector appointments,
most recently as President of JPMorgan International. Further
details are provided in Heidi’s biography on page 267.
Toward the end of 2014 a regulatory driven industry-wide
review of IT infrastructure commenced which will continue into
2015.
Joachim Faber
Chairman, Group Risk Committee
23 February 2015
Role and membership
The GRC is responsible for:
• advising the Board on high-level risk-related matters
and risk governance, including current and forward
looking risk exposures, future risk strategy and
management of risk within the Group;
• advising the Board on risk appetite and risk tolerance;
• reviewing the effectiveness of the Group’s risk
management systems framework and internal control
systems (other than internal financial control systems
which is the responsibility of the Group Audit
Committee);
Members
Joachim Faber (Chairman)
John Coombe1
John Lipsky
Rachel Lomax
Heidi Miller2
Meetings held in 2014
Meetings
attended
Meetings
eligible
to attend
13
5
13
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4
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5
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4
13
1 Retired as a Director and member on 23 May 2014.
2 Appointed a member on 1 September 2014.
By invitation, John Trueman, a non-executive director
of HSBC Bank plc, attended meetings of the GRC
throughout 2014. Safra Catz, a non-executive Director of
HSBC Holdings plc, attended two presentations given to
the GRC on IT-related matters.
Governance of risk
All of HSBC’s activities involve the measurement,
evaluation, acceptance and management of risk or
combinations of risks. The Board, advised by the GRC,
requires and encourages a strong risk governance culture
which shapes the Group’s attitude to risk. The Board
and the GRC 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 governance structure of the Board and its
committees for the management of risk is set out in the
table on page 24. The GRC has overall non-executive
responsibility for oversight of risk across the Group.
The Conduct & Values and the Financial System
Vulnerabilities committees are responsible for the
oversight of specific areas of risk which include the
promotion and embedding of HSBC Group Values and
HSBC Group principles and the oversight of matters
relating to anti-money laundering, sanctions, terrorist
financing and proliferation financing. The Conduct &
Values and the Financial System Vulnerabilities
committees regularly update the GRC on their activities.
Each major Group 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.
The GRC has set core terms of reference for subsidiary
company non-executive risk and audit committees.
Further details of the structures in place for the
management of risk across the Group are provided on
pages 112 to 118.
• monitoring executive control and management of risk
How the GRC discharged its responsibilities
including top and emerging risks; and
• advising the Group Remuneration Committee on the
alignment of remuneration with risk appetite.
The GRC is comprised of independent non-executive
Directors as listed below.
The GRC discussed top and emerging risks and the
Group’s risk profile with management at each of its
meetings. In monitoring top and emerging risks the GRC
received reports and presentations from the Group Chief
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Risk Officer (an executive Director), the Global Head
of Financial Crime Compliance and Group Money
Laundering Reporting Officer, and the Global Head of
Regulatory Compliance. During the year, other members
of the senior management attended GRC meetings
including the Group Chief Operating Officer, the Global
Head of Risk Strategy and Chief of Staff, the Head of
Group Performance and Reward and the Group Chief
Data Officer.
The Group Chief Risk Officer provided regular reports
and presentations to the GRC, including at each meeting
a presentation of the ‘risk map’ which describes our risk
profile by risk type in the global businesses and regions,
the Group Risk Appetite Statement, and the top
and emerging risks report which summarised the
Principal activities and significant issues considered include:
mitigating actions for identified risks. The GRC requested
reports and updates from management on risk-related
issues identified for in-depth consideration and also
received regular reports on matters discussed at Risk
Management Meetings of the GMB.
Page 118 provides further information on the top and
emerging risks for the Group.
Throughout the year, the GRC Chairman met 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.
In addition to addressing the matters noted above, the
GRC focused on a number of key areas including those
set out in the table below.
Key area
The Group Risk Appetite
Statement and monitoring
of the Group risk profile
against the Risk Appetite
Statement
PRA and EBA concurrent
stress tests
Execution risk
Legal and regulatory risks
IT and data-related risks
Geopolitical risk
Action taken
The GRC reviewed management proposals for revisions to the Group Risk Appetite Statement metrics for
2014. Following review, the Committee recommended a number of refinements to the Group Risk
Appetite Statement to the Board including the cost efficiency, Common Equity Tier 1 Capital and sovereign
exposure ratios.
The GRC regularly reviews the Group’s risk profile against the key performance metrics set out in the Risk
Appetite Statement. The GRC reviewed management’s assessment of risk and provided scrutiny of
management’s proposed mitigating actions.
The GRC monitored the PRA and EBA stress testing exercises and reviewed the results of stress testing
prior to submission to the respective regulators. It received reports over the course of the PRA and EBA
stress testing exercises and met three times during the year solely to consider stress testing related
matters. At these meetings the GRC reviewed the stress test scenarios as set by the PRA and EBA and the
enhancements to these scenarios where appropriate. The GRC oversaw a review of the lessons learnt from
this stress testing exercise.
Internal Audit assessed progress on the regulatory stress tests programmes and reported its conclusions
and recommendations to the GRC.
Execution risk is the risk relating to the delivery of the Group strategy and is a standing agenda item for
the GRC. Monitoring of this risk and challenging management’s assessment of execution risk and
corresponding mitigating actions remain a priority for the GRC.
In addition to the regular reports received and ‘deep-dive reviews’ conducted on specific issues identified,
the GRC requested reports from Internal Audit on the themes identified during the course of its work.
The legal and regulatory environment continues to evolve in both complexity and the level of
requirements placed on financial services sector firms.
The GRC received regular reports on legal and regulatory risks, reviewed management actions to mitigate
these risks and considered the potential impact of future developments in this area on the Group. In 2015,
these included reports concerning risks related to investigations of HSBC’s Swiss Private Bank by a number
of tax administration, regulatory and law enforcement authorities. A particular area of focus for the GRC
remains the uncertainty in respect of capital adequacy regulatory requirements; further time has been
scheduled for the GRC to address this matter.
During the year, the GRC considered a number of IT and data-related risks including internet crime and
fraud, data management and aggregation, and information security. The GRC reviewed management’s
assessment of these risks and management actions to mitigate them.
IT and data-related risks are expected to remain an area of focus for the GRC during the course of 2015.
The GRC received regular reports on geopolitical risks including the crises in the Middle East and Ukraine
and the continued tensions in respect of maritime sovereignty in the South China Sea. Management
provided regular updates on the implementation of mitigating actions in response to these matters which
included the augmentation of anti-money laundering, sanctions and financial crime compliance controls.
The GRC also held a joint meeting with the Group Audit Committee which focused on issues faced in
mainland China and the Asia-Pacific region.
Further information on the identification, management and mitigation of the risks set out above is provided on pages 114 to 117.
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Report of the Directors: Corporate Governance (continued)
Board committees
Financial System Vulnerabilities Committee
Role and membership
Chairman’s Statement
The Financial System Vulnerabilities Committee (‘FSVC’) oversees
the implementation by management of policies aimed at
mitigating financial crime and system abuse risks which HSBC
faces in the execution of its strategy. In doing so, it provides
thought leadership, governance, oversight and policy guidance
over the framework of controls and procedures which has been
designed to address these risks to which HSBC, and the financial
system more broadly, may be exposed. More formally, the
Committee oversees our compliance with regulatory orders,
including oversight of the Group’s relationship with the Monitor1,
with whom the Committee regularly meets and engages to
ensure alignment of our respective priorities and interests.
We recognise that in the past HSBC did not consistently identify,
and so prevent, misuse and abuse of the financial system through
its network. However, the adoption of the highest or most
effective global compliance standards – allied with the highest
standards of behaviour – forms part of our strategy to address
the possibility of this happening again, and will address our
obligations under the various regulatory orders entered into in
2012.
As you will read in this report, during 2014, the Committee has
made considerable progress in the achievement of its objective,
reviewing and adopting new global policies on anti-money
laundering and sanctions compliance, agreeing and setting
milestones regarding the enhancement of transaction monitoring
and customer due diligence systems and processes and routinely
engaging with the Monitor for this purpose. An equally
important aspect of the FSVC’s role in 2014 has been to provide
the Group with a forward-looking perspective on financial crime
risk. As an example, the Committee undertook a deep dive
review in 2014 to ascertain the actions being taken to mitigate
the risks associated with the vast amount of data to which the
firm is exposed in the delivery of products to its customers. The
five subject matter experts appointed to the FSVC have
provided invaluable guidance and advice in identifying risk
areas where the Group could become exposed, working with us
to mitigate those risks.
Building on this, the FSVC will continue to focus in 2015 on the
controls and procedures which will underpin our high behavioural
and compliance standards. A strong compliance culture is
essential to the success of our strategy and this will remain a
focus area for the FSVC during the year.
I would like to take this opportunity to thank Rona Fairhead for
her leadership of the Committee from the period since its
establishment in early 2013 and I am delighted to have inherited
from her in May last year a Committee with a clear intent and
purpose to address the challenges facing HSBC.
Lord Evans of Weardale
Chairman, Financial System Vulnerabilities Committee
23 February 2015
1 See page 27 for further details on the Monitor.
The FSVC has non-executive responsibility for:
• governance, oversight and policy guidance over the
framework of controls and procedures designed to
identify areas where HSBC and the financial system
more broadly may become exposed to financial crime
or system abuse;
• oversight of 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 and oversight of
implementation of the actions necessary to build
assurance in these areas;
• provision of advice as applicable on the
implementation of the Global Standards programme;
and
• provision of a forward-looking perspective on
financial crime risk to the Board.
Members
Lord Evans of Weardale
(Chairman)1
Kathleen Casey2
Rona Fairhead3
Nick Fishwick4
Dave Hartnett4
Bill Hughes4
Sir Simon Robertson
Leonard Schrank4
Juan Zarate4,5
Meetings held in 2014
Meetings
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Meetings
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1 Appointed Chairman on 23 May 2014.
2 Appointed a non-executive Director and member on 1 March 2014.
3 Retired as Chairman on 23 May 2014.
4 Co-opted non-director member.
5 Also provides advisory services to the board of HSBC
North America Holdings Inc.
Five co-opted non-director members have been
appointed advisers to the Committee to support its work.
Brief biographies are set out below:
Nick Fishwick, CMG: Former senior official in the Foreign
and Commonwealth Office, specialising in security,
intelligence 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.
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Dave 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.
Bill 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.
Leonard Schrank: Former chief executive officer of
SWIFT, the industry-owned, global financial messaging
system; oversaw SWIFT’s relationship with the US
Treasury Department and other countries on counter-
terrorism issues. Member of MIT Corporation.
The Honourable Juan Zarate: Senior Advisor 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.
How the FSVC discharged its responsibilities
The FSVC has agreed areas of focus where HSBC and the
financial system more broadly may become exposed to
financial crime or system abuse, with the GRC retaining
responsibility for high-level risk related matters and risk
governance. Particular areas of focus for FSVC included:
cyber security; technology and data systems; transaction
monitoring systems for anti-money laundering; sanctions
and other financial crime related risks; and customer due
diligence and know your customer procedures. Regular
reports and updates on these focus areas were provided
to the FSVC by the adviser members and relevant
executives.
The FSVC also maintained oversight of obligations under
the US and UK agreements and updates on HSBC’s
interactions with the Monitor.
The Chief Legal Officer, Group Chief Risk Officer, Global
Head of Financial Crime Compliance, the Group Money
Laundering Reporting Officer, Global Head of Regulatory
Compliance and the Group Head of Internal Audit
provided reports to the FSVC including on meetings held
with, and reports submitted to, regulators on the
Group’s compliance-related initiatives made both in
connection with the resolution of the investigations by
US and UK regulatory and law enforcement authorities in
December 2012 and also more generally. In addition to
the scheduled Committee meetings, the Chairman met
regularly with the Group Chairman, the adviser members
of the Committee and senior executives as required.
During the year, the FSVC received regular updates on
the Compliance Plan, which documents the Group’s
strategy to augment HSBC’s anti-money laundering and
sanctions compliance programme, which covers the
related policies, procedures and enhanced training.
Regular reports are also submitted to the FSVC on
Group-wide whistleblowing disclosures and anti-bribery
and corruption matters.
In addition to its reports to the Board, the FSVC also
regularly updates the Group Risk Committee on specified
matters to raise areas for its consideration as
appropriate.
During the year, the FSVC focused on a number of key
areas, as set out in the table below.
Principal activities and significant issues considered include:
Key area
Financial crime-related issues
Sanctions
Cyber security
Action taken
The FSVC reviewed and adopted a Group policy on anti-money laundering which is now being
implemented across all of HSBC’s businesses. It received regular updates on the implementation of
the IT strategy agreed as part of the work to manage and mitigate financial crime risks. A particular
area of focus was on enhancements proposed by management in respect of the Group’s transaction
monitoring systems.
The FSVC reviewed and adopted a Group policy on sanctions compliance which is now being
implemented, whilst the Group’s ongoing sanctions compliance programmes and management’s
strategy to respond to the expansion of global sanctions were also routinely monitored by the
Committee during the year.
During 2014, the FSVC reviewed cyber-security risks and strategy in this area and proposed
enhancements to the Group’s cyber security capabilities. The reviews included briefings on the
Group’s ability to predict, respond and recover from cyber-attacks. Metrics and timelines were agreed
with management to monitor progress in this area.
FATCA and tax transparency
The FSVC received updates to tax transparency initiatives undertaken by HSBC and the Group-wide
implementation of the requirements under the Foreign Account Tax Compliance Act.
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Report of the Directors: Corporate Governance (continued)
Board committees
Group Remuneration Committee
Nomination Committee
The Group Remuneration Committee is responsible for
approving remuneration policy. As part of its role, it
considers the terms of fixed pay, annual incentive plans,
share plans, other long-term incentive plans, benefits
and the individual remuneration packages of executive
Directors and other senior Group employees and
in doing so takes into account the pay and conditions
across the Group. No Directors are involved in deciding
their own remuneration.
Members1
Sir Simon Robertson (Chairman)
John Coombe 2
Renato Fassbind3
John Lipsky4
Sam Laidlaw
Jonathan Symonds5
Meetings held in 2014
Meetings
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1 All members are independent non-executive Directors.
2 Retired as a Director and member on 23 May 2014.
3 Resigned as a Director and member on 1 September 2014.
4 Appointed a member on 23 May 2014.
5 A member from 14 April 2014 until 1 September 2014.
The Directors’ Remuneration Report is set out on pages 300 to
327.
Chairman’s Statement
A key responsibility of the Nomination Committee (‘Nomco’) is
to ensure there is an appropriate balance of skills, knowledge,
experience, diversity and independence on the Board.
Following Nomco’s recommendation, the Board appointed in
2014 four independent non-executive Directors, namely, Phillip
Ameen, Kathleen Casey, Heidi Miller and Jonathan Symonds.
They have brought different expertise and experience to the
Board. HSBC now surpasses the target set under the Board’s
own diversity policy, which states that 30% of the Board
members should be female by 2020.
Another important responsibility of Nomco is to ensure that
plans are in place for the selection, appointment and orderly
succession of executive Directors and senior executives. Nomco
met once last year to undertake with the Group Chief Executive
an in-depth review of succession plans and concluded that they
are sufficient and appropriate but need to be kept under annual
review.
Nomco continues to monitor regulatory developments as they
may require changes to the composition of the Board. Nomco
has considered in detail the new requirements under the EU’s
Capital Requirements Directive IV which came into effect on
1 July 2014 and which restrict the number of directorships that
may be held by member of the Board. The ramifications of
these new requirements for the current Board have been
reviewed and the requirements are routinely kept under
review.
Sir Simon Robertson
Chairman, Nomination Committee
23 February 2015
Role and membership
Nomco has non-executive responsibility for leading the
process for Board appointments and for identifying and
nominating, for approval by the Board, candidates for
appointment to the Board. Nomco is responsible for
succession planning of Directors to the Board. In the
course of this, it also oversees senior management
succession planning.
Members1
Sir Simon Robertson (Chairman)
Laura Cha2
Rona Fairhead
James Hughes-Hallett3
Sam Laidlaw2
John Lipsky
Meetings held in 2014
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1 All members are independent non-executive Directors.
2 Appointed a member on 23 May 2014.
3 Retired as a Director and member on 23 May 2014.
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How Nomco discharged its responsibilities
Nomco undertook the following key activities in the
discharge of its responsibilities:
Principal activities and significant issues considered include:
Key area
Action taken
Appointments of new Directors
Forward planning
Size, structure and composition
of the Board and it committees
Regulatory developments
Diversity
Director training and
development
Time commitment and
independence of
non-executive Directors
Following a rigorous selection process, Nomco recommended to the Board the appointment of four
non-executive Directors during 2014: Phillip Ameen (with effect from 1 January 2015), Kathleen Casey,
Heidi Miller and Jonathan Symonds; and an executive Director: Marc Moses, Group Chief Risk Officer.
An external search consultancy, MWM Consulting, was used in relation to the appointment of three
of the four non-executive Directors (Kathleen Casey, Heidi Miller and Jonathan Symonds). MWM
Consulting has no additional connection with HSBC other than as search consultant for certain senior
executive hires. Phillip Ameen was identified by the Committee through his existing role as an
independent Director of HSBC North America Holdings Inc. since 2012 (where he chairs the Audit
Committee and serves on the Risk Committee). He also brings extensive financial and accounting
experience gained from a long career at General Electric (ultimately as Vice President, Comptroller and
Principal Accounting Officer of General Electric Corp.), as well as a depth of technical knowledge from
his participation in the accounting standard setting world.
Nomco 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.
Nomco monitors the size, structure and composition of the Board (including skills, knowledge,
experience, diversity and independence).
Nomco considered the election or re-election of Directors at the 2014 Annual General Meeting. It
has also recommended to the Board that all Directors should stand for election or re-election at the
2015 Annual General Meeting.
Nomco monitors regulatory developments as they may affect Board composition. During 2014,
Nomco considered the implications of the corporate governance requirements of the EU’s Capital
Requirements Directive IV and the Equality and Human Rights Commission’s guidance on the equality
law framework.
Nomco believes that one of its important duties is to ensure that there is a proper balance on the
Board to reflect diversity and the geographical nature of its business. Appointments to the Board are
made on merit and candidates are considered against objective criteria, having due regard to the
benefits of diversity on the Board. The Board diversity policy is available at www.hsbc.com/investor-
relations/governance/corporate-governance-codes.
Nomco regularly monitors the implementation of the Board’s diversity policy using the following
measurable objectives: at least 25% of the Board should be female, with a target of 30% to be
achieved by 2020; only external search consultants who are signatories to the Executive Search Firms
Voluntary Code of Conduct should be engaged by Nomco; and at least 30% of candidates, proposed
by search firms for consideration as non-executive Directors, should be women. We comply with these
requirements and, as at the date of this report, 35.3% of the Board is female.
Nomco reviews and monitors the training and continuous professional development of Directors and
senior management.
Nomco assessed the independence of, and time required from, non-executive Directors. Nomco is
satisfied that all non-executive Directors have the time to fulfil their fiduciary responsibilities to
provide oversight of the business of the Group; and to serve on the relevant Committees of the Board.
All Directors are asked to identify any other significant commitments they may have and confirm they
have sufficient time to discharge what is expected of them as members of the Board.
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Report of the Directors: Corporate Governance (continued)
Board committees
Conduct & Values Committee
Chairman’s Statement
The Conduct & Values Committee (‘CVC’) was established in
January 2014 to provide Board oversight of the Group’s
multiple efforts to raise standards of conduct and to embed the
behavioural values the Group stands for. The delivery of fair
outcomes for customers and upholding market integrity is a
prime driver of a sustainable and profitable business. Whilst
conduct risk is not a new concept, the Board recognises it is one
receiving increasing global regulatory and industry focus and
that it is therefore right to establish a committee whose
objective is to oversee how conduct risk is being managed.
The need for greater emphasis on this area has become
apparent in the last few years with the establishment of the
Consumer Financial Protection Bureau in the US in 2011; the
Financial Conduct Authority in the UK listing among its
objectives ensuring appropriate protection of consumers and
enhancing the integrity of the financial system; and the Hong
Kong Monetary Authority introducing a charter on treating
customers fairly. Additionally, fine levels have escalated, most
significantly in the US, with a developing trend of out of court
settlements. These facts reaffirm our belief that delivering
higher standards of conduct is essential to restoring consumer
confidence and rebuilding society’s trust in banking.
Since its establishment, the CVC has taken a systematic
approach focussing on the global businesses and global
functions, with a number of deep dives into its home and
priority markets, with a particular focus to date on the UK. The
business on the agenda for each meeting is closely mapped to
the terms of reference and ensures that key responsibilities are
adequately addressed at least once a year.
I have chaired the CVC since its establishment, with Laura Cha,
chair of the former Corporate Sustainability Committee, Lord
Evans of Weardale, Heidi Miller and Jonathan Symonds as
members.
In 2015, the CVC will continue to focus on implementation of
the Group’s conduct and market risk programme, with a
particular interest in employee training and customer
communication. It aims to take a forward looking approach to
assessing conduct risk and anticipated further changes in public
policy relating to conduct will be received with interest.
The Committee will additionally address its sustainability
responsibilities, as inherited from the now-demised Corporate
Sustainability Committee, so as to ensure that HSBC acts
responsibly towards the communities within which it operates.
Rachel Lomax
Chairman, Conduct & Values Committee
23 February 2015
Role and membership
The CVC is responsible for:
• HSBC policies, procedures and standards to ensure
that the Group conducts business responsibly and
consistently adheres to HSBC Values. It aims to align
its work to HSBC’s purpose of connecting customers
to opportunities, enabling businesses to thrive and
economies to prosper, and ultimately helping people
to fulfil their hopes and realise their ambitions; and
• ensuring that in the conduct of its business, HSBC
treats customers fairly and openly, does business with
the right clients and in the right way, is a responsible
employer, acts responsibly towards the communities
in which HSBC operates and treats other stakeholders
fairly.
The CVC is comprised of independent non-executive
Directors as listed below.
Members
Rachel Lomax (Chairman)1
Laura Cha2
Lord Evans of Weardale2
Heidi Miller3
Jonathan Symonds4
Meetings held in 2014
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1 Appointed Chairman on 17 January 2014.
2 Appointed a member on 17 January 2014.
3 Appointed a member on 1 September 2014.
4 Appointed a member on 14 April 2014.
Governance
The CVC exercises non-executive responsibility for the
oversight of the promotion and embedding of HSBC
Values and our required global conduct outcomes.
Additionally, the CVC will input as appropriate into the
Group Remuneration Committee on the alignment of
remuneration with conduct. It reports regularly to the
Board on its activities.
How the CVC discharged its responsibilities
During the course of 2014 the CVC received regular
reports and presentations from the Chief Executive,
RBWM, the Chief Executive, CMB, the Global Head
of Regulatory Compliance, the Group Head of
Development, the Head of Group Corporate
Sustainability and the Group Head of Internal Audit.
During the year, other members of senior management
attended CVC meetings including the Chief Executive,
GB&M, the Global Head of Financial Crime Compliance,
the Global Head of Communications, the Global Head
of Anti-Bribery and Corruption and the Global Head of
Marketing.
The Chief Executive, RBWM and the Chief Executive,
Global Commercial Banking provide regular reports
and presentations to the CVC, including an analysis of
customer complaint trends at each meeting. The CVC
also receives regular reports on whistleblowing cases,
the outcomes of internal audits and the Group’s
initiatives being undertaken to deliver against key
values and culture initiatives.
In addition to the scheduled Committee meetings, the
Chairman met regularly with the Group Chairman and
senior executives as required.
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The Committee is additionally responsible for advising
the Board, its committees and executive management
on corporate sustainability policies across the Group
including environmental, social and ethical issues. From
this year, our progress on sustainability policies and
performance is reported in the Strategic Report and
on our website at hsbc.com/sustainability.
We will no longer publish a separate Sustainability
Report as part of a progression towards an integrated
approach to sustainability reporting. This change
reflects best practice in reporting as well as the ongoing
integration of sustainability matters into the strategy
and management of HSBC.
During the year the CVC focused on a number of key
areas, as set out in the table below.
Principal activities and significant issues considered include:
Action taken
Key area
Global approach to conduct The CVC endorsed a global approach to the management of conduct which defines and sets out required
outcomes. It received regular reports from the Global Head of Regulatory Compliance on how conduct is
being managed consistently across the Group to deliver the required outcomes. It also sets out the
programmes and governance to deliver conduct improvements. In developing this approach, Management
has given consideration to strategy, business models and decision making, culture and behaviours,
interactions with customers, the impact of activities in financial markets and governance structures,
oversight frameworks and management information. There is close alignment between this and the work
being done to promote and embed HSBC Values.
Values
Customer experience
Whistleblowing
Employee engagement
The CVC oversees the promotion and embedding of HSBC Values. In 2013, the Group launched a project
to better understand how HSBC Values drive everyday behaviours. This included interviews with
leadership teams and functional specialists, focus groups with line managers and staff, and reviews of
management information and local documentation.
The CVC received regular reports from management on this project and contributed to the subsequent
action plan. It will continue to monitor the implementation of cultural change into 2015.
Customer complaints. The CVC reviewed reports regarding customer experience, complaint trends and
complaint handling. It considered improvements to the quality of complaint handling processes and root
cause analysis.
Sales processes and incentive schemes. The CVC considered the review mechanism established by RBWM
management, the aim of which is to ensure that the RBWM product range is appropriately positioned to
fulfil customers’ needs. The CVC also reviewed the changes implemented to sales processes and sales
incentive schemes in the RBWM and CMB businesses and the effectiveness of new quality assurance
programmes. This will continue into 2015.
The CVC has assumed responsibility for the governance of the Group’s whistleblowing policies and
procedures, including the protection of whistleblowers. This responsibility does not extend to matters
relating to financial reporting and associated auditing matters, which remain the responsibility of the
Group Audit Committee. The CVC reviewed current whistleblowing processes and disclosures and received
reports on an ongoing enhancement programme which takes account of recommendations made by the
UK Parliamentary Commission on Banking Standards, regulatory guidance and emerging industry best
practices.
The CVC monitored employee engagement across the Group and received the results of quarterly
Snapshot engagement surveys which were conducted during 2014. It will continue to monitor these
survey results in 2015, as well as the results of a Group People Survey planned to take place later in the
year.
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Report of the Directors: Corporate Governance (continued)
Internal control
Chairman’s Committee
Role and membership
The Chairman’s Committee has the power to act on
behalf of the Board between scheduled Board meetings
to facilitate ad hoc unforeseen business requiring urgent
Board approval. The Committee meets with such
frequency and at such times as it may determine, the
quorum for meetings is dependent upon the nature of
the business to be transacted, as set out in its terms of
reference.
Philanthropic and Community Investment
Oversight Committee
Role and membership
The Philanthropic and Community Investment Oversight
Committee, established by resolution of the Board in
December 2014, will focus on the Group’s philanthropic
activity, being monetary donations made to charitable
organisations and the contribution of staff time toward
voluntary activities.
The Committee has non-executive responsibility for
the oversight of HSBC’s philanthropic and community
investment activities in support of the Group’s corporate
sustainability objectives.
The Committee will meet for the first time in 2015 and
will meet at least twice each year.
Members
Laura Cha1 (Chairman)
Lord Evans of Weardale1
Sir Malcolm Grant2,4
Ruth Kelly3,4
Stephen Moss3,4
1 Appointed on 5 December 2014.
2 Independent member.
3 Employee member.
4 Appointed on 19 February 2015.
Internal control
Procedures
The Directors are responsible for maintaining and
reviewing the effectiveness of risk management and
internal control systems and for determining the nature
and extent of the significant risks it is willing to take
in achieving its strategic objectives. To meet this
requirement and to discharge its obligations under
the FCA Handbook and PRA Handbook, procedures
have been designed for safeguarding assets against
unauthorised use or disposal; for maintaining proper
accounting records; and for ensuring the reliability and
usefulness of financial information used within the
business or for publication. These procedures can only
provide reasonable but not absolute assurance against
material mis-statement, errors, losses or fraud.
These procedures are designed to provide effective
internal control within HSBC and accord with the
Financial Reporting Council’s guidance for directors
issued in its revised form in 2005. HSBC’s procedures
have been in place throughout the year and up to
23 February 2015, the date of approval of the Annual
Report and Accounts 2014. This guidance was amended
following consultations undertaken by the Financial
Reporting Council in November 2013 and April 2014,
resulting in revised guidance on risk management,
internal control and related financial and business
reporting. The revised guidance applies to companies
with financial years beginning on or after 1 October 2014.
In the case of companies acquired during the year, the
risk management and internal controls in place are being
reviewed against HSBC’s benchmarks and integrated
into HSBC’s processes.
In 2014 the GAC and GRC endorsed the adoption of
the COSO 2013 framework for the monitoring of risk
management and internal control systems to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act of
2002, the UK Corporate Governance Code and the Hong
Kong Corporate Governance Code. Full implementation
of the COSO 2013 framework will be completed in 2015.
HSBC continued to evaluate its internal control over
financial reporting under the Financial Reporting
Council’s Internal Control Revised Guidance for Directors
and the original 1992 Framework for the year ended 31
December 2014.
HSBC’s key risk management and internal control
procedures include the following:
• Group Standards. Functional, operating, financial
reporting and certain management reporting
standards are established by global 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 is delegated within limits set by
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the Board to each relevant Group Managing Director
to manage the day to day affairs of the business or
function for which he or she is accountable.
Delegation of authority from the Board requires
those individuals to maintain a clear and appropriate
apportionment of significant responsibilities and
to oversee the establishment and maintenance
of systems of control that are appropriate to their
business or function. Appointments to the most
senior positions within HSBC requires the approval
of the Board.
• Risk identification and monitoring. Systems and
procedures are in place to identify, control and report
on the major risks facing HSBC (see page 21) including
credit, market, liquidity and funding, capital, financial
management, model, reputational, pension, strategic,
sustainability, operational (including accounting,
tax, legal, regulatory compliance, financial crime
compliance, fiduciary, security and fraud, systems
operations, project and people risk) and insurance
risk. Exposure to these risks is monitored by risk
management committees, asset, liability and capital
management 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 regularly to discuss enterprise-wide risk
management issues. Asset, liability and capital
management issues are monitored by the Group
ALCO, which also reports to the RMM. HSBC’s
operational risk profile and the effective
implementation of the Group’s operational risk
management framework is monitored by the Global
Operational Risk Committee (‘GORC’), 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 2014,
attention was focused on:
− economic outlook and government intervention;
− increased geopolitical risk;
− regulatory developments affecting our business
model and Group profitability;
− regulatory investigations, fines, sanctions
commitments and consent orders and requirements
relating to conduct of business and financial crime
negatively affecting our results and brand;
− dispute risk;
− heightened execution risk;
− people risk;
− third party risk management;
− internet crime and fraud;
− information security risk;
− data management; and
− model risk.
• Strategic plans. Periodic strategic plans are 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 (including Financial Crime Compliance
and Regulatory 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
Global Finance and Global Risk functions that support
expert and rigorous analytical review of financial
reporting complemented by certified reviews by
heads of global businesses, global functions and
certain legal entities.
• Financial reporting. The Group financial reporting
process for preparing the consolidated Annual Report
and Accounts 2014 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 measuring, monitoring, mitigating
and managing their risks and controls. Processes are
in place to ensure weaknesses are escalated to senior
management and addressed, supported by our three
lines of defence model.
• IT operations. Centralised functional control
is exercised over all IT developments and operations.
Common systems are employed for similar business
processes wherever practicable.
• Functional management. Global functional
management is responsible for setting policies,
procedures and standards for the following risks:
credit, market, liquidity and funding, capital, financial
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Report of the Directors: Corporate Governance (continued)
Internal control / Going concern / Employees
management, model, reputational, pension, strategic,
sustainability and operational risk (including accounting,
tax, legal, financial crime compliance, regulatory
compliance, fiduciary, information security, security
and fraud, systems and people risk) and insurance
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 at subsidiary company level
and aggregated for risk concentration analysis on a
Group-wide basis.
• Internal Audit. The establishment and maintenance of
appropriate systems of risk management and internal
control is primarily the responsibility of business
management. The Global Internal Audit function,
which is centrally controlled, provides independent
and objective assurance in respect of the adequacy of
the design and operating effectiveness of the Group’s
framework of risk management, control and
governance processes across the Group, focusing on
the areas of greatest risk to HSBC using a risk-based
approach. The Group Head of Internal Audit reports
to the Chairman of the GAC and administratively to
the Group Chief Executive.
• Internal Audit recommendations. Executive
management is responsible for ensuring that
recommendations made by the Global Internal Audit
function are implemented within an appropriate and
agreed timetable. Confirmation to this effect must be
provided to Global 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 Values. HSBC’s reputation depends upon the
way in which it conducts its business and may be
affected by the way in which clients, to which
it provides financial services, conduct their business
or use financial products and services.
Role of GAC and GRC
On behalf of the Board, the GAC has responsibility for
oversight of risk management and internal controls over
financial reporting and the GRC has responsibility for
oversight of risk management and internal controls,
other than over financial reporting.
During the year, the GRC and the GAC have kept under
review the effectiveness of this system of internal control
and have reported regularly to the Board. In carrying
out their reviews, the GRC and the GAC receive regular
business and operational risk assessments, regular
reports from the Group Chief Risk Officer and the Group
Head of 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; half yearly-confirmations to the GAC
from audit and risk committees of principal subsidiary
companies regarding whether their financial statements
have been prepared in accordance with Group policies,
present fairly the state of affairs of the relevant principal
subsidiary, are prepared on a going concern basis; and
confirm if 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 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.
Effectiveness of internal controls
The Directors, through the GRC and the GAC, have
conducted an annual review of the effectiveness of our
system of risk management and 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 annual review of the effectiveness of our
system of risk management and internal control was
conducted with reference to COSO principles functioning
as evidenced by specified entity level controls. A report
on the effectiveness of each entity level control and
regular risk and control reporting was escalated to the
GRC and GAC from certain key management committees.
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
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.
HSBC’s principal activities, business and operating
models, strategic direction and top and emerging risks
are described in the ‘Strategic Report’; a financial
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summary, including a review of the consolidated income
statement and consolidated balance sheet, is provided in
the ‘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 2014 we had a total workforce of
266,000 full-time and part-time employees compared
with 263,000 at the end of 2013 and 270,000 at the end
of 2012. Our main centres of employment are the UK
with approximately 48,000 employees, India 32,000,
Hong Kong 30,000, Brazil 21,000, mainland China 21,000,
Mexico 17,000, the US 15,000 and France 9,000.
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.
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.
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 objective
criteria. 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.
Employee 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 2014, 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.
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
HSBC is committed to providing a safe and healthy
environment for our employees, customers and visitors
and pro-actively managing the health and safety risks
associated with our business. Our objectives include
compliance with health and safety laws in the countries
in which we operate, identifying, removing, reducing or
controlling material health and safety risks, reducing the
likelihood of fires, dangerous occurrences and accidents
to employees, customers and visitors.
The Corporate Real Estate department within HSBC has
overall responsibility for health and safety and has set
global health and safety policies and standards for use
wherever in the world HSBC operates. Achieving these
policies and standards is the responsibility of the country
Chief Operating Officer.
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 biannual security reviews of all Group
critical buildings to ensure measures to protect our staff,
buildings, assets and information are appropriate to the
level of threat.
HSBC remains committed to the effective management
of health and safety and protecting employees,
customers and visitors to HSBC.
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Report of the Directors: Corporate Governance (continued)
Employees / Other disclosures / Annual General Meeting
Employee health and safety
Number of employee workplace
fatalities
Accidents involving more than
3 days’ absence per 100,000
employees
All accident rate per 100,000
employees
2014
2013
2012
21
–
–
96
101
58
3882
355
375
1 Non-HSBC staff working on HSBC related activity.
2 Reflects higher reporting rate.
Remuneration policy
The quality and commitment of our employees
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 both short-term and sustainable performance.
Our reward strategy aims to reward 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 300.
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
2014 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/investor-relations/governance/
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 321.
Note 6 on the Financial Statements gives details on share-based
payments, including discretionary awards of shares granted
under HSBC share plans.
All-employee share plans
All-employee share option plans have operated within
the Group and eligible employees have been granted
options to acquire HSBC Holdings ordinary shares.
Options under the plans are usually exercisable after
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 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
22 September 2014, the day before options were
granted in 2014, was £6.58. There will be no further
grants under the HSBC Holdings Savings-Related Share
Option Plan: International. A new international all-
employee share purchase plan was launched in the third
quarter of 2013. The all-employee share option plans will
terminate on 27 May 2015 unless the Directors resolve
to terminate the plans at an earlier date.
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HSBC Holdings All-employee Share Option Plans
Dates of awards
from
to
Exercise price
from
to
Exercisable
from
to
At
1 Jan 2014
Granted
during year
Exercised1
during year
Lapsed
during year
At
31 Dec 2014
HSBC Holdings ordinary shares
Savings-Related Share Option Plan
30 Apr
2008
23 Sep
2014
(£)
3.3116
(£)
5.9397
1 Aug
2013
1 May
2020
53,950,886
28,688,703
25,097,425
3,798,209
53,743,955
Savings-Related Share Option Plan: International
30 Apr
2008
30 Apr
2008
30 Apr
2008
30 Apr
2008
24 Apr
2012
(£)
3.3116
(£)
5.9397
24 Apr
2012
(US$)
4.8876
(US$)
11.8824
24 Apr
2012
(€)
3.6361
(€)
7.5571
24 Apr
2012
(HK$)
37.8797
(HK$)
92.5881
1 Aug
2013
1 Aug
2013
1 Aug
2013
1 Aug
2013
1 Feb
2018
1 Feb
2018
1 Feb
2018
1 Feb
2018
10,022,450
3,997,069
1,574,652
24,215,341
–
–
–
–
5,625,183
683,208
3,714,059
1,528,838
600,903
1,867,328
935,177
67,973
571,502
17,206,998
539,561
6,468,782
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £6.36.
Discretionary Share Option Plans
There have been no grants of discretionary share options under employee share plans since 30 September 2005.
Dates of awards
Exercise price (£)
Exercisable
from
to
HSBC Holdings Group Share Option Plan1,2
from
to
from
to
30 Apr
2004
20 Apr
2005
HSBC Share Plan1
30 Sep
2005
7.2181
7.5379
30 Apr
2007
20 Apr
2015
7.9911
30 Sep
2008
30 Sep
2015
HSBC Holdings ordinary shares
At
1 Jan 2014
Exercised
during year
Lapsed
during year
At
31 Dec 2014
55,025,868
1,434
48,650,452
6,373,982
86,046
–
–
86,046
1 The HSBC Holdings Group Share Option Plan expired on 26 May 2005 and the HSBC Share Plan expired on 27 May 2011. 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 £6.09.
Other disclosures
Further information about share capital, Directors’
interests, dividends and shareholders, and employee
diversity is set out in the Appendix to this section on
page 294.
Annual General Meeting
All Directors listed on pages 264 to 268 attended the
Annual General Meeting in 2014, with the exception
of Heidi Miller and Phillip Ameen who were appointed
Directors on 1 September 2014 and 1 January 2015
respectively.
Our Annual General Meeting in 2015 will be held at
the Queen Elizabeth II Conference Centre, Broad
Sanctuary, Westminster, London SW1P 3EE on Friday
24 April 2015 at 11.00am.
An informal meeting of shareholders will be held at
1 Queen’s Road Central, Hong Kong on Monday 20 April
2015 at 4.30pm.
A live webcast of the Annual General Meeting will
be available on www.hsbc.com. A recording of the
proceedings will be available shortly after the conclusion
of the Annual General Meeting until 22 May 2015 on
www.hsbc.com.
On behalf of the Board
D J Flint
Group Chairman
HSBC Holdings plc
Registered number 617987
23 February 2015
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Report of the Directors: Corporate Governance (continued)
Appendix to Corporate Governance
Appendix to Corporate Governance – Other disclosures
Share capital
Issued share capital
The nominal value of HSBC Holdings’ issued share capital paid up at 31 December 2014 was US$9,608,951,630 divided
into 19,217,874,260 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 HSBC Holdings’ total issued share capital paid up at 31 December 2014
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.
Further information on the policy adopted by the Board for paying interim dividends on the ordinary shares can be found on page 458.
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 ‘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 23 February 2015 the
relevant period determined by the Board is four consecutive dividend payment dates. Whenever holders of the dollar
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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 23 February 2015. The dividend is paid at the rate of US$15.50 per quarter at the sole and absolute discretion
of the Board.
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 there with 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 23 February 2015, 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 23 February 2015,
HSBC Holdings may redeem such shares in whole at any time on or after 16 December 2010, subject to the prior consent
of the PRA.
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 23 February 2015 carries the
same rights and obligations as the dollar preference shares in issue at 23 February 2015 to the extent described in the
section above save as follows:
1 the holder of the sterling preference share is not entitled to attend or vote at general meetings;
2 the sterling preference share may be redeemed in whole on any date as may be determined by the Board; and
3 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 23 February 2015. 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.
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Report of the Directors: Corporate Governance (continued)
Appendix to Corporate Governance
Share capital during 2014
The following events occurred during the year in relation to the ordinary share capital of HSBC Holdings:
Scrip dividends
Issued in lieu of
Fourth interim dividend for 2013
First interim dividend for 2014
Second interim dividend for 2014
Third interim dividend for 2014
All-Employee share plans
HSBC Holdings
ordinary shares issued
on
number
Aggregate
nominal value
US$
30 April 2014
10 July 2014
9 October 2014
10 December 2014
184,047,509
27,302,240
34,787,645
22,338,589
92,023,755
13,651,120
17,393,823
11,169,295
Market value per share
US$
9.9254
10.3980
10.6850
10.1178
£
5.9788
6.1996
6.4478
6.2750
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 24,000 applications from HSBC employees
in the UK on 23 September 2014
Number
Aggregate
nominal value
US$
30,722,608
17,206,998
1,528,838
935,177
5,689,854
15,361,304
8,603,499
764,419
467,589
2,844,927
£
HK$
US$
€
28,688,703
14,344,352
Exercise price
from
3.3116
37.8797
4.8876
3.6361
to
5.9397
92.5881
11.8824
7.5571
HSBC International Employee Share Purchase Plan
6,470
3,235
Plan d’Epargne
HSBC ordinary shares issued for the benefit of non-UK
resident employees of HSBC France and its subsidiaries
1,763,449
881,725
£
€
5.9290
6.5770
6.7073
Discretionary share incentive plans
Options exercised under:
The HSBC Holdings Group Share Option Plan
HSBC share plans
Vesting of awards under the HSBC Share Plan and
HSBC Share Plan 2011
Authorities to allot and to purchase shares
HSBC Holdings
ordinary shares
issued
Aggregate
nominal value
US$
Exercise price
from (£)
to (£)
Options
lapsed
1,434
717
7.2181
7.5379
48,650,452
HSBC Holdings
ordinary shares
issued
Aggregate nominal
value
US$
Market value per share
from (£)
to (£)
67,226,264
33,613,132
5.9180
6.6040
At the Annual General Meeting in 2014, shareholders renewed the general authority for the Directors to allot new shares
up to 12,576,146,960 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 943,211,022 ordinary shares wholly for cash to persons
other than existing shareholders. Shareholders also renewed the authority for the Directors to make market purchases
of up to 1,886,422,044 ordinary shares. The Directors have not exercised this authority.
In addition, shareholders gave authority for the Directors to grant rights to subscribe for, or to convert any security into
no more than 4,500,000,000 ordinary shares in relation to any issue by HSBC Holdings or any member of the Group of
contingent convertible securities that automatically convert into or are exchanged for ordinary shares in HSBC Holdings in
prescribed circumstances. Further details about the issue of contingent convertible securities can be found in Note 35 on
the Financial Statements.
Other than as described in the table above headed ‘Share capital during 2014’, the Directors did not allot any shares
during 2014.
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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. Pursuant to Chapter 6 of the UK
Companies Act 2006 no shares are currently held in treasury.
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 2014 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
HSBC Holdings ordinary shares
Safra Catz3
Lord Evans of Weardale
Joachim Faber
Rona Fairhead
Douglas Flint
Stuart Gulliver
Sam Laidlaw
John Lipsky3
Rachel Lomax
Iain Mackay
Heidi Miller3
Marc Moses
Sir Simon Robertson
Jonathan Symonds
HSBC Bank 2.875% Notes 2015
Joachim Faber4
At
1 January
2014
–
1,495
10,605
21,858
392,664
2,730,477
35,123
15,525
–
65,130
–
400,753
9,912
–
Beneficial
owner
20,045
5,519
24,105
400,748
2,434,303
35,352
15,820
15,500
79,933
3,575
480,423
22,981
15,940
At 31 December 2014
Child
under 18
or spouse
Jointly
with another
person
Trustee
–
–
–
–
–
176,885
–
–
–
–
–
–
–
4,613
–
–
–
76,524
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,4162
–
–
–
–
–
–
–
Total
interests1
20,045
5,519
24,105
76,524
400,748
2,611,188
36,768
15,820
15,500
79,933
3,575
480,423
22,981
20,553
RMBm
RMBm
RMBm
RMBm
RMBm
RMBm
5.1
–
–
–
–
5.1
1 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 Scheme interests in the Directors’ Remuneration Report on page 320. At
31 December 2014, 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: Douglas Flint – 405,683; Stuart Gulliver – 5,175,003; Marc Moses – 1,775,461;
and Iain Mackay – 1,086,284. Each Director’s total interests represents less than 0.03% of the shares in issue.
2 Non-beneficial.
3 Safra Catz has an interest in 4,009, John Lipsky has an interest in 3,164 and Heidi Miller has an interest in 715 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 Non-beneficial interest in renminbi (‘RMB’) 1.2m 2.875% Notes 2015.
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
Douglas Flint (beneficial owner)
251
1 The acquisition of shares in the HSBC Holdings UK Share Incentive Plan through regular monthly contributions.
There have been no other changes in the share and loan capital interests of the Directors from 31 December 2014 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 2014, non-executive Directors and senior management (being executive Directors and Group Managing
Directors of HSBC Holdings) held, in aggregate, beneficial interests in 17,531,530 HSBC Holdings ordinary shares (0.09% of
the issued ordinary shares).
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Report of the Directors: Corporate Governance (continued)
Appendix to Corporate Governance
At 31 December 2014, executive Directors and senior management held, in aggregate, options to subscribe for 28,288
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 2015 and 2020 at prices ranging from £4.4621 to £5.1887 per
ordinary share.
Dividends and shareholders
Dividends for 2014
First, second and third interim dividends for 2014, each of US$0.10 per ordinary share, were paid on 10 July 2014,
9 October 2014 and 10 December 2014 respectively. Note 9 on the Financial Statements gives more information on the
dividends declared in 2014. On 23 February 2015, the Directors declared a fourth interim dividend for 2014 of US$0.20
per ordinary share in lieu of a final dividend, which will be payable on 30 April 2015 in cash in US dollars, or in sterling or
Hong Kong dollars at exchange rates to be determined on 20 April 2015, with a scrip dividend alternative. As the fourth
interim dividend for 2014 was declared after 31 December 2014 it has not been included in the balance sheet of HSBC as
a debt. The reserves available for distribution at 31 December 2014 were US$48,883m.
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 17 March, 16 June, 15 September and
15 December 2014.
Dividends for 2015
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 9 February 2015 for payment on 16 March 2015.
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 Strategic Report 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 HSBC Holdings (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 2014, 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 FCA Disclosure Rules and Transparency Rules:
• Legal & General Group Plc gave notice on 10 July 2013 that on 9 July 2013 its holding of HSBC Holdings ordinary shares
fell below 3.00% 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 2014, 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 21 November 2014 that on 18 November 2014 it had the following interests in
HSBC Holdings ordinary shares: a long position of 937,591,714 shares; a short position of 99,085,113 shares; and a
HSBC HOLDINGS PLC
298
lending pool of 527,117,024 shares, each representing 4.88%, 0.51% and 2.74%, respectively, of the ordinary shares
in issue at that date; and
• BlackRock, Inc. gave notice on 28 October 2014 that on 24 October 2014 it had the following interests in HSBC Holdings
ordinary shares: a long position of 1,238,135,870 shares and a short position of 4,572,291 shares, each representing
6.45% and 0.02%, 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 2014 and up to the date of this report.
Dealings in HSBC Holdings listed securities
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 HSBC Holdings nor any of its subsidiaries have purchased, sold
or redeemed any of its securities listed on The Stock Exchange of Hong Kong Limited during the year ended 31 December
2014.
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Directors’ Remuneration Report
Annual Statement
Directors’ Remuneration
Report
Page
App1
Annual Statement from the Group
Remuneration Committee Chairman
Our remuneration strategy and key decisions
for 2014
Major decisions on Directors’ remuneration
Future regulatory change
Directors’ remuneration policy
Downward override policy
Differences in policy applied to employees
generally
Material factors taken into account when
setting pay policy
300
300
302
302
303
304
304
305
Adjustments, malus and clawback
306
Remuneration policy – non-executive Directors 306
Service contracts
306
307
307
307
309
311
313
314
315
318
318
318
318
319
319
320
322
322
323
Other directorships
Annual report on remuneration
Remuneration Committee
Group variable pay pool
Single figure of remuneration
Remuneration scenarios and outcomes
Awards under the GPSP
Determining executive Directors’ annual
performance
Total pension entitlements
Payments to past Directors
Exit payments made in year
Scheme interests awarded during 2014
Summary of performance
CEO remuneration
Directors’ interests in shares
Shareholder context
Implementation of remuneration policy in
2015
Annual bonus scorecards
Additional disclosures
Employee compensation and benefits
Emoluments of senior management
Emoluments of five highest paid employees
Remuneration of eight highest paid senior
executives
Pillar 3 remuneration disclosures
1 Appendix to Directors’ Remuneration Report.
324
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325
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Annual Statement from
the Group Remuneration
Committee Chairman
Dear Shareholder,
I am very pleased to present the Remuneration Report
for 2014. In this report we provide details of the HSBC
remuneration policy, what we paid our Directors in 2014
and why.
This is the first year in which our remuneration policy,
which was approved at last year’s Annual General
Meeting, has been implemented. I hope this report
will give you an understanding of how the Group
Remuneration Committee (the ‘Committee’)
implemented the policy in 2014 and, more importantly,
the link between the performance and pay of our
executives and the long-term interests of our
shareholders.
The report is divided into three sections: my letter to
you as Chairman of the Committee, a summary of our
remuneration policy, and an annual report on what we
paid our Directors for the year ended 31 December 2014.
Additional remuneration-related disclosures are
provided in the appendix to this report.
Our remuneration strategy and key
decisions for 2014
Our remuneration strategy is designed to reward
competitively the achievement of long-term sustainable
performance and attract and motivate the very best
people who are committed to a long-term career with
the Group in the long-term interests of our shareholders.
The Committee believes that it is important that what
we pay our people is aligned to our business strategy.
Performance should be judged not only on what is
achieved over the short and long-term but also,
importantly, on how it is achieved, as we believe the
latter contributes to the long-term sustainability of the
business.
In 2014, new regulatory requirements were introduced
under the EU’s Capital Requirements Directive (‘CRD’) IV.
The consequential changes to the remuneration rules
of the Prudential Regulation Authority (‘PRA’) have
influenced how we pay our senior executives and those
of our employees identified by the PRA as having a
material impact on the institution’s risk profile, being
what are termed Material Risk Takers (‘MRTs’).
From 2014, CRD IV introduced a cap on variable pay
requiring banks in the EU, including HSBC, to restrict
variable pay awards of MRTs, if approved by
shareholders, to 200% of fixed pay. This authority was
sought and given by shareholders at last year’s Annual
General Meeting.
The CRD IV requirements present challenges for HSBC
in ensuring that the total compensation package for our
employees in all of the markets in which we operate
HSBC HOLDINGS PLC
300
around the world remains competitive, in particular,
relative to other banks not subject to these requirements.
As a consequence, we introduced fixed pay allowances
for our executive Directors and other MRTs to rebalance
the fixed and variable components of their total
compensation. The Committee believes that the
introduction of fixed pay allowances as a component
of remuneration was essential to ensure the total
compensation package for our employees remains
competitive. HSBC must continue to retain and attract
talent in key non-EU markets where our international
peers and their domestic competitors do not have to
comply with the CRD IV pay cap. As required by CRD IV,
fixed pay allowances are not linked to the achievement
of any performance conditions and we comply with the
current guidelines which have been issued by the
regulators. Our executive Directors and senior executives
receive this allowance in shares which are subject to a
retention period in order to maintain a close alignment
with the long-term interests of our shareholders.
In July 2014, the PRA introduced a new requirement for
firms to ensure that clawback (i.e. a firm’s ability to
recoup paid and/or vested awards) can be applied to
variable pay awards granted on or after 1 January 2015
for a period of at least seven years from the date of
award. This requirement is in addition to a firm’s ability
Overall performance summary/business context
to apply malus (i.e. reduction or cancellation of unvested
awards prior to the vesting of such awards) in certain
circumstances.
To comply with the new PRA requirement, the
Committee has established a clawback policy which
will apply to all awards we grant to MRTs on or after
1 January 2015. More details of the circumstances in
which ‘malus’ and ‘clawback’ can be applied is provided
later in this report.
The Committee has also adopted a policy enabling it to
exercise its discretion to reduce variable pay awards for
executive Directors and other senior executives when it
believes there has been insufficient yearly progress in
developing an effective anti-money laundering and
sanctions compliance programme.
In 2014, there were a number of legal and regulatory
costs for legacy events, including penalties arising from
the investigation of certain behaviour within the foreign
exchange markets. These were fully reflected in the
level of profits used by the Committee to determine the
incentive pool, and resulted in a US$600m adjustment to
the pool. Additionally, there were a number of actions
taken, including discretion applied to reduce variable
pay proposed for 2014 for Group employees by US$22m,
including members of senior management. More details
are provided later in this report.
HSBC Holdings plc
•
In 2014, the Group maintained a strong balance sheet and robust capital position. Excluding the effect of currency translation, loans
and advances grew by US$28bn and customer accounts increased by US$47bn, with a ratio of customer advances to customer
accounts of 72%.
• Profit before tax fell on a reported basis compared with 2013, primarily reflecting lower gains from disposals and reclassifications in
2014 and the effect of other significant items, which included provisions for fines, settlements and UK customer redress of US$3.7bn.
On an adjusted basis, excluding the effect of significant items and currency translation, profit before tax was broadly unchanged from
2013.
• Adjusted profit before tax was up in three out of five regions.
• CMB reported a record profit in 2014.
• Revenue on an adjusted basis was broadly unchanged from 2013. This reflected growth in CMB offset by a fall in revenue in GB&M,
together with lower revenue in RBWM and GPB reflecting the remodelling of these businesses.
• Net interest margin for the Group stabilised during 2014.
• Loan impairment charges were lower, reflecting the changes to our portfolio since 2011.
• The reported cost efficiency ratio increased from 59.6% in 2013 to 67.3% in 2014, and on an adjusted basis it increased to 61.1%
in 2014 from 57.7%, principally reflecting higher operating expenses due to an increase in Regulatory Programmes and Compliance
costs, inflationary pressures, continued investment in strategic initiatives, and a rise in the bank levy. These factors were partly offset
by sustainable cost savings in the year of US$1.3bn.
• The return on average ordinary shareholders’ equity was 7.3%, down from 9.2% in 2013, primarily reflecting lower gains from
disposals and reclassifications, together with higher operating expenses, including provisions for fines, settlements and UK customer
redress.
• Dividends in respect of 2014 increased from US$0.49 per ordinary share in 2013 to US$0.50 per ordinary share.
• Our capital position strengthened in 2014 with our CRD IV transitional CET1 ratio increasing to 10.9% from 10.8% in 2013.
RBWM
• Lower reported profit before tax was principally driven by lower
revenue from the continued run-off of our US CML portfolio and
higher operating expenses in our Principal RBWM business.
CMB
• CMB reported an increase in profit before tax reflecting higher
revenue performance in our home markets of Hong Kong and
the UK, together with lower LICs, mainly in Europe and Latin
America.
GB&M
• GB&M reported lower profit before tax, mainly reflecting an
GPB
• Lower profit before tax on an adjusted basis, mainly reflected a
increase in significant items, notably settlements and provisions
in connection with foreign exchange investigations, together
with lower revenue in part reflecting an adjustment following the
introduction of the FFVA and lower Foreign Exchange revenue.
managed reduction in client assets as we continued to reposition
the business. Despite a reduction in client assets, we attracted
positive net new money of US$14bn in areas that we have
targeted for growth.
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Directors’ Remuneration Report (continued)
Annual Statement / Directors’ remuneration policy
Major decisions on Directors’ remuneration
The Group Chief Risk Officer, Marc Moses, was
appointed an executive Director with effect from
1 January 2014, reflecting the criticality of the Risk
function to HSBC, his leadership of that function and his
personal contribution to the Group. His remuneration
has therefore been brought into line with the executive
Directors’ remuneration policy.
Following consultation with shareholders, the Group
Chairman, Douglas Flint, became eligible under the
policy to receive a one-time award under the Group
Performance Share Plan (‘GPSP’). The Committee has
subsequently decided that it will not grant a GPSP award
to the Group Chairman for 2014. Instead, it has decided
to review the base salary of the Group Chairman as part
of any future policy change that is proposed to
shareholders.
The Committee has concluded that there will be no
increase to the base salary of executive Directors in
2015. In light of the feedback received from some of our
shareholders, the Committee will review the level of
cash pension allowances for executive Directors as part
of any future policy change.
The Committee has exercised its discretion to reduce
the executive Directors’ overall variable pay from that
which would be justified simply from application of the
scorecard weightings. This adjustment is justified in the
context of the overall financial results and the legal,
compliance and regulatory issues impacting the Group,
particularly those related to historical events, including
but not limited to foreign exchange. Further details are
set out in this report.
Future regulatory change
Looking ahead to 2015/2016, further significant
regulatory changes to executive remuneration are
expected from the recent PRA and Financial Conduct
Authority consultation on ‘Strengthening the alignment
of risk and reward: new remuneration rules’. In addition,
the European Banking Authority is expected to issue for
consultation remuneration guidelines which include
criteria under which allowances can be treated as fixed
remuneration.
The number and volume of regulatory changes that
have been and are being proposed in connection with
remuneration are, in the Committee’s view, excessive
and are hindering our ability to communicate with any
certainty to our current employees and potential
employees the remuneration policies and structures
that would apply to them. Regulatory uncertainty and
complexity is contributing to a general misunderstanding
about how our remuneration policies work and the
impact of those policies on employee performance.
The Committee will consider the effect of these various
changes as well as shareholder feedback on our policy.
In light of these factors, it is possible that we will need
to make changes to our remuneration policy in 2016.
Sir Simon Robertson
Chairman of the Group Remuneration Committee
23 February 2015
HSBC HOLDINGS PLC
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Directors’ remuneration
policy
The following section sets out a summary of HSBC’s
remuneration policy for our executive and non-executive
Directors approved at the Annual General Meeting on
23 May 2014. The full policy is available in last year’s
Directors’ Remuneration Report in the Annual Report
and Accounts 2013, a copy of which can be obtained by
visiting the following website: http://www.hsbc.com/
investor-relations/financial-and-regulatory-reports.
The quality and long-term commitment of all of
our employees is fundamental to our success. We
therefore aim to attract, retain and motivate the very best
people who are committed to maintaining a long-term
Remuneration policy – executive Directors
career with the Group, and who will perform their role in
the long-term interests of shareholders.
The key elements of our remuneration policy, fixed
pay, benefits and variable pay consisting of the annual
incentive and GPSP are shown below. These elements
support the achievement of our strategic objectives
through balancing reward for both short-term and long-
term sustainable performance. Our strategy is designed
to reward only success, and to align employees’
remuneration with our risk framework and risk
outcomes. For our most senior employees, the greater
part of their reward is deferred and thereby subject
to malus, that is, unvested awards can be reduced or
cancelled if warranted by events. In addition, as outlined
in the Chairman’s statement, the variable pay awards
made from 1 January 2015 will be subject to clawback.
Base salary
• Paid in cash on a
monthly basis.
• Benchmarked on an
annual basis against
relevant comparator
group.
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• Base salary increases for
each executive Director
will not exceed more
than 15% of base salary
levels in our 2013
Directors’ Remuneration
Report during the term
of this policy.
Pension
• Cash allowance in lieu
of pension of up to
50% of base salary.
• To attract and retain
key talent by being
market competitive.
Fixed pay allowance
• Granted in immediately
vested shares.
• Shares issued are subject
to a retention period
(20% released in the March
immediately following the
end of the financial year,
80% released after a period
of 5 years from the date of
the first release).
• Reflects the role, skills, and
experience of the Directors
and the maintenance of a
competitive total
remuneration package for
the retention of key talent.
• Not subject to malus or
clawback.
Benefits
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B
• To take account of local market
practice and include the provision
of medical insurance, income
protection insurance, health
assessment, life assurance, club
membership, tax assistance, use of
company car (including any tax due
on the benefit) and travel assistance.
• Stuart Gulliver is also provided with
an accommodation and car benefit
in Hong Kong. Any tax due on this
benefit is borne by HSBC.
• Additional benefits may also be
provided where an executive is
relocated or spends a substantial
proportion of their time in more
than one jurisdiction based on
business needs.
Purpose and link to strategy Annual incentive
• To drive and reward
• Delivered in the form of cash and shares.
performance consistent with
strategy and align to
shareholder interests.
• Adherence to HSBC Values is a
prerequisite to be considered
for any variable pay.
• Deferral provides an incentive
for a longer-term commitment
and the ability to apply malus.
• Performance targets are set
taking into account the
economic environment, the
Group’s strategic priorities
and risk appetite.
• Maximum is 200% of fixed
pay.
A minimum of 50% of awards will be made
in shares.
• Measured against an annual scorecard,
based on targets set for financial and non-
financial measures. The scorecards vary by
individual.
• A minimum of 60% of the total award will
be deferred and vest over a period of three
years or such other period as determined
by the Committee.
• Maximum is 67% of fixed pay (1/3 of
maximum variable pay opportunity of
200% of fixed pay).
• The Committee can exercise its discretion
to vary the award if it considers that it
does not reflect the overall position and
performance of the Company.
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• Delivered in shares.
• Award levels are determined by considering
performance up to the end of the financial
year against enduring performance
measures set out in the long-term
performance scorecard.
• The award vests after a five-year period. On
vesting, the shares must be retained for the
duration of the participant’s employment.
• For leavers not deemed to be good leavers,
the unvested awards will be cancelled, and
the vested shares will be released in three
equal instalments on or around each
anniversary of the date of cessation of
employment.
• Maximum is 133% of fixed pay (2/3 of the
maximum total variable pay opportunity
of 200% of fixed pay).
• The Committee can exercise its discretion to
vary the award if it considers that it does not
reflect the overall position and performance
of the Company.
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Directors’ Remuneration Report (continued)
Directors’ remuneration policy
The following chart provides an overview of the release
profile of target performance total compensation for the
Group Chief Executive Officer based on the above policy.
Release profile for target total compensation
100%
66%
47%
44%
41%
38%
26%
26%
3%
3%
12%
3%
34%
GPSP1
19%
Fixed pay allowance
Annual incentive
Fixed pay allowance
Pension
Base salary
2014
2015
2016
2017
2018
2019
2020
Later of
2020 or
retirement
1 Shares arising from GPSP awards must be retained and cannot be sold for the duration of the participant’s employment. For leavers deemed
to be good leavers, the retention period applicable to their vested shares will end upon cessation of employment. For leavers not deemed to
be good leavers, their vested shares will be released in three equal instalments on or around each anniversary of the date of cessation of
employment.
The Committee will apply the above policy for executive
Directors in 2015. In the event that regulatory
requirements require changes to be made to the terms
of any fixed or variable remuneration outside this policy,
the Committee will make the changes necessary to
ensure regulatory compliance.
Downward override policy
Based on the recommendations received from the
independent monitor, the Committee introduced
a downward override policy in 2014, to set the
circumstances in which it will make a downward
adjustment to any variable pay determination for
the executive Directors and other senior executives.
Under this policy, the criteria used to determine the
downward adjustment will include:
• insufficient yearly progress in developing an effective
AML and sanctions compliance programme; or
• non-compliance with the US DPA and other relevant
orders.
The Committee will factor in the Financial System
Vulnerabilities Committee’s recommendations in
deciding the application and degree of any such
downward override to reduce variable pay awards.
Differences in policy applied to employees
generally
The mix of fixed and variable pay granted to an
employee is commensurate with the individual’s role
and experience and local market factors.
Fixed pay allowances are granted to MRTs or individuals
identified as having a material impact on the institution’s
risk profile based on the qualitative and quantitative
criteria set out in the EU Regulatory Technical Standard
604/2014. The fixed pay allowance can also be granted
to such other individuals where it is considered a
rebalancing of the fixed and variable pay components
of their remuneration would be appropriate.
The criteria used for determining fixed pay allowances
include the role undertaken, skills, experience, technical
expertise, market compensation for the role and other
remuneration that the employee may receive in the
year.
Group Managing Directors and Group General Managers
will receive the fixed pay allowance in shares with the
same release profile as the executive Directors. All other
employees will receive the fixed pay allowance in cash
when it is below a specified threshold. Where the fixed
pay allowance is above the specified threshold, all of it
will be received in shares that vest immediately. Any
shares delivered (net of shares sold to cover any income
HSBC HOLDINGS PLC
304
tax and social security) as part of the fixed pay allowance
would be subject to a retention period. 40% of the
shares are released in March following the end of the
relevant financial year in which the shares were granted.
The remaining 60% are released in three equal annual
tranches on or around each anniversary of the initial
release.
Elements of remuneration
Group Managing Directors participate in both the annual
incentive and the GPSP. Group General Managers
participate in the annual incentive and may receive other
long-term awards. Other employees across the Group
are eligible to participate in annual incentive
arrangements.
Base salary
Fixed pay allowance
Annual incentive
GPSP/long-term awards
Benefits and pension
Executive
Directors
Group
Managing
Directors
Group
General
Managers
Other
MRTs
–
Other
Employees
–
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.
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Funding
• Annual incentive and GPSP awards are funded from a single annual variable pay pool.
• Funding of the Group’s annual variable pay pool is determined in the context of Group profitability, capital
strength, shareholder returns, the distribution of profits between capital, dividends and variable pay, risk
appetite statement, market competitiveness, and overall affordability.
• Details of the calculation of this year’s variable pay pool can be found on page 309.
Pay and employment
conditions within
the Group
• HSBC considers pay across the Group when determining remuneration levels for its executive Directors. In
considering individual awards, a comparison of the pay and employment conditions of our employees and
senior executives is considered by the Committee.
• The Committee invites the Head of Group Performance and Reward to present proposals for remuneration
for the wider employee population and to consult on the extent to which the different elements of
remuneration are provided to other employees.
• Feedback from employee engagement surveys and HSBC Exchange meetings are taken into account in
determining the Group’s remuneration policy.
Regulation
• There is still a wide divergence in local regulations governing remuneration structures globally. This
presents significant challenges to HSBC, which operates worldwide.
•
In order to deliver long-term sustainable performance, it is important to have market-competitive
remuneration which is broadly equivalent across geographical boundaries in order to attract, motivate and
retain talented and committed employees around the world.
• We aim to ensure that our remuneration policy is aligned with regulatory practices and the interests of
shareholders.
• HSBC is fully compliant with the FSB, FCA, PRA and HKMA guidance and rules on remuneration which apply
at the date of this report.
Comparator group
• The Committee considers market data for executive Directors’ remuneration packages from a defined
remuneration comparator group.
• This group consists of ten global financial services companies, namely Australia and New Zealand Banking
Group Limited (‘ANZ’), 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. ANZ is an additional firm added to the group as part of the Committee’s 2014 review.
• The Committee can also review other companies where relevant in determining the remuneration policy.
• The Chairman of the Committee, the Head of Group Performance and Reward and the Group Company
Secretary meet with key institutional shareholders and other representative bodies. We consider these
types of meetings important to gather views on our current and developing remuneration practices to
ensure that our reward strategy continues to be aligned with the long-term interests of our shareholders.
Shareholder views
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Directors’ Remuneration Report (continued)
Directors’ remuneration policy / Annual report on remuneration
Adjustment, malus and clawback
In order to reward genuine performance, individual
awards are made on the basis of a risk-adjusted view
of both financial and non-financial performance. The
Committee has exclusive discretion to apply the malus
and clawback policies that it has adopted, enabling it to
take the following actions, taking into consideration an
individual’s proximity to, and responsibility for, the event
in question. Where practicable, an adjustment will be
made to current year variable pay, before the application
of malus, then clawback.
This policy is in line with the PRA regulatory
requirements.
Type of
action
Adjustment
Type of variable pay
award affected
Current year variable
pay
Circumstances where it may apply (including, but not limited to):
• Detrimental conduct or conduct which brings the business into disrepute, such as in 2014
relating to the investigation of certain behaviour within the Foreign Exchange markets.
•
Involvement in Group-wide events resulting in significant operational losses, including
events which have caused or have the potential to cause significant harm to HSBC.
• Non-compliance with HSBC Values and other mandatory requirements.
• For specified individuals, insufficient yearly progress in developing an effective AML and
sanctions compliance programme or non-compliance with the DPA and other relevant
orders.
Malus
Unvested deferred
awards granted in prior
years
• Detrimental conduct or conduct which brings the business into disrepute.
• Past performance being materially worse than originally reported.
• Restatement, correction or amendment of any financial statements.
•
Improper or inadequate risk management.
Clawback1
Vested or paid awards • Participation in or responsibility for conduct which results in significant losses.
• Failing to meet appropriate standards of fitness and propriety.
• Reasonable evidence of misconduct or material error that would justify, or would have
justified, summary termination of a contract of employment.
• HSBC or a business unit suffers a material failure of risk management within the context
of Group risk management standards, policies and procedures.
1 Clawback is only applicable to variable pay awards granted to MRTs on or after 1 January 2015. These include, but are not limited to, the awards
made in relation to the 2014 performance year.
Remuneration policy – non-executive
Directors
Non-executive Directors are not employees and receive
a fee for their services as Directors. In addition, it is
common practice for non-executive Directors to be
reimbursed expenses incurred in performing their role
and any related tax. They are not eligible to receive a
base salary, fixed pay allowance, benefits, pension or
any variable pay.
The fee levels payable reflect the time commitment and
responsibilities required of a non-executive Director of
HSBC Holdings. Fees are determined by reference to
other UK companies and banks in the FTSE 30, and to
the fees paid by other non-UK international banks.
The Board reviews each component of the fees
periodically to assess whether, individually and in
aggregate, they remain competitive and appropriate in
light of changes in roles, responsibilities, and/or the time
commitment required for the non-executive Directors
and to ensure that individuals of the appropriate calibre
are retained or can be appointed. The Board (excluding
the non-executive Directors) may approve changes to
the fees within the ranges prescribed in the remuneration
policy. The Board may also introduce any new component
of fee for non-executive Directors subject to the principles,
parameters and other requirements set out in the
remuneration policy.
The Philanthropic and Community Investment Oversight
Committee, a new non-executive Board committee,
was established on 5 December 2014. In line with its
authority under the remuneration policy, the Board
approved the following fee levels for this committee:
chairman – £25,000 per annum; member – £15,000 per
annum.
No other change has been made or is proposed to the
fees of non-executive Directors during the term of this
policy. The fees payable to non-executive Directors are
set out in last year’s Directors’ Remuneration Report
in the Annual Report and Accounts 2013.
Service contracts
Executive Directors
Our policy is to employ executive Directors on service
agreements with 12 months’ notice period. Consistent
with the best interests of the Group, the Committee will
seek to minimise termination payments. Directors may
be eligible for a payment in relation to statutory rights.
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Service contracts
Director
Douglas Flint
Stuart Gulliver
Iain Mackay
Marc Moses
Contract date
(rolling)
Notice period
(Director & HSBC)
14 February 2011
10 February 2011
4 February 2011
27 November 2014
12 months
12 months
12 months
12 months
Other than as set out under ‘Directors’ remuneration
policy’ and ‘Policy on payments for loss of office’ in the
Directors’ Remuneration Report in the Annual Report
and Accounts 2013, there are no further obligations
which could give rise to remuneration payments or
payments for loss of office.
Non-executive Directors
Non-executive Directors are appointed for fixed terms
not exceeding three years, which may be renewed
subject to their re-election by shareholders at annual
general meetings. Non-executive Directors do not
have a service contract, but are bound by letters of
appointment issued for and on behalf of HSBC Holdings
plc. Other than as set out in ‘Remuneration policy – non-
executive Directors’ in the Directors’ Remuneration
Report in the Annual Report and Accounts 2013, there
are no obligations in the non-executive Directors’ letters
of appointment which could give rise to remuneration
payments or payments for loss of office. Non-executive
Directors’ current terms of appointment will expire as
follows:
• in 2015, Joachim Faber, Rona Fairhead, John Lipsky,
Rachel Lomax and Sir Simon Robertson;
• in 2017, Kathleen Casey, Safra Catz, Laura Cha,
Lord Evans of Weardale, Sam Laidlaw and Jonathan
Symonds; and
• in 2018, Heidi Miller and Phillip Ameen1.
1 Appointed with effect from 1 January 2015.
Other directorships
Executive Directors may accept appointments as non-
executive directors of companies which are not part
of HSBC if so authorised by either the Board or the
Nomination Committee.
When considering a request to accept a non-executive
appointment, the Board or the Nomination Committee
will take into account, amongst other things, the
expected time commitment associated with the
proposed appointment. The time commitment for
Directors’ external appointments is also routinely
reviewed to ensure that these external appointments
will not compromise the Directors’ commitment to HSBC.
In accordance with the requirements of CRD IV, Directors
who are approved by the PRA to take up certain roles
on the Board are subject to the following limits on the
number of directorships which they may hold:
• one executive directorship with two non-executive
directorships; or
• four non-executive directorships.
With the consent of the PRA one additional non-
executive directorship may be held.
Any remuneration receivable in respect of an external
appointment of an executive Director is normally paid
to the Group, unless otherwise approved by the
Nomination Committee or the Board.
Annual report on
remuneration
Remuneration Committee
Role
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 executive Directors, senior
employees, employees in positions of significant
influence and employees whose activities have or could
have a material impact on our risk profile and, in doing
so, takes into account the pay and conditions across the
Group. No executive Directors are involved in deciding
their own remuneration.
Membership
The members of the Group Remuneration Committee
during 2014 were Sir Simon Robertson (Chairman), Sam
Laidlaw, John Lipsky (appointed 23 May 2014), Jonathan
Symonds (appointed 14 April 2014 but stepped down
from this Committee on 1 September 2014 to become
Chairman of the Group Audit Committee), Renato
Fassbind (resigned as a Director on 1 September 2014),
and John Coombe (retired as a Director on 23 May 2014).
Activities
The Committee met 11 times during 2014. The following
is a summary of the Committee’s key activities during
2014.
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Directors’ Remuneration Report (continued)
Annual report on remuneration
Details of the Committee’s key activities
Month
January
Activities
• 2013 performance year pay review matters
• Design of new remuneration policy
• New shareholding guidelines
• Governance matters
Month
July
Activities
• Feedback from the 2014 Annual General Meeting
• 2014 performance year pay review matters
• Update on notable events
• Matters regarding Group-wide incentives
• Employee share plan matters
• Governance matters
February
• 2013 performance year pay review matters
• 2014 GPSP and Annual Scorecards for executive
September • 2014 performance year pay review matters
• Review of PRA/FCA consultation on alignment
Directors
• Design of new remuneration policy
• Matters regarding Group-wide incentives
framework
• Employee share plan matters
• New shareholding guidelines
• Regulatory submissions and disclosures
• Governance matters
• Provision of response to the monitor’s report
• 2013 performance year pay review matters
• Review of PRA consultation on clawback rules
• Update on notable events
• Matters regarding retirement benefit
arrangements and incentive plans
• Regulatory submissions and disclosures
• New remuneration policy matters
• Preparation for the 2014 Annual General Meeting
• Matters regarding retirement benefit
arrangements and incentive plans
• Regulatory submissions and disclosures
• Matters regarding implementation of new
remuneration policy
• Preparation for the 2014 Annual General Meeting
• 2014 performance year pay review matters
• Employee share plan matters
• Governance matters
between risk and reward
October
• Shareholder feedback on remuneration matters
• Update on PRA/FCA consultation on alignment
between risk and reward
November • Update on EBA’s report and opinion on fixed pay
allowances
• 2014 Risk Appetite Statement review and
Remuneration Code risk assessment
• 2014 proposed Group variable pay spend and
methodology
• Approval of clawback policy
• Update on notable events
• Regulatory submissions and disclosures
•
Independent review of HSBC Reward Strategy
against the HKMA remuneration guidelines
December • Risk appetite framework and Financial Crime
•
Compliance updates
Inputs from the Group Risk Committee, Financial
System Vulnerabilities Committee, and Conduct &
Values Committee
• 2014 performance year pay review matters
• 2015 GPSP and Annual Scorecards for executive
Directors
• Update on notable events
• Regulatory submissions and disclosures
• Employee share plan matters
• Governance matters
March
April
May
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Advisers
In 2014, the Committee did not engage any external
adviser, and will only seek specific legal and/or
remuneration advice independently as and when it
considers this to be necessary.
During the year, the Group Chief Executive provided
regular briefings to the Committee. In addition, the
Committee received advice from the Group Head of
Human Resources and Corporate Sustainability, Ann
Almeida, the Head of Group Performance and Reward,
Alexander Lowen, the Group Chief Risk Officer, Marc
Moses, and the Global Head of Financial Crime
Compliance and Group Money Laundering Reporting
Variable pay pool determination
Officer, Robert Werner, as part of their executive role as
employees of HSBC. The Committee also received advice
and feedback from the Group Risk Committee, Financial
System Vulnerabilities Committee and Conduct & Values
Committee on risk and compliance-related matters
relevant to remuneration, and the implementation of
the downward override policy.
Group variable pay pool
(Unaudited)
Variable pay pool determination
The Committee considers many factors in determining
the Group’s variable pay pool funding.
Performance and risk
appetite statement
• The variable pay pool takes into account the performance of the Group which is considered within
the context of our risk appetite statement. This helps to ensure that the variable pay pool is shaped
by risk considerations and any Group-wide notable events.
• 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.
Counter-cyclical funding
methodology
• 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 competitive 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.
Distribution of profits
•
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 next page for the 2014, 2013 and target split).
Commerciality and
affordability
• Finally, the commercial requirement to remain competitive in the market and overall affordability
are considered. Both the annual incentive and GPSP 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 that performance-related awards for individual global businesses, global
functions, geographical regions and levels of staff are considered in a holistic fashion.
• Market competiveness is one of the inputs in the determination of the variable pay pool. This
allows us to address any gaps to market identified when comparing total reward with our global
peers. This recognises the challenges which arise from being headquartered in the UK and hereby
having to apply more stringent reward practices than those applied in markets outside the EU.
Factors which influence our competitive market position in Asia, Latin America and the US in
attracting and retaining talent are the discounts applied on their pay by employees arising from
regulations covering a variable pay cap, higher and longer deferrals, malus and now clawback.
• This year’s variable pay pool was established by reference to the Group’s reported profit before tax,
which is adjusted to exclude movements in the fair value of own debt attributable to credit spread,
the gains and losses from disposals, and debit valuation adjustment. Reported profit before tax
includes the costs of fines, penalties and other items of redress.
• Taking into account all of the above, the Committee decided that in light of performance, the
competitive market environment , risk inputs, and other factors, the adjusted pre-tax pre-variable
pay profit payout ratio for 2014 would be 16% (15% in 2013). The higher payout ratio reflects
stronger performance in Asia and the Middle East, and an increased emphasis on risk and control
functions.
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Directors’ Remuneration Report (continued)
Annual report on remuneration
Variable pay pool outcome (US$m)
(Unaudited)
2014
2013
-7%
3,920
3,660
Relative importance of spend on pay
(Unaudited)
The chart below provides a breakdown of total staff pay
relative to the amount paid out in dividends.
US$m
2014
2013
-16%
1,120
1,327
4%
9,600
9,200
Group
Global Banking and Markets
4%
20,366
19,626
19,196
(430)
Group
2014
Global Banking
and Markets
2014
2013
2013
Variable compensation
incentive pool as a %
of pre-tax profit (pre-
variable pay)1
% of variable pay pool
deferred2
16%
15%
15%
13%
14%
18%
25%
30%
1 The 2014 Group pre-tax pre-variable pay profit calculation as
described on the previous page.
2 The percentage of variable pay deferred for 2014 MRT population
is 50%.
Pro forma post-tax profits allocation
(Unaudited)
On a pro-forma basis, attributable post-tax profits
(excluding the movements in the fair value of own
debt and before pay distributions) were allocated in
the proportions shown in the chart below. The Group’s
target policy is for the vast majority of post-tax profit
to be allocated to capital and to shareholders.
Ordinary dividends1
Employee compensation
and benefits2
1 Dividends per ordinary share in respect of that year. For 2014, this
includes the first, second and third interim dividends paid in 2014
of US$5.8bn (gross of scrip) and a fourth interim dividend of
US$3.8bn.
2 Employee compensation and benefits in 2014 includes fixed pay,
benefits and variable pay as outlined on page 303. Employee
compensation and benefits in 2013 totalled US$19,196m which
included an accounting gain arising from a change in the basis of
delivering ill-health benefits in the UK of US$430m. Excluding this
accounting gain, 2013 employee compensation and benefits
totalled US$19,626m.
Retained
earnings/
capital
32%
Variable pay2
15%
2014
Dividends1
53%
Retained
earnings/
capital
53%
2013
Dividends1
35%
Variable pay2
12%
Retained
earnings/
capital
45%
Target
Dividends1
40%
Variable pay2
15%
1 Inclusive of dividends to holders of other equity instruments and net of scrip issuance based on an assumption of scrip take up for the fourth
quarter of 2014 of 20%. Dividends per ordinary share declared in respect of 2014 were US$0.50, an increase of 2% compared with 2013.
2 Total variable pay pool net of tax and portion to be delivered by the award of HSBC shares.
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Single figure of remuneration
Executive Directors
(Audited)
Douglas Flint
2014
£000
2013
£000
Stuart Gulliver
2014
£000
2013
£000
Iain Mackay
2014
£000
2013
£000
Marc Moses
2014
£000
2013
£000
Fixed pay
Base salary
Fixed pay allowance
Pension
Variable pay
Annual incentive
GPSP
1,500
–
750
2,250
–
–
1,500
–
750
2,250
–
–
Total fixed and variable pay
2,250
2,250
Benefits
Non-taxable benefits
Notional return on deferred cash
136
105
41
48
102
27
1,250
1,700
625
3,575
1,290
2,112
3,402
6,977
589
53
–
1,250
–
625
1,875
1,833
3,667
5,500
7,375
591
67
–
700
950
350
700
–
350
700
950
350
2,000
1,050
2,000
867
1,131
1,998
3,998
43
28
11
1,074
2,148
3,222
4,272
33
53
7
1,033
1,131
2,164
4,164
6
33
36
–
–
–
–
–
–
–
–
–
–
–
Total single figure of
remuneration
2,532
2,427
7,619
8,033
4,080
4,365
4,239
–
Notes to the single figure of remuneration
(Audited)
Marc Moses was appointed an executive Director with effect from 1 January 2014, so his 2013 figures have not been disclosed.
Base salary
• Salary paid in year for executive Directors. No fees were paid to executive Directors.
Fixed pay allowance
• Fixed pay allowance granted in immediately vested shares in the year for executive Directors.
• The shares are subject to a retention period. 20% released in the March immediately following the end of the financial year.
80% released after a period of five years from the date of the first release.
• Dividends will be paid on the vested shares held during the retention period.
Pension
• The amounts consist of an allowance of 50% of annual base salary in lieu of personal pension arrangements.
• No other benefits were received by the executive Directors from the Group pension plans.
Benefits
• All taxable benefits (gross value before payment of tax). Benefits include provision of medical insurance, accommodation and car,
club membership, tax gross-up for accommodation and car benefit, and car allowance.
• Non-taxable benefits include the provision of life assurance and other insurance cover.
• The values of the significant benefits in the above table were as follows:
Car benefit (UK and Hong Kong)
Hong Kong bank-owned
accommodation3
Tax expense on car benefit and
Hong Kong bank-owned
accommodation
Insurance benefit (non-taxable)
Douglas Flint
2014
£000
701
2013
£000
–2
Stuart Gulliver
2014
£000
881
2013
£000
–
–
246
581
80
–2
78
2391
–2
Iain Mackay
2014
£000
–2
2013
£000
–2
Marc Moses
2014
£000
–2
–
–2
–2
–
–2
–2
–
–2
–2
2013
£000
–
–
–
–
79
229
266
54
1 The UK car benefit provided for Douglas Flint and Stuart Gulliver in 2014 has not changed from 2013. The valuation of the car benefit has
increased as they are no longer deemed pool cars for UK tax purposes, and include driver wages, fuel and all associated costs.
2 The car benefit and tax on car benefit for Douglas Flint in 2013, Marc Moses in 2014 and Iain Mackay is not included in the above table as it was
not significant. The insurance benefit for Stuart Gulliver and Marc Moses in 2014 and Iain Mackay is not included in the above table as it was not
significant.
3 Based on the current market rental value of the bank-owned property, as estimated by an external lease service provider, plus utility costs, rates,
the taxable value of furniture and taking into account the business use of the property, the taxable value of the accommodation is considered to
be 70% of the total of these amounts.
Annual incentive
• Annual incentive awarded (including deferred amounts) as a result of achievement of performance measures for the relevant financial
year. 60% of the award is deferred. 50% of both the deferred and non-deferred component of the award is payable in cash and the
remaining 50% in shares, subject to a six month retention period on vesting.
• The deferred element of the 2014 award pays out over a period of three years, subject to service and malus conditions: 33% vests
on or around the first and second anniversary of grant and 34% on or around the third anniversary of grant. For the 2014 award the
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Directors’ Remuneration Report (continued)
Annual report on remuneration
performance measures and the outcomes of the performance conditions can be found on pages 315-317. Outcomes for the 2013
award can be found in the Directors’ Remuneration Report in the Annual Report and Accounts 2013.
• The deferred share awards also include a right to receive dividend equivalents. Dividend equivalents on deferred share awards are
delivered in the form of additional shares, in the same time and in the same manner and in such proportion as the original deferred
award that vests. The expected value of these dividend equivalents is included in the value of deferred share awards.
Illustration of annual incentives
(Unaudited)
2014
2015
2016
Mar
Sep
Mar
2017
Mar
2018 and beyond
Mar
6-month
retention
6 months
1 year
1 year
Performance period
3-year vesting period
Award level
based on 2014
performance
Award made
in March
2015, 50%
paid in cash
immediately
50% paid
in shares
released
after six
months
33% vests on or
around the first
anniversary of
grant and subject to
6-month retention
33% vests on or
around the second
anniversary of
grant and subject to
6-month retention
34% vests on or
around the third
anniversary of
grant and subject to
6-month retention
N
o
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4
0
%
6
0
%
Awards subject to malus and clawback provisions at the discretion of the Remuneration Committee
GPSP
• GPSP awarded as a result of achievement of sustainable long-term performance. Figures shown reflect the face value of awards
granted in 2014 and 2013 respectively.
• Award levels are determined by considering performance against enduring performance measures set out in the long-term
performance scorecard. There are no post-grant performance conditions.
• The award is subject to a five-year cliff vesting period during which the Committee has the authority to cancel all or part of the award.
On vesting, the shares (net of tax) must be retained for the duration of the participant’s employment.
• For the 2014 award the outcomes of the performance conditions can be found in the section titled ‘Awards under the GPSP’ on
page 314. Outcomes for the 2013 award can be found in the Directors’ Remuneration Report in the Annual Report and Accounts 2013.
• The GPSP awards also include a right to receive dividend equivalents for the period between the grant and the vesting date. Dividend
equivalents on the GPSP awards will be delivered when the GPSP awards vest. There was no vesting of historical GPSP awards in 2014.
The expected value of these dividend equivalents are included in the value of GPSP awards.
Illustration of GPSP
(Unaudited)
Historical to
2014
2015
2016
2017
2018
2019
2020
and beyond
Performance period
5-year vesting period
Award level
based on 2014
and long-term
sustainable
performance
Award made
in March 2015
Value of GPSP award fluctuates up or
down based on share price performance
Vesting awards
subject to retention
Although shares
are fully vested,
executive Directors
must retain the
shares for duration
of employment
Award vests fully
after five years
in March 2020
Awards subject to malus and clawback provisions at the discretion of the Remuneration Committee
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Notional return on deferred cash
• The deferred cash award portion of the annual incentive also include a right to receive notional returns for the period between grant
date and vesting date and determined by reference to the dividend yield on HSBC shares, determined annually.
• A payment of notional return is made annually in the same proportion as the vesting of the deferred awards on each vesting date.
The amount is disclosed on a paid basis in the year in which the payment is made.
Remuneration scenarios and outcomes
The charts below show the value and composition of remuneration under three performance scenarios for each of the
executive Directors based on the current policy in comparison to the actual 2014 variable pay outcomes.
Stuart Gulliver
(Amounts in £’000)
Fixed pay1
Annual incentive2
GPSP3
7,150
33%
17%
50%
3,575
100%
10,725
45%
22%
33%
6,977
30%
18%
52%
Marc Moses
(Amounts in £’000)
Fixed pay1
Annual incentive2
GPSP3
4,000
33%
17%
50%
2,000
100%
6,000
45%
22%
33%
4,164
27%
25%
48%
Minimum policy
Target policy
Maximum policy
2014 actual
Minimum policy
Target policy
Maximum policy
2014 actual
Iain Mackay
(Amounts in £’000)
Fixed pay1
Annual incentive2
GPSP3
4,000
33%
17%
50%
2,000
100%
6,000
45%
22%
33%
3,998
28%
22%
50%
Minimum policy
Target policy
Maximum policy
2014 actual
1 Fixed pay includes base salary, fixed pay allowance and pension
allowance for the year, and excludes benefits.
2 Maximum award level as stated in our remuneration policy
Includes deferred portion of award. Target has been defined as
50% of the maximum award. Minimum assumes no annual
incentive award.
3 Maximum award level as stated in our remuneration policy.
Target has been defined as 50% of the maximum award. The
GPSP scorecard has not been designed with a numeric targeted
or expected value of performance. Minimum assumes no GPSP
award.
Variable pay outcomes
(Audited)
Fixed pay
Value (£000)
Annual incentive
Maximum multiple of fixed pay
Performance outcome
Multiple awarded
Value (£000)
GPSP
Maximum multiple of fixed pay
Performance outcome
Multiple awarded
Pre-discretion value (£000)
Committee discretion (£000)
Post-discretion value (£000)
Total variable pay
Maximum multiple of fixed pay
Multiple awarded
Value (£000)
Stuart Gulliver
Iain Mackay Marc Moses
3,575
0.67
54.1%
0.36
1,290
1.33
54.8%
0.73
2,612
(500)
2,112
2.00
0.95
3,402
2,000
2,000
0.67
65.0%
0.43
867
1.33
54.8%
0.73
1,461
(330)
1,131
2.00
1.00
1,998
0.67
77.5%
0.52
1,033
1.33
54.8%
0.73
1,461
(330)
1,131
2.00
1.08
2,164
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Directors’ Remuneration Report (continued)
Annual report on remuneration
Awards under the GPSP
(Audited)
Awards in respect of 2014 were assessed against the
2014 long-term scorecard published in the Annual Report
and Accounts 2013 and reproduced below.
The performance assessment under the 2014 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 gateway to GPSP
participation, which was assessed to have been met for
all executive Directors. A summary of the assessment
and rationale for the conclusions is set out below.
Annual assessment – GPSP
Measure
Capital strength (%)1
Progressive dividend payout (%)2
Return on equity (%)3
Cost efficiency ratio
– Jaws4
– Cost efficiency ratio (%)3
Financial
Strategy execution
Risk and compliance
People
Non-financial
Total performance outcome
Weighting
Long-term
target range
Actual 2014
performance
Assessment
Outcome
>10
40-60
12-15
Positive jaws1
Mid-50s
Judgement
Judgement
Judgement
15%
15%
15%
7.5%
7.5%
60%
20%
15%
5%
40%
100%
11.1
72.5
7.2
(14.7)
67.8
n/a
n/a
n/a
100%
100%
0%
0%
0%
67%
50%
80%
15.0%
15.0%
–
–
–
30.0%
13.3%
7.5%
4.0%
24.8%
54.8%
1 Capital strength is defined as common equity tier 1 capital (CRD IV end point basis).
2 Payout ratio reflects dividends in respect of the year.
3 Return on equity and cost efficiency ratio excludes from the return the impact of fair value movements on own debt designated at fair value
resulting from changes in credit spreads.
4 Revenue growth (excluding the impact of fair value movements on own debt designated at fair value resulting from changes in credit spreads)
less operating expense growth.
Financial (60% weighting – achieved 30%)
Capital strength (assessment: 100%): The Committee
took particular note in 2014 of the Group’s position
against prospective capital and liquidity standards given
the publication of important fresh regulatory proposals
on total loss-absorbing capacity (‘TLAC’), net stable
funding and leverage. The Group’s ability and capacity to
meet these standards will have important ramifications
for its business model, the prospective returns available
and, therefore, the Group’s dividend paying capacity.
The Committee also took note of the outcome of stress
tests conducted by the EBA and the PRA, which provided
independent evidence of the Group’s resilience to
economic downturn and sectoral weaknesses in framing
its judgements on capital strength and dividend policy.
The Committee noted positively the outcome of these
stress tests which placed the Group favourably amongst
its peers in terms of its capacity to absorb and recover
from adverse circumstances.
The strength of the capital position was therefore
considered favourably, with additional note taken of the
improvement in the year-end common equity tier 1 ratio
and the increase in the estimated end point position
under CRD IV.
Progressive dividend payout (assessment: 100%):
The projected capacity to maintain a progressive
dividend policy was also noted favourably, which was
underpinned by the Group’s strong capital position, its
distributable reserves, its cash position, and its planning
assumptions around future performances. The
progressive development of the Group’s dividend was
achieved notwithstanding economic weakness in parts
of the external environment, demonstrating the benefits
of the Group’s diversified business model.
Return on equity (assessment: 0%): The Group did not
achieve previously set aspiration of 12-15%. While
having made good progress towards reducing legacy
positions and having de-risked the business where
necessary, Group performance remains below its stated
target. Business model changes consequent upon new
regulatory requirements and enhanced risk controls to
reduce the possibility of future customer redress and
conduct issues were considered to be essential elements
to take the Group to where it needed to be for
sustainable financial performance. In the interim, the
Committee noted the necessary structural changes
which are likely to constrain the overall return of equity
and mask the benefits coming from new business and
from market share improvement in some areas.
Additionally, the Group’s performance continues to be
exposed in the near term to uncertainties from an
evolving regulatory reform agenda (including the Group’s
target capital ratios), contingent legal risks from notable
legacy matters and continued significant customer
redress costs. While acknowledging the commendable
efforts being made to meet an ROE target of 12-15%
against increased capital requirements both at a global
and at a local level, it was decided not to make any
award under this opportunity.
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Cost efficiency ratio (assessment: 0%): Based on the
2014 development of the Group’s operating expenses,
it was judged that no reward should be made under
the cost efficiency ratio element of the scorecard. It was
noted that the strengthening of Regulatory and Financial
Crime Compliance resources and capabilities was a
material element in the level of higher costs. It was also
recognised that this situation is not likely to diminish in
the medium term.
Non-financial (40% weighting – achieved 24.8%)
Strategy execution (assessment: 67%): The Board
reviewed progress achieved by management in 2014 to
deliver the strategic priorities including organic growth,
implementation of Global Standards and driving further
efficiency gains through streamlining processes and
procedures.
Against a backdrop of weaker than expected economic
growth in a number of important markets, and with
financial market activity and liquidity further constrained
by the industry reshaping in response to regulatory
changes, the Group was nevertheless able to demonstrate
underlying growth in a number of its global businesses
and maintain market position in key products. The
Committee recognised that the Board had emphasised
a cautious approach to risk appetite during 2014 in light
of uncertain economic conditions.
Management demonstrated further progress towards
the implementation of Global Standards, acknowledging
that material further work is required to achieve full
roll-out.
With regard to streamlining, the Group delivered
over US$1bn of sustainable savings but these were
outweighed by incremental costs in support of growth
initiatives and to implement regulatory change, enhance
risk controls and implement Global Standards. In light of
this, management launched new initiatives to improve
efficiency across global businesses and functions which
will continue into 2015.
Risk and compliance (assessment: 50%): The Committee
received input from the Group Risk Committee, the
Conduct & Values Committee and the Financial System
Vulnerability Committee on evidence of progress being
made to minimise the long-term impact of regulatory
and compliance issues on the Group’s reputation.
The Committee was satisfied that based on feedback
received it was clear that this remains a top priority
within the organisation and progress was made in
2014. The Committee took particular notice of work
on restructuring the Group Compliance function,
investment in greater compliance capabilities, the
establishment of enterprise-wide risk assessment
programmes, the roll-out of enhanced training and
continued strengthening of governance oversight. The
Committee also noted the disappointing incidence of
further fines and penalties received in 2014, albeit in
relation to matters occurring in prior periods, and the
consequential extension of work to prevent recurrence.
People (assessment: 80%): The Committee reviewed
progress made in talent development, succession
planning, diversity and attrition in some areas. The
Committee recognised continued progress, including the
successful initiation of a mentoring programme between
non-executive directors and senior executives below
Board level.
This performance assessment resulted in an overall score
of 54.8%.
Notwithstanding this, the Committee subsequently used
their discretion to reduce the executive Directors’ GPSP
awards by the following amounts:
GPSP adjustment
GPSP
adjustment
£000
Adjustment
as a percentage
of variable pay
%
500
330
330
13%
14%
13%
Director
Stuart Gulliver
Iain Mackay
Marc Moses
For Stuart Gulliver and Marc Moses, the adjustments
were considered appropriate based on the weight of
legal, compliance and regulatory issues affecting the
Group, even those related to historical events, including
but not limited to foreign exchange. For Iain Mackay, the
adjustment is considered appropriate by the Committee
in the context of overall year-on-year Group-wide
profitability, incentive pool funding and market
remuneration benchmarks.
In 2013, the Committee also used their discretion to
reduce Stuart Gulliver’s overall variable pay by 18.5%.
Determining executive Directors’ annual
performance
(Audited)
The annual incentive award made to executive Directors
in respect of 2014 reflected the Committee’s assessment
of the extent to which they had achieved personal and
corporate objectives set within their performance
scorecard as agreed by the Board at the beginning of the
year. This measurement took into account 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 2014. In addition, in accordance with the
downward override policy, the Committee also consulted
the Financial System Vulnerabilities Committee and
took into consideration the feedback received from this
committee in relation to progress on enhancing AML and
sanctions compliance as well as progress in meeting the
Group obligations under the DPA and other relevant
orders.
In order for any award of annual incentive to be made
under the above performance scorecard, the Committee
had to satisfy itself the executive Directors had personally
met and shown leadership in promoting HSBC Values.
This overriding test assessed behaviour around HSBC
Values of being ‘open, connected and dependable’ and
acting with ‘courageous integrity’, which was assessed
to have been met for all executive Directors.
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Directors’ Remuneration Report (continued)
Annual report on remuneration
Notwithstanding regulatory difficulties, overall the
executive Directors performed well in the context of
a challenging market environment.
A summary of each executive Director’s assessment
against specific performance measures is provided in
the following tables.
Stuart Gulliver
Annual assessment
Measure
Pre-tax profit (US$bn)1
Return on equity (%)2
Cost efficiency ratio (%)
– Jaws3
– Cost efficiency ratio (%)2
Dividends (%)4
Capital strength (%)5
Financial
Strategy execution
Risk and compliance
Non-financial
Promoting HSBC Values
Total
Weighting
Target6
Performance
Assessment
Outcome
17.5%
10%
8.75%
8.75%
10%
5%
60%
20%
20%
40%
21.6
9.8
5.6
58.5
57.1
10.9
Judgement
Judgement
18.6
7.2
(14.7)
67.8
72.5
11.1
n/a
n/a
86%
0%
0%
0%
100%
100%
70%
50%
Over-riding test
100%
15.1%
–
–
–
10.0%
5.0%
30.1%
14.0%
10.0%
24.0%
Met
54.1%
1 Group’s reported profit before tax adjusted to exclude movements in the fair value of own debt attributable to credit spread, the gains and
losses from disposals, and debit valuation adjustment (2013 does not include debit valuation adjustment).
2 Return on equity and cost efficiency ratio excludes from the return the impact of fair value movements on own debt designated at fair value
resulting from changes in credit spreads.
3 Revenue growth (excluding the impact of fair value movements on own debt designated at fair value resulting from changes in credit spreads)
less operating expense growth.
4 Payout ratio reflects dividends in respect of the year.
5 Capital strength is defined as common equity tier 1 capital (CRD IV end point basis).
6 Based on prior year 2013.
Strategy execution (assessment: 70%): The Board
reviewed progress achieved in 2014 to deliver the
strategic priorities including organic growth,
implementation of Global Standards, and driving further
efficiency gains through streamlining processes and
procedures.
The Committee noted favourably that underlying
revenue reflected progress in execution against priority
initiatives, including growing market share in selected
trade corridors and maintaining market position in key
products.
The Committee noted progress in the Global Standards
programme throughout 2014 in moving from design
to execution phase, the continuation of disposals and
closures of non-core businesses and shareholdings
(75 transactions since 2011). In addition, the global
businesses are implementing operating procedures to
assure the delivery of global AML and sanctions policies
approved earlier in the year. The Committee noted
continuing investment to strengthen financial crime
compliance expertise and build strategic infrastructure
for customer due diligence, transaction monitoring and
sanctions screening. As a consequence, the Committee
was advised the Group had been able to deliver on its
2014 milestones.
The Committee noted favourably that the Group had
achieved sustainable savings in excess of US$1bn in the
year through business simplification and re-engineering.
The Committee noted that costs during 2014 had
increased by being affected by significant items and a
rise in regulatory and financial crime compliance costs,
inflationary pressures, continued investment in strategic
initiatives, and a rise in the bank levy. The Committee
was advised the Group had launched new initiatives to
further improve efficiency across global businesses and
key functions which will continue into 2015.
Risk and compliance (assessment: 50%): This measure
increased in weighting to 20% from 15% in 2013 to
underscore the Group’s commitment to these areas. The
Committee reviewed the Group’s progress in increasing
and enhancing Group Compliance headcount, the roll
out of the ‘Driving a values-led high performance culture’
programme, the implementation of measures to address
conduct risk (e.g., product range reviews and associated
product exits, changes to retail banking incentive
arrangements) and the continued strengthening of
governance oversight. The outcome has been affected by
the incidence, scale and reputational damage incurred
from continuing customer redress and regulatory fines
and penalties incurred in 2014.
This performance assessment resulted in an overall score
of 54.1%.
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Iain Mackay
Annual assessment
Measure
Grow both business and dividends
Risk and compliance including Global Standards
Streamline processes and procedures
Strategic priorities
People
Promoting HSBC Values
Total
Weighting
Target
Performance
Assessment
Outcome
15%
50%
25%
90%
10%
Judgement
Judgement
Judgement
Judgement
n/a
n/a
n/a
n/a
85%
75%
45%
35%
Over-riding test
100%
13.0%
37.5%
11.0%
61.5%
3.5%
Met
65.0%
Grow both business and dividends (assessment: 85%):
The Committee recognised the contribution of the
Finance function in supporting the development,
implementation and monitoring of business cases
in support of organic growth and the substantial
improvement in clarity in analysts and investors
presentations which had attracted favourable comment
from analysts and shareholders.
Risk and compliance including Global Standards
(assessment: 75%): The Committee noted substantial
progress in a number of areas. Risk and compliance
metrics, and implementation of new cost and resource
monitoring processes for Global Standards programmes
were both fully met during the year.
Streamline processes and procedures (assessment:
45%): The Committee recognised the substantial
commitment to, and achievement of, the exacting stress
testing programmes across the Group. It was further
noted that costs were higher than target, while the
target for sustainable saves had not been met fully.
Similarly, while progress was being made in re-
engineering the global Finance function, a number
of initiatives were still in progress.
People (assessment: 35%): The progress made in
performance management and reward differentiation
for the global Finance function and further work to be
done in increasing employee diversity and cost
restructuring were noted.
This performance assessment resulted in an overall score
of 65%.
Marc Moses
Annual assessment
Measure
Grow both business and dividends
Risk and compliance including Global Standards
Streamline processes and procedures
Strategic priorities
People
Promoting HSBC Values
Total
Weighting
Target
Performance
Assessment
Outcome
20%
50%
20%
90%
10%
Judgement
Judgement
Judgement
Judgement
n/a
n/a
n/a
n/a
90%
75%
70%
80%
Over-riding test
100%
18.0%
37.5%
14.0%
69.5%
8.0%
Met
77.5%
Grow both business and dividends (assessment: 90%):
The Committee recognised the use of risk appetite
statements to enable a sustainable business, and the
provision of resources to support business growth (e.g.,
risk analytics and enhancements to risk processes to
enable improvements in quality of credit portfolio).
Risk and compliance including Global Standards
(assessment: 75%): The Committee noted the progress
towards implementing Global Standards, compliance
with regulatory requirements, and de-risking the
organisation. This was evidenced by the roll-out of the
AML and sanctions compliance plan, the development
of the operational risk transformation roadmap and the
successful execution of the PRA and EBA stress tests.
Streamline processes and procedures (assessment:
70%): The Committee recognised these objectives have
been largely met, supported by the management of
business performance, delivery of key streamlining
initiatives, and re-engineering of Financial Crime
Compliance systems. Work towards the Global Risk data
strategy programme to support PRA data requirements,
which included enhancements to the Risk data
infrastructure, was further noted.
People (assessment: 80%): The execution of the pay
and performance plans, as well as the learning and
development plans which were part of a comprehensive
people strategy for the Global Risk function were noted.
This performance assessment resulted in an overall score
of 77.5%.
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Directors’ Remuneration Report (continued)
Annual report on remuneration
Non-executive Directors
Fees and benefits
(Audited)
Kathleen Casey1
Safra Catz
Laura Cha2
Lord Evans of Weardale
Joachim Faber
Rona Fairhead3
Sam Laidlaw
John Lipsky
Rachel Lomax
Heidi Miller4
Sir Simon Robertson
Jonathan Symonds5
Total6
Total (US$000)
Fees
2014
£000
129
95
197
167
145
494
140
168
205
52
260
365
2,417
3,979
2013
£000
–
95
195
50
137
202
125
150
155
–
240
–
1,349
2,221
Benefits7
2014
£000
2013
£000
Total
2014
£000
12
4
22
14
10
19
–
27
21
–
6
3
138
229
–
14
47
–
21
6
–
25
8
–
1
–
122
201
141
99
219
181
155
513
140
195
226
52
266
368
2,555
4,208
2013
£000
–
109
242
50
158
208
125
175
163
–
241
–
1,471
2,422
1 Appointed on 1 March 2014.
2 Includes fees of £57,000 in 2014 (£75,000 for 2013) as Director, Deputy Chairman and member of the nomination committee of The Hongkong
and Shanghai Banking Corporation Limited.
3 Includes a fee of £334,000 in 2014 as non-executive Chairman of HSBC North America Holdings Inc (appointed on 1 January 2014).
4 Appointed on 1 September 2014.
5 Appointed on 14 April 2014 as non-executive Director of HSBC Holdings plc and non-executive chairman of HSBC Bank plc, for which he received
a fee of £247,000.
6 Excludes fees and benefits for Marvin Cheung, John Coombe, Renato Fassbind and James Hughes-Hallett who were not Directors at 31 December
2014. Marvin Cheung resigned on 1 August 2014. His fees for 2014 were £113,000 (£197,000 for 2013) (including fees of £40,000 as Director,
Chairman of the risk committee and member of the audit committee of Hang Seng Bank Limited). His benefits for 2014 were £18,000 (£45,000
for 2013). John Coombe retired on 23 May 2014. His fees and benefits for 2014 were £85,000 and £5,000 respectively (£205,000 and £14,000
respectively in 2013). Renato Fassbind resigned on 1 September 2014. His fees and benefits for 2014 were £109,000 and £10,000 respectively
(£145,000 and £23,000 respectively in 2013). James Hughes-Hallett retired on 23 May 2014. His fees and benefits for 2014 were £50,000 and
£1,000 respectively (£145,000 and £1,000 respectively in 2013).
7 Benefits include travel-related expenses relating to the attendance at Board and other meetings at HSBC Holdings registered office. Amounts
disclosed are estimated and have been grossed up using a tax rate of 45%, where relevant.
Total pension entitlements
(Audited)
Exit payments made in year
(Audited)
No employees who served as executive Directors during
the year have a right to amounts under any HSBC final
salary pension schemes or are entitled to additional
benefits in the event of early retirement. There is no
retirement age set for Directors, but the normal
retirement age for employees is 65.
Payments to past Directors
(Audited)
This report does not include details of payments made
to past Directors below the de minimis limit set by the
company of £50,000.
No payments for loss of office were made in 2014 to any
person serving as a Director in the year or any previous
years.
Scheme interests awarded during 2014
(Unaudited)
The table below sets out the scheme interests awarded
to Directors in 2014 (for performance in 2013) as
disclosed in the 2013 Directors’ Remuneration Report.
No non-executive Directors received scheme interests
during the financial year.
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Scheme awards in 2014
(Unaudited)
Type of interest
awarded
Basis on which
award made
Dates of
award
Face value
awarded1
£000
Percentage
receivable
for minimum
performance2
Number of
shares
awarded
Share price
on date
of grant1
End of
performance
period
Stuart Gulliver Deferred cash
Annual incentive 2013
Stuart Gulliver Restricted shares Annual incentive 2013
Stuart Gulliver Restricted shares GPSP 2013
Iain Mackay
Iain Mackay
Iain Mackay
Deferred cash
Annual incentive 2013
Restricted shares Annual incentive 2013
Restricted shares GPSP 2013
Marc Moses Deferred cash
Marc Moses
Marc Moses
Annual incentive 2013
Restricted shares Annual incentive 2013
Restricted shares GPSP 2013
10 Mar 2014
10 Mar 2014
10 Mar 2014
10 Mar 2014
10 Mar 2014
10 Mar 2014
10 Mar 2014
10 Mar 2014
10 Mar 2014
550
550
3,667
322
322
2,147
322
322
2,147
0%
0%
0%
0%
0%
0%
0%
0%
0%
n/a
88,766
591,779
n/a
51,997
346,647
n/a
51,992
346,613
n/a 31 Dec 2013
£6.196 31 Dec 2013
£6.196 31 Dec 2013
n/a 31 Dec 2013
£6.196 31 Dec 2013
£6.196 31 Dec 2013
n/a 31 Dec 2013
£6.196 31 Dec 2013
£6.196 31 Dec 2013
GPSP awards made based on performance up to the financial year-end preceding the grant date with no further performance conditions after
grant. Vesting occurs five years after grant date and 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.
The above table does not include details of shares issued as part of the Fixed Pay Allowances, as those shares vest immediately and are not subject
to any service or performance conditions.
1 Share price used is the closing mid-market price on the last working day preceding the date of grant.
2 Awards determined based on performance achieved during the period to 31 December 2013. The overall award level could have been 0% of the
maximum opportunity if minimum performance was achieved for the period to 31 December 2013. After grant, awards are subject to service
condition and malus provisions.
Summary of performance
(Unaudited)
HSBC TSR and FTSE100 Index
The graph shows the TSR performance against the FTSE
100 Index for the six-year period ended 31 December
2014. The FTSE 100 Index has been chosen as this is a
recognised broad equity market index of which HSBC
Holdings is a member.
CEO remuneration
(Unaudited)
Historical CEO remuneration
200%
180%
160%
140%
120%
100%
80%
Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014
HSBC
FTSE 100
Source: Datastream
The table below summarises the CEO’s single figure remuneration over the past six years together with the outcomes of
the respective annual incentive and long-term incentive awards.
2014
2013
2012
2011
20101
20091
Stuart Gulliver
Stuart Gulliver
Stuart Gulliver
Stuart Gulliver
Michael Geoghegan
Michael Geoghegan
Single
figure of
remuneration
(£000)
Annual
incentive
maximum2
Annual
incentive
paid2
(% of fixed pay)3 (% of maximum)
Long-term
incentive
maximum4
Long-term
incentive
paid4
(% of fixed pay)3 (% of maximum)
7,619
8,033
7,532
8,047
7,932
7,580
67%
300%
300%
300%
400%
400%
54.1%
49.0%
52.0%
57.5%
81.6%
93.5%
133%
600%
600%
600%
700%
700%
44.3%
49.0%
40.0%
50.0%
19.1%
25.4%
1 The GPSP was introduced in 2011. Prior to this, values shown relate to awards of Performance Shares under the HSBC Share Plan. Under this plan
Performance Share awards vest three years after grant subject to performance conditions of total shareholder return, economic profit and
earnings per share, and an over-riding ‘sustained improvement’ judgement by the committee.
2 The 2012 annual incentive figure for Stuart Gulliver used for this table includes 60% of the annual incentive disclosed in the 2012 Directors’
Remuneration Report which was deferred for five years. The vesting of these awards is subject to service condition and satisfactory completion
of the DPA. The DPA condition ends on or around the fifth anniversary of the award date unless the DPA is extended or otherwise continues
beyond that date, in which case the awards will vest on or around the date on which the DPA expires and otherwise ceases to operate.
3 For 2014, fixed pay includes base salary, fixed pay allowance and pension allowance for the year, and excludes benefits. For 2013 and earlier,
fixed pay includes base salary only.
4 Long-term incentive awards are shown in the year where the performance period is deemed to be substantially completed. For performance
share awards this is at the end of the third financial year following the date of grant (Performance Share awards shown in 2010 therefore relate
to awards granted in 2008). For GPSP awards this is at the end of the financial year preceding the date of grant (GPSP awards shown in 2011 to
2014 therefore relate to awards granted in 2012 to 2015).
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Directors’ Remuneration Report (continued)
Annual report on remuneration
Comparison of Group CEO and all-employee pay
The following table compares the changes in Group CEO pay to changes in employee pay between 2013 and 2014:
Percentage change in remuneration
Group CEO1
Employee group2
Base
salary
0.0%
4.4%
Benefits3
(0.3%)
5.7%
Annual
incentive4
(29.6%)
(5.3%)
1 Group CEO received an FPA of £1.7 million with effect from 1 January 2014 based on the new remuneration policy approved by shareholders.
Further details on the FPA are provided in the remuneration policy section for executive Directors.
2 Employee group consists of all employees globally, based on costs included in wages and salaries disclosed in financial reports (excluding FPA)
and staff numbers (full-time equivalents averaged over the financial year).
3 Employee group consists of UK employees only (full-time equivalents averaged over the financial year) as it was deemed the most appropriate
comparison for the Group CEO given varying local requirements.
4 Employee group consists of all employees globally, based on annual incentive pool less GPSP as disclosed in financial reports and staff numbers
(full-time equivalents at the financial year-end).
Directors’ interests in shares
(Audited)
Guidelines
To ensure appropriate alignment with our shareholders,
we have shareholding guidelines expressed as a number
of shares for executive Directors, non-executive Directors,
and Group Managing Directors. The Committee considers
that share ownership by senior executives and non-
executive Directors helps align their interests with
those of shareholders. The numbers of shares they
are required to hold are set out in the table below.
Individuals are given five years from 2014 or (if later)
their appointment as executive Director, non-executive
Director, or Group Managing Director to build up the
recommended levels of shareholding.
HSBC operates an anti-hedging policy for all employees.
As part of this all employees are required to certify
each year that they have not entered into any personal
hedging strategies in relation to their holdings of HSBC
shares.
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.
The shareholdings of all persons who were Directors in
2014 (including the shareholdings of their connected
persons) at 31 December 2014 or at the time of their
retirement are set out below.
Share options
(Audited)
Douglas Flint
Douglas Flint
Iain Mackay
Date of award Exercise price
Exercisable
From1
until
At 1 Jan
2014
Exercised
in year
At 31 Dec
2014
24 Apr 2012
23 Sep 2014
23 Sep 2014
4.4621
5.1887
5.1887
1 Aug 2015
1 Nov 2019
1 Nov 2017
1 Feb 2016
1 May 2020
1 May 2018
2,016
–
–
–
–
–
2,016
2,919
3,469
1 May be advanced to an earlier date in certain circumstances, e.g. retirement.
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 £500 (or equivalent) each month
over a period of three or five years which may be used
on or around the 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 2014 was £6.09. The
highest and lowest market values per ordinary share
during the year were £6.81 and £5.89. 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.
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Shares
(Audited)
Executive Directors
Douglas Flint
Stuart Gulliver
Iain Mackay
Marc Moses
Group Managing Directors4
Non-executive Directors5
Safra Catz
John Coombe6
Lord Evans of Weardale
Joachim Faber
Rona Fairhead
Sam Laidlaw
John Lipsky
Rachel Lomax
Heidi Miller7
Sir Simon Robertson
Jonathan Symonds8
At 31 December 2014 or date of retirement
Scheme interests
Shares awarded
subject to deferral
Total share
interests
(number of
shares)
400,748
2,611,188
79,933
480,423
n/a
20,045
23,845
5,519
24,105
76,524
36,768
15,820
15,500
3,575
22,981
20,553
Share
options2
4,935
–
3,469
–
n/a
without
performance
conditions3
with
performance
conditions
–
2,476,808
942,732
1,216,599
n/a
–
87,007
60,150
58,439
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
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
Shareholding
requirement
(number of
shares)1
400,000
750,000
450,000
450,000
250,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
1 The current shareholding requirement does not count unvested share based incentives.
2 All share options are unexercised.
3 Includes GPSP awards which are made following an assessment of performance over the relevant period ending on 31 December immediately
before the grant date but are subject to a five-year vesting period.
4 All of the Group Managing Directors are expected to meet their minimum shareholding requirement by 2019 or within five years of the date of
their appointment, whichever is later.
5 Those who were non-executive Directors in 2014 but are not in the list above did not hold any shares as at 31 December 2014, or at the date of
their retirement, directly or through any connected persons.
6 John Coombe retired as a Director on 23 May 2014.
7 Appointed on 1 September 2014.
8 Appointed on 14 April 2014.
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Directors’ Remuneration Report (continued)
Annual report on remuneration
Shareholder context
(Unaudited)
The table below shows the outcome of the remuneration-related votes at the Annual General Meeting of HSBC Holdings
plc held on 23 May 2014.
Advisory vote on 2013 Remuneration Report
9,744,121,154
Binding vote on the Remuneration Policy
9,781,954,191
Number of
votes cast
For
Against
8,180,579,271
(83.95%)
7,762,051,505
(79.35%)
1,563,541,883
(16.05%)
2,019,902,686
(20.65%)
Withheld
205,528,859
167,509,544
Implementation of remuneration policy in 2015
(Unaudited)
The table below summarises how each element of pay will be implemented in 2015.
Purpose and link
to strategy
Fixed pay
Base salary
Fixed pay allowance1
Operation and planned changes to policy
Base salary levels will remain unchanged from their 2014 levels as follows:
Douglas Flint: £1,500,000
Stuart Gulliver: £1,250,000
Iain Mackay: £700,000
Marc Moses: £700,000
Fixed pay allowances will remain unchanged from their 2014 levels as follows:
Douglas Flint: Nil
Stuart Gulliver: £1,700,000
Iain Mackay: £950,000
Marc Moses: £950,000
Pension
Pension Allowance to apply in 2015 as a percentage of base salary will remain unchanged as follows:
Douglas Flint: 50%
Stuart Gulliver: 50%
Iain Mackay: 50%
Marc Moses: 50%
Benefits
Benefits
Variable pay1
Annual incentive
GPSP
No changes are proposed to the benefits package for 2015.
No changes are proposed to the annual incentive.
No changes are proposed to the GPSP.
1 This approach applies to all executive Directors with the exception of the Group Chairman, Douglas Flint, who is not eligible for a fixed pay
allowance or variable pay awards.
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Annual bonus scorecards
The measures and weightings of the performance
measures to apply to the 2015 annual incentive for
Stuart Gulliver, Iain Mackay and Marc Moses are given
below. Douglas Flint is not included as he is not eligible
for an annual incentive award.
The Committee is of the opinion that the performance
targets for the annual incentive are commercially sensitive
and that it would be detrimental to the interests of the
company to disclose them before the start of the financial
year. Subject to commercial sensitivity, the targets will be
disclosed after the end of the relevant financial year in
that year’s remuneration report.
2015 annual incentive scorecards
Stuart Gulliver
Iain Mackay
Measures
Profit before tax1
Return on equity
Jaws2
Grow dividends3
Financial
Weighting
15%
Functional measures
linked to
Grow both business and
dividends
15%
15%
Global Standards including
risk and compliance
Streamline processes and
procedures
15%
Marc Moses
Functional measures
Weighting
linked to
Weighting
15% Grow both business and
dividends
50% Global Standards including
risk and compliance
25% Streamline processes and
procedures
60% Strategic priorities
90% Strategic priorities
Strategy execution
Global Standards including
risk and compliance
Non-financial
15% People
25%
40% People
Over-riding
10% People
10% People
Over-riding
Promoting HSBC Values
test Promoting HSBC Values
test Promoting HSBC Values
Total
100% Total
100% Total
2015 Group GPSP scorecard
Measure
Return on equity
Jaws2
Grow dividends3
Financial
Long-term target range
>10%
Positive adjusted jaws
Progressive
Strategy execution
Global standards including risk and compliance
Judgement
Judgement
Non-financial
Total
20%
50%
20%
90%
10%
10%
Over-riding
test
100%
Weighting
20%
20%
20%
60%
15%
25%
40%
100%
1 Profit before tax, as defined for the Group variable pay pool.
2 Revenue growth less operating expense, on an adjusted basis.
3 Dividend per ordinary share (USD) in respect of the year, measured year on year; consistent with the growth of the overall profitability of the
Group, predicated on the continued ability to meet with regulatory capital requirements.
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Directors’ Remuneration Report (continued)
Appendix
Appendix to Directors’ Remuneration Report
Additional disclosures
This appendix provides disclosures required under the Hong Kong Ordinances, Hong Kong Listing Rules, Project Merlin
agreement, Financial Conduct Authority’s Prudential Sourcebook for Banks and the US Securities and Exchange
Commission Form 20-F disclosures.
Employee compensation and benefits
Emoluments of Directors
(Unaudited)
Set out below are details of emoluments paid to executive Directors for the year ended 31 December 2014.
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)
Total 2013 (US$000)
Douglas Flint
£000
Stuart Gulliver
£000
Iain Mackay
£000
Marc Moses
£000
2,491
–
–
–
–
2,491
4,101
3,752
4,217
–
3,402
–
–
7,619
12,545
12,558
2,071
–
1,998
–
–
4,069
6,700
6,813
2,039
–
2,164
–
–
4,203
6,922
–
The aggregate amount of Directors emoluments (including both executive Directors and non-executive Directors) for the
year ended 2014 was US$34,475,463. No payments were made in respect of pensions and loss of office. Marc Moses was
appointed an executive Director with effect from 1 January 2014, therefore his 2013 figures have not been disclosed.
Emoluments of senior management
(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 2014 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
32,237
433
23,749
–
–
56,419
92,893
The aggregate emoluments of senior management for the year ended 31 December 2014 was US$92,892,912. 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
£6,000,001 – £7,000,000
£7,000,001 – £8,000,000
Number of
senior
management
1
1
7
3
3
1
1
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 2014 was US$713,715.
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Emoluments of five highest paid employees
(Unaudited)
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
2014.
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)
The emoluments of the five highest paid employees were within the following bands:
£4,000,001 – £4,100,000
£4,200,001 – £4,300,000
£4,700,001 – £4,800,000
£6,000,001 – £6,100,000
£7,600,001 – £7,700,000
5 highest paid
employees
£000
14,945
128
11,690
–
–
26,763
44,066
Number of
5 highest paid
employees
1
1
1
1
1
Remuneration of eight highest paid senior executives
(Unaudited)
Set out below are details of the remuneration of the eight highest paid senior executives (including members of the GMB,
but not Directors of HSBC Holdings):
561
434
995
199
199
299
299
996
111
1,107
2,102
3,461
Fixed
Cash based
Shares-based
Total fixed
Annual incentive1
Cash
Non-deferred shares2
Deferred cash3
Deferred shares3
1
£000
650
3,016
3,666
421
421
631
631
2
£000
606
1,549
2,155
345
345
517
517
3
£000
650
904
1,554
283
283
424
424
Employee
4
£000
5
£000
6
£000
7
£000
8
£000
668
726
1,394
265
265
398
398
741
617
1,358
224
224
336
336
650
710
765
376
1,360
1,141
223
223
334
334
224
224
336
336
Total annual incentive
2,104
1,724
1,414
1,326
1,120
1,114
1,120
GPSP
Deferred shares
Total variable pay
Total remuneration
Total remuneration (US$000)
234
2,338
6,004
9,887
191
1,915
4,070
6,701
157
1,571
3,125
5,144
147
1,473
2,867
4,720
125
1,245
2,603
4,287
124
1,238
2,598
4,276
124
1,244
2,385
3,928
1 Annual incentive in respect of performance year 2014.
2 Awards vested, subject to a six-month retention period.
3 Awards vest over a three-year period, 33% vests on or around the first and second anniversary of grant and 34% on or around third anniversary
of grant.
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Directors’ Remuneration Report (continued)
Appendix
Pillar 3 remuneration disclosures
The following tables show the remuneration awards made by HSBC to its Identified Staff and MRTs for 2014. Individuals
have been identified as MRTs based on the qualitative and quantitative criteria set out in the Regulatory Technical
Standard EU 604/2014 that came into force in June 2014. This replaces the criteria that were previously used to identify
Code Staff for the purposes of the PRA’s and the FCA’s Remuneration Code.
The scope of the qualitative and quantitative criteria specified in Regulatory Technical Standard EU 604/2014 to identify
MRTs is much broader than the criteria used to identify Code Staff in previous years. Accordingly, the number of
individuals identified as MRTs for 2014 is significantly larger than the number of individuals that were identified as Code
Staff in previous years. The figures for 2013 in the tables below relate to the number of individuals that were identified as
Code Staff for 2013.
These disclosures reflect the requirements of the FCA’s Prudential Sourcebook for Banks.
Aggregate remuneration expenditure
Global business aligned
Retail
Banking
and Wealth
Management
US$m
Commercial
Banking
US$m
Global
Banking and
Markets
US$m
Global
Private
Banking
US$m
Non-global
business
aligned
US$m
Total
US$m
Aggregate remuneration expenditure
(2014 MRTs/2013 Code Staff)1
2014
2013
94.3
39.7
61.7
14.6
741.3
309.0
70.2
44.9
374.4
171.2
1,341.9
579.4
1 Includes salary and incentives awarded in respect of performance in the years 2013 and 2014 (including deferred component) and any pension or
benefits outside of policy.
Remuneration – fixed and variable amounts – Group-wide
Number of 2014 MRTs/2013 Code Staff
Fixed
Cash-based
Shares-based
Total fixed
Variable2
Cash
Non-deferred shares3
Deferred cash
Deferred shares
Total variable pay4
2014
MRTs
(non-senior
manage-
ment)
Senior
manage-
ment1
98
US$m
64.1
51.8
115.9
18.5
18.5
24.9
41.5
103.4
1,080
US$m
517.0
88.7
605.7
138.9
132.0
119.5
126.4
516.8
2013
Code Staff
(non-senior
manage-
ment)
264
US$m
101.1
–
101.1
60.1
56.5
79.3
92.8
Senior
manage-
ment1
66
US$m
52.6
–
52.6
19.0
18.9
26.6
72.4
136.9
288.7
Total
1,178
US$m
581.1
140.5
721.6
157.4
150.5
144.4
167.9
620.2
Total
330
US$m
153.7
–
153.7
79.1
75.4
105.9
165.2
425.6
1 Definition of senior management for 2014 includes members of the Group Management Board, Group General Managers and non-executive
Directors. For 2013, this includes members of the Group Management Board and Group General Managers only.
2 Variable pay awarded in respect of performance in the years 2013 and 2014.
3 Vested shares, subject to a six-month retention period.
4 In accordance with shareholder approval received on 23 May 2014, for each MRT the variable component of remuneration for any one year is
limited to 200% of fixed component of total remuneration of the MRT.
Remuneration – fixed and variable amounts – UK based
Number of 2014 MRTs/2013 Code Staff
Total fixed
Total variable pay1
2014
MRTs
(non-senior
manage-
ment)
446
US$m
244.5
205.2
Senior
manage-
ment
64
US$m
73.1
60.7
2013
Code Staff
(non-senior
manage-
ment)
157
US$m
53.7
120.3
Senior
manage-
ment
35
US$m
30.4
86.0
Total
510
US$m
317.6
265.9
Total
192
US$m
84.1
206.3
1 Variable pay awarded in respect of performance in the years 2013 and 2014.
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Deferred remuneration1
Deferred remuneration at 31 December
Outstanding, unvested
Awarded during the year
Paid out2
Reduced through malus3
2014
MRTs
(non-senior
manage-
ment)
US$m
691.8
353.8
210.3
–
Senior
manage-
ment
US$m
270.2
112.6
33.9
–
2013
Code Staff
(non-senior
manage-
ment)
US$m
331.7
159.6
269.9
–
Senior
manage-
ment
US$m
213.4
87.0
110.7
0.4
Total
US$m
962.0
466.4
244.2
–
Total
US$m
545.1
246.6
380.6
0.4
1 This table provides details of actions taken during the performance years 2013 and 2014. For details of variable pay awards granted for the
performance years 2013 and 2014, please refer to both the Remuneration tables above.
2 All valued as at 31 December of the relevant year, except for 2013 vested shares which are valued using share price as at day of vesting.
3 This table only discloses instances of malus for 2014 MRTs/2013 Code Staff. Malus has been applied in the year for other individuals who have
left the Group. Where practicable, an adjustment will be made to current year variable pay, before the application of malus (see page 306 for
further information).
Sign-on and severance payments
Sign-on payments
Made during year (US$m)
Number of beneficiaries
Severance payments
Made during year (US$m)
Number of beneficiaries
Highest such award to single person (US$m)
MRT remuneration by band1
€0 – €1,000,000
€1,000,001 – €1,500,000
€1,500,001 – €2,000,000
€2,000,001 – €2,500,000
€2,500,001 – €3,000,000
€3,000,001 – €3,500,000
€3,500,001 – €4,000,000
€4,000,001 – €4,500,000
€4,500,001 – €5,000,000
€5,000,001 – €6,000,000
€6,000,001 – €7,000,000
€7,000,001 – €8,000,000
€8,000,001 – €9,000,000
2014
MRTs
(non-senior
manage-
ment)
Senior
manage-
ment
1.9
1
–
–
–
2.6
5
4.1
13
0.5
2013
Code Staff
(non-senior
manage-
ment)
Senior
manage-
ment
–
–
1.1
3
0.6
3.7
3
1.6
5
0.6
Total
4.5
6
4.1
13
0.5
Total
3.7
3
2.7
8
Number of 2014 MRTs
Number of 2013 Code Staff
Senior
manage-
ment
MRTs
(non-senior
manage-
ment)
29
20
10
13
10
6
3
2
2
1
–
1
1
829
150
54
23
12
7
3
1
1
–
–
–
–
Senior
manage-
ment
Code Staff
(non-senior
manage-
ment)
11
19
9
6
7
4
2
3
3
–
–
1
1
139
44
33
19
16
10
1
1
–
1
–
–
–
Total
858
170
64
36
22
13
6
3
3
1
–
1
1
Total
150
63
42
25
23
14
3
4
3
1
–
1
1
1 Table prepared in euros in accordance with Article 450 of the Capital Requirements Regulation, using the rates published by the European
Commission for financial programming and budget for December of the reported year as published on their website.
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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 329 to 333, 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 2014 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. Each person who is a Director at the date of approval of this report has confirmed 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 was given pursuant to
section 418 of the Companies Act 2006 and should be interpreted in accordance with and subject to those provisions.
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 Strategic Report, a
Directors’ Report, Directors’ Remuneration Report and the Corporate Governance Report on pages 1 to 327 of this Annual
Report and Accounts 2014 and for the maintenance and integrity of the Annual Report and Accounts 2014 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.
Each of the Directors, the names of whom are set out in the ‘Report of the Directors: Corporate Governance’ section
on pages 264 to 268 of the Annual Report and Accounts 2014, 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
parent 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 parent 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 2014, taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess the parent company’s performance, business model and
strategy.
On behalf of the Board
D J Flint, Group Chairman
23 February 2015
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Opinions and conclusions arising from our audit
Our opinion on the financial statements is unmodified
We have audited the financial statements of HSBC Holdings plc for the year ended 31 December 2014 set out on pages
335 to 457. 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 2014 and of the Group’s profit for the year then ended;
• the Group financial statements have been properly prepared in accordance with International Financial Reporting
Standards as adopted by the European Union (‘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.
Our assessment of risks of material misstatement
In arriving at our audit opinion above, our strategy was to increase our audit procedures in areas where we identified a
higher risk of material misstatement of the financial statements.
To conduct our risk assessment, we considered the inherent risks facing the Group and the parent company, including
those arising from the respective business models, and how the Group controls those risks. In doing so, we considered a
number of factors including: the Group’s ability to continue as a going concern; the risk of fraud; the design and
implementation of the Group’s control environment; and the risk of management override of key controls.
We revisited our risk assessment after testing the operating effectiveness of a number of the Group’s key controls
including internal controls over financial reporting and specific anti-fraud controls as well as testing the basis of the going
concern assumption. We also considered the inherent need for the directors to make and appropriately disclose
judgements when preparing the financial statements.
As a result of this assessment, the risks of material misstatement that had the greatest effect on our audit were areas
where significant judgement was required and were as follows:
The risk
Our response
Impairment of loans and advances
Refer to the critical accounting estimates and judgements in Note 1(k) on the Financial Statements, the Group Audit Committee Report on
pages 277 to 279 and the disclosures of credit risk within the audited elements of the Risk sections of the Financial Review on pages 111
to 237.
The impairment of loans and advances is
estimated by the directors through the application
of judgement and use of highly subjective
assumptions.
Due to the significance of loans and advances
(representing 41% of total assets) and the related
estimation uncertainty, this is considered a key
audit risk.
The portfolios which give rise to the greatest
uncertainty are typically those where impairments
are derived from collective models, are unsecured
or are subject to potential collateral shortfalls.
In 2014, we continued to pay particular attention
to collective impairment methodologies, focusing
specifically on US mortgages, the commercial and
global banking portfolios, and Brazilian personal
and business loans, either due to their relative size
or the potential impact of changing inputs and
assumptions. We also focused on portfolios that
were potentially more sensitive to developing and
emerging global economic trends. In addition, we
also focused on individually significant exposures
that either continued to be, have become, or were
at risk of being individually impaired.
Our audit procedures included the assessment of controls over
the approval, recording and monitoring of loans and advances,
and evaluating the methodologies, inputs and assumptions used
by the Group in calculating collectively assessed impairments,
and assessing the adequacy of impairment allowances for
individually assessed loans and advances.
We compared the Group’s assumptions for both collective
and individual impairment allowances to externally available
industry, financial and economic data and our own assessments
in relation to key inputs. As part of this, we critically assessed the
Group’s revisions to estimates and assumptions, specifically in
respect of the inputs to the impairment models in the
commercial and global banking portfolios and the consistency of
judgement applied in the use of economic factors, loss
emergence periods and the observation period for historical
default rates. For a sample of exposures that were subject to an
individual impairment assessment, and focusing on those with
the most significant potential impact on the financial
statements, we specifically challenged the Group’s assumptions
on the expected future cash flows, including the value of
realisable collateral based on our own understanding and
available market information.
We also assessed whether the financial statement disclosures
appropriately reflect the Group’s exposure to credit risk,
specifically considering those portfolios identified in 2014 as
presenting the greatest risk.
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Independent Auditor’s Report to the Members of HSBC Holdings plc only (continued)
Report
The risk
Our response
Litigation, regulatory actions and customer remediation
Refer to the critical accounting estimates and judgements, and disclosures of provisions and contingent liabilities in Notes 29, 37 and 40
on the Financial Statements and the Group Audit Committee Report on pages 277 to 279.
The recognition and measurement of provisions
and the measurement and disclosure of
contingent liabilities in respect of litigation,
regulatory actions and customer remediation
(together ‘legal and regulatory matters’)
require significant judgement. Due to the
significance of these matters and the difficulty
in assessing and measuring the quantum from
any resulting obligations, this is considered a
key audit risk.
In 2014, we paid particular attention to
significant matters that experienced notable
developments or that emerged during the
period. The areas of greatest focus were
customer redress programmes and foreign
exchange matters in the UK, and other tax and
regulatory matters in France, the US and
Switzerland.
Our audit procedures included the assessment of controls over the
identification, evaluation and measurement of potential obligations
arising from legal and regulatory matters.
For matters identified, we considered whether an obligation exists,
the appropriateness of provisioning and/or disclosure based on the
facts and circumstances available. In order to assess the facts and
circumstances, we obtained and assessed the relevant regulatory
and litigation documents and also interviewed the Group’s internal
and external legal counsel. We also critically assessed the
assumptions made and key judgements applied and considered
possible alternative outcomes based on our own experience and
knowledge of market information.
Additionally we considered whether the Group’s disclosures of the
application of judgement in estimating provisions and contingent
liabilities adequately reflected the uncertainties associated with
legal and regulatory matters.
The risk
Our response
Valuation of financial instruments
Refer to the critical accounting estimates and judgements and disclosures of fair values in Notes 12 to 16, 18, 24 and 25 on the Financial
Statements, the Group Audit Committee Report on pages 277 to 279 and the disclosures of market risk within the audited elements of the
Risk sections of the Financial Review on pages 111 to 237.
The fair value of financial instruments is
determined through the application of
valuation techniques which often involve the
exercise of judgement by the directors and the
use of assumptions and estimates.
Due to the significance of financial instruments
and the related estimation uncertainty, this is
considered a key audit risk. At 31 December
2014, financial assets carried at fair value
represented 40% of total assets and financial
liabilities carried at fair value represented 25%
of total liabilities.
Estimation uncertainty is particularly high for
those instruments where significant valuation
inputs are unobservable (i.e. Level 3
instruments). At 31 December 2014, Level 3
instruments represented 1.4% of financial
assets carried at fair value and 1.3% of financial
liabilities carried at fair value.
In 2014, we have continued to focus on
developments in derivative fair value
methodologies and specifically on the Group’s
adoption of a funding fair value adjustment
for the measurement of uncollateralised
derivatives.
Our audit procedures included the assessment of controls over the
identification, measurement and management of valuation risk, and
evaluating the methodologies, inputs and assumptions used by the
Group in determining fair values.
For the Group’s fair value models, we assessed the appropriateness
of the models and inputs. We compared observable inputs against
independent sources and externally available market data.
For a sample of instruments with significant unobservable valuation
inputs, and with the assistance of our own valuation specialists,
we critically assessed the assumptions and models used or re-
performed an independent valuation assessment, by reference
to what we considered to be available alternative methods and
sensitivities to key factors.
We also evaluated the methodology and inputs used by the Group
in determining its funding fair value adjustment recorded on the
uncollateralised derivatives portfolio and compared that against
current market practice based on our experience of comparable
institutions.
Additionally, we assessed whether the financial statement
disclosures of fair value risks and sensitivities appropriately reflect
the Group’s exposure to valuation risk.
HSBC HOLDINGS PLC
330
The risk
Deferred tax assets
Our response
Refer to the critical accounting estimates and judgements and disclosures of deferred taxation in Note 8 on the Financial Statements and
the Group Audit Committee Report on pages 277 to 279.
The recognition of deferred tax assets relies on
the significant application of judgement by the
directors in respect of assessing the probability
and sufficiency of future taxable profits, future
reversals of existing taxable temporary
differences and ongoing tax planning strategies.
Due to the size of the Group’s recognised
deferred tax assets (US$7.4bn) and the
associated uncertainty surrounding
recoverability, this is considered a key audit
risk.
In 2014, we have continued to focus on the
most significant deferred tax assets which arise
in the US, Brazil and Mexico. We paid particular
attention to the tax planning strategy in the US,
which continues to rely on the capital support
of the parent company, and to management’s
forecasts of future profitability in Brazil that
support the deferred tax asset.
Our audit procedures included the assessment of controls over
the recognition and measurement of deferred tax assets and the
assessment of assumptions used in projecting the Group’s future
taxable profits in relevant jurisdictions. We also challenged the
Group’s assumptions and commitment to continue to invest
sufficient capital in the US by evaluating the expected tax planning
strategies that will be employed and the availability of capital that
collectively support the realisation of the recognised deferred tax
assets.
We compared key inputs used by the Group to forecast future
profits to externally available data such as economic forecasts and
the Group’s own historical data and performance and assessed the
sensitivity of the outcomes to reasonably possible changes in
assumptions. We also used our own tax specialists to critically
assess the appropriateness of the future tax planning strategies.
Additionally, we assessed whether the Group’s disclosures of
the application of judgement in estimating recognised and
unrecognised deferred tax asset balances appropriately reflect
the Group’s deferred tax position.
The risk
Goodwill impairment
Our response
Refer to the critical accounting estimates and judgements and disclosures of goodwill in Note 21 on the Financial Statements and the
Group Audit Committee Report on pages 277 to 279.
Goodwill impairment testing of cash generating
units (‘CGUs’) relies on estimates of value-in-
use based on estimated future cash flows.
Due to the uncertainty of forecasting and
discounting future cash flows and the
significance of the Group’s recognised goodwill
(US$19.2bn), this is deemed a significant risk.
Uncertainty is typically highest for those CGUs
where headroom between value-in-use and
carrying value is limited and where the value-
in-use is most sensitive to estimates of future
cash flows.
In 2014, we focused on CGUs that were most
sensitive and reliant on future cash flow
projections and, as a result of recent historical
performance, were expected to have reduced
headroom, particularly GPB businesses in
Europe.
Our audit procedures included the assessment of controls over the
Group’s process for the recognition and measurement of goodwill
impairment, including the assumptions used. We also tested the key
assumptions forming the Group’s value-in-use calculation, including
the cash flow projections and discount rates.
We assessed the reasonableness of cash flow projections and
compared key inputs, such as the discount rates and growth rates,
to externally available industry, economic and financial data and
the Group’s own historical data and performance. With the
assistance of our own specialists, we critically assessed the
assumptions and methodologies used to forecast value-in-use for
those CGUs where significant goodwill was found to be sensitive
to changes in those assumptions. On an overall basis, we also
evaluated the aggregate values-in-use determined by the Group
to its external market capitalisation.
Additionally we considered whether the Group’s disclosures of the
application of judgement in estimating CGU cash flows and the
sensitivity of the results of those estimates adequately reflect the
risks associated with goodwill impairment.
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Independent Auditor’s Report to the Members of HSBC Holdings plc only (continued)
Report
The risk
Interests in associates
Our response
Refer to the critical accounting estimates and judgements and disclosures of interests in associates in Note 20 on the Financial Statements
and the Group Audit Committee Report on pages 277 to 279.
The majority of HSBC’s interests in associates
relate to its 19.03% interest in Bank of
Communications Co., Limited (‘BoCom’), which
is listed on the Hong Kong and Shanghai stock
exchanges.
Under the equity method of accounting for
associates, these interests are initially stated at
cost, and are adjusted thereafter for the post-
acquisition change in HSBC’s share of the net
assets of the associate less any impairment
provisions.
BoCom’s market value has been below its
carrying amount for a sustained period, and
therefore its current carrying amount
(US$14.6bn) continues to rely on the Group’s
significant judgement in determining BoCom’s
recoverable amount based on its value-in-use.
The projected future cash flows and discount
rates used by the Group in determining
BoCom’s value-in-use are subject to estimation
uncertainty and sensitivity. Therefore, we
consider this a key audit risk.
Our audit procedures included the assessment of the Group’s
methodology and calculation of BoCom’s value-in-use. We
evaluated the reasonableness of cash flow projections against
BoCom’s most recent financial performance and considered the
appropriateness of key inputs such as long-term growth rates used
to extrapolate these cash flows, the discount rate, the risk-weighted
assets to total assets ratio and the loan impairment charge to gross
loans ratio and compared these to available industry, economic and
financial data, and to consensus market forecasts.
We met with BoCom’s management to understand current business
performance and expectations and whether they were properly
reflected in the Group’s own assumptions. We also compared the
results of the value-in-use calculations to market available
price/earnings multiples for BoCom and other listed banks in
mainland China and assessed the Group’s analysis of the difference
between the market value and the value-in-use of its interest in
BoCom. This assessment included consideration of the valuation
methodologies and assumptions used by other market participants.
Additionally, we considered whether the Group’s disclosures of the
application of judgement in estimating the recoverable amount and
the sensitivity of the results of those estimates adequately reflect
the risks associated with impairment of interests in associates.
Our application of materiality and an overview of the scope of our audit
The materiality for the Group financial statements as a whole was set at US$930m, determined with reference to a
benchmark of Group profit before tax, normalised to exclude fair value movements on long-term debt attributable to
credit spread (‘own credit spread’), which we believe to be one of the principal considerations for members of the
company in assessing financial performance. Materiality represents 5.0% of Group profit before tax and 5.1% after
adjustment to exclude own credit spread.
We report to the Group Audit Committee any corrected or uncorrected identified misstatements exceeding US$45m,
in addition to other identified misstatements that warranted reporting on qualitative grounds.
Our approach to scoping components was: for some regions, we instructed the regional audit team to conduct and report
to us on a full scope regional audit and specified certain components within those regions that should be subject to a full
scope audit overseen by the relevant regional audit team; within other regions, we directly instructed component audit
teams to conduct and report to us full scope audits. Accordingly, we instructed or specified full scope audits at 23
components across all five regions as follows:
• Europe (7 components)
• Asia (8 components)
• Middle East and North Africa (1 component)
• North America (4 components)
• Latin America (3 components)
These audits covered 82% of total Group operating income; 78% of total profits and losses that made up Group profit
before tax; and 88% of total Group assets. The segment disclosures in Note 11 set out the individual significance of each
region.
We approved materiality for those full scope audits that we directly instructed, ranging from US$50m to US$750m having
regard to the mix of size and risk profile of the Group across the components.
The Group audit team visited locations in Europe, Asia, North America and Latin America and teams from components in
each region attended a Group audit planning meeting. The Group audit team also held regular telephone meetings with
the regional audit teams and other component auditors. In addition, regional audit teams visited locations of key
components within their regions.
HSBC HOLDINGS PLC
332
Our separate opinion in relation to IFRSs as issued by the International Accounting Standards Board is
unmodified
As explained in Note 1(a) on 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.
Our opinion on other matters prescribed by the Companies Act 2006 is unmodified
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 Strategic Report and Directors’ Report for the financial year for which the financial
statements are prepared is consistent with the financial statements.
We have nothing to report in respect of matters on which we are required to report by exception
Under International Standards on Auditing (UK and Ireland) we are required to report to you if, based on the knowledge
we acquired during our audit, we have identified other information in the annual report that contains a material
inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise
misleading.
In particular, we are required to report to you if:
• we have identified material inconsistencies between the knowledge we acquired during our audit and the directors’
statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and
understandable and provides the information necessary for shareholders to assess the Group’s performance, business
model and strategy; or
• the Corporate Governance section of the Annual Report and Accounts describing the work of the Group Audit
Committee does not appropriately address matters communicated by us to the Group Audit Committee.
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 pages 290 and 291, in relation to going concern; and
• the part of the Corporate Governance Statement relating to the company’s compliance with the ten provisions of the
2012 UK Corporate Governance Code specified for our review.
We have nothing to report in respect of the above responsibilities.
Scope of report and responsibilities
As explained more fully in the Directors’ Responsibilities Statement set out on page 328, the Directors are responsible for
the preparation of the financial statements and for being satisfied that they give a true and fair view.
A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at
http://www.frc.org.uk/auditscopeukprivate.
This report is made solely to the company’s members, as a body and is subject to important explanations and disclaimers
regarding our responsibilities, published on our website at http://www.kpmg.com/uk/auditscopeukco2014b, which are
incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this
report, the work we have undertaken and the basis of our opinions.
Guy Bainbridge (Senior Statutory Auditor)
for and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
15 Canada Square
London E14 5GL
23 February 2015
HSBC HOLDINGS PLC
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Financial Statements
Consolidated income statement
Financial Statements
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of cash flows
Consolidated statement of changes in equity
HSBC Holdings balance sheet
HSBC Holdings statement of cash flows
HSBC Holdings statement of changes in equity
Notes on the Financial
Statements
1
Basis of preparation
2 Net income/(expense) from financial
instruments designated at fair value
3 Net insurance premium income
4 Net insurance claims and benefits paid and
movement in liabilities to policyholders
5 Operating profit
6
Employee compensation and benefits
7 Auditors’ remuneration
8
Tax
9 Dividends
10
11
12
13
Earnings per share
Segmental analysis
Trading assets
Fair values of financial instruments carried at
fair value
14
Fair values of financial instruments not carried
at fair value
15
Financial assets designated at fair value
16 Derivatives
335
336
337
338
339
341
342
343
345
354
354
355
356
356
364
365
370
371
371
377
378
390
392
394
17 Non-trading reverse repurchase and repurchase
agreements
Financial investments
Assets charged as security for liabilities, assets
transferred and collateral accepted as
security for assets
Interests in associates and joint ventures
Goodwill and intangible assets
Investments in subsidiaries
Prepayments, accrued income and other assets
Trading liabilities
Financial liabilities designated at fair value
Debt securities in issue
Accruals, deferred income and other liabilities
Liabilities under insurance contracts
Provisions
Subordinated liabilities
18
19
20
21
22
23
24
25
26
27
28
29
30
31 Maturity analysis of assets, liabilities and off-
balance sheet commitments
32 Offsetting of financial assets and financial
liabilities
33
Foreign exchange exposures
34 Non-controlling interests
35
Called up share capital and other equity
instruments
36 Notes on the statement of cash flows
37
Contingent liabilities, contractual commitments
and guarantees
Lease commitments
Structured entities
Legal proceedings and regulatory matters
Related party transactions
Events after the balance sheet date
38
39
40
41
42
398
399
401
403
407
413
416
417
417
418
418
419
420
423
426
434
435
436
437
439
441
442
443
446
455
457
HSBC HOLDINGS PLC
334
Consolidated income statement
for the year ended 31 December 2014
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 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 insurance premium income
Gains on disposal of US branch network, US cards business and Ping An
Insurance (Group) Company of China, Ltd
Other operating income
Total operating income
Net insurance claims and benefits paid and movement in liabilities to
policyholders
Net operating income before loan impairment charges and other credit risk
provisions
Loan impairment charges and other credit risk provisions
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
Total operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
Tax expense
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
Notes
2
3
4
5
6
21
5
20
8
10
10
2014
US$m
50,955
(16,250)
34,705
19,545
(3,588)
15,957
4,853
1,907
6,760
508
1,965
2,473
1,335
311
11,921
–
1,131
74,593
2013
US$m
51,192
(15,653)
35,539
19,973
(3,539)
16,434
6,643
2,047
8,690
(1,228)
1,996
768
2,012
322
11,940
–
2,632
78,337
2012
US$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
(13,345)
(13,692)
(14,215)
61,248
(3,851)
57,397
(20,366)
(18,565)
(1,382)
(936)
(41,249)
16,148
2,532
18,680
(3,975)
14,705
13,688
1,017
US$
0.69
0.69
64,645
(5,849)
58,796
(19,196)
(17,065)
(1,364)
(931)
(38,556)
20,240
2,325
22,565
(4,765)
17,800
16,204
1,596
US$
0.84
0.84
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
The accompanying notes on pages 345 to 457 form an integral part of these financial statements1.
For footnote, see page 344.
HSBC HOLDINGS PLC
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Financial Statements (continued)
Consolidated statement of comprehensive income / Consolidated balance sheet
Consolidated statement of comprehensive income
for the year ended 31 December 2014
Profit for the year
Other comprehensive income/(expense)
Items that will be reclassified subsequently to profit or loss when specific
conditions are met:
Available-for-sale investments2
– fair value gains/(losses)
– fair value gains reclassified to the income statement
– amounts reclassified to the income statement in respect of impairment
losses
– income taxes
Cash flow hedges
– fair value gains
– fair value gains reclassified to the income statement
– income taxes
Share of other comprehensive income/(expense) of associates and
joint ventures
– share for the year
– reclassified to income statement on disposal
Exchange differences
– foreign exchange gains reclassified to income statement on disposal of a
foreign operation
– other exchange differences
– Income tax attributable to exchange differences
Items that will not be reclassified subsequently to profit or loss:
Remeasurement of defined benefit asset/liability
– before income taxes
– income taxes
Other comprehensive income for the year, net of tax
Total comprehensive income for the year
Attributable to:
– shareholders of the parent company
– non-controlling interests
Total comprehensive income for the year
2014
US$m
14,705
2,972
4,794
(1,672)
374
(524)
188
1,512
(1,244)
(80)
80
78
2
(8,903)
(21)
(8,917)
35
1,985
2,419
(434)
(3,678)
11,027
9,245
1,782
11,027
2013
US$m
17,800
(1,718)
(1,787)
(1,277)
286
1,060
(128)
776
(894)
(10)
(71)
(35)
(36)
(1,372)
(290)
(1,154)
72
(458)
(601)
143
(3,747)
14,053
12,644
1,409
14,053
2012
US$m
15,334
5,070
6,396
(1,872)
1,002
(456)
109
552
(423)
(20)
533
311
222
1,017
(1,128)
2,145
–
(195)
(391)
196
6,534
21,868
20,455
1,413
21,868
The accompanying notes on pages 345 to 457 form an integral part of these financial statements1.
For footnote, see page 344.
HSBC HOLDINGS PLC
336
Consolidated balance sheet
at 31 December 2014
Notes
2014
US$m
2013
US$m
166,599
6,021
25,220
303,192
38,430
282,265
120,046
992,089
179,690
425,925
76,842
985
16,640
29,918
7,456
129,957
4,927
27,674
304,193
29,037
345,008
112,149
974,660
161,713
415,467
75,176
1,309
18,181
27,577
7,111
2,634,139
2,671,318
27,674
77,426
1,350,642
107,432
5,990
190,572
76,153
340,669
95,947
53,396
1,213
73,861
4,998
1,524
26,664
2,434,161
9,609
11,918
11,532
20,244
137,144
190,447
9,531
199,978
25,220
86,507
1,361,297
164,220
6,910
207,025
89,084
274,284
104,080
52,341
607
74,181
5,217
910
28,976
2,480,859
9,415
11,135
5,851
26,742
128,728
181,871
8,588
190,459
2,634,139
2,671,318
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 banks3
Loans and advances to customers3
Reverse repurchase agreements – non-trading
Financial investments
Prepayments, accrued income and other assets
Current tax assets
Interests in associates and joint ventures
Goodwill and intangible assets
Deferred tax assets
Total assets at 31 December
Liabilities and equity
Liabilities
Hong Kong currency notes in circulation
Deposits by banks3
Customer accounts3
Repurchase agreements – non-trading
Items in the course of transmission to other banks
Trading liabilities
Financial liabilities designated at fair value
Derivatives
Debt securities in issue
Accruals, deferred income and other liabilities
Current tax liabilities
Liabilities under insurance contracts
Provisions
Deferred tax liabilities
Subordinated liabilities
Total liabilities at 31 December
Equity
Called up share capital
Share premium account
Other equity instruments
Other reserves
Retained earnings
Total shareholders’ equity
Non-controlling interests
Total equity at 31 December
Total liabilities and equity at 31 December
12
15
16
17
18
23
20
21
8
17
24
25
16
26
27
28
29
8
30
35
34
The accompanying notes on pages 345 to 457 form an integral part of these financial statements1.
For footnote, see page 344.
D J Flint, Group Chairman
HSBC HOLDINGS PLC
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Financial Statements (continued)
Consolidated statement of cash flows / Consolidated statement of changes in equity
Consolidated statement of cash flows
for the year ended 31 December 2014
Cash flows from operating activities
Profit before tax
Adjustments for:
– net gain from investing activities
– share of profits in associates and joint ventures
– (gain)/loss on disposal of associates, joint ventures, subsidiaries and
businesses
– other non-cash items included in profit before tax
– change in operating assets
– change in operating liabilities
– elimination of exchange differences4
– dividends received from associates
– contributions paid to defined benefit plans
– tax paid
Net cash generated from/(used in) 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
Net cash inflow/(outflow) from disposal of customer and loan portfolios
Net purchase of intangible assets
Net cash inflow from disposal of US branch network and US cards business
Proceeds from disposal of Ping An
Net cash inflow/(outflow) from disposal of other subsidiaries, businesses,
associates and joint ventures
Net cash outflow from acquisition of or increase in stake of associates
Net cash generated from/(used in) investing activities
Cash flows from financing activities
Issue of ordinary share capital
Net sales/(purchases) of own shares for market-making and investment
purposes
Issue of other equity instruments
Redemption of preference shares
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 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
Notes
2014
US$m
2013
US$m
2012
US$m
18,680
22,565
20,649
36
36
36
(1,928)
(2,532)
9
11,262
25,877
(93,814)
24,571
757
(681)
(3,573)
(21,372)
(384,199)
382,837
(1,477)
88
(1,035)
(903)
–
–
(242)
(30)
(4,961)
267
(96)
5,681
(234)
3,500
(3,163)
–
(6,611)
(639)
(573)
(1,868)
(28,201)
346,281
(16,779)
301,301
(1,458)
(2,325)
(1,173)
11,995
(148,899)
164,757
4,479
694
(962)
(4,696)
44,977
(363,979)
342,539
(1,952)
441
6,518
(834)
–
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3,295
(26)
(6,585)
297
(32)
–
–
1,989
(1,662)
–
(6,414)
(586)
(573)
(6,981)
31,411
315,308
(438)
346,281
(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
1,954
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(1,804)
5,653
594
(25)
–
–
37
(1,754)
(14)
(5,925)
(572)
(573)
(8,232)
(11,735)
325,449
1,594
315,308
Cash and cash equivalents at 31 December
36
The accompanying notes on pages 345 to 457 form an integral part of these financial statements1.
For footnote, see page 344.
HSBC HOLDINGS PLC
338
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HSBC HOLDINGS PLC
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Financial Statements (continued)
Consolidated statement of changes in equity / HSBC Holdings balance sheet
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HSBC HOLDINGS PLC
340
HSBC Holdings balance sheet
at 31 December 2014
Assets
Cash at bank and in hand:
– balances with HSBC undertakings
Derivatives
Loans and advances to HSBC undertakings
Financial investments in HSBC undertakings
Prepayments, accrued income and other assets
Current tax assets
Investments in subsidiaries
Deferred tax assets
Total assets at 31 December
Liabilities and equity
Liabilities
Amounts owed to HSBC undertakings
Financial liabilities designated at fair value
Derivatives
Debt securities in issue
Accruals, deferred income and other liabilities
Current tax liabilities
Deferred tax liabilities
Subordinated liabilities
Total liabilities
Equity
Called up share capital
Share premium account
Other equity instruments
Other reserves
Retained earnings
Total equity
Total liabilities and equity at 31 December
Notes
2014
US$m
2013
US$m
16
22
8
25
16
26
8
30
35
249
2,771
43,910
4,073
125
472
96,264
–
407
2,789
53,344
1,210
133
245
92,695
13
147,864
150,836
2,892
18,679
1,169
1,009
1,398
–
17
17,255
42,419
9,609
11,918
11,476
37,456
34,986
105,445
147,864
11,685
21,027
704
2,791
1,327
48
–
14,167
51,749
9,415
11,135
5,828
37,303
35,406
99,087
150,836
The accompanying notes on pages 345 to 457 form an integral part of these financial statements1.
For footnote, see page 344.
D J Flint, Group Chairman
HSBC HOLDINGS PLC
341
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S
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 2014
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
– tax received
Net cash generated from/(used in) operating activities
Cash flows from investing activities
Net cash outflow from acquisition of or increase in stake of subsidiaries
Repayment of capital from subsidiaries
Net cash used in investing activities
Cash flows from financing activities
Issue of ordinary share capital
Issue of other equity instruments
Sales of own shares to meet share awards and share option awards
Subordinated loan capital issued
Subordinated loan capital repaid
Debt securities repaid
Dividends paid on ordinary shares
Dividends paid to holders of other equity instruments
Net cash generated from/(used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Notes
2014
US$m
2013
US$m
6,228
17,725
36
36
36
36
52
1,854
(9,914)
133
(1,647)
(1,603)
3,505
1,902
924
5,635
–
3,500
(1,654)
(1,634)
(6,611)
(573)
(413)
(158)
407
249
74
(10,795)
(1,061)
156
6,099
(665)
–
(665)
1,192
–
44
1,989
(1,618)
–
(6,414)
(573)
(5,380)
54
353
407
The accompanying notes on pages 345 to 457 form an integral part of these financial statements1.
For footnote, see page 344.
HSBC HOLDINGS PLC
342
HSBC Holdings statement of changes in equity
for the year ended 31 December 2014
Called up
share
capital
US$m
Share
premium
US$m
Other
equity
instru-
ments1
US$m
Retained
1 earnings9
At 1 January 2014
9,415
11,135
5,828
Profit for the year
Other comprehensive income (net of tax)
– available-for-sale investments
– income tax
Total comprehensive income for the year
Shares issued under employee share plans
Shares issued in lieu of dividends and
amounts arising thereon
Capital securities issued
Dividends to shareholders8
Tax credit on distributions
Own shares adjustment
Exercise and lapse of share options
Cost of share-based payment
arrangements
Income taxes on share-based payments
Equity investments granted to employees
of subsidiaries under employee share
plans
–
–
–
–
–
60
134
–
–
–
–
–
–
–
–
–
–
–
–
–
917
(134)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,648
–
–
–
–
–
–
–
US$m
35,406
6,527
–
–
–
6,527
(53)
2,709
–
(9,893)
104
103
(37)
74
(2)
48
At 31 December 2014
9,609
11,918
11,476
34,986
At 1 January 2013
9,238
10,084
5,828
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 thereon
Dividends to shareholders8
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
–
–
–
–
–
60
117
–
–
–
–
–
–
–
–
–
–
–
–
1,168
(117)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
24,707
17,882
–
–
–
17,882
(36)
2,523
(9,510)
42
222
(123)
49
–
(350)
Other reserves
Available-
for-sale
fair value
reserve
US$m
Other
paid-in
capital10
US$m
Merger
and other
reserves7
US$m
Total
share-
holders’
equity
US$m
124
–
116
152
(36)
116
–
–
–
–
–
–
–
–
–
–
240
114
–
10
2
8
10
–
–
–
–
–
–
–
–
–
2,052
35,127
99,087
–
–
–
–
–
–
–
–
–
–
–
37
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6,527
116
152
(36)
6,643
924
2,709
5,648
(9,893)
104
103
–
74
(2)
48
2,089
35,127
105,445
1,929
35,127
–
–
–
–
–
–
–
–
–
–
123
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
87,027
17,882
10
2
8
17,892
1,192
2,523
(9,510)
42
222
–
49
–
(350)
At 31 December 2013
9,415
11,135
5,828
35,406
124
2,052
35,127
99,087
Dividends per ordinary share at 31 December 2014 were US$0.49 (2013: US$0.48; 2012: US$0.41).
The accompanying notes on pages 345 to 457 form an integral part of these financial statements1.
For footnote, see page 344.
HSBC HOLDINGS PLC
343
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S
Financial Statements (continued)
Footnotes
Footnotes to the Financial Statements
1 The audited sections of ‘Risk’ on pages 111 to 237 and the audited sections of ‘Capital’ on pages 238 to 262 are also an integral part of
these financial statements.
2 Available-for-sale investments include nil in respect of the investment in Ping An classified as ‘Assets held for sale’ (2013: nil; 2012:
US$: 737m).
3 From 1 January 2014, non-trading reverse repos and repos are presented as separate lines in the balance sheet. Previously, non-
trading reverse repos were included within ‘Loans and advances to banks’ and ‘Loans and advances to customers’ and non-trading
repos were included within ‘Deposits by banks’ and ‘Customer accounts’. Comparative data have been re-presented accordingly. Non-
trading reverse repos and repos have been presented as separate lines in the balance sheet to align disclosure with market practice
and provide more meaninful information in relation to loans and advances. The extent to which reverse repos and repos represent
loans to/from customers and banks is set out in Note 17 on the Financial Statements.
4 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.
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 85,337,430 (US$641m) 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 (2013: 85,997,271 (US$915m); 2012: 86,394,826
(US$874m)).
7 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.
8 Including distributions paid on preference shares and capital securities classified as equity under IFRSs.
9 Retained earnings include 179,419 (US$3m) (2013: 330,030 (US$5m)) of own shares held to fund employee share plans.
10 Other paid-in capital arises from the exercise and lapse of share options granted to employees of HSBC Holdings subsidiaries.
11 During September 2014, HSBC Holdings issued US$2,250m, US$1,500m and €1,500m of Perpetual Subordinated Contingent
Convertible Capital Securities, on which there were US$13m of external issuance costs and US$33m of intra-group issuance costs which
are classified as equity under IFRSs.
HSBC HOLDINGS PLC
344
Notes on the Financial Statements
1 – Basis of preparation
1 Basis of preparation and significant accounting policies
(a) Compliance with International Financial Reporting Standards
International Financial Reporting Standards (‘IFRSs’) comprise accounting standards issued or adopted by the
International Accounting Standards Board (‘IASB’) and interpretations issued or adopted by the IFRS Interpretations
Committee (‘IFRS IC’).
The consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings have been
prepared in accordance with IFRSs as issued by the IASB and as endorsed by the EU. EU-endorsed IFRSs could differ
from IFRSs as issued by the IASB if, at any point in time, new or amended IFRSs were not to be endorsed by the EU.
At 31 December 2014, there were no unendorsed standards effective for the year ended 31 December 2014 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 2014 are prepared in accordance with IFRSs as issued by the IASB.
Standards adopted during the year ended 31 December 2014
There were no new standards applied during the year ended 31 December 2014.
On 1 January 2014, HSBC applied ‘Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32)’, which
clarified the requirements for offsetting financial instruments and addressed inconsistencies in current practice when
applying the offsetting criteria in IAS 32 ‘Financial Instruments: Presentation’. The amendments were applied
retrospectively and did not have a material effect on HSBC’s financial statements.
During 2014, 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) Future accounting developments
In addition to the projects to complete financial instrument accounting, discussed below, the IASB is working on
projects on insurance and lease accounting which could represent significant changes to accounting requirements
in the future.
Standards and amendments issued by the IASB and endorsed by the EU but effective after
31 December 2014
During 2014, the EU endorsed the amendments issued by IASB through the Annual Improvements to IFRSs 2010-2012
Cycle and the 2011-2013 Cycle, and a narrow-scope amendment to IAS 19 ‘Employee Benefits’. HSBC has not early
applied any of the amendments effective after 31 December 2014 and it expects they will have an immaterial effect,
when applied, on the consolidated financial statements of HSBC and the separate financial statements of HSBC
Holdings.
Standards and amendments issued by the IASB but not endorsed by the EU
In May 2014, the IASB issued IFRS 15 ‘Revenue from Contracts with Customers’. The standard is effective for annual
periods beginning on or after 1 January 2017 with early application permitted. IFRS 15 provides a principles-based
approach for revenue recognition, and introduces the concept of recognising revenue for obligations as they are
satisfied. The standard should be applied retrospectively, with certain practical expedients available. HSBC is
currently assessing the impact of this standard but it is not practicable to quantify the effect as at the date of the
publication of these financial statements.
In July 2014, the IASB issued IFRS 9 ‘Financial Instruments’, which is the comprehensive standard to replace IAS 39
‘Financial Instruments: Recognition and Measurement’, and includes requirements for classification and
measurement of financial assets and liabilities, impairment of financial assets and hedge accounting.
Classification and measurement
The classification and measurement of financial assets will depend on the entity’s business model for their
management and their contractual cash flow characteristics and result in financial assets being measured at
amortised cost, fair value through other comprehensive income (‘FVOCI’) or fair value through profit or loss. In many
instances, the classification and measurement outcomes will be similar to IAS 39, although differences will arise, for
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Notes on the Financial Statements (continued)
1 – Basis of preparation
example, since IFRS 9 does not apply embedded derivative accounting to financial assets, and equity securities will be
measured at fair value through profit or loss or, in limited circumstances, at fair value through other comprehensive
income. The combined effect of the application of the business model and the contractual cash flow characteristics
tests may result in some differences in the population of financial assets measured at amortised cost or fair value
compared with IAS 39. The classification of financial liabilities is essentially unchanged, except that, for certain
liabilities measured at fair value, gains or losses relating to changes in the entity’s own credit risk are to be included
in other comprehensive income.
Impairment
The impairment requirements apply to financial assets measured at amortised cost and FVOCI, and lease receivables
and certain loan commitments and financial guarantee contracts. At initial recognition, allowance (or provision in the
case of commitments and guarantees) is required for expected credit losses (‘ECL’) resulting from default events that
are possible within the next 12 months (‘12 month ECL’). In the event of a significant increase in credit risk, allowance
(or provision) is required for ECL resulting from all possible default events over the expected life of the financial
instrument (‘lifetime ECL’).
The assessment of whether credit risk has increased significantly since initial recognition is performed for each
reporting period by considering the change in the risk of default occurring over the remaining life of the financial
instrument, rather than by considering an increase in ECL.
The assessment of credit risk, and the estimation of ECL, are required to be unbiased and probability-weighted, and
should incorporate all available information which is relevant to the assessment, including information about past
events, current conditions and reasonable and supportable forecasts of future events and economic conditions at the
reporting date. In addition, the estimation of ECL should take into account the time value of money. As a result, the
recognition and measurement of impairment is intended to be more forward-looking than under IAS 39 and the
resulting impairment charge will tend to be more volatile. It will also tend to result in an increase in the total level of
impairment allowances, since all financial assets will be assessed for at least 12-month ECL and the population of
financial assets to which lifetime ECL applies is likely to be larger than the population for which there is objective
evidence of impairment in accordance with IAS 39.
Hedge accounting
The general hedge accounting requirements aim to simplify hedge accounting, creating a stronger link with risk
management strategy and permitting hedge accounting to be applied to a greater variety of hedging instruments and
risks. The standard does not explicitly address macro hedge accounting strategies, which are being considered in a
separate project. To remove the risk of any conflict between existing macro hedge accounting practice and the new
general hedge accounting requirements, IFRS 9 includes an accounting policy choice to remain with IAS 39 hedge
accounting.
Transition
The classification and measurement and impairment requirements are applied retrospectively by adjusting the
opening balance sheet at the date of initial application, with no requirement to restate comparative periods. Hedge
accounting is generally applied prospectively from that date.
The mandatory application date for the standard as a whole is 1 January 2018, but it is possible to apply the revised
presentation for certain liabilities measured at fair value from an earlier date. HSBC intends to revise the presentation
of fair value gains and losses relating to the entity’s own credit risk on certain liabilities as soon as permitted by EU
law. If this presentation was applied at 31 December 2014, the effect would be to increase profit before tax with the
opposite effect on other comprehensive income based on the change in fair value attributable to changes in HSBC’s
credit risk for the year, with no effect on net assets. Further information on change in fair value attributable to
changes in credit risk, including HSBC’s credit risk, is disclosed in Note 25.
HSBC is assessing the impact that the rest of IFRS 9 will have on the financial statements through a Group-wide
project which has been in place since 2012, but due to the complexity of the classification and measurement,
impairment, and hedge accounting requirements and their inter-relationships, it is not possible at this stage to
quantify the potential effect.
(d) Changes to the presentation of the Financial Statements and Notes on the Financial Statements
In order to make the financial statements and notes thereon easier to understand, HSBC has changed the location
and the wording used to describe certain accounting policies within the notes, removed certain immaterial
disclosures and changed the order of certain sections. In applying materiality to financial statement disclosures, we
consider both the amount and nature of each item. The main changes to the presentation of the financial statements
and notes thereon in 2014 are as follows:
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• Consolidated balance sheet and Consolidated statement of changes in equity: rationalised certain line items
disclosure to focus on material information.
• Credit risk: changed the order and presentation of certain disclosures to remove duplication and focus on material
information.
• In 2013, the financial statements included Note 2 ‘Summary of significant accounting policies’. In 2014, the
accounting policies have been placed, whenever possible, within the relevant Notes on the Financial Statements,
and the changes in wording are intended to more clearly set out the accounting policies. These changes in the
wording do not represent changes in accounting policies.
• Critical accounting policies: replaced ‘Critical accounting policies’ with ‘Critical accounting estimates and
judgements’ and placed them within the relevant notes alongside the significant accounting policy to which they
relate. The new approach meets the reporting requirements of IAS 1 ‘Presentation of Financial Statements’ and of
the US Securities and Exchange Commission.
• Note 6 ‘Employee compensation and benefits’: rationalised to remove duplication and focus on material
information.
• Note 38 ‘Lease commitments’: rationalised to focus on material information.
• In 2013, the financial statements included Note 13 Analysis of financial assets and liabilities by measurement basis
and Note 23 ‘Property, Plant and equipment’. In 2014, separate notes for these areas have been removed and
relevant information incorporated into other notes.
• In 2013, the financial statements included Note 20 ‘Transfers of financial assets’ and Note 36 Assets charged as
security for liabilities and collateral accepted as security for assets. In 2014, the relevant information for these
areas has been included in a single Note 19 ‘Assets charged as security for liabilities, assets transferred and
collateral accepted as security for assets’.
From 1 January 2014, HSBC has chosen to present non-trading reverse repos and repos separately on the face of
the balance sheet. These items are classified for accounting purposes as loans and receivables or financial liabilities
measured at amortised cost. Previously, they were presented on an aggregate basis together with other loans or
deposits measured at amortised cost under the following headings in the consolidated balance sheet: ‘Loans and
advances to banks’, ‘Loans and advances to customers’, ‘Deposits by banks’ and ‘Customer accounts’. The separate
presentation aligns disclosure of reverse repos and repos with market practice and provides more meaningful
information in relation to loans and advances. Further explanation is provided in Note 17.
From 1 January 2014, the geographical region ‘Asia’ replaced the geographical regions previously reported as ‘Hong
Kong’ and ‘Rest of Asia-Pacific’. This better aligns with internal information used to manage the business.
Comparative data have been re-presented. Further explanation is provided in Note 11.
(e) 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 111 to 237.
Capital disclosures under IAS 1 ‘Presentation of Financial Statements’ have been included in the audited sections of
‘Report of the Directors: Capital’ on pages 238 to 262.
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 111 to 237.
In accordance with HSBC’s policy to provide disclosures that help investors and other stakeholders understand 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 provides additional disclosures having
regard to the recommendations of the Enhanced Disclosures Task Force (‘EDTF’) report ‘Enhancing the Risk
Disclosures of Banks’ issued in October 2012. 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. 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 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.
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Notes on the Financial Statements (continued)
1 – Basis of preparation
HSBC’s consolidated financial statements are presented in US dollars because the US dollar and currencies linked to it
form the major currency bloc in which HSBC transacts and funds its business. The US dollar is also HSBC Holdings’
functional currency because the US dollar and currencies linked to it are the most significant currencies relevant to
the underlying transactions, events and conditions of its subsidiaries, as well as representing a significant proportion
of its funds generated from financing activities.
(f) Critical accounting estimates and judgements
The preparation of financial information requires the use of estimates and judgements about future conditions. In
view of the inherent uncertainties and the high level of subjectivity involved in the recognition or measurement of
items listed below, 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 conclusions from those reached by management
for the purposes of the 2014 Financial Statements. Management’s selection of HSBC’s accounting policies which
contain critical estimates and judgements is listed below; it reflects the materiality of the items to which the policies
are applied and the high degree of judgement and estimation uncertainty involved:
• Impairment of loans and advances: Note 1(k);
• Deferred tax assets: Note 8;
• Valuation of financial instruments: Note 13;
• Impairment of interests in associates: Note 20;
• Goodwill impairment: Note 21;
• Provisions: Note 29.
(g) Going concern
The financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and
parent company have the resources to continue in business for the foreseeable future. In making this assessment, the
Directors have considered a wide range of information relating to present and future conditions, including future
projections of profitability, cash flows and capital resources.
(h) Consolidation and related disclosures
HSBC controls and consequently consolidates an entity when it is exposed, or has rights, to variable returns from its
involvement with the entity and has the ability to affect those returns through its power over the entity. Control is
initially assessed based on consideration of all facts and circumstances, and is subsequently reassessed when there
are significant changes to the initial setup.
Where an entity is governed by voting rights, HSBC would consolidate when it holds, directly or indirectly, the
necessary voting rights to pass resolutions by the governing body. In all other cases, the assessment of control is
more complex and requires judgement of other factors, including having exposure to variability of returns, power
over the relevant activities or holding the power as agent or principal.
Business combinations are accounted for using the acquisition method. 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. For
acquisitions 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.
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, based on either financial statements made up to 31 December or pro-rated amounts
adjusted for any material transactions or events occurred between the date of financial statements available and
31 December.
(i) Foreign currencies
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 at the balance sheet date. Any resulting exchange differences are
included in the income statement. Non-monetary assets and liabilities that are measured at historical cost in a foreign
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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 foreign exchange component of a
gain or loss on a non-monetary item is recognised either in other comprehensive income or in the income statement
depending where the gain or loss on the underlying non-monetary item is recognised.
In the consolidated financial statements, the assets and liabilities of branches, subsidiaries, joint ventures and
associates whose functional currency is not US dollars, are translated into the Group’s presentation currency at the
rate of exchange at the balance sheet date, while their results are translated into US dollars at the average rates of
exchange for the reporting period. Exchange differences arising from the retranslation of opening foreign currency
net assets, and the retranslation of the results for the reporting period from the average rate to the exchange rate
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 and in other comprehensive income in consolidated financial statements. On disposal of a foreign
operation, exchange differences previously recognised in other comprehensive income are reclassified to the income
statement as a reclassification adjustment.
(j) Loans and advances to banks and customers
These include loans and advances originated by HSBC, not classified as held for trading or designated at fair value.
They are recognised when cash is advanced to a borrower and are derecognised when either the borrower repays
its obligations, or the loans are sold, 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 impairment allowance.
Loans and advances are reclassified to ‘Assets held for sale’ when they meet the criteria presented in Note 23;
however, their measurement continues to be in accordance with this policy.
HSBC may commit to underwrite loans on fixed contractual terms for specified periods of time. Where the loan
arising from the lending commitment is expected to be held for trading, the commitment to lend is recorded as
a derivative. On drawdown, the loan is classified as held for trading. Where HSBC intends to hold the loan, a provision
on the loan commitment is only recorded where it is probable that HSBC will incur a loss. On inception of the loan,
the loan to be held is recorded at its fair value and subsequently measured at amortised cost. For certain
transactions, such as leveraged finance and syndicated lending activities, the cash advanced may not be 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, the difference is charged to the income statement in other operating income. The write-down will be
recovered over the life of the loan, through the recognition of interest income, unless the loan becomes impaired.
(k) Impairment of loans and advances and available-for-sale financial assets
Critical accounting estimates and judgements
Impairment of loans and advances
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 largest concentration of collectively assessed loan impairment allowances are in North America, where they were US$2.4bn,
representing 38% (2013: US$3.8bn; 47%) of the Group’s total collectively assessed loan impairment allowances and 19%
(2013:25%) of the Group’s total impairment allowances. Of the North American collective impairment allowances approximately
71% (2013: 79%) related to the US CML portfolio.
Collective impairment allowances are subject to estimation uncertainty, in part because it is not practicable to identify losses on
an individual loan basis due to 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 incurred losses is likely to be greater or less than historical
experience.
Where 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.
For individually assessed loans, 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
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Notes on the Financial Statements (continued)
1 – Basis of preparation
loss event has occurred, judgement is exercised in evaluating all relevant information on indicators of impairment, including the
consideration of whether payments are contractually past-due and the consideration of other 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.
HSBC might 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 or 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. Judgements are involved in differentiating the credit risk characteristics
of forbearance cases, including those which return to performing status following renegotiation. Where collectively assessed loan
portfolios include significant levels of loan forbearance, portfolios are segmented to reflect their specific credit risk characteristics,
and estimates are made of the incurred losses inherent within each forbearance portfolio segment. 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$0.2bn at 31 December 2014 (2013: US$0.4bn).
Impairment of loans and advances
Losses for impaired loans are recognised when there is objective evidence that impairment of a loan or portfolio of
loans has occurred. Impairment allowances that are calculated on individual loans or on groups of loans assessed
collectively, are recorded as charges to the income statement and are recorded against the carrying amount of
impaired loans on the balance sheet. 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 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 these criteria will be individually assessed for
impairment, except when volumes of defaults and losses are sufficient to justify treatment under a collective
assessment methodology (see below).
Loans considered as individually significant are typically to corporate and commercial customers, are for larger
amounts and are managed on an individual basis. For these loans, HSBC considers 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 to make this
assessment include:
– 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 loans where objective evidence of impairment exists, impairment losses are determined considering the following
factors:
– HSBC’s aggregate exposure to the customer;
– 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 costs of obtaining and selling collateral as part of foreclosure;
– the ability of the borrower to obtain, and make payments in, the currency of the loan if not denominated in local
currency; and
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– when available, the secondary market price of the debt.
The determination of the realisable value of security is based on the market value at the time the impairment
assessment is performed. The value is not adjusted for expected future changes in market prices, though 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.
Collectively assessed loans and advances
Impairment is assessed collectively to cover losses which have been incurred but have not yet been identified on
loans subject to individual assessment or for homogeneous groups of loans that are not considered individually
significant. Retail lending portfolios are generally assessed for impairment collectively as the portfolios are generally
large homogeneous loan pools.
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 a collective impairment assessment. These
credit risk characteristics may include country of origination, type of business involved, type of products offered,
security obtained or other relevant factors. This assessment captures 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. When information becomes available which identifies losses on individual
loans within the group, those loans are removed from the group and assessed individually.
The collective impairment allowance is determined after taking into account:
– 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 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 management for each identified portfolio
based on 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 may vary over time as these factors change.
Homogeneous groups of loans and advances
Statistical methods are used to determine collective impairment losses for homogeneous groups of loans not
considered individually significant. Losses in these groups of loans are recorded individually when individual loans
are removed from the group and written off. The methods that are used to calculate collective allowances are:
– When appropriate empirical information is available, HSBC utilises roll-rate methodology, which employs
statistical analyses of historical data and experience of delinquency and default to reliably estimate the amount
of the loans that will eventually be written off as a result of the events occurring before the balance sheet date but
which HSBC is not able to identify individually. Individual loans are grouped using ranges of past due days;
statistical analysis is then used to estimate the likelihood that loans in each range will progress through the various
stages of delinquency and become irrecoverable. Additionally, individual loans are segmented based on their
credit characteristics as described above. In applying this methodology, adjustments are made to estimate the
periods of time between a loss event occurring and its discovery, for example through a missed payment, (known
as the emergence period) and the period of time between discovery and write-off (known as the outcome period).
Current economic conditions are also evaluated when calculating the appropriate level of allowance required to
cover inherent loss. 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, or a discounted
cash flow model. Where a basic formulaic approach is undertaken, the period between a loss event 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 the statistical models, they
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Notes on the Financial Statements (continued)
1 – Basis of preparation
are taken into account by adjusting the impairment allowances derived from the statistical models to reflect these
changes as at the balance sheet date.
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.
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 those assets are classified as held for sale. 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. Impairments and reversal of previous
impairments are recognised in the income statement 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. They 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
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. Any new agreements arising due to derecognition events will continue
to be disclosed as renegotiated loans and are assessed for impairment as above.
Impairment of available-for-sale financial assets
Available-for-sale financial assets are assessed at each balance sheet date for objective evidence of impairment. If
such evidence exists 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 has an impact which can be reliably measured on the estimated future cash flows
of the financial asset an impairment loss is recognised.
If the available-for-sale financial asset is impaired, the difference between its acquisition cost (net of any principal
repayments and amortisation) and its current fair value, less any previous impairment loss recognised in the income
statement, is recognised in the income statement.
Impairment losses are recognised in the income statement within ‘Loan impairment charges and other credit risk
provisions’ for debt instruments and within ‘Gains less losses from financial investments’ for equities. The impairment
methodologies for available-for-sale financial assets are set out in more detail below:
– Available-for-sale debt securities. In assessing 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 the recovery of future cash flows. Financial difficulties of the issuer, as
well as 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.
In addition, the performance of underlying collateral and the extent and depth of market price declines is relevant
when assessing objective evidence of impairment of available-for-sale ABSs. The primary indicators of potential
impairment are considered to be adverse fair value movements and the disappearance of an active market for a
security, while changes in credit ratings are of secondary importance.
– Available-for-sale equity securities. Objective evidence of impairment 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.
HSBC HOLDINGS PLC
352
A significant or prolonged decline in the fair value of the equity 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
continuous 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, the subsequent accounting treatment for changes in the fair value of
that asset differs depending on the type of asset:
– 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, or the instrument is no longer impaired, the
impairment loss is 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.
(l) Funding fair value adjustment
In line with evolving market practice HSBC revised its estimation methodology for valuing the uncollateralised
derivative portfolios by introducing a funding fair value adjustment (‘FFVA’). The FFVA adjustment reflects the
estimated present value of the future market funding cost or benefit associated with funding uncollateralised
derivative exposure at rates other than the Overnight Index Swap (‘OIS’) rate, which is the benchmark rate used for
valuing collateralised derivatives. The impact of FFVA adoption in 2014 was a US$263m reduction in net trading income,
reflecting the incorporation of a funding spread over Libor. Further details have been provided in Note 13 to the
Financial Statements.
(m) Operating income
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 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.
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.
Non-interest income and expense
Fee income is earned from a diverse range of services provided by HSBC to its customers. Fee income is accounted
for as follows:
– 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.
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.
The accounting policies for net income/(expense) from financial instruments designated at fair value and for net
insurance premium income are disclosed in Note 2 and Note 3.
HSBC HOLDINGS PLC
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Notes on the Financial Statements (continued)
2 – Net income/(expense) from fin instr at FV / 3 – Net insurance premium income / 4 – Net insurance claims
2 Net income/(expense) from financial instruments designated at fair value
Accounting policy
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 through profit or loss,
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 through profit or loss; and
• interest income, interest expense and dividend income in respect of financial assets and liabilities designated at fair value through
profit or loss; and derivatives managed in conjunction with the above, 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’.
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
Year ended 31 December
HSBC Holdings
2014
US$m
2,300
131
(19)
2,412
(435)
508
417
333
(242)
(23)
11
61
2,473
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
Year ended 31 December
3 Net insurance premium income
Accounting policy
2014
US$m
339
126
(27)
438
2013
US$m
3,170
118
(26)
3,262
(1,237)
(1,228)
(1,246)
(3,743)
3,761
(39)
10
(2,494)
768
2013
US$m
(695)
(1,558)
1,213
(1,040)
2012
US$m
2,980
83
35
3,098
(996)
(4,327)
(5,215)
431
457
(23)
22
(5,324)
(2,226)
2012
US$m
(2,260)
456
(474)
(2,278)
Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance contracts where premiums are
accounted for when liabilities are established.
Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance contracts to which
they relate.
Net insurance premium income
Gross insurance premium income
Reinsurers’ share of gross insurance premium income
Year ended 31 December 2014
Non-linked
insurance1
US$m
7,705
(441)
7,264
Linked life
insurance
US$m
2,195
(8)
2,187
Investment
contracts
with DPF2
US$m
2,470
−
2,470
Total
US$m
12,370
(449)
11,921
HSBC HOLDINGS PLC
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Gross insurance premium income
Reinsurers’ share of gross insurance premium income
Year ended 31 December 2013
Gross insurance premium income
Reinsurers’ share of gross insurance premium income
Year ended 31 December 2012
1 Includes non-life insurance.
2 Discretionary participation features.
Non-linked
insurance1
US$m
Linked life
insurance
US$m
Investment
contracts
with DPF2
US$m
7,002
(450)
6,552
7,578
(550)
7,028
3,012
(8)
3,004
3,325
(8)
3,317
2,384
–
2,384
2,699
–
2,699
Total
US$m
12,398
(458)
11,940
13,602
(558)
13,044
4 Net insurance claims and benefits paid and movement in liabilities to policyholders
Accounting policy
Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year, including claim handling costs
and any policyholder bonuses allocated in anticipation of a bonus declaration.
Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date on which, following
notification, the policy ceases to be included within the calculation of the related insurance liabilities. Death claims are recognised when
notified.
Reinsurance recoveries are accounted for in the same period as the related claim.
Net insurance claims and benefits paid and movement in liabilities to policyholders
Gross claims and benefits paid and movement in liabilities
– claims, benefits and surrenders paid
– movement in liabilities
Reinsurers’ share of claims and benefits paid and movement in
liabilities
– claims, benefits and surrenders paid
– movement in liabilities
Year ended 31 December 2014
Gross claims and benefits paid and movement in liabilities
– claims, benefits and surrenders paid
– movement in liabilities
Reinsurers’ share of claims and benefits paid and movement in
liabilities
– claims, benefits and surrenders paid
– movement in liabilities
Year ended 31 December 2013
Gross claims and benefits paid and movement in liabilities
– claims, benefits and surrenders paid
– movement in liabilities
Reinsurers’ share of claims and benefits paid and movement in
liabilities
– claims, benefits and surrenders paid
– movement in liabilities
Year ended 31 December 2012
1 Includes non-life insurance.
2 Discretionary participation features.
Non-linked
insurance1
US$m
Linked life
insurance
US$m
7,770
3,575
4,195
(411)
(176)
(235)
7,359
6,892
3,014
3,878
(367)
(164)
(203)
6,525
6,900
1,905
4,995
(537)
(217)
(320)
6,363
2,765
1,499
1,266
33
(88)
121
2,798
3,379
1,976
1,403
111
(426)
537
3,490
3,984
1,810
2,174
223
(681)
904
4,207
Investment
contracts
with DPF2
US$m
3,188
2,215
973
–
–
–
Total
US$m
13,723
7,289
6,434
(378)
(264)
(114)
3,188
13,345
3,677
2,308
1,369
–
–
–
13,948
7,298
6,650
(256)
(590)
334
3,677
13,692
3,645
2,525
1,120
–
–
–
14,529
6,240
8,289
(314)
(898)
584
3,645
14,215
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Notes on the Financial Statements (continued)
5 – Operating profit / 6 – Employee compensation and benefits
5 Operating profit
Operating profit is stated after the following items of income, expense, gains and losses, and loan impairment charges and
other credit risk provisions:
Income
Interest recognised on impaired financial assets
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
Expense
Interest on financial instruments, excluding interest on financial liabilities
held for trading or designated at fair value
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
Payments under lease and sublease agreements
– minimum lease payments
– contingent rents and sublease payments
UK bank levy
Gains/(losses)
Impairment of available-for-sale equity securities
Gains/(losses) recognised on assets held for sale
Gains on disposal of HSBC Bank (Panama) S.A.
(Losses)/gains arising from dilution of interest in Industrial Bank and other associates
and joint ventures
Loan impairment charges and other credit risk provisions
– net impairment charge on loans and advances
– release/(impairment) of available-for-sale debt securities
– impairment in respect of other credit risk provisions
6 Employee compensation and benefits
Wages and salaries
Social security costs
Post-employment benefits
Year ended 31 December
Average number of persons employed by HSBC during the year
Europe
Asia
Middle East and North Africa
North America
Latin America
Year ended 31 December
2014
US$m
1,137
9,438
3,253
6,726
5,874
2013
US$m
1,261
9,799
3,176
5,432
6,860
2012
US$m
1,261
10,042
2,897
5,850
7,677
(15,322)
(14,610)
(17,625)
(1,427)
(185)
(1,548)
(1,199)
(349)
(1,066)
(373)
220
–
(32)
(3,851)
(4,055)
319
(115)
2014
US$m
17,477
1,666
1,223
20,366
2014
74,024
116,492
8,616
21,983
43,652
264,767
(1,396)
(171)
(1,425)
(1,098)
(327)
(916)
(175)
(729)
1,107
1,051
(5,849)
(6,048)
211
(12)
2013
US$m
16,879
1,594
723
19,196
(1,501)
(170)
(1,166)
(1,149)
(17)
(472)
(420)
485
–
–
(8,311)
(8,160)
(99)
(52)
2012
US$m
17,780
1,633
1,078
20,491
2013
75,334
114,216
9,181
22,568
47,496
268,795
2012
77,204
116,779
8,645
27,396
54,162
284,186
HSBC HOLDINGS PLC
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Reconciliation of total incentive awards granted to incentive awards in employee compensation and benefits
Total incentive awards approved and granted for the current year1
Less: deferred bonuses awarded for the current year, expected to be recognised
in future periods
Total incentives awarded and recognised in the current year
Current year charges for deferred bonuses from previous years
Other
Total incentive awards for the current year included in employee compensation
and benefits
2014
US$m
3,660
(359)
3,301
425
(114)
3,612
2013
US$m
3,920
(436)
3,484
427
(164)
3,747
2012
US$m
3,689
(355)
3,334
671
(28)
3,977
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 310.
Income statement charge: deferred bonuses
Current year
bonus pool
US$m
Prior year
bonus pools
US$m
Total
US$m
2014
Charge recognised in 2014
– deferred share awards
– deferred cash awards
Charge expected to be recognised in 2015 or later
– deferred share awards
– deferred cash awards
2013
Charge recognised in 2013
– deferred share awards
– deferred cash awards
Charge expected to be recognised in 2014 or later
– deferred share awards
– deferred cash awards
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
Share-based payments
Accounting policy
245
147
98
359
250
109
269
188
81
436
356
80
277
224
53
355
315
40
425
373
52
381
334
47
427
354
73
306
259
47
671
613
58
376
335
41
670
520
150
740
584
156
696
542
154
742
615
127
948
837
111
731
650
81
HSBC enters into both equity-settled and cash-settled share-based payment arrangements with its employees as compensation for
services provided by employees. 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’.
For cash-settled share-based payment arrangements, the services acquired and liability incurred are measured at the fair value of the
liability and recognised as the employees render service. Until settlement, the fair value of the liability is re-measured, with changes in
fair value recognised in the income statement.
Fair value is determined by using appropriate valuation models. 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. 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.
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 for which the subsidiaries are
re-charged, the difference between the cost of the share-based payment arrangement and the fair value of the equity instruments
expected to be issued to satisfy those arrangements is recognised as an adjustment to ‘Investment in subsidiaries’ over the vesting
period.
HSBC HOLDINGS PLC
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Notes on the Financial Statements (continued)
6 – Employee compensation and benefits
‘Wages and salaries’ include the effect of share-based payments arrangements, of which US$732m are equity settled
(2013: US$630m; 2012: US$988m), as follows:
Restricted share awards
Savings-related and other share award option plans
Year ended 31 December
HSBC share awards
Award
Restricted share
awards
(including Annual
incentive awards
delivered in
shares) and GPSP
Policy
• An assessment of performance over the relevant period ending
on 31 December is used to determine the amount of the award to
be granted.
• Deferred awards generally require employees to remain in
employment over the vesting period and are not subject to
performance conditions after the grant date.
• Deferred Annual incentive awards generally vest over a period
of three years and GPSP awards vest after five years.
• Vested shares may be subject to a retention requirement
(restriction) post-vesting. GPSP awards are retained until
cessation of employment.
• Awards granted from 2010 onwards are subject to malus
provision prior to vesting.
Movement on HSBC share awards
Restricted share awards outstanding at 1 January
Additions during the year
Released in the year
Forfeited in the year
Restricted share awards outstanding at 31 December
Weighted average fair value of awards granted (US$)
HSBC share option plans
2014
US$m
738
36
774
2013
US$m
599
63
662
2012
US$m
912
96
1,008
Purpose
• To drive and reward performance consistent
with strategy and align to shareholder
interests.
• Deferral provides an incentive for a longer-
term commitment and the ability to apply
malus.
2014
Number
(000s)
116,932
82,871
(78,224)
(5,096)
116,483
10.18
2013
Number
(000s)
165,589
59,261
(99,820)
(8,098)
116,932
10.95
Main plans
Savings-related
share option
plans
HSBC Holdings
Group share
option plan
Policy
• Two plans: the UK plan and the International Plan. The last grant
Purpose
• To align the interests of all employees with
of options under the International Plan was in 2012.
the creation of shareholder value.
• From 2014, eligible employees save up to £500 per month (or for
International options granted prior to 2013, the equivalent of
£250 in US dollars, Hong Kong dollars or Euros), with the option to
use the savings to acquire shares.
• Exercisable within six months following either the third or fifth
anniversaries of the commencement of a three-year or five-year
contract, respectively, (or for International options granted prior
to 2013, three months following the first anniversary of the
commencement of a one-year savings contract).
• The exercise price is set at a 20% (2013: 20%) discount to the
market value immediately preceding the date of invitation (except
for the one-year options granted under the US sub-plan prior to
2013 where a 15% discount was applied).
• 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.
HSBC HOLDINGS PLC
358
Calculation of fair values
The fair values of share options are calculated using a Black-Scholes model. The fair value of a share award is based on the
share price at the date of the grant.
Movement on HSBC share option plans
Outstanding at 1 January 2014
Granted during the year2
Exercised during the year3
Expired during the year
Outstanding at 31 December 2014
Weighted average remaining contractual life (years)
Outstanding at 1 January 2013
Granted during the year2
Exercised during the year3
Expired during the year
Outstanding at 31 December 2013
Weighted average remaining contractual life (years)
Savings-related share option plans
WAEP1
£
Number
(000s)
93,760
28,689
(50,393)
(5,690)
66,366
2.66
112,752
8,679
(17,968)
(9,703)
93,760
1.80
4.04
5.19
3.48
4.81
4.89
4.04
5.47
4.56
4.47
4.04
HSBC Holdings Group share option
plan
Number
(000s)
55,026
–
(1)
(48,651)
6,374
0.30
87,173
–
(17,595)
(14,552)
55,026
0.45
WAEP1
£
7.23
–
7.22
7.22
7.29
6.94
–
6.21
4.21
7.23
1 Weighted average exercise price.
2 The weighted average fair value of options granted during the year was US$1.90 (2013: US$2.98).
3 The weighted average share price at the date the options were exercised was US$9.91 (2013: US$10.86) and US$9.49 (2013: US$10.93) for the
savings-related share option plans and HSBC Holdings Group share option plan, respectively.
Post-employment benefit plans
Accounting policy
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 service cost
and the net interest on the net defined benefit asset or liability and is presented in operating expenses.
The past service cost, which is charged immediately to the income statement, is the change in the present value of the defined benefit
obligation for employee service in prior periods resulting from a plan amendment (the introduction or withdrawal of, or changes to, a
defined benefit plan) or curtailment (a significant reduction by the entity in the number of employees covered by a plan). A settlement is
a transaction that eliminates all further legal and constructive obligations for part or all of the benefits provided under a defined benefit
plan, other than a payment of benefits to, or on behalf of, employees that is set out in the terms of the plan and included in the actuarial
assumptions.
Re-measurements of the net defined benefit asset or liability, which comprise actuarial gains and losses, return on plan assets (excluding
interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income.
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.
The net defined benefit asset or liability represents the present value of defined benefit obligations reduced by the fair value of plan
assets. Any net defined benefit surplus is limited to the present value of available refunds and reductions in future contributions to the
plan.
The cost of obligations arising from other post-employment defined benefit plans, such as defined benefit health-care plans, are
accounted for on the same basis as defined benefit pension plans.
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Notes on the Financial Statements (continued)
6 – Employee compensation and benefits
Income statement charge
Defined benefit pension plans
Defined contribution pension plans
Pension plans
Defined benefit and contribution healthcare plans
Year ended 31 December
2014
US$m
469
687
1,156
67
1,223
2013
US$m
54
597
651
72
723
Net assets/(liabilities) recognised on the balance sheet in respect of defined benefit plans
Fair value of
plan assets
US$m
Present value of
defined benefit
obligations
US$m
Effect of
limit on plan
surpluses
US$m
Defined benefit pension plans
Defined benefit healthcare plans
At 31 December 2014
Total employee benefit liabilities (within ‘Accruals, deferred income
and other liabilities’)
Total employee benefit assets (within ‘Prepayments, accrued
income and other assets’)
Defined benefit pension plans
Defined benefit healthcare plans
At 31 December 2013
Total employee benefit liabilities (within ‘Accruals, deferred income
and other liabilities’)
Total employee benefit assets (within ‘Prepayments, accrued
income and other assets’)
44,824
179
45,003
(42,062)
(1,104)
(43,166)
40,622
190
40,812
(40,467)
(1,106)
41,573
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 surpluses
Total actuarial gains/(losses) recognised in other comprehensive income
At 31 December
HSBC pension plans
Percentage of HSBC employees:
– enrolled in defined contribution plans
– enrolled in defined benefit plans
– covered by HSBC pension plans
2014
US$m
(4,445)
2,764
(274)
(88)
17
2,419
(2,026)
2014
%
66
22
88
(17)
–
(17)
(30)
–
(30)
2013
US$m
(3,844)
(1,524)
796
143
(16)
(601)
(4,445)
2013
%
64
23
87
2012
US$m
427
599
1,026
52
1,078
Total
US$m
2,745
(925)
1,820
(3,208)
5,028
125
(916)
(791)
(2,931)
2,140
2012
US$m
(3,453)
208
(440)
(154)
(5)
(391)
(3,844)
2012
%
62
23
85
The Group operates a number of pension plans throughout the world. Some are defined benefit plans, of which the
largest is the HSBC Bank (UK) Pension Scheme (‘the principal plan’). The Pension Risk section on page 200 and the
Appendix to Risk on page 236 contain details about the characteristics and risks and amount, timing and uncertainty of
future cash flows and policies and practices associated with the principal plan.
HSBC HOLDINGS PLC
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Effect of the asset ceiling
HSBC
Bank (UK)
Pension
Scheme
US$m
Net defined benefit
asset/(liability)
HSBC
Bank (UK)
Pension
Scheme
US$m
Other
plans
US$m
Other
plans
US$m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(30)
–
–
–
2,036
(228)
(26)
(254)
(1,911)
(257)
6
(251)
(4)
95
(59)
17
–
–
17
–
–
–
–
–
–
–
2,764
4,864
(2,317)
217
(274)
397
265
132
–
–
–
(172)
845
(987)
(30)
41
278
239
39
–
55
–
(17)
4,764
(2,019)
Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans
Fair value of plan assets
Present value of defined
benefit obligations
HSBC
Bank (UK)
Pension
Scheme
US$m
31,665
–
–
–
HSBC
Bank (UK)
Pension
Scheme
US$m
(29,629)
(228)
(26)
(254)
Other
plans
US$m
8,957
–
(5)
(5)
Other
plans
US$m
(10,838)
(257)
11
(246)
1,386
370
(1,291)
(425)
4,864
845
(2,100)
(1,034)
4,864
–
–
(2,112)
397
265
132
38
(954)
(40)
845
–
–
(316)
278
239
39
17
(543)
(23)
–
(2,317)
217
1,838
–
–
–
(38)
954
40
–
(987)
(47)
357
–
–
–
(17)
598
23
35,244
9,580
(30,480)
(11,582)
(9,782)
(8,799)
(11,899)
(5,605)
(2,498)
(3,479)
At 1 January 2014
Current service cost
Past service cost and gains/(losses)
from settlements
Service cost
Net interest income/(cost) on
the net defined benefit
asset/(liability)
Re-measurement effects
recognised in other
comprehensive income
– return on plan assets
(excluding interest income)
– actuarial losses
– other changes
Exchange differences
Contributions by HSBC
– normal
– special
Contributions by employees
Benefits paid
Administrative costs and taxes
paid by plan
At 31 December 2014
Present value of defined benefit
obligation relating to:
– actives
– deferreds
– pensioners
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Notes on the Financial Statements (continued)
6 – Employee compensation and benefits
Net asset/(liability) under defined benefit pension plans (continued)
Fair value of plan assets
Present value of defined
benefit obligations
HSBC
Bank (UK)
Pension
Scheme
US$m
29,092
–
–
–
HSBC
Bank (UK)
Pension
Scheme
US$m
(26,475)
(259)
438
179
Other
plans
US$m
9,015
–
(3)
(3)
Other
plans
US$m
(11,581)
(249)
(41)
(290)
1,260
156
(1,127)
(229)
817
817
–
–
766
605
399
206
38
(876)
(37)
–
21
21
–
–
(59)
336
274
62
17
(513)
(13)
–
(2,341)
–
(2,453)
112
(740)
–
–
–
(38)
876
37
–
775
–
829
(54)
23
–
–
–
(17)
452
13
16
At 1 January 2013
Current service cost
Past service cost and gains/(losses)
from settlements1
Service cost
Net interest income/(cost) on
the net defined benefit
asset/(liability)
Re-measurement effects
recognised in other
comprehensive income
– return on plan assets
(excluding interest income)
– actuarial gains/(losses)
– other changes
Exchange differences
Contributions by HSBC
– normal
– special
Contributions by employees
Benefits paid
Administrative costs and taxes
paid by plan
Disposals
At 31 December 2013
31,665
8,957
(29,629)
(10,838)
Present value of defined benefit
obligation relating to:
– actives
– deferreds
– pensioners
(8,896)
(8,358)
(12,375)
(5,465)
(2,144)
(3,229)
Effect of the asset ceiling
HSBC
Bank (UK)
Pension
Scheme
US$m
Net defined benefit
asset/(liability)
HSBC
Bank (UK)
Pension
Scheme
US$m
Other
plans
US$m
Other
plans
US$m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(19)
–
2,617
(259)
(2,585)
(249)
–
–
–
438
179
(44)
(293)
133
(73)
(16)
(1,524)
–
–
(16)
817
(2,453)
112
5
–
–
–
–
–
–
–
26
605
399
206
–
–
–
–
780
21
829
(70)
(31)
336
274
62
–
(61)
–
16
(30)
2,036
(1,911)
1 HSBC announced to employees in the UK that the future service accrual for active members of the Defined Benefit Section (‘DBS’) of the principal
plan would cease with effect from 30 June 2015 and that all active members of the DBS will become member of the Defined Contribution Section
from 1 July 2015. This resulted in a reduction in the defined benefit obligation of the Scheme and a corresponding gain of US$430m in 2013,
recorded in ‘Past service cost and (gains)/losses on settlements’ in the table above.
HSBC expects to make US$530m of contributions to defined benefit pension plans during 2015. Benefits expected to be
paid from the plans to retirees over each of the next five years, and in aggregate for the five years thereafter, are as
follows:
Benefits expected to be paid from plans
HSBC Bank (UK) Pension Scheme1
Other plans1
2015
US$m
970
566
2016
US$m
999
576
2017
US$m
1,029
595
2018
US$m
1,060
605
2019
US$m
1,091
643
2020-2024
US$m
5,968
3,366
1 The duration of the defined benefit obligation is 19.8 years for the HSBC Bank (UK) Pension Scheme under the disclosure assumptions adopted
(2013: 19.5 years) and 14.2 years for all other plans combined (2013: 13.7 years).
HSBC HOLDINGS PLC
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Fair value of plan assets by asset classes
31 December 2014
Quoted
market price
in active
market
US$m
No quoted
market price
in active
market
US$m
31,355
4,557
22,965
52
3,781
6,390
1,778
4,109
(8)
511
3,889
945
–
1,317
1,627
3,190
756
2,267
(92)
259
Value
US$m
35,244
5,502
22,965
1,369
5,408
9,580
2,534
6,376
(100)
770
Thereof
HSBC1
US$m
930
–
–
930
–
(13)
11
7
(107)
76
Value
US$m
31,665
4,655
17,708
2,827
6,475
8,957
2,854
4,892
399
812
HSBC Bank (UK) Pension Scheme
Fair value of plan assets
– equities
– bonds
– derivatives
– other
Other plans
Fair value of plan assets
– equities
– bonds
– derivatives
– other
31 December 2013
Quoted
market price
in active
market
US$m
No quoted
market price
in active
market
US$m
26,520
3,667
17,708
–
5,145
7,731
2,789
4,409
–
533
5,145
988
–
2,827
1,330
1,226
65
483
399
279
Thereof
HSBC1
US$m
2,827
–
–
2,827
–
574
14
9
399
152
1 The fair value of plan assets includes derivatives entered into with HSBC Bank plc as detailed in Note 41.
Post-employment defined benefit plans’ principal actuarial financial assumptions
HSBC determines the discount rates to be applied to its obligations in consultation with the plans’ local actuaries, on the
basis of current average yields of high quality (AA-rated or equivalent) debt instruments, with maturities consistent with
those of the defined benefit obligations.
Key actuarial assumptions for the principal plan
UK
At 31 December 2014
At 31 December 2013
At 31 December 2012
Discount
rate
%
Inflation
rate
%
Rate of
increase for
pensions
Rate of
pay increase
%
%
Interest
credit rate
%
3.70
4.45
4.50
3.20
3.60
3.10
3.00
3.30
2.90
3.70
4.10
3.60
n/a
n/a
n/a
Mortality tables and average life expectancy at age 65 for the principal plan
UK
At 31 December 2014
At 31 December 2013
Mortality
table
Life expectancy at age 65 for
a male member currently:
Aged 45
Aged 65
Life expectancy at age 65 for
a female member currently:
Aged 45
Aged 65
SAPS S11
SAPS S11
23.6
23.6
25.2
25.2
25.0
24.9
26.9
26.8
1 Self-administered Pension Scheme (‘SAPS’) with Continuous Mortality Investigation 2014 improvements (2013: 2013 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.
Actuarial assumption sensitivities
The effect of changes in key assumptions on the principal plan
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 2015 pension cost from a 25bps increase
Change in 2015 pension cost from a 25bps decrease
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 2015 pension cost from a 25bps increase
Change in 2015 pension cost from a 25bps decrease
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 2015 pension cost from a 25bps increase
Change in 2015 pension cost from a 25bps decrease
HSBC HOLDINGS PLC
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HSBC Bank (UK) Pension Scheme
2014
US$m
(1,420)
1,523
(75)
73
1,026
(1,184)
44
(48)
1,188
(1,127)
50
(45)
2013
US$m
(1,352)
1,450
(83)
79
994
(1,137)
53
(68)
1,301
(1,225)
66
(64)
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Notes on the Financial Statements (continued)
7 – Auditors’ remuneration / 8 – Tax
Rate of pay increase
Change in pension obligation at year-end from a 25bps increase
Change in pension obligation at year-end from a 25bps decrease
Change in 2015 pension cost from a 25bps increase
Change in 2015 pension cost from a 25bps decrease
Mortality
Change in pension obligation from each additional year of longevity assumed
HSBC Holdings
HSBC Bank (UK) Pension Scheme
2014
US$m
2013
US$m
237
(232)
12
(11)
768
212
(205)
15
(15)
712
Employee compensation and benefit expense in respect of HSBC Holdings’ employees in 2014 amounted to US$681m
(2013: US$542m). The average number of persons employed by HSBC Holdings during 2014 was 2,070 (2013: 1,525).
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 and recognises these contributions as an expense as they fall due.
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
Year ended 31 December
Vesting of long-term incentive awards
2014
US$000
4,567
17,812
4,426
26,805
–
2013
US$000
4,027
9,488
7,357
20,872
–
2012
US$000
5,435
10,316
13,983
29,734
5,733
In addition, there were payments under retirement benefit agreements with former Directors of US$1,269,160 (2013:
US$1,198,744). The provision at 31 December 2014 in respect of unfunded pension obligations to former Directors
amounted to US$19,419,524 (2013: US$19,729,103).
During the year, aggregate contributions to pension schemes in respect of Directors were nil (2013: nil).
The salary and other emoluments figure includes fixed pay allowances. Discretionary annual incentives for Directors are
based on a combination of individual and corporate performance and are determined by the Group Remuneration
Committee. Details of Directors’ remuneration, share options and awards under the HSBC Share Plan and HSBC Share Plan
2011 are included in the ‘Directors’ Remuneration Report’ on page 300 to 327.
7 Auditors’ remuneration
Audit fees payable to KPMG1
Audit fees payable to non-KPMG entities
Year ended 31 December
2014
US$m
40.6
1.2
41.8
2013
US$m
43.4
1.1
44.5
2012
US$m
47.2
1.4
48.6
1 Fees payable to KPMG for HSBC Holdings’ statutory audit and audit of HSBC’s subsidiaries, pursuant to legislation and includes fees payable for
the current year. Excluded from the 2014 audit fees payable to KPMG is a net release of accruals of US$2.5 million relating to prior years and
fees related to the transition of the audit to PwC of US$1.3 million.
The following fees were payable by HSBC to the Group’s principal auditor, KPMG Audit Plc and its associates (together
‘KPMG’):
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Fees payable by HSBC to KPMG
Fees for HSBC Holdings’ statutory audit1
– relating to current year
– relating to prior year
Fees for other services provided to HSBC
Audit of HSBC’s subsidiaries2
Audit-related assurance services3
Taxation-related services:
– taxation compliance services
– taxation advisory services
Other assurance services
Other non-audit services4
Year ended 31 December
2014
US$m
13.4
13.4
–
62.5
27.2
22.6
1.5
0.8
0.7
9.7
75.9
2013
US$m
2012
US$m
12.9
12.6
0.3
67.5
30.5
27.4
1.3
1.3
0.5
6.5
80.4
13.2
12.8
0.4
67.3
34.0
23.6
2.1
1.3
1.1
5.2
80.5
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 the consolidation returns of HSBC Holdings’ subsidiaries which are clearly
identifiable as being in support of the Group audit opinion. Excluded from the 2014 fees is US$0.3m related to prior year and fees related to the
transition of the audit to PwC of US$1.3m.
2 Fees payable for the statutory audit of the financial statements of HSBC’s subsidiaries. Excluded from the 2014 fees is a net release of accruals of
US$2.8m relating to prior years.
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, recruitment and remuneration.
Fees payable by HSBC’s associated pension schemes to KPMG
Audit of HSBC’s associated pension schemes
Audit related assurance services
Year ended 31 December
2014
US$000
322
5
327
2013
US$000
2012
US$000
379
5
384
256
–
256
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$3.6m (2013: US$5.3m; 2012: US$3.3m)
by parties other than HSBC but where HSBC is connected with the contracting party and may therefore 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 the HSBC Group.
8 Tax
Accounting policy
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.
HSBC HOLDINGS PLC
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Notes on the Financial Statements (continued)
8 – Tax
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 is charged or credited directly 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.
Critical accounting estimates and judgements
Deferred tax assets
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. In absence of a history of taxable profits, the
most significant judgements relate to expected future profitability and to the applicability of tax planning strategies, including corporate
reorganisations.
Our US operations have a history of tax losses, but profitability is expected to improve. Tax planning strategies support the recognition
of deferred tax assets in the US, with retention of capital in the US operations being a significant factor in recognising the deferred tax
assets. Given the recent occurrence of tax losses, the recognition of deferred tax assets in Brazil takes into consideration both the
reliance placed on management's projection of income and on the use of strategies, such as corporate reorganisations and other
initiatives, to improve the profitability of our Brazilian banking operations from a tax perspective.
Tax expense
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
Year ended 31 December
2014
US$m
69
54
15
3,881
4,423
(542)
3,950
25
(477)
83
419
3,975
2013
US$m
(8)
103
(111)
3,949
3,947
2
3,941
824
739
93
(8)
4,765
2012
US$m
250
60
190
5,560
5,421
139
5,810
(495)
(269)
66
(292)
5,315
1 Overseas tax included Hong Kong profits tax of US$1,135m (2013: US$1,133m; 2012: US$1,049m). The Hong Kong tax rate applying to the
profits of subsidiaries assessable in Hong Kong was 16.5% (2013: 16.5%; 2012: 16.5%). Other overseas subsidiaries and overseas branches
provided for taxation at the appropriate rates in the countries in which they operate.
Tax reconciliation
The tax charged to the income statement differs from the tax charge that would apply if all profits had been taxed at the
UK corporation tax rate as follows:
Profit before tax
Tax expense
Tax at 21.5% (2013: 23.25%; 2012: 24.5%)
Effect of differently taxed overseas profits
Adjustments in respect of prior period liabilities
Deferred tax temporary differences not recognised/
(previously not recognised)
Effect of profits in associates and joint ventures
Tax effect of disposal of Ping An
Tax effect of reclassification of Industrial Bank
Non-taxable income and gains
Permanent disallowables
Change in tax rates
Local taxes and overseas withholding taxes
Other items
Year ended 31 December
2014
US$m
18,680
4,016
33
(108)
(154)
(547)
–
–
(668)
969
22
434
(22)
3,975
%
21.5
0.2
(0.6)
(0.8)
(2.9)
–
–
(3.5)
5.1
0.1
2.3
(0.1)
21.3
2013
US$m
22,565
5,246
(177)
(117)
332
(543)
(111)
(317)
(871)
647
93
551
32
4,765
%
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(0.8)
(0.5)
1.5
(2.4)
(0.5)
(1.4)
(3.9)
2.9
0.4
2.4
0.1
21.1
2012
US$m
20,649
5,057
(57)
37
374
(872)
(204)
–
(542)
1,092
78
581
(229)
5,315
%
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0.2
1.8
(4.3)
(1.0)
–
(2.6)
5.3
0.4
2.8
(1.1)
25.7
HSBC HOLDINGS PLC
366
The effective tax rate for the year was 21.3% compared with 21.1% for 2013. The effective tax rate for the year reflected
the recurring benefits from tax exempt income from government bonds and equities held by a number of Group entities
and recognition of the Group’s share of post-tax profits of associates and joint ventures within our pre-tax income,
together with a current tax credit for prior periods offset in part by non-tax-deductible settlements and provision in
connection with foreign exchange investigations. The effective tax rate in 2013 was lower because of benefits from non-
taxable gains offset in part by a write-down of deferred tax assets.
The main rate of corporation tax in the UK reduced from 23% to 21% on 1 April 2014 and will be further reduced to 20%
on 1 April 2015. The reduction in the corporate tax rate to 20% was enacted through the 2013 Finance Act on 17 July
2013. It is not expected that the future rate reduction 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. Where the ultimate tax treatment is uncertain, 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.
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. The net deferred tax assets totalled US$5.6bn at 31 December 2014 (2013: US$6.5bn). The main items to note are:
US
The net deferred tax asset relating to HSBC’s operations in the US was US$4.1bn (2013: US$4.4bn). The deferred tax
assets included in this total reflected the carry forward of tax losses and tax credits of US$0.9bn (2013: US$0.7bn),
deductible temporary differences in respect of loan impairment allowances of US$0.8bn (2013: US$1.2bn) and other
temporary differences of US$2.4bn (2013: US$2.5bn).
Deductions for loan impairments for US tax purposes generally occur when the impaired loan is charged off, or if earlier,
when the impaired loan is sold. The tax deduction is 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.
On the evidence available, including historical levels of profitability, management projections of future income and HSBC
Holdings’ commitment to continue to retain 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 currently indicate that tax losses and tax credits will be fully
recovered by 2017. The current level of the deferred tax asset in respect of loan impairment allowances and other
deductible temporary differences is projected to reduce over the next four years.
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 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. As
financial performance in our US operations improves it is expected that projected future profits from US operations will
be relied on in the evaluation of the recognition of the deferred tax asset in future periods as the sustainability of the
improving financial performance is demonstrated.
Brazil
The net deferred tax asset relating to HSBC’s operations in Brazil was US$1.3bn (2013: US$1.0bn). The deferred tax assets
included in this total reflected the carry forward of tax losses of US$0.3bn (2013: US$0.1bn), deductible temporary
differences in respect of loan impairment allowances of US$0.7bn (2013: US$0.7bn) and other temporary differences of
US$0.3bn (2013: US$0.2bn).
Deductions for loan impairments for Brazilian 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.
Management projections of profits from the Brazilian banking operations currently indicate that the tax losses and other
temporary differences will be substantially recovered within the next five to eight years. Loan impairment deductions are
recognised for tax purposes typically within two to three years of the accounting recognition.
HSBC HOLDINGS PLC
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Notes on the Financial Statements (continued)
8 – Tax
Mexico
The net deferred tax asset relating to HSBC’s operations in Mexico was US$0.5bn (2013: 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.
Management’s analysis of the recognition of these deferred tax assets relies on the primary strategy of selling certain loan
portfolios, the losses on which are deductible for tax in Mexico when sold. Any such deductions for tax would lead to the
reversal of the carried forward loan impairment provision recognised for deferred tax purposes. The deferred tax balances
are carried forward to future years without expiry.
In September 2013, the Mexican Government proposed a number of tax reforms that were approved by the Chamber
of Senate in October 2013 and published in the Official Gazette in December 2013. The tax reforms included a new basis
of tax deduction for loan impairment charges that will allow banks to recognise tax deductions as and when loans are
written off the balance sheet. The reforms also brought in transitional rules to allow banks to continue to claim any
unclaimed deductions as at 31 December 2013. On 4 July 2014, the Mexican Government issued rule I.3.22.5 of the
Miscellaneous Tax Resolution that clarified the treatment of the transitional rules, but had no impact on the deferred
tax assets held in our operations in Mexico.
On the evidence available, including historical and projected levels of loan portfolio growth, loan impairment rates
and profitability, it is expected that the business will realise these assets over the next five years.
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 liability relating to HSBC’s operations in the UK was US$0.4bn (2013: asset of US$0.4bn). The
deferred tax liabilities included in this total related primarily to retirement benefits.
There were no material carried forward tax losses or tax credits recognised within the Group’s deferred tax assets in
the UK.
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$22.6bn (2013: US$22.0bn). These amounts included unused state losses arising in our US
operations of US$14.1bn (2013: US$17.3bn).
Of the total amounts unrecognised, US$4.2bn (2013: US$5.0bn) had no expiry date, US$0.9bn (2013: US$1.0bn) was
scheduled to expire within 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 2014 and 2013
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$132m (2013: US$20m) has, however,
been provided in respect of distributable reserves of associates that, on distribution, would attract withholding tax.
HSBC HOLDINGS PLC
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HSBC HOLDINGS PLC
369
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Notes on the Financial Statements (continued)
9 – Dividends / 10 – Earnings per share / 11 – Segmental analysis
HSBC Holdings
Movement of deferred tax assets
At 1 January 2014
Income statement
Other comprehensive income
At 31 December 2014
At 1 January 2013
Income statement
Other comprehensive income
At 31 December 2013
Accelerated
capital
allowances
US$m
Available-
for-sale
investments
US$m
Other
Investments
US$m
Share-
based
payments
US$m
Other short-
term timing
differences
US$m
2
–
–
2
2
–
–
2
(23)
–
(36)
(59)
(31)
–
8
(23)
19
3
–
22
31
(12)
–
19
11
2
–
13
12
(1)
–
11
4
1
–
5
–
4
–
4
Total
US$m
13
6
(36)
(17)
14
(9)
8
13
The amount of unused tax losses for which no deferred tax asset is recognised in the balance sheet was US$3,760m (2013:
US$3,405m) of which US$10m (2013: US$9m) relate to capital losses. On the evidence available, including historical levels
of profitability and management projections of future income, it is expected that there will be not sufficient taxable
income generated by the business to recover the tax losses carried forward by HSBC Holdings. The losses have no expiry
date.
9 Dividends
Dividends to shareholders of the parent company
2014
2013
2012
Per
share
US$
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 paid on ordinary shares
In respect of previous year:
– fourth interim dividend
In respect of current year:
– first interim dividend
– second interim dividend
– third interim dividend
Total
Total dividends on preference shares
classified as equity (paid quarterly)
0.19
3,582
1,827
0.18
3,339
540
0.14
2,535
0.10
0.10
0.10
0.49
1,906
1,914
1,918
9,320
284
372
226
2,709
0.10
0.10
0.10
0.48
1,861
1,864
1,873
8,937
167
952
864
0.09
0.09
0.09
1,633
1,646
1,655
2,523
0.41
7,469
2,429
259
748
783
639
62.00
90
62.00
90
62.00
90
Total coupons on capital securities classified as equity
2014
2013
2012
First Per security
US$
call date
Total Per security
US$
US$m
Total Per security
US$
US$m
Total
US$m
Perpetual subordinated capital securities1
– US$2,200m
– US$3,800m
Total
Apr 2013
Dec 2015
2.032
2.000
179
304
483
2.032
2.000
179
304
483
2.032
2.000
179
304
483
1 Coupons are paid quarterly on the perpetual subordinated capital securities.
The Directors declared after the end of the year a fourth interim dividend in respect of the financial year ended
31 December 2014 of US$0.20 per ordinary share, a distribution of approximately US$3,844m. The fourth interim dividend
will be payable on 30 April 2015 to holders of record on 6 March 2015 on the Principal Register in the UK, the Hong Kong
or the Bermuda Overseas Branch registers. No liability is recorded in the financial statements in respect of the fourth
interim dividend for 2014.
On 15 January 2015, HSBC paid a coupon on the perpetual subordinated capital securities of US$0.508 per security,
a distribution of US$45m. No liability was recorded in the balance sheet at 31 December 2014 in respect of this coupon
payment.
In September 2014, HSBC issued three contingent convertible securities as set out on page 438 which are classified as
equity under IFRSs. Coupons are paid semi-annually on the contingent convertible securities and none fell due in 2014. On
20 January 2015, HSBC paid a coupon on one of the contingent convertible securities of US$28.125 per security,
a distribution of US$28m. No liability was recorded in the balance sheet at 31 December 2014 in respect of this coupon
payment.
HSBC HOLDINGS PLC
370
The reserves available for distribution at 31 December 2014 were US$48,883m.
10 Earnings per share
‘Basic earnings per ordinary share’ is calculated by dividing the profit attributable to ordinary shareholders of the parent
company by the weighted average number of ordinary shares outstanding, excluding own shares held. ‘Diluted earnings
per ordinary share’ is calculated by dividing the basic earnings, which require no adjustment for the effects of dilutive
potential ordinary shares, by the weighted average number of ordinary shares outstanding, excluding own shares held,
plus the weighted average number of ordinary shares that would be issued on conversion of dilutive potential ordinary
shares.
Profit attributable to the ordinary shareholders of the parent company
Profit attributable to shareholders of the parent company
Dividend payable on preference shares classified as equity
Coupon payable on capital securities classified as equity
Year ended 31 December
Basic and diluted earnings per share
2014
US$m
13,688
(90)
(483)
13,115
2013
US$m
16,204
(90)
(483)
15,631
Basic1
Effect of dilutive potential ordinary shares
Diluted1
2014
Number
of shares
(millions)
18,960
96
19,056
Profit
US$m
13,115
–
13,115
Per
share
US$
0.69
–
0.69
Profit
US$m
15,631
–
15,631
2013
Number
of shares
(millions)
18,530
124
18,654
Per
share
US$
Profit
US$m
2012
Number
of shares
(millions)
0.84 13,454
–
–
18,125
146
0.84 13,454
18,271
2012
US$m
14,027
(90)
(483)
13,454
Per
share
US$
0.74
–
0.74
1 Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted).
The weighted average number of dilutive potential ordinary shares excluded 6m employee share options that were anti-
dilutive (2013: 60m; 2012: 103m).
11 Segmental analysis
Accounting policy
HSBC has a matrix management structure. 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. The GMB 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
geographical 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.
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 providing funding.
Measurement of segmental assets, liabilities, income and expenses is in accordance with the Group’s accounting policies. Segmental
income and expenses include transfers between segments and these transfers are conducted at arm’s length. Shared costs are included
in segments on the basis of the actual recharges made. The expense of the UK bank levy is included in the Europe geographical region as
HSBC regards the levy as a cost of carrying on business and being headquartered in the UK.
Products and services
HSBC provides a comprehensive range of banking and related financial services to its customers in its five 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. CMB also offers its customers
access to products and services offered by other global businesses, for example Global Banking & Markets (‘GB&M’),
HSBC HOLDINGS PLC
371
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Notes on the Financial Statements (continued)
11 – Segmental analysis
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, equities,
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 within the Group’s priority markets.
Change in operating segments
HSBC’s operating segments are Europe, Asia, Middle East and North Africa (‘MENA’), North America and Latin America.
Previously, HSBC’s operating segments were reported as Europe, Hong Kong, Rest of Asia-Pacific, Middle East and
North Africa, North America and Latin America. Hong Kong and Rest of Asia-Pacific are no longer regarded as separate
reportable operating segments, having considered the geographical financial information presented to the chief operating
decision maker. From 1 January 2014, they have been replaced by a new operating segment, ‘Asia’, which better aligns
with internal management information used for evaluation when making business decisions and resource allocations. The
chief operating decision-maker continues to be the GMB and the basis for measuring segmental results has not changed.
Comparative financial information has been re-presented accordingly.
There has been no change in the underlying business operations comprising the Asia segment. Reported net operating
income in Asia for the year to 31 December 2014 was US$23,677m (31 December 2013: US$24,432m; 31 December 2012:
US$25,332m). This was US$713m lower (31 December 2013: US$749m lower; 31 December 2012: US$674m lower) than
would be calculated by adding net operating income reported for Hong Kong and Rest of Asia-Pacific on an individual
basis. The reduction in net operating income is offset by an equal decrease in operating expenses. The difference relates
to shared service recharges and business activity undertaken between the two regions which form revenue or expense on
an individual basis, but are eliminated as ‘intra-segment’ activity when reported as Asia. There is no difference between
profit before tax reported for Asia and that which would be calculated by adding the profit before tax of Hong Kong and
Rest of Asia-Pacific on an individual basis.
North
America
US$m
Latin
America
US$m
Intra-
HSBC items
US$m
5,015
1,940
411
786
8,152
(322)
7,830
(3,072)
(3,108)
5,310
1,415
856
691
8,272
(2,124)
6,148
(2,565)
(2,894)
(180)
(242)
(23)
−
23
(2,972)
(2,972)
−
(2,972)
−
2,972
−
−
(69)
(6,429)
1,401
16
1,417
(195)
1,222
(231)
(5,932)
2,972
216
−
216
(46)
170
−
−
−
−
−
Total
US$m
34,705
15,957
6,760
3,826
61,248
(3,851)
57,397
(20,366)
(18,565)
(1,382)
(936)
(41,249)
16,148
2,532
18,680
(3,975)
14,705
Profit/(loss) for the year
2014
Net interest income
Net fee income
Net trading income
Other income
Net operating income1
Loan impairment (charges)/recoveries
and other credit risk provisions
Net operating income
Employee compensation and benefits
General and administrative expenses
Depreciation and impairment of
property, plant and equipment
Amortisation and impairment of
intangible assets
Total operating expenses
Operating profit
Share of profit in associates and joint
ventures
Profit before tax
Tax expense
Profit/(loss) for the year
Europe
US$m
10,611
6,042
2,534
2,384
21,571
(764)
20,807
(8,191)
(11,076)
(543)
(407)
Asia
US$m
12,273
5,910
2,622
2,872
23,677
(647)
23,030
(5,862)
(3,959)
(389)
(217)
(20,217)
(10,427)
590
12,603
6
596
(853)
(257)
2,022
14,625
(2,542)
12,083
MENA
US$m
1,519
650
314
65
2,548
6
2,554
(676)
(500)
(28)
(12)
(1,216)
1,338
488
1,826
(339)
1,487
HSBC HOLDINGS PLC
372
Profit/(loss) for the year (continued)
2013
Net interest income
Net fee income
Net trading income
Other income/(expense)
Net operating income1
Loan impairment (charges)/recoveries
and other credit risk provisions
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
Total operating expenses
Operating profit
Share of profit in associates and joint
ventures
Profit before tax
Tax expense
Profit for the year
2012
Net interest income
Net fee income
Net trading income
Gains on disposal of US branch network,
US cards business and Ping An
Other income/(expense)
Net operating income1
Loan impairment charges and other
credit risk provisions
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
Total operating expenses
Operating profit/(loss)
Share of profit/(loss) in associates and
joint ventures
Profit/(loss) before tax
Tax expense
Profit/(loss) for the year
Europe
US$m
10,693
6,032
4,423
(181)
20,967
(1,530)
19,437
(7,175)
(9,479)
(559)
(400)
(17,613)
1,824
1
1,825
(1,279)
546
10,394
6,169
2,707
–
(1,662)
17,608
(1,921)
15,687
(8,070)
(10,059)
(597)
(369)
(19,095)
(3,408)
(6)
(3,414)
(173)
(3,587)
Asia
US$m
11,432
5,936
2,026
5,038
24,432
(498)
23,934
(5,666)
(3,660)
(392)
(218)
(9,936)
13,998
1,855
15,853
(2,170)
13,683
10,707
5,418
2,516
3,012
3,679
25,332
(510)
24,822
(5,712)
(3,619)
(427)
(222)
(9,980)
14,842
3,188
18,030
(2,711)
15,319
MENA
US$m
1,486
622
357
38
2,503
42
2,545
(634)
(607)
(35)
(13)
(1,289)
1,256
438
1,694
(328)
1,366
1,470
595
390
–
(25)
(286)
2,144
(652)
(459)
(44)
(11)
(1,166)
978
372
1,350
(254)
1,096
North
America
US$m
Latin
America
US$m
Intra-
HSBC items
US$m
5,742
2,143
948
(30)
8,803
(1,197)
7,606
(3,098)
(3,051)
6,186
1,701
936
1,745
10,568
(2,666)
7,902
(2,623)
(2,896)
(176)
(202)
(91)
(6,416)
1,190
31
1,221
(313)
908
8,117
2,513
507
4,012
(456)
(3,457)
11,236
(3,243)
(5,413)
(209)
(5,930)
1,972
–
1,972
(675)
1,297
6,984
1,735
971
–
1,261
10,951
(2,137)
8,814
(2,814)
(3,117)
(195)
(221)
(89)
(8,940)
2,296
3
2,299
(1,313)
986
(278)
(6,430)
2,384
–
2,384
(864)
1,520
–
–
–
(2,628)
(2,628)
–
(2,628)
–
2,628
–
–
2,628
–
–
–
–
–
–
–
–
–
(2,684)
(2,684)
–
(2,684)
–
2,684
–
–
2,684
–
–
–
–
–
2,430
14,693
1 Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue.
HSBC HOLDINGS PLC
373
Total
US$m
35,539
16,434
8,690
3,982
64,645
(5,849)
58,796
(19,196)
(17,065)
(1,364)
(931)
(38,556)
20,240
2,325
22,565
(4,765)
17,800
37,672
16,430
7,091
7,024
113
68,330
(8,311)
60,019
(20,491)
(19,983)
(1,484)
(969)
(42,927)
17,092
3,557
20,649
(5,315)
15,334
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Notes on the Financial Statements (continued)
11 – Segmental analysis
Other information about the profit/(loss) for the year
2014
Net operating income1
– external
– inter-segment
Profit for the year includes the following
significant non-cash items:
Depreciation, amortisation and
impairment
Loan impairment losses gross of
recoveries and other credit risk
provisions
Impairment of financial investments
Changes in fair value of long-term debt
and related derivatives
Restructuring costs
2013
Net operating income1
– external
– inter-segment
Profit for the year includes the following
significant non-cash items:
Depreciation, amortisation and
impairment
Loan impairment losses gross of
recoveries and other credit risk
provisions
Impairment of financial investments
Changes in fair value of long-term debt
and related derivatives
Restructuring costs
2012
Net operating income1
– external
– inter-segment
Profit for the year includes the following
significant non-cash items:
Depreciation, amortisation and
impairment
Loan impairment losses gross of
recoveries and other credit risk
provisions
Impairment of financial investments
Changes in fair value of long-term debt
and related derivatives
Restructuring costs
Europe
US$m
21,571
20,450
1,121
Asia
US$m
23,677
22,071
1,606
MENA
US$m
2,548
2,524
24
North
America
US$m
Latin
America
US$m
Intra-
HSBC items
US$m
8,152
7,937
215
8,272
8,266
6
(2,972)
–
(2,972)
950
606
1,066
(256)
614
117
800
286
(4)
7
40
37
–
(3)
2
182
473
437
14
(99)
28
2,466
10
–
57
–
–
–
–
–
Total
US$m
61,248
61,248
–
2,251
4,806
54
508
211
20,967
20,108
859
24,432
22,853
1,579
2,503
2,497
6
8,803
8,569
234
10,568
10,618
(50)
(2,628)
–
(2,628)
64,645
64,645
–
957
610
2,165
(61)
(936)
211
665
4
(1)
79
48
45
–
(3)
3
303
412
1,321
15
(288)
100
2,949
6
–
42
–
–
–
–
–
2,330
7,145
(36)
(1,228)
435
17,608
16,405
1,203
25,332
23,893
1,439
2,430
2,455
(25)
14,693
14,566
127
10,951
11,011
(60)
(2,684)
–
(2,684)
68,330
68,330
–
966
649
55
363
499
2,329
420
(3,091)
292
691
62
(4)
128
361
1
(13)
27
3,587
32
(1,219)
219
2,489
4
–
94
–
–
–
–
–
2,532
9,457
519
(4,327)
760
1 Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue.
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Balance sheet information
Europe
US$m
Asia
US$m
At 31 December 2014
Loans and advances to customers
Interests in associates and joint ventures
Total assets
Customer accounts
Total liabilities
Capital expenditure incurred1
At 31 December 2013
Loans and advances to customers
Interests in associates and joint ventures
Total assets
Customer accounts
Total liabilities
Capital expenditure incurred1
At 31 December 2012
Loans and advances to customers
Interests in associates and joint ventures
Total assets
Customer accounts
Total liabilities
Capital expenditure incurred1
409,733
175
1,290,926
545,959
1,223,371
1,168
456,110
169
1,392,959
581,933
1,326,537
907
436,141
178
1,389,240
535,215
1,327,487
925
362,955
14,958
878,723
577,491
807,998
637
336,897
13,822
831,791
548,483
770,938
1,236
310,665
15,309
804,709
529,754
749,561
544
MENA
US$m
29,063
2,955
62,417
39,720
52,569
25
27,211
2,575
60,810
38,683
50,706
32
28,086
2,262
62,605
39,583
53,498
102
North
America
US$m
129,787
83
436,859
138,884
398,356
208
127,953
74
432,035
140,809
393,635
265
134,475
85
490,247
141,700
450,480
248
Latin
America
US$m
Intra-
HSBC items
US$m
Total
US$m
43,122
10
115,354
48,588
102,007
348
43,918
–
113,999
51,389
99,319
385
53,605
–
131,277
65,144
113,923
458
–
–
(150,140)
–
(150,140)
974,660
18,181
2,634,139
1,350,642
2,434,161
–
2,386
–
–
(160,276)
–
(160,276)
992,089
16,640
2,671,318
1,361,297
2,480,859
–
2,825
–
–
(185,540)
–
(185,540)
962,972
17,834
2,692,538
1,311,396
2,509,409
–
2,277
1 Expenditure incurred on property, plant and equipment and other intangible assets. Excludes assets acquired as part of business combinations
and goodwill.
Other financial information
Net operating income by global business
2014
Net operating income2
– external
– internal
2013
Net operating income2
– external
– internal
2012
Net operating income2
– external
– internal
RBWM
US$m
24,594
22,692
1,902
26,740
25,038
1,702
33,861
31,980
1,881
CMB
US$m
16,303
16,879
(576)
16,365
17,241
(876)
16,551
17,295
(744)
GB&M
US$m
17,778
20,055
(2,277)
19,176
20,767
(1,591)
18,273
20,410
(2,137)
GPB
US$m
2,377
1,980
397
2,439
1,955
484
3,172
2,413
759
Intra-
HSBC items
US$m
Other1
US$m
6,365
(358)
6,723
5,651
(356)
6,007
2,332
(3,768)
6,100
(6,169)
–
(6,169)
(5,726)
–
(5,726)
(5,859)
–
(5,859)
Total
US$m
61,248
61,248
–
64,645
64,645
–
68,330
68,330
–
1 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.
2 Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue.
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Notes on the Financial Statements (continued)
11 – Segmental analysis / 12 – Trading assets
Information by country
UK
Hong Kong
USA
France
Brazil
Other countries
Year ended/at 31 December
2014
2013
2012
External net
operating
income1,2
US$m
Non-
current
assets3
US$m
External net
operating
income1,2
US$m
Non-
current
assets3
US$m
External net
operating
income1,2
US$m
14,392
12,656
5,736
2,538
4,817
21,109
61 248
61,248
8,671
12,376
5,685
10,301
1,403
28,273
66,709
13,347
12,031
6,121
3,111
5,364
24,671
64,645
17,481
12,170
4,189
11,565
1,715
27,879
74,999
9,149
11,307
11,779
2,881
6,395
26,819
68,330
Non-
current
assets3
US$m
18,391
11,657
6,718
11,074
2,017
30,078
79,935
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.
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 12 months after the reporting period.
Financial information presented on our previous geographical operating segments
Net operating income1
2014
Net operating income
– external
– inter-segment
2013
Net operating income
– external
– inter-segment
2012
Net operating income
– external
– inter-segment
Profit/(loss) before tax
Year to:
31 December 2014
31 December 2013
31 December 2012
Balance sheet information
At 31 December 2014
Total assets
Total liabilities
At 31 December 2013
Total assets
Total liabilities
At 31 December 2012
Total assets
Total liabilities
Europe
US$m
Hong
Kong
US$m
21,571
20,450
1,121
20,967
20,108
859
17,608
16,405
1,203
13,844
12,656
1,188
13,203
12,031
1,172
12,422
11,307
1,115
Rest of
Asia-
Pacific
US$m
10,546
9,415
1,131
11,978
10,822
1,156
13,584
12,586
998
North
America
US$m
Latin
America
US$m
MENA
US$m
Intra-
HSBC
items
US$m
Total
US$m
2,548
2,524
24
2,503
2,497
6
8,152
7,937
215
8,803
8,569
234
8,272
8,266
6
(3,685)
–
(3,685)
61,248
61,248
–
10,568
10,618
(50)
(3,377)
–
(3,377)
64,645
64,645
–
2,430
2,455
(25)
14,693
14,566
127
10,951
11,011
(60)
(3,358)
–
(3,358)
68,330
68,330
–
596
1,825
(3,414)
8,142
8,089
7,582
6,483
7,764
10,448
1,826
1,694
1,350
1,417
1,221
2,299
216
1,972
2,384
–
–
–
18,680
22,565
20,649
1,290,926
1,223,371
587,534
556,388
359,757
320,178
62,417
52,569
436,859
398,356
115,354
102,007
(218,708)
(218,708)
2,634,139
2,434,161
1,392,959
1,326,537
555,413
523,579
335,937
306,918
60,810
50,706
432,035
393,635
113,999
99,319
(219,835)
(219,835)
2,671,318
2,480,859
1,389,240
1,327,487
518,334
496,640
342,269
308,815
62,605
53,498
490,247
450,480
131,277
113,923
(241,434)
(241,343)
2,692,538
2,509,409
1 Net operating income before loan impairment charges and other credit risk provisions.
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12 Trading assets
Accounting policy
Financial assets are classified as held for trading if they have been acquired principally for the purpose of selling 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. They are recognised on trade date, when HSBC enters into contractual arrangements with counterparties, and
are normally derecognised when sold. They are initially measured at fair value, with transaction costs taken to the income statement.
Subsequent changes in their fair values are recognised in the income statement in ‘Net trading income’. For trading assets, the interest is
shown in ‘Net trading income’.
Trading assets
Trading assets:
– not subject to repledge or resale by counterparties
– which may be repledged or resold by counterparties
At 31 December
Treasury and other eligible bills
Debt securities
Equity securities
Trading securities at fair value
Loans and advances to banks1
Loans and advances to customers1
At 31 December
2014
US$m
247,586
56,607
304,193
16,170
141,532
75,249
232,951
27,581
43,661
304,193
1 Loans and advances to banks and customers include reverse repos, settlement accounts, stock borrowing and other amounts.
2013
US$m
201,492
101,700
303,192
21,584
141,644
63,891
227,119
27,885
48,188
303,192
2013
US$m
23,450
11,591
5,909
86,714
2,736
32,828
63,891
2014
US$m
25,880
9,280
6,946
78,774
3,494
33,328
75,249
232,951
227,119
Trading securities 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
At 31 December
1 Included within these figures are debt securities issued by banks and other financial institutions of US$22,399m (2013: US$22,989m), of which
US$2,949m (2013: US$3,973m) are guaranteed by various governments.
2 Includes securities that are supported by an explicit guarantee issued by the US Government.
3 Excludes asset-backed securities included under US Treasury and US Government agencies.
Trading securities listed on a recognised exchange and unlisted
Fair value
Listed1
Unlisted2
At 31 December 2014
Fair value
Listed1
Unlisted2
At 31 December 2013
Treasury
and other
eligible bills
US$m
1,311
14,859
16,170
194
21,390
21,584
Debt
securities
US$m
Equity
securities
US$m
98,028
43,504
141,532
85,821
55,823
141,644
74,542
707
75,249
62,724
1,167
63,891
Total
US$m
173,881
59,070
232,951
148,739
78,380
227,119
1 Included within listed investments are US$5,956m (2013: US$3,836m) of securities listed in Hong Kong.
2 Unlisted treasury and other eligible bills primarily comprise treasury bills not listed on an exchange but for which there is a liquid market.
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Notes on the Financial Statements (continued)
13 – Fair values of financial instruments carried at fair value
13 Fair values of financial instruments carried at fair value
Accounting policy
All financial instruments are recognised initially at fair value. Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a financial
instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However,
sometimes 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 at inception (‘day 1 gain or loss’),
being the difference between the transaction price and the fair value. When significant unobservable parameters are used, the entire
day 1 gain or loss is deferred and is recognised in the income statement over the life of the transaction until the transaction matures, is
closed out, the valuation inputs become observable or HSBC enters into an offsetting transaction.
The fair value of financial instruments is generally measured on an individual basis. However, in cases where HSBC manages a group of
financial assets and liabilities according to its net market or credit risk exposure, HSBC measures the fair value of the group of financial
instruments on a net basis but presents the underlying financial assets and liabilities separately in the financial statements, unless they
satisfy the IFRS offsetting criteria as described in Note 32.
Critical accounting estimates and judgements
Valuation of financial instruments
The best evidence of fair value is a quoted price in an actively traded principal 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, the fair value of the total holding of the financial instrument is calculated as the product of the number
of units and quoted price. 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 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. Valuation techniques may incorporate assumptions about factors that other market participants would use in
their valuations, including:
•
the likelihood and expected timing of future cash flows on the instrument. Judgement may be required to assess the counterparty’s
ability to service the instrument in accordance with its contractual terms. Future cash flows may be sensitive to changes in market
rates;
• selecting an appropriate discount rate for the instrument. Judgement is required to assess what a market participant would regard
as the appropriate spread of the rate for an instrument over the appropriate risk-free rate;
•
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.
A range of valuation techniques is employed, dependent on the instrument type and available market data. Most valuation techniques
are based upon discounted cash flow analyses, in which expected future cash flows are calculated and discounted to present value using
a discounting curve. Prior to considering credit risk, the expected future cash flows may be known, as would be the case for the fixed leg
of an interest rate swap, or may be uncertain and require projection, as would be the case for the floating leg of an interest rate swap.
‘Projection’ utilises market forward curves, if available. In option models, the probability of different potential future outcomes must be
considered. In addition, the value of some products is dependent on more than one market factor, and in these cases it will typically be
necessary to consider how movements in one market factor may affect the other market factors. The model inputs necessary to perform
such calculations include interest rate yield curves, exchange rates, volatilities, correlations, prepayment and default rates. For interest
rate derivatives with collateralised counterparties and in significant currencies, HSBC uses a discounting curve that reflects the overnight
interest rate (‘OIS’).
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 or greater than 5% of the instrument’s valuation 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).
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 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;
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• 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 valuation models, 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.
Changes in fair value are generally subject to a profit and loss analysis process. This process disaggregates changes in fair
value into three high level categories; (i) portfolio changes, such as new transactions or maturing transactions, (ii) market
movements, such as changes in foreign exchange rates or equity prices, and (iii) other, such as changes in fair value
adjustments (see further below).
The majority of financial instruments measured at fair value are in GB&M. GB&M’s fair value governance structure is
illustrated below as an example:
Group Finance Director
Finance
Valuation Committees
Responsible for 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
Financial liabilities measured at fair value
In certain circumstances, HSBC records its own debt in issue at fair value, based on quoted prices in an active market for
the specific instrument 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.
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Notes on the Financial Statements (continued)
13 – Fair values of financial instruments carried at fair value
Fair value hierarchy
Fair values of financial assets and liabilities are determined according to the following hierarchy:
• Level 1 – valuation technique using quoted market price: financial instruments with quoted prices for identical
instruments in active markets that HSBC can access at the measurement date.
• Level 2 – valuation technique using observable inputs: 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 following table sets out the financial instruments by fair value hierarchy.
Financial instruments carried at fair value and bases of valuation
Recurring fair value measurements at 31 December 2014
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
Recurring fair value measurements at 31 December 2013
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
Quoted
market
price
Level 1
US$m
180,446
23,697
4,366
241,464
62,385
3,792
4,649
182,721
30,173
2,539
262,836
88,935
10,482
4,508
Valuation techniques
Using
observable
inputs
Level 2
US$m
With significant
unobservable
inputs
Level 3
US$m
117,279
4,614
337,718
131,264
122,048
72,361
334,113
115,124
7,649
277,224
130,760
110,576
78,602
267,441
6,468
726
2,924
4,988
6,139
–
1,907
5,347
608
2,502
7,245
7,514
–
2,335
Total
US$m
304,193
29,037
345,008
377,716
190,572
76,153
340,669
303,192
38,430
282,265
400,841
207,025
89,084
274,284
The increase in Level 2 derivative balances reflects the overall increase in derivative balances and is discussed in Note 16.
There were no other significant movements during 2014.
Transfers between Level 1 and Level 2 fair values
Assets
Available
for sale
US$m
2,702
–
Held for
trading
US$m
18,149
–
Designated
at fair value
through
profit or loss
US$m
Derivatives
US$m
–
–
–
–
Held for
trading
US$m
22,964
–
At 31 December 2014
Transfers from Level 1 to Level 2
Transfers from Level 2 to Level 1
Liabilities
Designated
at fair value
through
profit or loss
Derivatives
US$m
US$m
–
–
–
–
Transfers between levels of the fair value hierarchy are deemed to occur at the end of each semi-annual reporting period.
Transfers from Level 1 to Level 2 mainly reflect the reclassification of settlement balances and cash collateral following
reassessment of the application of levelling criteria to these balances.
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Fair value adjustments
Fair value adjustments are adopted when HSBC considers that there are additional factors that would be considered by a
market participant which are not incorporated within the valuation model. 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.
Global Banking and Markets fair value adjustments
Type of adjustment
Risk-related
– bid-offer
– uncertainty
– credit valuation adjustment
– debit valuation adjustment
– funding fair value adjustment
– other
Model-related
– model limitation
– other
Inception profit (Day 1 P&L reserves) (Note 16)
At 31 December
2014
US$m
1,958
539
357
871
(270)
460
1
57
52
5
114
2,129
2013
US$m
1,565
561
343
1,274
(616)
–
3
202
199
3
167
1,934
The largest change in recurring fair value adjustments was a decline of US$403m in respect of the credit valuation
adjustment, as a result of both reduced derivative counterparty exposures and general narrowing of credit default swap
(‘CDS’) spreads. Narrowing HSBC credit default swap spreads similarly contributed to a reduction in the debit valuation
adjustment (‘DVA’) of US$346m.
Funding fair value adjustment (‘FFVA’) reflects the potential future cost or benefit of funding the uncollateralised derivative
portfolio at rates other than overnight (‘OIS’) rates. The impact of FFVA adoption in 2014 was a US$263m reduction in net
trading income, reflecting the incorporation of a funding spread over Libor. FFVA is measured from an OIS base, and the total
FFVA balance of US$460m also reflects the difference between OIS and Libor which had been previously reflected in the fair
value of the uncollateralised derivative portfolio.
Risk-related adjustments
Bid-offer
IFRS 13 requires use of the price within the bid-offer spread that is most representative of fair value. Valuation models
will typically generate mid-market values. The bid-offer adjustment reflects the extent to which bid-offer costs would be
incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by
disposing of or unwinding the position.
Uncertainty
Certain model inputs may be less readily determinable from market data, and/or the choice of model itself may be more
subjective. In these circumstances, 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 CVA 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 (see below).
Debit valuation adjustment
The DVA 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 (see below).
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Notes on the Financial Statements (continued)
13 – Fair values of financial instruments carried at fair value
Funding fair value adjustment
The funding fair value adjustment is calculated by applying future market funding spreads to the expected future funding
exposure of any uncollateralised component of the OTC derivative portfolio. This includes the uncollateralised component
of collateralised derivatives in addition to derivatives that are fully uncollateralised. The expected future funding
exposure is calculated by a simulation methodology, where available. The expected future funding exposure is adjusted
for events that may terminate the exposure such as the default of HSBC or the counterparty. The funding fair value
adjustment and debit valuation adjustment are calculated independently.
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.
Inception profit (Day 1 P&L reserves)
Inception profit adjustments are adopted when the fair value estimated by a valuation model is based on one or more
significant unobservable inputs. The accounting for inception profit adjustments is discussed on page 378. An analysis of
the movement in the deferred Day 1 P&L reserve is provided on page 395.
Credit valuation adjustment/debit valuation adjustment methodology
HSBC calculates a separate CVA and DVA for each HSBC legal entity, and within each entity for each counterparty to
which the entity has exposure. HSBC calculates the CVA by applying the probability of default (‘PD’) of the counterparty,
conditional on the non-default of HSBC, to HSBC’s expected positive exposure to the counterparty and multiplying the
result by the loss expected in the event of default. Conversely, HSBC calculates the DVA by applying the PD of HSBC,
conditional on the non-default of the counterparty, to the expected positive exposure of the counterparty to HSBC and
multiplying the result by the loss expected in the event of default. Both calculations are performed over the life of the
potential exposure.
For most products HSBC uses a simulation methodology to calculate the expected positive exposure to a counterparty. This
incorporates a range of potential exposures across the portfolio of transactions with the counterparty over the life of the
portfolio. The simulation methodology includes credit mitigants such as counterparty netting agreements and collateral
agreements with the counterparty. A standard loss given default (‘LGD’) assumption of 60% is generally adopted for
developed market exposures, and 75% for emerging market exposures. Alternative LGD assumptions may be adopted when
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 the
mapping approach is not appropriate, using a simplified methodology which generally follows 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 is used in the simulation methodology.
The methodologies do not, in general, account for ‘wrong-way risk’. Wrong-way risk arises when the underlying value of the
derivative prior to any CVA is positively correlated to the probability of default by the counterparty. When 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, we include all third-party counterparties in the CVA and DVA
calculations and do not net these adjustments across Group entities. We review and refine the CVA and DVA
methodologies on an ongoing basis.
Valuation of uncollateralised derivatives
Historically, HSBC has valued uncollateralised derivatives by discounting expected future cash flows at a benchmark interest
rate, typically Libor or its equivalent. In line with evolving industry practice, HSBC changed this approach in the second half of
2014. HSBC now views the OIS curve as the base discounting curve for all derivatives, both collateralised and uncollateralised,
and has adopted an FFVA to reflect the funding of uncollateralised derivative exposure at rates other than OIS. The impact of
adopting the funding fair value adjustment was a reduction in trading revenues of US$263m. This is an area in which a full
industry consensus has not yet emerged. HSBC will continue to monitor industry evolution and refine the calculation
methodology as necessary.
HSBC HOLDINGS PLC
382
Fair value valuation bases
Financial instruments measured at fair value using a valuation technique with significant unobservable inputs – Level 3
Available
Held for
trading
US$m US$m
for sale
Private equity including strategic
investments
Asset-backed securities
Loans held for securitisation
Structured notes
Derivatives with monolines
Other derivatives
Other portfolios
At 31 December 2014
Private equity including strategic
investments
Asset-backed securities
Loans held for securitisation
Structured notes
Derivatives with monolines
Other derivatives
Other portfolios
At 31 December 2013
3,120
1,462
–
–
–
–
406
4,988
3,729
1,677
–
–
–
–
1,839
7,245
164
616
39
2
–
–
5,647
6,468
103
643
83
14
–
–
4,504
5,347
1 Designated at fair value through profit or loss.
Assets
At fair
value1
US$m
432
–
–
–
–
–
294
26
726
420
–
–
–
–
–
188
608
Deriv-
atives
US$m
–
–
–
–
239
2,685
–
2,924
–
–
–
–
320
2,182
–
2,502
Total
US$m
3,716
2,078
39
2
239
2,685
6,347
15,106
4,252
2,320
83
14
320
2,182
6,531
15,702
Held for
trading
US$m
Liabilities
At fair
value1
US$m US$m
Deriv-
atives
47
–
–
6,092
–
–
–
6,139
–
–
–
7,514
–
–
–
7,514
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
1,906
–
1,907
–
–
–
–
–
2,335
–
2,335
Total
US$m
47
–
–
6,092
1
1,906
–
8,046
–
–
–
7,514
–
2,335
–
9,849
Level 3 instruments are present in both ongoing and legacy businesses. Loans held for securitisation, derivatives with
monolines, certain ‘other derivatives’ and predominantly all Level 3 asset-backed securities are legacy. HSBC has the
capability to hold these positions.
Private equity including 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 alternative 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 with significant unobservable inputs 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.
Level 3 structured notes principally comprise equity-linked 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.
HSBC HOLDINGS PLC
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Notes on the Financial Statements (continued)
13 – Fair values of financial instruments carried at fair value
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.
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
At 1 January 2014
Total gains/(losses) recognised in profit
or loss
– trading income excluding net interest
income
– net income/(expense) from other
financial instruments designated at
fair value
– gains less losses from financial
investments
– loan impairment charges and
other credit risk provisions
Total gains/(losses) recognised in other
comprehensive income1
– available-for-sale investments:
fair value gains/(losses)
– cash flow hedges: fair value
gains/(losses)
– exchange differences
Purchases
New issuances
Sales
Settlements
Transfers out
Transfers in
At 31 December 2014
Assets
Designated
at fair value
through
profit or loss
US$m
608
Held for
trading
US$m
5,347
Available
for sale
US$m
7,245
Derivatives
US$m
2,502
Held for
trading
US$m
7,514
Liabilities
Designated
at fair value
through
profit or loss Derivatives
US$m
2,335
US$m
–
174
–
–
198
(24)
126
208
–
(82)
1,505
–
(1,237)
(1,255)
(3,027)
1,457
4,988
194
194
–
(178)
–
–
(178)
705
–
(481)
(49)
(112)
1,042
6,468
56
–
56
(16)
–
–
(16)
273
–
(149)
(78)
–
32
726
959
959
–
(25)
(25)
–
(126)
(123)
–
(9)
(117)
–
–
–
27
(544)
106
2,924
–
–
(123)
(31)
2,067
–
(1,655)
(1,918)
310
6,139
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(5)
(5)
–
54
–
34
20
–
–
–
(69)
(527)
119
1,907
HSBC HOLDINGS PLC
384
Assets
Available
for sale
US$m
Held for
trading
US$m
Designated
at fair value
through
profit or loss
US$m
Derivatives
US$m
Held for
trading
US$m
Liabilities
Designated
at fair value
through
profit or loss Derivatives
US$m
US$m
Unrealised gains/(losses) recognised in
profit or loss relating to assets and
liabilities held at 31 December 2014
– trading income excluding net interest
income
– net income/(expense) from other
financial instruments designated at
fair value
– loan impairment charges and other
credit risk provisions
At 1 January 2013
Total gains/(losses) recognised in profit
or loss
– trading income/(expense) excluding
net interest income
– net income from other financial
instruments designated at fair value
– gains less losses from financial
investments
– loan impairment charges and
other credit risk provisions
Total gains/(losses) recognised in
other comprehensive income1
– available-for-sale investments:
fair value gains
– cash flow hedges: fair value losses
– exchange differences
Purchases
New issuances
Sales
Settlements
Transfers out
Transfers in
At 31 December 2013
Unrealised gains/(losses) recognised in
profit or loss relating to assets and
liabilities held at 31 December 2013
– trading income excluding net interest
income
– net income from other financial
instruments designated at fair value
– loan impairment charges and
other credit risk provisions
(24)
–
–
(24)
1
1
–
–
46
–
46
–
946
946
–
–
(122)
(122)
–
–
8,511
4,378
413
3,059
7,470
(52)
–
–
(66)
14
487
568
–
(81)
1,838
–
(766)
(756)
(3,121)
1,104
7,245
(166)
–
–
(166)
343
343
–
–
–
20
–
–
20
1,293
–
(1,821)
(473)
(385)
1,992
5,347
362
362
–
–
36
–
36
–
–
–
–
–
–
56
–
(4)
(27)
(68)
202
608
41
–
41
–
(205)
(205)
–
–
–
(7)
–
(11)
4
–
–
–
(311)
(171)
137
2,502
(297)
(297)
–
–
(747)
(747)
–
–
–
9
–
–
9
(482)
3,161
(14)
(1,150)
(1,051)
318
7,514
(401)
(401)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
134
134
–
–
3,005
393
393
–
–
–
57
–
–
57
–
–
–
(1,004)
(160)
44
2,335
72
72
–
–
1 Included in ‘Available-for-sale investments: fair value gains/(losses)’ and ‘Exchange differences’ in the consolidated statement of comprehensive
income.
Purchases and sales of Level 3 available-for-sale assets predominantly reflect ABS activity, particularly in the securities
investment conduits. Transfers out of Level 3 available-for-sale securities reflect increased confidence in the pricing of
certain emerging markets corporate debt, in addition to improved price discovery of some ABSs. Transfers into Level 3
largely relate to other ABSs where price discovery has deteriorated. New issuances of trading liabilities reflect structured
note issuances, mainly equity-linked notes. Transfers out of Level 3 trading liabilities principally relate to equity linked
notes as certain model inputs became observable. Transfers into Level 3 trading assets primarily relate to loans in the
process of syndication.
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Notes on the Financial Statements (continued)
13 – Fair values of financial instruments carried at fair value
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
The following table shows the sensitivity of Level 3 fair values to reasonably possible alternative assumptions:
Sensitivity of fair values to reasonably possible alternative assumptions
Reflected in
profit or loss
Reflected in
other comprehensive income
Derivatives, trading assets and trading liabilities1
Financial assets and liabilities designated at fair value
Financial investments: available for sale
At 31 December 2014
Derivatives, trading assets and trading liabilities1
Financial assets and liabilities designated at fair value
Financial investments: available for sale
At 31 December 2013
Favourable
changes
US$m
Unfavourable
changes
US$m
296
37
51
384
350
32
–
382
(276)
(47)
(67)
(390)
(285)
(51)
–
(336)
Favourable
changes
US$m
Unfavourable
changes
US$m
–
–
270
270
–
–
434
434
–
–
(350)
(350)
–
–
(673)
(673)
1 Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these financial instruments are
risk-managed.
The reduction in the effect of both favourable and unfavourable changes in significant unobservable inputs in relation
to derivatives, trading assets and trading liabilities predominantly reflects greater certainty in some emerging market
foreign exchange volatility, as markets have developed. The reduction in the effect of both favourable and unfavourable
changes in significant unobservable inputs in relation to available-for-sale assets during the period primarily reflects a
decrease in the Level 3 balances.
Sensitivity of fair values to reasonably possible alternative assumptions by Level 3 instrument type
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
Private equity including strategic investments
Asset-backed securities
Loans held for securitisation
Structured notes
Derivatives with monolines
Other derivatives
Other portfolios
At 31 December 2014
Private equity including strategic investments
Asset-backed securities
Loans held for securitisation
Structured notes
Derivatives with monolines
Other derivatives
Other portfolios
At 31 December 2013
77
49
1
14
11
129
103
384
31
60
3
16
25
212
35
382
(110)
(22)
(1)
(9)
(11)
(155)
(82)
(390)
(61)
(27)
(3)
(9)
(16)
(164)
(56)
(336)
172
60
–
–
–
–
38
270
226
113
–
–
–
–
95
434
(255)
(55)
–
–
–
–
(40)
(350)
(436)
(99)
–
–
–
–
(138)
(673)
Favourable and unfavourable changes are determined on the basis of sensitivity analysis. The sensitivity analysis aims to
measure a range of fair values consistent with the application of a 95% confidence interval. Methodologies take account
of the nature of the valuation technique employed, as well as the availability and reliability of observable proxy and
historical data. When the available data is not amenable to statistical analysis, the quantification of uncertainty is
judgemental, but remains guided by the 95% confidence interval.
When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table
reflects the most favourable or the most unfavourable change from varying the assumptions individually.
Key unobservable inputs to Level 3 financial instruments
The table below lists key unobservable inputs to Level 3 financial instruments, and provides the range of those inputs as at
31 December 2014. The core range of inputs is the estimated range within which 90% of the inputs fall. A further
description of the categories of key unobservable inputs is given below.
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HSBC HOLDINGS PLC
387
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Notes on the Financial Statements (continued)
13 – Fair values of financial instruments carried at fair value
Private equity including 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. Given the bespoke nature of the analysis in respect of each holding, it is not practical to quote a range of key
unobservable inputs.
Prepayment rates
Prepayment rates are a measure of the anticipated future speed at which a loan portfolio will be repaid in advance of the
due date. Prepayment rates are an important input into modelled values of ABSs. A modelled price may be used where
insufficient observable market prices exist to enable a market price to be determined directly. Prepayment rates are also
an important input into the valuation of derivatives linked to securitisations. For example, so-called securitisation swaps
have a notional value that is linked to the size of the outstanding loan portfolio in a securitisation, which may fall as
prepayments occur. Prepayment rates vary according to the nature of the loan portfolio, and expectations of future
market conditions. For example, current prepayment rates in US residential MBSs would generally be expected to rise as
the US economy improves. Prepayment rates may be estimated using a variety of evidence, such as prepayment rates
implied from proxy observable security prices, current or historical prepayment rates and macro-economic modelling.
Market proxy
Market proxy pricing may be used for an instrument for which specific market pricing is not available, but evidence is
available in respect of instruments that have some characteristics in common. In some cases it might be possible to
identify a specific proxy, but more generally evidence across a wider range of instruments will be used to understand the
factors that influence current market pricing and the manner of that influence. For example, in the collateralised loan
obligation market it may be possible to establish that A-rated securities exhibit prices in a range, and to isolate key factors
that influence position within the range. Applying this to a specific A-rated security within HSBC’s portfolio allows
assignment of a price.
The range of prices used as inputs into a market proxy pricing methodology may therefore be wide. This range is not
indicative of the uncertainty associated with the price derived for an individual security.
Volatility
Volatility is a measure of the anticipated future variability of a market price. Volatility tends to increase in stressed market
conditions, and decrease in calmer market conditions. Volatility is an important input in the pricing of options. In general,
the higher the volatility, the more expensive the option will be. This reflects both the higher probability of an increased
return from the option and the potentially higher costs that HSBC may incur in hedging the risks associated with the
option. If option prices become more expensive, this will increase the value of HSBC’s long option positions (i.e. the
positions in which HSBC has purchased options), while HSBC’s short option positions (i.e. the positions in which HSBC has
sold options) will suffer losses.
Volatility varies by underlying reference market price, and by strike and maturity of the option. Volatility also varies over
time. As a result, it is difficult to make general statements regarding volatility levels. For example, while it is generally the
case that foreign exchange volatilities are lower than equity volatilities, there may be examples in particular currency pairs
or for particular equities where this is not the case.
Certain volatilities, typically those of a longer-dated nature, are unobservable. The unobservable volatility is then
estimated from observable data. For example, longer-dated volatilities may be extrapolated from shorter-dated
volatilities. The range of unobservable volatilities quoted in the table on page 387 reflects the wide variation in volatility
inputs by reference market price. For example, foreign exchange volatilities for a pegged currency may be very low,
whereas for non-managed currencies the foreign exchange volatility may be higher. As a further example, volatilities for
deep-in-the-money or deep-out-of-the-money equity options may be significantly higher than at-the-money options. The
core range is significantly narrower than the full range because these examples with extreme volatilities occur relatively
rarely within the HSBC portfolio. For any single unobservable volatility, the uncertainty in the volatility determination is
significantly less than the range quoted above.
Correlation
Correlation is a measure of the inter-relationship between two market prices and is expressed as a number between
minus one and one. A positive correlation implies that the two market prices tend to move in the same direction, with a
correlation of one implying that they always move in the same direction. A negative correlation implies that the two
market prices tend to move in opposite directions, with a correlation of minus one implying that the two market prices
always move in opposite directions. Correlation is used to value more complex instruments where the payout is
dependent upon more than one market price. For example, an equity basket option has a payout that is dependent upon
the performance of a basket of single stocks, and the correlation between the price movements of those stocks will be an
HSBC HOLDINGS PLC
388
input to the valuation. This is referred to as equity-equity correlation. There is a wide range of instruments for which
correlation is an input, and consequently a wide range of both same-asset correlations (e.g. equity-equity correlation) and
cross-asset correlations (e.g. foreign exchange rate-interest rate correlation) used. In general, the range of same-asset
correlations will be narrower than the range of cross-asset correlations.
Correlation may be unobservable. Unobservable correlations may be estimated based upon a range of evidence, including
consensus pricing services, HSBC trade prices, proxy correlations and examination of historical price relationships.
The range of unobservable correlations quoted in the table reflects the wide variation in correlation inputs by market
price pair. For any single unobservable correlation, the uncertainty in the correlation determination is likely to be less
than the range quoted above.
Credit spread
Credit spread is the premium over a benchmark interest rate required by the market to accept lower credit quality. In
a discounted cash flow model, the credit spread increases the discount factors applied to future cash flows, thereby
reducing the value of an asset. Credit spreads may be implied from market prices. Credit spreads may not be observable
in more illiquid markets.
Inter-relationships between key unobservable inputs
Key unobservable inputs to Level 3 financial instruments may not be independent of each other. As described above,
market variables may be correlated. This correlation typically reflects the manner in which different markets tend to react
to macroeconomic or other events. For example, improving economic conditions may lead to a ‘risk on’ market, in which
prices of risky assets such as equities and high yield bonds rise, while ‘safe haven’ assets such as gold and US Treasuries
decline. Furthermore, the effect of changing market variables upon the HSBC portfolio will depend on HSBC’s net risk
position in respect of each variable. For example, increasing high-yield bond prices will benefit long high-yield bond
positions, but the value of any credit derivative protection held against these bonds will fall.
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:
Basis of valuing HSBC Holdings’ financial assets and liabilities measured at fair value
Valuation technique using observable inputs: Level 2
Assets at 31 December
Derivatives
Available for sale
Liabilities at 31 December
Designated at fair value
Derivatives
2014
US$m
2,771
4,073
18,679
1,169
2013
US$m
2,789
1,210
21,027
704
HSBC HOLDINGS PLC
389
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Notes on the Financial Statements (continued)
14 – Fair values of financial instruments not carried at fair value
14 Fair values of financial instruments not carried at fair value
Fair values of financial instruments not carried at fair value and bases of valuation
Fair value
Valuation techniques
Quoted
market
price
Level 1
US$m
Using
observable
inputs
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US$m
With
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inputs
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US$m
–
–
–
1,418
–
–
–
146
–
–
–
–
1,432
–
–
–
166
–
109,087
13,598
160,600
37,671
77,300
1,336,865
107,432
94,325
28,806
111,297
10,762
178,516
23,960
86,440
1,346,343
164,173
101,551
29,704
3,046
959,239
1,123
74
98
13,730
–
1,932
1,248
8,727
971,520
1,166
25
51
14,576
47
2,941
1,309
Total
US$m
112,133
972,837
161,723
39,163
77,398
1,350,595
107,432
96,403
30,054
120,024
982,282
179,682
25,417
86,491
1,360,919
164,220
104,658
31,013
Carrying
amount
US$m
112,149
974,660
161,713
37,751
77,426
1,350,642
107,432
95,947
26,664
120,046
992,089
179,690
25,084
86,507
1,361,297
164,220
104,080
28,976
Assets and liabilities not held for sale
at 31 December 2014
Assets
Loans and advances to banks1
Loans and advances to customers1
Reverse repurchase agreements – non-trading1
Financial investments: debt securities
Liabilities
Deposits by banks1
Customer accounts1
Repurchase agreements – non-trading1
Debt securities in issue
Subordinated liabilities
Assets and liabilities not held for sale
at 31 December 2013
Assets
Loans and advances to banks1
Loans and advances to customers1
Reverse repurchase agreements – non-trading1
Financial investments: debt securities
Liabilities
Deposits by banks1
Customer accounts1
Repurchase agreements – non-trading1
Debt securities in issue
Subordinated liabilities
1 From 1 January 2014, non-trading reverse repos and repos are presented as separate lines in the balance sheet. Previously, non-trading reverse
repos were included within ‘Loans and advances to banks’ and ‘Loans and advances to customers’ and non-trading repos were included within
‘Deposits by banks’ and ‘Customer accounts’. Comparative data have been re-presented accordingly. Non-trading reverse repos and repos have
been presented as separate lines in the balance sheet to align disclosure with market practice and provide more meaningful information in
relation to loans and advances.
Fair values are determined according to the hierarchy set out in Note 13.
Other financial instruments not carried at fair value are typically short-term in nature and reprice to current market rates
frequently. Accordingly, their carrying amount is a reasonable approximation of fair value. This includes cash and balances
at central banks, items in the course of collection/transmission from/to other banks, Hong Kong Government certificates
of indebtedness and Hong Kong currency notes in circulation, all of which are measured at amortised cost.
Carrying amount and fair value of loans and advances to customers by industry sector
2014
Loans and advances to customers
– personal
– corporate and commercial
– financial
2013
Loans and advances to customers
– personal
– corporate and commercial
– financial
Carrying amount at 31 December
Not impaired
US$m
Impaired
US$m
954,710
377,154
527,168
50,388
967,181
390,018
527,483
49,680
19,950
11,800
8,016
134
24,908
14,108
10,439
361
Total
US$m
974,660
388,954
535,184
50,522
992,089
404,126
537,922
50,041
Loans and advances to customers are classified as not impaired or impaired in accordance with the criteria described on
page 137.
HSBC HOLDINGS PLC
390
2014
Loans and advances to customers
– personal
– corporate and commercial
– financial
2013
Loans and advances to customers
– personal
– corporate and commercial
– financial
Analysis of loans and advances to customers by geographical segment
Fair value at 31 December
Not impaired
US$m
Impaired
US$m
954,347
375,615
528,361
50,371
957,695
379,353
529,029
49,313
18,490
10,721
7,642
127
24,587
13,774
10,340
473
Total
US$m
972,837
386,336
536,003
50,498
982,282
393,127
539,369
49,786
Loans and advances to customers
Europe
Asia
Middle East and North Africa
North America
Latin America
At 31 December
Valuation
2014
2013
Carrying amount
US$m
Fair value
US$m
Carrying amount
US$m
Fair value
US$m
409,733
362,955
29,063
129,787
43,122
974,660
413,373
361,412
28,658
126,232
43,162
972,837
456,110
336,897
27,211
127,953
43,918
992,089
453,331
335,132
26,891
122,823
44,105
982,282
The fair value measurement is HSBC’s estimate of the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. 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.
Fair values of the following assets and liabilities are estimated for the purpose of disclosure as described below:
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 include 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.
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 effect of repricing between origination and the
balance sheet date.
The fair value of loans and advances to customers in North America is lower than the carrying amount, primarily in the US,
reflecting the market conditions at the balance sheet date. This is due to 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. The relative
fair values have increased during 2014 largely due to improved conditions in the housing industry driven by increased
property values and, to a lesser extent, lower required market yields and increased investor demand for these types of
loans and advances.
The fair value of loans and advances to customers in Europe has improved relative to the carrying amount, primarily in the
UK mortgage market where increased competition and central bank policies to stimulate lending have reduced interest
rates and increased fair values accordingly.
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Notes on the Financial Statements (continued)
15 – Financial assets designated at fair value
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
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 approximated by its carrying value.
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.
Repurchase and reverse repurchase agreements – non-trading
Fair values are estimated by using discounted cash flows, applying current rates. Fair values approximate carrying
amounts as their balances are generally short dated.
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.
Fair values of HSBC Holdings’ financial instruments not carried at fair value on the balance sheet
Assets at 31 December
Loans and advances to HSBC undertakings
Liabilities at 31 December
Amounts owed to HSBC undertakings
Debt securities in issue
Subordinated liabilities
2014
Carrying
amount
US$m
43,910
2,892
1,009
17,255
Fair
value1
US$m
45,091
2,906
1,357
20,501
2013
Carrying
amount
US$m
Fair
value1
US$m
53,344
55,332
11,685
2,791
14,167
11,868
3,124
16,633
1 Fair values were determined using valuation techniques with observable inputs (Level 2).
15 Financial assets designated at fair value
Accounting policy
Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out
below, and are so designated irrevocably at inception. 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
instruments, or recognising gains and losses on different bases from related positions. Under this criterion, the main class of financial
assets designated by HSBC are financial assets 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. If no fair value
designation was made for the related assets, the assets would be classified as available for sale, with changes in fair value recorded
in other comprehensive income. The related financial assets and liabilities are managed and reported to management on a fair value
basis. Designation at fair value of the financial assets and related liabilities allows the changes in fair values to be recorded in the
income statement and presented in the same line;
• applies to groups of financial instruments 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. For example, certain financial assets are held to meet liabilities under non-linked insurance
contracts. HSBC has documented risk management and investment strategies designed to manage and monitor market risk of those
assets on net basis, after considering non-linked liabilities. Fair value measurement is also consistent with the regulatory reporting
requirements under the appropriate regulations for those insurance operations;
• relates to financial instruments containing one or more non-closely related embedded derivatives.
Designated financial assets are recognised at fair value when HSBC enters into contracts with counterparties, which is generally on trade
date, and are normally derecognised when sold. Subsequent changes in fair values are recognised in the income statement in
‘Net income from financial instruments designated at fair value’.
HSBC HOLDINGS PLC
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Financial assets designated at fair value:
– not subject to repledge or resale by counterparties
– which may be repledged or resold by counterparties
At 31 December
Treasury and other eligible bills
Debt securities
Equity securities
Securities designated at fair value
Loans and advances to banks and customers
At 31 December
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
2014
US$m
28,357
680
29,037
56
8,891
20,006
28,953
84
29,037
2014
US$m
8
140
40
4,088
18
4,653
20,006
28,953
2013
US$m
38,062
368
38,430
50
12,589
25,711
38,350
80
38,430
2013
US$m
34
534
113
4,097
140
7,721
25,711
38,350
1 Included within these figures are debt securities issued by banks and other financial institutions of US$1,388m (2013: US$4,419m), of which
US$24m (2013: US$92m) are guaranteed by various governments.
2 Include securities that are supported by an explicit guarantee issued by the US Government.
3 Exclude ABSs included under US Treasury and US Government agencies.
Securities listed on a recognised exchange and unlisted
Fair value
Listed1
Unlisted
At 31 December 2014
Fair value
Listed1
Unlisted
At 31 December 2013
Treasury
and other
eligible bills
US$m
Debt
securities
US$m
Equity
securities
US$m
5
51
56
−
50
50
2,731
6,160
8,891
2,773
9,816
12,589
13,837
6,169
20,006
18,235
7,476
25,711
Total
US$m
16,573
12,380
28,953
21,008
17,342
38,350
1 Included within listed investments are US$1,361m of investments listed on a recognised exchange in Hong Kong (2013: US$1,148m).
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Notes on the Financial Statements (continued)
16 – Derivatives
16 Derivatives
Accounting policy
Derivatives
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 are recognised initially, and are subsequently measured, at fair value. Fair values of derivatives are obtained either from
quoted market prices or by using valuation techniques.
Embedded derivatives are bifurcated from the host contract when their economic characteristics and risks are not clearly and closely
related to those of the host non-derivative contract, their contractual terms would otherwise meet the definition of a stand-alone
derivative and the combined contract is not held for trading or designated at fair value. The bifurcated 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 for accounting purposes if the offsetting criteria
presented in Note 32 are met.
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’. Gains and losses for derivatives managed in conjunction with financial instruments designated at
fair value 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 issued by HSBC that are designated at fair value, the
contractual interest is shown in ‘Interest expense’ together with the interest payable on the issued debt.
Hedge accounting
When derivatives are 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’).
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 requires a documented assessment, both at hedge inception
and on an ongoing basis, of whether or not the hedging instruments are highly effective in offsetting the changes attributable to the
hedged risks in the fair values or cash flows of the hedged items.
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 that contain the hedged risk. If a hedging
relationship no longer meets the criteria for hedge accounting, the hedge accounting is discontinued; the cumulative adjustment to the
carrying amount of the hedged item is amortised to the income statement on a recalculated effective interest rate over the residual
period to maturity, unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately.
Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other
comprehensive income; the ineffective portion of the change in fair value 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 affects profit or loss. In hedges of forecasted transactions that result in recognition of a non-financial asset or
liability, previous gains and losses recognised in other comprehensive income are included in the initial measurement of the asset or
liability.
When a hedging relationship is discontinued, any cumulative gain or loss recognised in other comprehensive income remains in equity
until the forecast transaction is recognised in the income statement. When a forecast transaction is no longer expected to occur, the
cumulative gain or loss previously recognised in other comprehensive income is immediately reclassified to the income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. A gain or loss on the effective
portion of the hedging instrument is recognised in other comprehensive income; the residual change in fair value 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, both prospectively and retrospectively, on an ongoing basis.
The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed and 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, with the effectiveness range being defined as 80% to 125%. Hedge ineffectiveness is recognised in the
income statement in ‘Net trading income’.
Derivatives that do not qualify for hedge accounting
Non-qualifying hedges are derivatives entered into as economic hedges of assets and liabilities for which hedge accounting was not
applied.
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Fair values of derivatives by product contract type held by HSBC
Foreign exchange
Interest rate
Equities
Credit
Commodity and other
Gross total fair values
Offset
At 31 December 2014
Foreign exchange
Interest rate
Equities
Credit
Commodity and other
Gross total fair values
Offset
At 31 December 2013
Trading
US$m
95,584
471,379
11,694
9,340
3,884
591,881
78,652
456,282
18,389
9,092
2,624
565,039
Assets
Hedging
US$m
1,728
1,864
–
–
–
3,592
2,262
2,294
–
–
–
4,556
Total
US$m
97,312
473,243
11,694
9,340
3,884
595,473
(250,465)
345,008
80,914
458,576
18,389
9,092
2,624
569,595
(287,330)
282,265
Trading
US$m
95,187
463,456
13,654
10,061
3,508
585,866
75,350
448,434
22,573
8,926
1,786
557,069
Liabilities
Hedging
US$m
572
4,696
–
–
–
5,268
448
4,097
–
–
–
4,545
Total
US$m
95,759
468,152
13,654
10,061
3,508
591,134
(250,465)
340,669
75,798
452,531
22,573
8,926
1,786
561,614
(287,330)
274,284
Derivative assets increased during 2014, driven by yield curve movements and increased market volatility in foreign
exchange. The decline in equity derivative assets and liabilities reflects the inclusion of variation margin on cash-settled
exchange-traded equity derivatives within gross fair value rather than ‘offsetting’. This change has no impact upon total
derivatives assets.
Fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries
Foreign exchange
Interest rate
At 31 December 2014
Foreign exchange
Interest rate
At 31 December 2013
Use of derivatives
Trading
US$m
680
1,607
2,287
1,774
955
2,729
Assets
Hedging
US$m
–
484
484
45
15
60
Total
US$m
680
2,091
2,771
1,819
970
2,789
Trading
US$m
1,066
–
1,066
471
233
704
Liabilities
Hedging
US$m
103
–
103
–
–
–
Total
US$m
1,169
–
1,169
471
233
704
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.
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 transactions, HSBC
employs the same credit risk management framework to assess and approve potential credit exposures that it uses 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 include market-making and risk management. Market-making entails quoting bid and offer prices
to other market participants for the purpose of generating revenues based on spread and volume. Risk management
activity is undertaken to manage the risk arising from client transactions, with the principal purpose of retaining client
margin.
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.
Substantially all of HSBC Holdings’ derivatives entered into with HSBC undertakings are managed in conjunction with
financial liabilities designated at fair value.
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Notes on the Financial Statements (continued)
16 – Derivatives
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.
Notional contract amounts of derivatives held for trading purposes by product type
Foreign exchange
Interest rate
Equities
Credit
Commodity and other
At 31 December
HSBC
2014
US$m
5,548,075
22,047,278
568,932
550,197
77,565
28,792,047
2013
US$m
5,264,978
27,056,367
589,903
678,256
77,842
33,667,346
HSBC Holdings
2014
US$m
15,595
8,650
–
–
–
24,245
2013
US$m
17,280
10,304
–
–
–
27,584
The decline in interest rate derivatives notionals during the year reflects participation in industry-wide ‘portfolio
compression’ exercises.
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.
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$550bn (2013: US$678bn) consisted of protection bought of
US$272bn (2013: US$339bn) and protection sold of US$278bn (2013: US$339bn). The credit derivative business operates
within the market risk management framework described on page 222.
Derivatives valued using models with unobservable inputs
The difference between the fair value at initial recognition (the transaction price) and the value that would have been
derived had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent
releases, is as follows:
Unamortised balance of derivatives valued using models with significant unobservable inputs
Unamortised balance at 1 January
Deferral on new transactions
Recognised in the income statement during the period:
– amortisation
– subsequent to unobservable inputs becoming observable
– maturity, termination or offsetting derivative
– risk hedged
Exchange differences
Unamortised balance at 31 December1
1 This amount is yet to be recognised in the consolidated income statement.
Hedge accounting derivatives
2014
US$m
167
177
(234)
(114)
(13)
(107)
–
4
114
2013
US$m
181
206
(221)
(105)
(39)
(77)
–
1
167
HSBC uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and
liability portfolios and structural positions. This enables HSBC to optimise the overall cost to the Group of accessing debt
capital markets, and to mitigate the market risk which would otherwise arise from structural imbalances in the maturity
and other profiles of its assets and liabilities.
The notional contract amounts of derivatives held for hedge accounting purposes indicate the nominal value of
transactions outstanding at the balance sheet date; they do not represent amounts at risk.
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Notional contract amounts of derivatives held for hedge accounting purposes by product type
HSBC
2014
2013
Cash flow
hedge
US$m
25,340
190,902
216,242
Fair value
hedge
US$m
–
90,338
90,338
Cash flow
hedge
US$m
25,799
201,197
226,996
Fair value
hedge
US$m
226
90,354
90,580
HSBC Holdings
2014
Fair value
hedge
US$m
2013
Fair value
hedge
US$m
1,120
5,477
6,597
1,120
1,977
3,097
Foreign exchange
Interest rate
At 31 December
Fair value hedges
HSBC’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value
of fixed-rate long-term financial instruments due to movements in market interest rates.
Fair value of derivatives designated as fair value hedges
HSBC
Foreign exchange
Interest rate
At 31 December
HSBC Holdings
Foreign exchange
Interest rate
At 31 December
Gains or losses arising from fair value hedges
HSBC
Gains/(losses):
– on hedging instruments
– on the hedged items attributable to the hedged risk
Year ended 31 December
HSBC Holdings
Gains/(losses):
– on hedging instruments
– on the hedged items attributable to the hedged risk
Year ended 31 December
2014
Assets
US$m
Liabilities
US$m
–
387
387
–
484
484
–
4,012
4,012
103
–
103
2014
US$m
(2,542)
2,561
19
423
(422)
1
2013
Assets
US$m
5
1,163
1,168
45
15
60
2013
US$m
1,997
(1,932)
65
14
(21)
(7)
Liabilities
US$m
–
2,889
2,889
–
–
–
2012
US$m
(898)
871
(27)
–
–
–
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.
Fair value of derivatives designated as cash flow hedges
Foreign exchange
Interest rate
At 31 December
2014
2013
Assets
US$m
1,673
1,477
3,150
Liabilities
US$m
572
684
1,256
Assets
US$m
2,257
1,131
3,388
Liabilities
US$m
439
1,208
1,647
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Notes on the Financial Statements (continued)
17 – Non-trading reverse repos and repos / 18 – Financial investments
Forecast principal balances on which interest cash flows are expected to arise
Net cash inflows/(outflows) exposure
Assets
Liabilities
At 31 December 2014
Net cash inflows/(outflows) exposure
Assets
Liabilities
At 31 December 2013
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
131,694
(60,814)
70,880
135,857
(60,402)
75,455
122,728
(46,582)
76,146
124,670
(46,990)
77,680
79,529
(36,371)
43,158
89,405
(38,406)
50,999
959
(8,169)
(7,210)
2,156
(10,221)
(8,065)
This table reflects the interest rate repricing profile of the underlying hedged items.
The gains and losses on ineffective portions of derivatives designated as cash flow hedges are recognised immediately in
‘Net trading income’. During the year to 31 December 2014 a gain of US$34m (2013: gain of US$22m; 2012: gain of
US$35m) 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 2014, the fair values of outstanding financial instruments designated as hedges of net investments
in foreign operations were assets of US$55m (2013: US$4m), liabilities of US$1m (2013: US$23m) and notional contract
values of US$3,525m (2013: US$2,840m).
Ineffectiveness recognised in ‘Net trading income’ in the year ended 31 December 2014 was nil (2013 and 2012: nil).
17 Non-trading reverse repurchase and repurchase agreements
Accounting policy
When securities are sold subject to a commitment to repurchase them at a predetermined price (‘repos’), they remain on the balance
sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to resell (‘reverse
repos’) are not recognised on the balance sheet and an asset is recorded in respect of the initial consideration paid.
Non trading repos and reverse repos are measured at amortised cost. The difference between the sale and repurchase price or between
the purchase and resale price is treated as interest and recognised in net interest income over the life of the agreement.
Non-trading repos and reverse repos are presented as separate lines in the balance sheet. This separate presentation was adopted with
effect from 1 January 2014 and comparatives are re-presented accordingly. Previously, non-trading reverse repos were included within
‘Loans and advances to banks’ and ‘Loans and advances to customers’ and non-trading repos were included within ‘Deposits by banks’
and ‘Customer accounts’.
The extent to which non-trading reverse repos and repos represent amounts with customers and banks is set out below.
Assets
Banks
Customers
At 31 December
Liabilities
Banks
Customers
At 31 December
2014
US$m
95,403
66,310
161,713
27,876
79,556
107,432
2013
US$m
91,475
88,215
179,690
42,705
121,515
164,220
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18 Financial investments
Accounting policy
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. They are recognised on trade date when HSBC enters into contractual
arrangements to purchase those instruments, and are normally derecognised when either the securities are sold or redeemed.
(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 until they 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 over a debt security’s expected life. Premiums and/or discounts arising on the purchase of dated debt
securities are included in the interest recognised. Dividends from equity assets are recognised in the income statement when the
right to receive payment is established.
(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, less any impairment losses.
The accounting policy relating to impairments of available-for-sale securities is presented in Note 1(k).
Available-for-sale financial assets are reclassified to held to maturity if there is a change in intention or ability to hold those assets to
maturity due to a change in the way those assets are managed. The fair value on reclassification becomes the new amortised cost and
the assets are subsequently carried at amortised cost rather than fair value.
Financial investments
Financial investments:
– not subject to repledge or resale by counterparties
– which may be repledged or resold by counterparties
At 31 December
Carrying amount and fair value of financial investments
Treasury and other eligible bills
– available for sale
Debt securities1
– available for sale
– held to maturity
Equity securities
– available for sale
At 31 December
2014
US$m
380,419
35,048
415,467
2014
2013
Carrying
amount
US$m
81,517
81,517
323,256
285,505
37,751
10,694
10,694
415,467
Fair
value
US$m
81,517
81,517
324,668
285,505
39,163
10,694
10,694
416,879
Carrying
amount
US$m
78,111
78,111
338,674
313,590
25,084
9,140
9,140
425,925
2013
US$m
394,207
31,718
425,925
Fair
value
US$m
78,111
78,111
339,007
313,590
25,417
9,140
9,140
426,258
1 During the year US$11,043m of available-for-sale debt securities were reclassified to held-to-maturity debt securities.
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Notes on the Financial Statements (continued)
18 – Financial investments / 19 – Assets charged as security
Financial investments at amortised cost and fair value
US Treasury
US Government agencies3
US Government sponsored entities3
UK Government
Hong Kong Government
Other government
Asset-backed securities4
Corporate debt and other securities
Equities
At 31 December 2014
US Treasury
US Government agencies3
US Government sponsored entities3
UK Government
Hong Kong Government
Other government
Asset-backed securities4
Corporate debt and other securities
Equities
At 31 December 2013
US Treasury
US Government agencies3
US Government sponsored entities3
UK Government
Hong Kong Government
Other government
Asset-backed securities4
Corporate debt and other securities
Equities
At 31 December 2012
Amortised
cost1
US$m
33,931
18,326
9,339
28,680
43,573
159,846
20,911
84,387
7,421
406,414
50,369
19,211
5,263
23,565
49,570
153,619
25,961
87,469
8,081
423,108
60,657
22,579
5,262
17,018
42,687
146,507
29,960
86,099
4,284
415,053
Fair
value2
US$m
34,745
18,516
9,761
29,758
43,574
163,401
19,177
87,252
10,694
416,878
50,421
18,771
5,445
23,580
49,579
156,208
24,115
88,999
9,140
426,258
61,925
23,500
5,907
17,940
42,711
149,179
26,418
89,777
5,789
423,146
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$53,877m (2013: US$55,303m; 2012:
US$59,908m), of which US$8,812m (2013: US$8,946m; 2012: US$6,916m) are guaranteed by various governments. The fair value of the debt
securities issued by banks and other financial institutions was US$54,375m (2013: US$55,467m; 2012: US$60,616m).
3 Include securities that are supported by an explicit guarantee issued by the US Government.
4 Excludes ABSs included under US Government agencies and sponsored entities.
Financial investments listed on a recognised exchange and unlisted
Carrying amount
Listed1
Unlisted2
At 31 December 2014
Carrying amount
Listed1
Unlisted2
At 31 December 2013
Treasury and
other eligible
bills available
for sale
US$m
4,101
77,416
81,517
1,404
76,707
78,111
Debt
securities
available
for sale
US$m
168,879
116,626
285,505
134,473
179,117
313,590
Debt
securities
held to
maturity
US$m
6,037
31,714
37,751
6,176
18,908
25,084
Equity
securities
available
for sale
US$m
5,928
4,766
10,694
3,950
5,190
9,140
Total
US$m
184,945
230,522
415,467
146,003
279,922
425,925
1 The fair value of listed held-to-maturity debt securities as at 31 December 2014 was US$6,459m (2013: US$6,281m). Included within listed
investments were US$3,752m (2013: US$2,832m) of investments listed on a recognised exchange in Hong Kong.
2 Unlisted treasury and other eligible bills available for sale primarily comprise treasury bills not listed on an exchange but for which there is a
liquid market.
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Maturities of investments in debt securities at their carrying amount
Available for sale
Held to maturity
At 31 December 2014
Available for sale
Held to maturity
At 31 December 2013
1 year or less
US$m
5 years or less
but over 1 year
US$m
10 years or less
but over 5 years
US$m
68,344
1,396
69,740
78,222
2,993
81,215
134,815
9,622
144,437
146,200
8,380
154,580
44,938
7,087
52,025
44,556
6,442
50,998
Over 10 years
US$m
37,408
19,646
57,054
44,612
7,269
51,881
Total
US$m
285,505
37,751
323,256
313,590
25,084
338,674
Contractual maturities and weighted average yields of investment debt securities
Within one year
Amount
US$m
Yield
%
After one year but
within five years
Amount
US$m
Yield
%
After five years but
within ten years
Amount
US$m
Yield
%
After ten years
Amount
US$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
Total amortised cost at 31 December 2014
Total carrying value
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 at 31 December 2014
Total carrying value
4,136
–
–
281
350
46,946
688
16,392
68,793
68,344
–
–
–
1
95
–
1,300
1,396
1,396
0.8
–
–
2.2
0.4
2.2
1.3
2.3
–
–
–
0.5
4.1
–
3.5
20,273
9
1,939
12,389
953
65,497
1,172
30,687
132,919
134,815
75
1
92
37
278
–
9,139
9,622
9,622
1.0
4.2
3.2
1.0
1.0
2.7
1.4
2.1
4.8
7.6
1.4
1.3
4.8
–
3.6
3,961
44
1,393
12,541
–
12,806
4,003
7,048
41,796
44,938
44
50
406
20
202
–
6,365
7,087
7,087
2.5
3.9
3.3
1.7
–
2.9
1.4
2.7
4.8
2.6
2.9
1.8
5.2
–
4.0
1,490
9,704
1,138
–
–
2,864
15,036
6,459
36,691
37,408
115
8,506
4,370
2
722
11
5,920
19,646
19,646
4.1
2.6
3.3
–
–
2.4
1.1
3.3
4.2
2.4
3.1
1.2
4.9
6.4
4.1
The maturity distributions of ABSs 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 2014 by the book amount of available-for-sale debt securities at that date. The yields do not include
the effect of related derivatives.
19 Assets charged as security for liabilities, assets transferred 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
2014
US$m
5,170
17,294
77,960
138,991
11,373
6,079
256,867
2013
US$m
6,387
17,733
87,894
190,095
8,816
1,035
311,960
The table above shows assets where a charge has been granted to secure liabilities on a legal and contractual basis. 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
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.
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Notes on the Financial Statements (continued)
19 – Assets charged as security / 20 – Interests in associates and joint ventures
These transactions are conducted under terms that are usual and customary to collateralised transactions including,
where relevant, standard securities lending and repurchase agreements.
Assets transferred
Accounting policy
Derecognition of financial assets
Financial assets are derecognised when the contractual rights 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.
HSBC enters into transactions in the normal course of business by which it transfers financial assets to third parties.
Depending on the circumstances, these transfers may either result in these financial assets being derecognised or
continuing to be recognised.
The financial assets shown above include amounts transferred to third parties that do not qualify for derecognition,
notably debt securities held by counterparties as collateral under repurchase agreements and 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 on the balance sheet. 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.
Transferred financial assets not qualifying for full derecognition and associated financial liabilities
Carrying
amount of
assets before
transfer
US$m
Carrying
amount of
transferred
assets
US$m
78,541
13,177
3,775
At 31 December 2014
Repurchase agreements
Securities lending agreements
Other sales (recourse to transferred asset only)
Securitisations recognised to the extent of
Carrying
amount of
associated
liabilities
US$m
Fair
value of
transferred
assets
US$m
Fair
value of
associated
liabilities
US$m
Net
position
US$m
79,141
10,643
4,049
4,007
4,018
continuing involvement
17,427
11
5
11
5
At 31 December 2013
Repurchase agreements
Securities lending agreements
Other sales (recourse to transferred asset only)
Securitisations recognised to the extent of
125,508
9,175
6,707
126,175
8,884
7,019
6,827
6,707
continuing involvement
17,427
16
8
16
8
(11)
6
120
8
Collateral accepted as security for assets
The fair value of assets accepted as collateral in relation to reverse repo and securities borrowing that HSBC is permitted
to sell or repledge in the absence of default is US$269,019m (2013: US$259,617m). The fair value of any such collateral
that has been sold or repledged was US$163,342m (2013: US$186,013m). 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.
HSBC HOLDINGS PLC
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20 Interests in associates and joint ventures
Accounting policy
Investments in which HSBC, together with one or more parties, has joint control of an arrangement set up to undertake an economic
activity are classified as joint ventures. HSBC classifies investments in entities over which it has significant influence, and that are neither
subsidiaries (Note 22) nor joint ventures, as associates.
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. 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.
An investment in an associate is tested for impairment when there is an indication that the investment may be impaired. Goodwill on
acquisitions of interests in joint ventures and associates is not tested separately for impairment.
Profits on transactions between HSBC and its associates and joint ventures are eliminated to the extent of HSBC’s interest in the
respective associates or joint ventures. Losses are also eliminated to the extent of HSBC’s interest in the associates or joint ventures
unless the transaction provides evidence of an impairment of the asset transferred.
Critical accounting estimates and judgements
Impairment of interests in associates
Impairment testing involves significant judgement in determining the value in use, and in particular estimating the present values of
cash flows expected to arise from continuing to hold the investment.
The most significant judgements relate to the impairment testing of our investment in Bank of Communications (‘BoCom’). Key
assumptions used in estimating BoCom’s value in use, the sensitivity of the value in use calculation to different assumptions and a
sensitivity analysis that shows the changes in key assumptions that would reduce the excess of value in use over the carrying amount
(the ‘headroom’) to nil are described in the Note below.
Associates
At 31 December 2014, the carrying amount of HSBC’s interests in associates was US$17,940m (2013: US$16,417m).
Principal associates of HSBC
Listed
Bank of Communications Co., Limited
The Saudi British Bank
At 31 December
2014
Carrying
amount
US$m
14,590
2,811
17,401
Fair
value1
US$m
13,140
6,220
19,360
2013
Carrying
amount
US$m
13,412
2,437
15,849
Fair
value1
US$m
9,954
4,693
14,647
1 Principal associates are listed on recognised stock exchanges. The fair values are based on the quoted market prices of the shares held (Level 1 in
the fair value hierarchy).
Bank of Communications Co., Limited
The Saudi British Bank
1 People’s Republic of China.
At 31 December 2014
Country of
incorporation
and principal
place of business
Principal
activity
PRC1 Banking services
Saudi Arabia Banking services
HSBC’s
interest
in equity
capital
Issued
equity
capital
19.03%
40.00%
RMB74,263m
SR10,000m
Details of all HSBC associates and joint ventures, as required under Section 409 of the Companies Act 2006, will be
annexed to the next Annual Return of HSBC Holdings filed with the UK Registrar of Companies.
HSBC had US$14,590m (2013: US$13,412m) of interests in associates listed in Hong Kong.
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Notes on the Financial Statements (continued)
20 – Interests in associates and joint ventures
Bank of Communications Co., Limited (‘BoCom’)
HSBC’s investment in 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 Cooperation
and Exchange Programme, HSBC is assisting in the maintenance of financial and operating policies and a number of staff
has been seconded to assist in this process.
Impairment testing
At 31 December 2014, the fair value of HSBC’s investment in BoCom had been below the carrying amount for
approximately 32 months, apart from a short period in 2013. As a result, we performed an impairment test on the
carrying amount of the investment in BoCom. The test confirmed that there was no impairment at 31 December 2014.
The recoverable amount was US$15.7bn (2013: US$14.0bn), an excess over carrying amount (‘headroom’) of US$1.1bn
at 31 December 2014 (2013: US$0.6bn). The increase in headroom is due to the improved capital position of BoCom.
Bank of Communications Co., Limited
Basis of recoverable amount
At 31 December 2014
At 31 December 2013
VIU
US$bn
15.7
Carrying
value
US$bn
14.6
Fair
value
US$bn
13.1
VIU
US$bn
Carrying
value
US$bn
14.0
13.4
Fair
value
US$bn
10.0
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 VIU calculation uses discounted cash flow projections based on management’s
estimates of earnings. Cash flows beyond the short- to medium-term are then extrapolated in perpetuity using a long-
term growth rate. An imputed capital maintenance charge (‘CMC’) is included to meet the expected regulatory capital
requirements, and calculated as a deduction from forecast cash flows. The principal inputs to the CMC calculation include
estimates of asset growth, the ratio of risk-weighted assets to total assets, and the expected regulatory capital
requirements. Management judgement is required in estimating the future cash flows of BoCom.
Key assumptions in VIU calculation
Long-term growth rate: the growth rate used was 5% (2013: 5%) for periods after 2018 and does not exceed forecast GDP
growth in China.
Discount rate: the discount rate of 13% (2013: 13%) is derived from a range of values obtained by applying a Capital Asset
Pricing Model (‘CAPM’) calculation for BoCom, using market data. Management supplements this by comparing the rates
derived from the CAPM with discount rates available from external sources, and HSBC’s discount rate for evaluating
investments in China. The discount rate used was within the range of 11.4% to 14.2% (2013: 10.5% to 15.0%) indicated
by the CAPM and external sources.
Loan impairment charge as a percentage of customer advances: the ratio used ranges from 0.73% to 1% (2013: 0.64% to
1%) in the short- to medium-term. The long-term ratio was assumed to revert to a historical rate of 0.65% (2013: 0.64%).
The rates were within the short- to medium-term range forecasts of 0.51% to 1.08% (2013: 0.55% to 1.20%) disclosed by
external analysts.
Risk-weighted assets as a percentage of total assets: the ratio used ranges from 70% to 72% in the short- to medium-term.
The long-term ratio reverts to a rate of 70% (2013: 68.7%).
Cost-income ratio: the ratio used ranges from 40.0% to 42.4% (2013: 39.7% to 43.2%) in the short- to medium-term. The
ratios were within the short- to medium-term range forecasts of 37.2% to 44.5% (2013: 38.0% to 44.2%) disclosed by
external analysts.
Sensitivity analyses were performed on each key assumption to ascertain the impact of reasonably possible changes in
assumptions. The following change to each key assumption used on its own in the VIU calculation would reduce the
headroom to nil.
Key assumption
• Long-term growth rate
• Discount rate
• Loan impairment charge as a percentage of customer advances
• Risk-weighted assets as a percentage of total assets
• Cost-income ratio
Changes to key assumption to reduce headroom to nil
• Decrease by 43 basis points
•
Increase by 53 basis points
•
Increase by 8 basis points
•
Increase by 3.3%
•
Increase by 1.6%
The following table illustrates the effect on VIU of reasonably possible changes to key assumptions. This reflects the
sensitivity of VIU to each key assumption on its own and it is possible that more than one favourable and/or unfavourable
change will occur at the same time.
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Carrying amount: US$14.6bn
Long-term growth rate
VIU
Increase/(decrease) in VIU
Discount rate
VIU
Increase/(decrease) in VIU
Loan impairment charge as a percentage of customer
advances
VIU
Increase/(decrease) in VIU
Risk-weighted assets as a percentage of total assets
VIU
Increase/(decrease) in VIU
Cost income ratio
VIU
Increase/(decrease) in VIU
At 31 December 2013
Carrying amount: US$13.4bn
Long-term growth rate
VIU
Increase/(decrease) in VIU
Discount rate
VIU
Increase/(decrease) in VIU
Loan impairment charge as a percentage of customer
advances
VIU
Increase/(decrease) in VIU
Risk-weighted assets as a percentage of total assets
VIU
Increase/(decrease) in VIU
Cost income ratio
VIU
Increase/(decrease) in VIU
Selected financial information of BoCom
Favourable change
US$bn
US$bn
Current model
US$bn
Unfavourable change
US$bn
US$bn
+50bp
17.0
1.3
-50bp
16.8
1.1
+100bp
18.6
2.9
-100bp
18.1
2.4
0.65% throughout
16.2
0.5
-100bp
16.0
0.3
-50bp
16.0
0.3
+50bp
15.4
1.4
-50bp
15.6
1.6
-200bp
16.3
0.6
-100bp
16.3
0.6
+100bp
16.9
2.9
-100bp
17.3
3.3
0.64% throughout
14.8
0.8
-100bp
14.4
0.4
-50bp
14.3
0.3
-200bp
14.7
0.7
-100bp
14.7
0.7
5%
15.7
13%
15.7
2014-18: 0.73% – 1%
2019 onwards: 0.65%
15.7
2014-18: 70% – 72%
2019 onwards: 70.0%
15.7
2014-18: 40.0% – 42.4%
2019 onwards: 42.4%
15.7
5%
14.0
13%
14.0
2013-18: 0.64% – 1.00%
2019 onwards: 0.64%
14.0
68.7% throughout
14.0
2013-18: 39.7% – 43.2%
2019 onwards: 43.2%
14.0
-50bp
14.5
(1.2)
+50bp
14.7
(1.0)
-100bp
13.4
(2.3)
+100bp
13.9
(1.8)
1% from 2014-18
2019 onwards: 0.65%
14.9
(0.8)
+100bp
15.4
(0.3)
+200bp
15.1
(0.6)
+50bp
+100bp
15.4
(0.3)
15.1
(0.6)
-50bp
12.9
(1.1)
+50bp
12.7
(1.3)
-100bp
11.8
(2.2)
+100bp
11.6
(2.4)
1% from 2014-18
13.5
(0.5)
+100bp
13.7
(0.3)
+200bp
13.4
(0.6)
+50bp
+100bp
13.7
(0.3)
13.4
(0.6)
The statutory accounting reference date of BoCom is 31 December. For the year ended 31 December 2014, HSBC included
the associate’s results on the basis of financial statements made up for the 12 months to 30 September 2014, taking into
account changes in the subsequent period from 1 October 2014 to 31 December 2014 that would have materially affected
the results.
Selected balance sheet information of BoCom
Cash and balances at central banks
Loans and advances to banks and other financial institutions
Loans and advances to customers
Other financial assets
Other assets
Total assets
Deposits by banks and other financial institutions
Customer accounts
Other financial liabilities
Other liabilities
Total liabilities
Total equity
HSBC HOLDINGS PLC
405
At 30 September
2014
US$m
150,306
79,960
547,706
178,883
45,140
1,001,995
209,935
663,745
28,860
25,361
927,901
74,094
2013
US$m
142,209
88,049
516,161
165,521
34,392
946,332
170,916
667,588
20,564
19,655
878,723
67,609
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Notes on the Financial Statements (continued)
20 – Interests in associates and joint ventures / 21 – Goodwill and intangible assets
Reconciliation of BoCom’s total shareholders’ equity to the carrying amount in
HSBC’s consolidated financial statements as at 31 December
HSBC’s share of total shareholders’ equity
Add: Goodwill and other intangible assets
Carrying amount
Selected income statement information of BoCom
Net interest income
Net fee and commission income
Loan impairment charges
Depreciation and amortisation
Tax expense
Profit for the year
Other comprehensive income
Total comprehensive income
Dividends received from BoCom
Summarised aggregate financial information in respect of all associates excluding BoCom
Carrying amount
HSBC’s share of:
– total assets
– total liabilities
– revenues
– profit or loss from continuing operations
– other comprehensive income
– total comprehensive income
Joint ventures
At 30 September
2014
US$m
14,040
550
14,590
2013
US$m
12,810
602
13,412
For the 12 months ended
30 September
2014
US$m
2013
US$m
22,030
4,792
(3,509)
(920)
(3,102)
10,626
217
10,843
597
2014
US$m
3,350
20,099
16,837
801
519
2
521
20,768
4,010
(2,811)
(809)
(2,823)
10,099
(375)
9,724
549
2013
US$m
3,005
21,007
18,056
927
408
9
417
At 31 December 2014, the carrying amount of HSBC’s interests in joint ventures was US$241m (2013: US$223m).
Associates and joint ventures
For the year ended 31 December 2014, HSBC’s share of associates and joint ventures’ tax on profit was US$600m
(2013: US$556m), which is included within ‘Share of profit in associates and joint ventures’ in the income statement.
Movements in interests 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
At 31 December1
1 Includes goodwill of US$621m (2013: US$608m).
2014
US$m
16,640
30
(133)
2,532
(757)
(212)
78
3
18,181
2013
US$m
17,834
26
(3,148)
2,325
(694)
396
(35)
(64)
16,640
HSBC HOLDINGS PLC
406
21 Goodwill and intangible assets
Goodwill
Present value of in-force long-term insurance business
Other intangible assets
At 31 December
Goodwill
Accounting policy
2014
US$m
19,169
5,307
3,101
27,577
2013
US$m
21,179
5,335
3,404
29,918
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 is allocated to cash-generating units (‘CGU’s) for the purpose of impairment testing, which is undertaken at the lowest level at
which goodwill is monitored for internal management purposes. HSBC’s CGU’s are based on geographical regions subdivided by global
business. Impairment testing is performed at least annually, or whenever there is an indication of impairment, by comparing the
recoverable amount of a CGU with its carrying amount. The carrying amount of a CGU is based on its assets and liabilities, including
attributable goodwill. The recoverable amount of a CGU is the higher of its fair value less cost to sell and its value in use. VIU is the
present value of the expected future CGU cash flows. If the recoverable amount is less than the carrying value, an impairment loss is
charged to the income statement. Goodwill is carried on balance sheet at cost less accumulated impairment losses.
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.
Critical accounting estimates and judgements
Goodwill impairment
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:
•
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 reflect management’s view of future business prospects at the time of the
assessment; and
•
the rates used to discount future expected cash flows can have a significant effect on their valuation and are based on the costs of
capital assigned to individual CGUs. The cost of capital percentage is generally derived from a Capital Asset Pricing Model, which
incorporates inputs reflecting a number of financial and economic variables, including the risk-free interest rate in the country
concerned and a premium for the risk of the business being evaluated. These variables are subject to fluctuations in external market
rates and economic conditions beyond management’s control, are 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 2014, no impairment of goodwill was identified (2013: nil). In addition to the annual impairment test which was performed as at
1 July 2014, management reviewed the current and expected performance of the CGUs as at 31 December 2014 and determined that
there was no indication of impairment of the goodwill allocated to them.
HSBC HOLDINGS PLC
407
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Notes on the Financial Statements (continued)
21 – Goodwill and intangible assets
Reconciliation of goodwill
Gross amount
At 1 January 2014
Disposals
Exchange differences
Reclassified to held for sale
Other
At 31 December 2014
Accumulated impairment losses
At 1 January 2014
Exchange differences
Other
At 31 December 2014
Europe
US$m
14,977
(168)
(1,594)
(8)
−
13,207
−
−
−
−
Asia
US$m
1,016
−
(30)
−
23
1,009
−
−
−
−
Net carrying amount at 31 December 2014
13,207
1,009
Gross amount
At 1 January 2013
Disposals
Exchange differences
Reclassified to held for sale1
Reinstated from held for sale
Other
At 31 December 2013
Accumulated impairment losses
At 1 January 2013
Exchange differences
Other
At 31 December 2013
14,660
–
596
(611)
332
–
14,977
–
–
–
–
1,134
–
(129)
–
–
11
1,016
–
–
–
–
Net carrying amount at 31 December 2013
14,977
1,016
MENA
US$m
North
America
US$m
Latin
America
US$m
55
−
(1)
−
−
54
−
−
−
−
54
60
–
(5)
–
–
–
55
–
–
–
–
55
7,861
−
1
−
(47)
7,815
(5,971)
1
47
(5,923)
1,892
8,339
–
(2)
–
–
(476)
7,861
(6,449)
2
476
(5,971)
1,890
3,241
−
(240)
24
(18)
3,007
−
−
−
−
3,007
3,646
(1)
(132)
(272)
–
–
3,241
–
–
–
–
3,241
Total
US$m
27,150
(168)
(1,864)
16
(42)
25,092
(5,971)
1
47
(5,923)
19,169
27,839
(1)
328
(883)
332
(465)
27,150
(6,449)
2
476
(5,971)
21,179
1 During 2013, goodwill in Europe amounting to US$611m was reclassified to assets held for sale following the decision to sell the private banking
operations of HSBC Private Bank Holdings (Suisse) S.A. in Monaco. On transfer to held for sale, a write down of the disposal group by US$279m
was recorded and allocated to goodwill. Following the later decision to retain the operations, the reclassification of the assets and liabilities out
of held for sale resulted in the reinstatement of the remaining goodwill.
Impairment testing
Timing of impairment testing
HSBC’s impairment test in respect of goodwill allocated to each ‘CGU’ is performed as at 1 July each year.
Basis of the recoverable amount
The recoverable amount of all CGUs to which goodwill has been allocated was equal to its VIU at each respective testing
date for 2013 and 2014.
For each significant CGU, the VIU is calculated by discounting management’s cash flow projections for the CGU. The
discount rate used is based on the cost of capital HSBC allocates to investments in the countries within which the CGU
operates. The long-term growth rate is used to extrapolate the cash flows in perpetuity because of the long-term
perspective within the Group of the business units making up the CGUs. For the goodwill impairment test conducted
at 1 July 2014, management’s cash flow projections until the end of 2018 were used.
HSBC HOLDINGS PLC
408
Key assumptions in VIU calculation
Cash-generating unit
Retail Banking and Wealth Management – Europe
Commercial Banking – Europe
Global Private Banking – Europe
Global Banking and Markets – Europe
Retail Banking and Wealth Management – Latin America
2014
Cash-generating unit
Retail Banking and Wealth Management – Europe
Commercial Banking – Europe
Global Private Banking – Europe
Global Banking and Markets – Europe
Retail Banking and Wealth Management – Latin America
2013
Nominal
growth rate
beyond initial cash
flow projections
%
Discount
rate
%
9.1
10.1
7.1
11.0
12.8
8.0
10.0
7.3
9.9
11.2
4.5
4.2
3.4
4.2
7.9
3.9
3.8
3.0
3.7
8.6
Goodwill
at 1 July
US$m
4,298
3,214
3,808
3,296
1,762
16,378
4,135
3,062
3,607
3,101
1,812
15,717
At 1 July 2014, aggregate goodwill of US$4,526m (1 July 2013: US$4,550m) had been allocated to CGUs that were not
considered individually significant. The Group’s 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 2013 and 2014 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 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. For the 1 July 2014 test, the
methodology used to determine the discount rate for each CGU was refined to more accurately reflect the rates of
inflation for the countries within which the CGU operates. 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 2013 and
2014, 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 GMB. The key assumptions in addition to the discount rate and nominal long-term growth rate for
each significant CGU are discussed below.
Global Private Banking – Europe: the cash flow forecast for GPB – Europe primarily reflects the repositioning of the
business that is underway to concentrate on clients aligned with the Group’s priorities. Revenues in GPB – Europe are
predominately generated through HSBC’s client relationships and the key assumption in the cash flow forecast is the level
of assets under management and profitability therein following the strategic repositioning. The cash flow forecast
includes increased profitability in GPB – Europe which is dependent on management achieving the planned strategic
repositioning, in the context of the external environment.
At 1 July 2014, GPB – Europe had an excess of recoverable amount over carrying amount (‘headroom’) of US$1.8bn.
The following changes to the key assumptions in the value in use calculation would be necessary in order to reduce
headroom to nil:
Key assumption
Discount rate
Long-term growth rate
Cash flow projection
Change to key assumption to reduce headroom to nil
Increase by 90 basis points
Decrease by 102 basis points
Decrease by 19.7%
The following table illustrates the effect on VIU of reasonably possible changes to key assumptions. This reflects the
sensitivity of VIU to each key assumption on its own and it is possible that more than one favourable and/or unfavourable
change will occur at the same time.
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Notes on the Financial Statements (continued)
21 – Goodwill and intangible assets
At 1 July 2014
Carrying amount of CGU: US$7.3bn
Excess of recoverable amount over carrying amount: $1.8bn
Long-term growth rate
VIU
Increase/(decrease) in VIU
Discount rate
VIU
Increase/(decrease) in VIU
Forecast cash flow
VIU
Increase/(decrease) in VIU
Favourable
change
US$bn
Current
model
US$bn
Unfavourable
change
US$bn
+100bp
12.2
3.1
-100bp
12.5
3.4
+20%
10.9
1.8
3.4%
9.1
7.1%
9.1
378
9.1
-100bp
7.4
(1.7)
+100bp
7.2
(1.9)
-20%
7.3
(1.8)
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, nominal GDP growth,
competitors’ positions within the market 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 slower than expected growth and an uncertain regulatory environment. RBWM –
Europe is sensitive to further customer remediation and regulatory actions. 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 – Europe or CMB – 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. Accordingly, recovery in European revenues is assumed to continue over the
projection period to 2018. Interest rate fluctuations would put further pressure on European markets revenue recovery.
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 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 GB&M – Europe.
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 CGU, with
Brazil and Mexico being the two largest. Key assumptions include growth in lending and deposit volumes and the credit
quality of the loan portfolios. Potential challenges include unfavourable economic conditions restricting client demand
and competitor pricing constraining margins. 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.
Intangible assets
Accounting policy
Intangible assets are recognised, and those that are acquired in a business combination are distinguished from goodwill, when they are
separable or arise from contractual or other legal rights, and their fair value can be measured reliably.
Intangible assets include the present value of in-force long-term insurance business and long-term investment contracts with
discretionary participating features (‘PVIF’), 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.
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. An intangible
asset recognised during the current period is tested before the end of the current year; and where
•
intangible assets have a finite useful life, except for PVIF, 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’.
HSBC HOLDINGS PLC
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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
generally between 3 and 10 years
generally 10 years
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 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.
Present value of in-force long-term insurance business
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 2014 was US$5.3bn (2013: US$5.3bn).
Movements in PVIF
PVIF at 1 January
Value of new business written during the year1
Movements arising from in-force business:
– expected return
– experience variances2
– changes in operating assumptions
Investment return variances
Changes in investment assumptions
Other adjustments
Change in PVIF of long-term insurance business
Transfer of assets classified as held for sale3
Exchange differences and other
PVIF at 31 December
2014
US$m
5,335
870
(545)
62
(69)
(34)
(75)
52
261
(122)
(167)
2013
US$m
4,847
924
(505)
(20)
186
42
(120)
18
525
–
(37)
5,307
5,335
1 Value of new business written during the year is the present value of the projected stream of profits from the business.
2 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 affects profits on future business.
3 Relates to the UK Pensions business which was classified as held for sale in the first half of the year. See page 191 for further details.
In the PVIF calculation, expected cash flows are projected after adjusting for a variety of assumptions made by
each insurance operation to reflect local market conditions and management’s judgement of future trends, and after
applying risk margins to reflect any uncertainty in the underlying assumptions. The main assumptions relate to economic
and non-economic assumptions and policyholder behaviour. Variations in actual experience and changes to assumptions
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’);
• 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’);
• the effects of changes in projected future cash flows associated with operating assumption experience variances
compared with those assumed at the start of the period (‘experience variances’);
• changes related to future investment returns (‘changes in investment assumptions’); and
• the effect of actual investment experience on existing assets compared with the assumptions 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.
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Notes on the Financial Statements (continued)
21 – Goodwill and intangible assets / 22 – Investments in subsidiaries
Key assumptions used in the computation of PVIF for main life insurance operations
Economic assumptions are either set in a way that is consistent with observable market values or, in certain markets
(including those where the risk free curve is not observable at tenors matching the duration of our insurance contract
liabilities) we make use of long-term economic assumptions. Setting such assumptions involves the projection of long-
term interest rates and the time horizon over which rates in less developed markets will tend towards the norms
observed in mature markets. The assumptions are informed by relevant historical data and by research and analysis
performed by the Group’s Economic Research team and external experts. The valuation of PVIF will be sensitive to any
changes in these long-term assumptions in the same way that it is sensitive to observed market movements, and the
impact of such changes is included in the sensitivities presented below.
Weighted average risk free rate
Weighted average risk discount rate
Expense inflation
2014
Hong Kong
%
1.86
7.42
3.00
UK
%
1.65
2.15
4.67
France1
%
1.21
1.73
2.00
2013
UK
%
Hong Kong
%
2.45
2.95
3.39
2.31
7.41
3.00
France1
%
2.38
4.69
2.00
1 For 2014, the calculation of France’s PVIF assumes a risk discount rate of 1.73% plus a risk margin of US$ 63m. For 2013, a composite rate of
4.69% was used. This was equivalent to a rate of 3.08% plus a risk margin of US$64m.
Sensitivity to changes in economic assumptions
The Group sets the risk discount rate applied to the PVIF calculation by starting from a risk-free rate curve and adding
explicit allowances for risks not reflected in the best estimate cash flow modelling. Where shareholders provide options
and guarantees to policyholders the cost of these options and guarantees is an explicit reduction to PVIF, unless it is
already allowed for as an explicit addition to the technical provisions required by regulators. See page 195 for further
details of these guarantees.
The following table shows the effect on the PVIF of reasonably possible changes in the main economic assumption,
risk-free rates, across all insurance manufacturing subsidiaries. Due to certain characteristics of the contracts, the
relationships are non-linear and the results of the sensitivity testing should not be extrapolated to higher levels of stress.
The sensitivities shown are before actions that could be taken by management to mitigate effects and before resultant
changes in policyholder behaviour. The sensitivities have increased from 2013 to 2014, driven mainly by falling yields and
a flattening of the yield curve in France during 2014. In the low yield environment the PVIF asset is particularly sensitive to
yield curve movements driven by the projected cost of options and guarantees described on page 195.
Effect on PVIF at 31 December of:
+ 100 basis point shift in risk-free rate
– 100 basis point shift in risk-free rate1
2014
US$m
320
(589)
2013
US$m
184
(289)
1 Where a –100 basis point parallel shift in the risk-free rate would result in a negative rate, the effect on PVIF has been calculated using a
minimum rate of 0%.
Sensitivity to changes in non-economic assumptions
Policyholder liabilities and PVIF for life manufacturers are determined by reference to non-economic assumptions
including mortality and/or morbidity, lapse rates and expense rates. The table below shows the sensitivity of PVIF to
reasonably possible changes in these non-economic assumptions at that date across all our insurance manufacturing
subsidiaries.
Effect on PVIF at 31 December of:
10% increase in mortality and/or morbidity rates
10% decrease in mortality and/or morbidity rates
10% increase in lapse rates
10% decrease in lapse rates
10% increase in expense rates
10% decrease in expense rates
2014
US$m
(66)
70
(146)
165
(93)
94
2013
US$m
(84)
84
(154)
173
(109)
110
HSBC HOLDINGS PLC
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Other intangible assets
Movement of intangible assets excluding goodwill and the PVIF
Cost
At 1 January 2014
Additions
Disposals
Amount written off
Other changes
At 31 December 2014
Accumulated amortisation
At 1 January 2014
Charge for the year1
Impairment
Disposals
Amount written off
Other changes
At 31 December 2014
Net carrying amount at 31 December 2014
Cost
At 1 January 2013
Additions
Disposals
Amount written off
Other changes
At 31 December 2013
Accumulated amortisation
At 1 January 2013
Charge for the year1
Impairment
Disposals
Amount written off
Other changes
At 31 December 2013
Net carrying amount at 31 December 2013
Internally
generated
software
US$m
5,999
732
(35)
(24)
(259)
6,413
(3,809)
(677)
(11)
32
24
155
(4,286)
2,127
5,703
731
(117)
(57)
(261)
5,999
(3,469)
(675)
(39)
111
57
206
(3,809)
2,190
Other
US$m
2,975
177
(80)
(53)
(156)
163
2,863
(1,761)
(261)
(54)
77
53
57
(1,889)
974
3,345
142
(196)
(47)
(269)
2,975
(1,963)
(179)
(4)
167
47
171
(1,761)
1,214
Total
US$m
8,974
909
(115)
(77)
(415)
9,276
(5,570)
(938)
(65)
109
77
212
(6,175)
3,101
9,048
873
(313)
(104)
(530)
8,974
(5,432)
(854)
(43)
278
104
377
(5,570)
3,404
1 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’. The revaluation net of amortisation
charge for mortgage servicing rights was US$67m in 2014 (2013: credit of US$34m).
22 Investments in subsidiaries
Accounting policy
HSBC classifies investments in entities which it controls as subsidiaries. HSBC consolidation policy is described in Note 1(h). Subsidiaries
which are structured entities are covered in Note 39.
HSBC Holdings’ investments in subsidiaries are stated at cost less impairment losses. Impairment losses recognised in prior periods are
reversed through the income statement if there has been a change in the estimates used to determine the investment’s recoverable
amount since the last impairment loss was recognised.
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Notes on the Financial Statements (continued)
22 – Investments in subsidiaries
Principal subsidiaries of HSBC Holdings
At 31 December 2014
Country of
incorporation
or registration
HSBC’s
interest in
equity capital
%
100
100
100
99.99
100
80.65
62.14
100
100
100
100
100
100
Issued
equity
capital
£265m
TRL652m
£797m
€337m
CHF1,363m
€75.4m
HK$9, 658m
A$811m
RMB15,400m
RM115m
TWD34,800m
HK$4,178m
HK$96,052m
Share
class
Ordinary £1
A–Common TRL1
B–Common TRL1
Ordinary £1
Preferred Ordinary £1
Series 2 Third Dollar
Preference US$0.01
Third Dollar
Preference US$0.01
Shares €5.00
Ordinary CHF1,000
Shares of no par value
Ordinary no par value
Ordinary no par value
Ordinary CNY1.00
Ordinary RM0.50
Ordinary TWD10.00
Ordinary HK$1.00
Ordinary no par value
CIP2 US$1.00
CRP3 US$1.00
NIP4 US$1.00
100
US$931m
94.53
EGP2,796m
Ordinary US$1.00
CRP3 US$1.00
Ordinary EGP84.00
100
100
100
100
C$1,225m
US$2m
–6
–6
Common shares of no
par value
Common US$100
Common US$0.01
Common US$0.05
Europe
HSBC Asset Finance (UK) Limited
HSBC Bank A.S.
HSBC Bank plc
HSBC France
HSBC Private Banking Holdings (Suisse) SA
HSBC Trinkaus & Burkhardt AG
Asia
Hang Seng Bank Limited1
HSBC Bank Australia Limited
HSBC Bank (China) Company Limited
HSBC Bank Malaysia Berhad
HSBC Bank (Taiwan) Limited
HSBC Life (International) Limited
The Hongkong and Shanghai Banking Corporation Limited
Middle East and North Africa
HSBC Bank Middle East Limited
HSBC Bank Egypt S.A.E.
North America
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
England
Turkey
England
France
Switzerland
Germany
Hong Kong
Australia
PRC5
Malaysia
Taiwan
Bermuda
Hong Kong
Jersey
Egypt
Canada
USA
USA
USA
Argentina
99.99
ARS1,244m
Brazil
100
BRL6,402m
Ordinary–A ARS1.00
Ordinary–B ARS1.00
Shares of no par value
Mexico
99.99
MXN5,681m
Ordinary MXN2.00
1 Listed in Hong Kong.
2 Cumulative Irredeemable Preference shares.
3 Cumulative Redeemable Preference shares.
4 Non-cumulative Irredeemable Preference shares.
5 People’s Republic of China.
6 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 26 ‘Debt securities in issue’, 30 ‘Subordinated liabilities’ and 34 ‘Non-controlling interests’, respectively.
All the above subsidiaries are included in the HSBC consolidated financial statements.
HSBC HOLDINGS PLC
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Details of all HSBC subsidiaries, as required under Section 409 of the Companies Act 2006, will be annexed to the next
Annual Return of HSBC Holdings filed with the UK Registrar of Companies.
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.
HSBC 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 maintains a capital buffer consistent
with the Group’s risk appetite for the relevant country or region. Our capital management process culminates in the
annual Group capital plan, which is approved by the Board. 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’ issuance of equity and non-equity capital and by profit retention. As part of its capital management
process, HSBC Holdings seeks to maintain a balance between the composition of its capital and its investment in
subsidiaries. Subject to the above, there is no current or foreseen impediment to HSBC Holdings’ ability to provide such
investments. The ability of subsidiaries to pay dividends or advance monies to HSBC Holdings depends on, among other
things, their respective local regulatory capital and banking requirements, statutory reserves, and financial and operating
performance. During 2014 and 2013, none of the Group’s subsidiaries experienced significant restrictions on paying
dividends or repaying loans and advances. Also, there are no foreseen restrictions envisaged by our subsidiaries on paying
dividends or repaying loans and advances.
The amount of guarantees by HSBC Holdings in favour of other HSBC Group entities is set out in Note 37.
Structured entities consolidated by HSBC where HSBC owns less than 50% of the voting rights
Solitaire Funding Ltd
Mazarin Funding Limited
Barion Funding Limited
Malachite Funding Limited
HSBC Home Equity Loan Corporation I
HSBC Home Equity Loan Corporation II
Regency Assets Limited
Bryant Park Funding LLC
Carrying value of total
consolidated assets
Nature of SPE
2014
US$bn
9.0
3.9
2.0
1.4
1.9
0.9
11.0
–
2013
US$bn
10.2 Securities investment conduit
7.4 Securities investment conduit
3.8 Securities investment conduit
3.0 Securities investment conduit
2.1 Securitisation
1.6 Securitisation
13.5 Conduit
0.4 Conduit
In addition to the above, HSBC consolidates a number of individually insignificant structured entities with total assets of
US$22.9bn (2013: US$26.1bn). For further details, see Note 39.
In each of the above cases, HSBC controls and consolidates an entity when it is exposed, or has rights, to variable returns
from its involvement with the entity and has the ability to affect those returns through its power over the entity.
Subsidiaries with significant non-controlling interests
Hang Seng Bank Limited
Proportion of ownership interests and voting rights held by non-controlling interests
Place of business
Profit attributable to non-controlling interests
Accumulated non-controlling interests of the subsidiary
Dividends paid to non-controlling interests
Summarised financial information:
– total assets
– total liabilities
– net operating income before loan impairment
– profit for the year
– total comprehensive income for the year
2014
2013
37.86%
Hong Kong
37.86%
Hong Kong
US$m
760
5,765
513
160,769
144,642
3,687
2,007
4,460
US$m
1,332
4,591
495
145,380
133,253
4,876
3,517
3,145
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Notes on the Financial Statements (continued)
23 – Prepayments, accrued income and other assets / 24 – Trading liabilities / 25 – Financial liabilities at FV
23 Prepayments, accrued income and other assets
Accounting policy
Assets held for sale
Assets and liabilities of disposal groups and non-current assets are classified as held for sale when their carrying amounts will be
recovered principally through sale rather than through continuing use. Held-for-sale assets are generally 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’.
Immediately before the initial classification as held for sale, the carrying amounts of the relevant assets and liabilities are measured in
accordance with applicable IFRSs. On subsequent remeasurement of a disposal group, the carrying amounts of any assets and liabilities
that are not within the scope of the measurement requirements of IFRS 5, but are included in a disposal group classified as held for sale,
are remeasured under applicable IFRSs before the fair value less costs to sell of the disposal group is determined.
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 impairment losses and
depreciation over their estimated useful lives, as follows:
• 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 impairment
losses and depreciation over their useful lives, which are generally between 5 years and 20 years.
Property, plant and equipment is subject to an impairment review if their carrying amount may not be recoverable.
HSBC holds certain properties as investments to earn rentals or for capital appreciation, or both, and those investment properties are
included on balance sheet at fair value.
Prepayments, accrued income and other assets
Prepayments and accrued income
Assets held for sale
Bullion
Endorsements and acceptances
Reinsurers’ share of liabilities under insurance contracts (Note 28)
Employee benefit assets (Note 6)
Other accounts
Property, plant and equipment
At 31 December
2014
US$m
10,554
7,647
15,726
10,775
1,032
5,028
13,882
10,532
75,176
2013
US$m
11,006
4,050
22,929
11,624
1,408
2,140
12,838
10,847
76,842
Prepayments, accrued income and other assets include US$40,622m (2013: US$37,635m) of financial assets, the majority
of which are measured at amortised cost.
Property, plant and equipment – selected information
Cost or fair value
Accumulated depreciation and impairment
Net carrying amount at 31 December
Additions at cost
Disposals at net book value
Property, plant and equipment1:
Land and buildings
– freehold
– long leasehold
– medium and short leasehold
Investment properties2
2014
US$m
21,831
11,299
10,532
1,477
69
5,234
1,769
1,252
2,213
2,236
2013
US$m
21,927
11,080
10,847
1,980
267
5,661
2,062
1,266
2,333
1,945
1 Includes nil freehold (2013: nil), US$1,306m long leasehold (2013: US$1,309m), US$2,638m medium leasehold (2013: US$2,472m) and nil short
leasehold (2013: US$2m) in Hong Kong.
2 Investment properties are valued on a market value basis as at 31 December each year by independent professional valuers who have recent
experience in the location and type of properties. Investment properties in Hong Kong, the Macau Special Administrative Region and mainland
China, which represent more than 74% by value of HSBC’s investment properties subject to revaluation, were valued by DTZ Debenham Tie Leung
Limited whose valuers are members of the Hong Kong Institute of Surveyors. Properties in other countries, which represent 26% by value of
HSBC’s investment properties, were valued by different independent professionally qualified valuers.
HSBC HOLDINGS PLC
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24 Trading liabilities
Accounting policy
Trading liabilities are classified as held for trading if they have been acquired or incurred principally for the purpose of selling or
repurchasing in the near term, or form part of a portfolio of identified financial instruments that are managed together and for which
there is evidence of a recent pattern of short-term profit-taking. They are recognised on trade date, when HSBC enters into contractual
arrangements with counterparties, and are normally derecognised when extinguished. They are initially measured at fair value, with
subsequent changes in fair value and interest paid recognised in the income statement in ‘Net trading income’.
The sale of borrowed securities is classified as trading liabilities.
Trading liabilities
Deposits by banks1
Customer accounts1
Other debt securities in issue (Note 26)
Other liabilities – net short positions in securities
At 31 December
2014
US$m
41,453
50,600
33,602
64,917
2013
US$m
43,130
57,688
32,155
74,052
190,572
207,025
1 Deposits by banks and customer accounts include repos, settlement accounts, stock lending and other amounts.
At 31 December 2014, the cumulative amount of change in fair value attributable to changes in HSBC’s credit risk was a
loss of US$79m (2013: loss of US$95m).
25 Financial liabilities designated at fair value
Accounting policy
The criteria for designating instruments at fair value and their measurement are described in Note 15. The fair value designation, once
made, is irrevocable. Designated financial liabilities are recognised when HSBC enters into contracts with counterparties and are normally
derecognised when extinguished. This section provides examples of such designations:
• Long-term debt issues. The interest payable on certain fixed rate long-term debt securities issued has been matched with the interest
on certain 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, and this mismatch is eliminated through the fair value designation.
• Financial liabilities under unit-linked and non-linked investment contracts.
HSBC issues contracts to customers that contain insurance risk, financial risk or a combination thereof. A contract under which HSBC
accepts insignificant insurance risk from another party is not classified as an insurance contract, but is accounted for as a financial
liability. See Note 28 for contracts where HSBC accepts significant insurance risk.
Customer liabilities under linked and certain non-linked investment contracts issued by insurance subsidiaries and the corresponding
financial assets are designated at fair value. Liabilities 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. Premiums receivable and amounts withdrawn are accounted for as
increases or decreases in the liability recorded in respect of investment contracts. 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.
Financial liabilities designated at fair value – HSBC
Deposits by banks and customer accounts
Liabilities to customers under investment contracts
Debt securities in issue (Note 26)
Subordinated liabilities (Note 30)
Preferred securities (Note 30)
At 31 December
2014
US$m
160
6,312
46,364
21,822
1,495
76,153
2013
US$m
315
13,491
53,363
18,230
3,685
89,084
The carrying amount at 31 December 2014 of financial liabilities designated at fair value was US$5,813m more than the
contractual amount at maturity (2013: US$4,375m more). The cumulative amount of the change in fair value attributable
to changes in credit risk was a loss of US$870m (2013: loss of US$1,334m).
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Notes on the Financial Statements (continued)
26 – Debt securities in issue / 27 – Accruals, deferred income and other liabilities / 28 – Liabilities under insurance contracts
Financial liabilities designated at fair value – HSBC Holdings
Debt securities in issue (Note 26):
– owed to third parties
Subordinated liabilities (Note 30):
– owed to third parties
– owed to HSBC undertakings
At 31 December
2014
US$m
2013
US$m
8,185
8,106
9,513
981
18,679
9,760
3,161
21,027
The carrying amount at 31 December 2014 of financial liabilities designated at fair value was US$2,694m more than
the contractual amount at maturity (2013: US$2,309m more). The cumulative amount of the change in fair value
attributable to changes in credit risk was a loss of US$520m (2013: loss of US$859m).
26 Debt securities in issue
Accounting policy
Financial liabilities for debt securities issued are recognised when HSBC enters into contractual arrangements with counterparties and
initially measured at fair value, which is normally the consideration received, net of directly attributable transaction costs incurred.
Subsequent measurement of financial liabilities, other than those measured at fair value through profit or loss and financial guarantees,
is at amortised cost, using the effective interest method to amortise the difference between proceeds received, net of directly
attributable transaction costs incurred, and the redemption amount over the expected life of the instrument.
Debt securities in issue – HSBC
Bonds and medium-term notes
Other debt securities in issue
Of which debt securities in issue reported as:
– trading liabilities (Note 24)
– financial liabilities designated at fair value (Note 25)
At 31 December
Debt securities in issue – HSBC Holdings
Debt securities
Of which debt securities in issue reported as:
– financial liabilities designated at fair value (Note 25)
At 31 December
27 Accruals, deferred income and other liabilities
Liabilities of disposal groups held for sale
Accruals and deferred income
Amounts due to investors in funds consolidated by HSBC
Obligations under finance leases
Endorsements and acceptances
Employee benefit liabilities (Note 6)
Other liabilities
At 31 December
2014
US$m
132,539
43,374
175,913
(33,602)
(46,364)
95,947
2014
US$m
9,194
(8,185)
1,009
2014
US$m
6,934
15,075
782
67
10,760
3,208
16,570
53,396
2013
US$m
146,116
43,482
189,598
(32,155)
(53,363)
104,080
2013
US$m
10,897
(8,106)
2,791
2013
US$m
2,804
16,185
1,008
252
11,614
2,931
17,547
52,341
Accruals, deferred income and other liabilities include US$43,840m (2013: US$46,258m) of financial liabilities, the
majority of which are measured at amortised cost.
HSBC HOLDINGS PLC
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28 Liabilities under insurance contracts
Accounting policy
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.
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.
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 DPF
Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts include provisions for
the future discretionary benefits to policyholders. These provisions reflect actual performance of the investment portfolio to date and
management expectation of the future performance of the assets backing the contracts, as well as other experience factors such as
mortality, lapses and operational efficiency, where appropriate. This benefit may arise from the contractual terms, regulation, or past
distribution policy.
Investment contracts with DPF
While investment contracts with DPF are financial instruments, they continue to be treated as insurance contracts as 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.
Liabilities under insurance contracts
Non-linked insurance contracts1
At 1 January 2014
Claims and benefits paid
Increase in liabilities to policyholders
Disposals/transfers to held-for-sale
Exchange differences and other movements
At 31 December 2014
Investment contracts with discretionary participation features
At 1 January 2014
Claims and benefits paid
Increase in liabilities to policyholders
Exchange differences and other movements2
At 31 December 2014
Linked life insurance contracts
At 1 January 2014
Claims and benefits paid
Increase in liabilities to policyholders
Disposals/transfers to held-for-sale
Exchange differences and other movements3
At 31 December 2014
Total liabilities to policyholders at 31 December 2014
Gross
US$m
33,950
(3,575)
7,764
(589)
(577)
36,973
26,427
(2,175)
3,188
(2,372)
25,068
13,804
(1,499)
2,762
(2,547)
(700)
11,820
73,861
Reinsurers’
share
US$m
(1,118)
175
(409)
527
53
(772)
–
–
–
–
–
(290)
88
33
74
(165)
(260)
(1,032)
Net
US$m
32,832
(3,400)
7,355
(62)
(524)
36,201
26,427
(2,175)
3,188
(2,372)
25,068
13,514
(1,411)
2,795
(2,473)
(865)
11,560
72,829
HSBC HOLDINGS PLC
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Notes on the Financial Statements (continued)
29 – Provisions
Non-linked insurance contracts1
At 1 January 2013
Claims and benefits paid
Increase in liabilities to policyholders
Disposals/transfers to held-for-sale
Exchange differences and other movements
At 31 December 2013
Investment contracts with discretionary participation features
At 1 January 2013
Claims and benefits paid
Increase in liabilities to policyholders
Exchange differences and other movements2
At 31 December 2013
Linked life insurance contracts
At 1 January 2013
Claims and benefits paid
Increase in liabilities to policyholders
Exchange differences and other movements3
At 31 December 2013
Total liabilities to policyholders at 31 December 2013
Gross
US$m
30,765
(3,014)
6,892
(52)
(641)
33,950
24,374
(2,308)
3,677
684
26,427
13,056
(1,976)
3,379
(655)
13,804
74,181
Reinsurers’
share
US$m
(952)
164
(367)
13
24
(1,118)
–
–
–
–
–
(455)
426
111
(372)
(290)
(1,408)
Net
US$m
29,813
(2,850)
6,525
(39)
(617)
32,832
24,374
(2,308)
3,677
684
26,427
12,601
(1,550)
3,490
(1,027)
13,514
72,773
1 Includes liabilities under non-life insurance contracts.
2 Includes movement in liabilities relating to discretionary profit participation benefits due to policyholders arising from net unrealised investment
gains recognised in other comprehensive income.
3 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.
29 Provisions
Accounting policy
Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a present legal or
constructive obligation, which has arisen as a result of past events and for which a reliable estimate can be made.
Critical accounting estimates and judgements
Provisions
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 the assessment of litigation, property (including onerous contracts) and similar
obligations.
Provisions for legal proceedings and regulatory matters typically require a higher degree of judgement than other types of provisions.
When matters 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, management and legal advisers evaluate on an ongoing basis whether provisions should be recognised, revising previous
judgements and estimates as appropriate. At more advanced stages, it is typically easier to make judgements and estimates around
a better defined set of possible outcomes. However, the amount provisioned can remain 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.
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.
HSBC HOLDINGS PLC
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Provisions
At 1 January 2014
Additional provisions/increase in
provisions
Provisions utilised
Amounts reversed
Unwinding of discounts
Exchange differences and other
movements
At 31 December 2014
At 1 January 2013
Additional provisions/increase in
provisions
Provisions utilised
Amounts reversed
Unwinding of discounts
Exchange differences and other
movements
At 31 December 2013
Restructuring
costs
US$m
Contractual
commitments
US$m
Legal
proceedings
and regulatory
matters
US$m
Customer
remediation
US$m
Other
provisions
US$m
271
147
(143)
(43)
–
(35)
197
251
179
(111)
(65)
–
17
271
177
136
(2)
(46)
1
(32)
234
301
57
(5)
(66)
–
(110)
177
1,832
2,382
1,752
(1,109)
(281)
43
(53)
2,184
1,667
1,209
(709)
(340)
38
(33)
1,832
1,440
(1,769)
(184)
10
(48)
1,831
2,387
1,536
(1,487)
(94)
7
33
2,382
555
154
(112)
(66)
11
10
552
646
230
(167)
(126)
13
(41)
555
Total
US$m
5,217
3,629
(3,135)
(620)
65
(158)
4,998
5,252
3,211
(2,479)
(691)
58
(134)
5,217
Further details of legal proceedings and regulatory matters are set out in Note 40, including the provisions made on
foreign exchange rate investigations and litigation. 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.
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 is not necessarily initiated by
regulatory action.
Payment protection insurance
At 31 December 2014, a provision of US$1,079m (31 December 2013: US$946m) was held relating to the estimated
liability for redress in respect of the possible mis-selling of payment protection insurance (‘PPI’) policies in previous
years. An increase in provisions of US$960m was recognised during the year, primarily reflecting an increase in inbound
complaints by claims management companies compared to previous forecasts. The current projected trend of inbound
complaint volumes implies that the redress programme will be complete by the first quarter of 2018. However, this timing
is subject to uncertainty as the trend may change over time based on actual experience.
Cumulative provisions made since the Judicial Review ruling in the first half of 2011 amounted to US$4.2bn of which
US$3.2bn had been paid as at 31 December 2014.
The estimated liability for redress is calculated on the basis of 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 approximately 5.4m PPI policies have been sold by HSBC since 2000, generating estimated revenues of US$4.3bn
at 2014 average exchange rates. The gross written premiums on these polices was approximately US$5.6bn at 2014
average exchange rates. At 31 December 2014, the estimated total complaints expected to be received was 1.9m,
representing 36% of total policies sold. It is estimated that contact will be made with regard to 2.3m policies, representing
42% of total policies sold. This estimate includes inbound complaints as well as HSBC’s proactive contact exercise on
certain policies (‘outbound contact’).
The following table details the cumulative number of complaints received at 31 December 2014 and the number of claims
expected in the future:
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Notes on the Financial Statements (continued)
29 – Provisions / 30 – Subordinated liabilities
Inbound complaints1 (000s of policies)
Outbound contact (000s of policies)
Response rate to outbound contact
Average uphold rate per claim2
Average redress per claim (US$)
1 Excludes invalid claims where the complainant has not held a PPI policy.
2 Claims include inbound and responses to outbound contact.
Cumulative to
31 December
2014
1,215
448
51%
77%
2,611
Future
expected
344
291
51%
71%
3,115
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$222m at 2014 average exchange rates. Each 1% increase/decrease in the response rate to our
outbound contact exercise would increase/decrease the redress provision by approximately US$13m.
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.
Interest rate derivatives
At 31 December 2014, a provision of US$312m (31 December 2013: US$776m) was held relating to the estimated liability
for redress in respect of the possible mis-selling of interest rate derivatives in the UK. The provision relates to the
estimated redress payable to customers in respect of historical payments under derivative contracts, the expected write-
off by the bank of open derivative contract balances, and estimated project costs. An increase in the provision of
US$288m was recorded during the year, reflecting updated claims experience and the announcement by the FCA on
28 January 2015 of the extension of the scheme to 31 March 2015, and expectation of an additional population who will
opt into the scheme following communications to affected customers.
The extent to which HSBC is ultimately required to pay redress depends on the responses of contacted and other
customers during the review period and analysis of the facts and circumstances of each individual case, including
consequential loss claims received. For these reasons, there is currently a high degree of uncertainty as to the eventual
costs of redress related to this programme.
UK Consumer Credit Act
HSBC has undertaken a review of compliance with the fixed-sum unsecured loan agreement requirements of the UK
Consumer Credit Act (‘CCA’). US$379m has been recognised at 31 December 2014 within ‘Accruals, deferred income and
other liabilities’ for the repayment of interest to customers, primarily where annual statements did not remind them of
their right to partially prepay the loan, notwithstanding that the customer loan documentation did refer to this right. The
cumulative liability to date is US$591m, of which payments of US$212m have been made to customers. There is
uncertainty as to whether other technical requirements of the CCA have been met, for which we have assessed the
contingent liability as up to US$0.9bn.
Brazilian labour, civil and fiscal claims
Within ‘Legal proceedings and regulatory matters’ above are labour, civil and fiscal litigation provisions of US$501m
(2013: US$500m). Of these provisions, US$246m (2013: US$232m) was in respect of labour and overtime litigation
claims brought by past employees against HSBC operations in Brazil following their departure from the bank. The main
assumptions involved in estimating the liability are the expected number of departing employees, individual salary levels
and the facts and circumstances of each individual case.
HSBC HOLDINGS PLC
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30 Subordinated liabilities
HSBC
Subordinated liabilities
At amortised cost
– subordinated liabilities
– preferred securities
Designated at fair value (Note 25)
– subordinated liabilities
– preferred securities
At 31 December
Subordinated liabilities
HSBC Holdings
Other HSBC
At 31 December
HSBC’s subordinated liabilities
2014
US$m
26,664
22,355
4,309
23,317
21,822
1,495
49,981
25,277
24,704
49,981
2013
US$m
28,976
24,573
4,403
21,915
18,230
3,685
50,891
22,308
28,583
50,891
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Subordinated liabilities rank behind senior obligations and generally count towards the capital base of HSBC. Where
applicable, capital securities may be called and redeemed by HSBC subject to prior notification to the PRA and, where
relevant, the consent of the local banking regulator. If not redeemed at the first call date, coupons payable may step-up
or become floating rate based on interbank rates.
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%.
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 due to the inclusion of issuance costs, regulatory amortisation and regulatory
eligibility limits prescribed in the grandfathering provisions under CRD IV.
HSBC’s subordinated liabilities in issue
Additional tier 1 capital securities guaranteed by HSBC Holdings plc1
€1,400m
£500m
€750m
5.3687% non-cumulative step-up perpetual preferred securities2
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,
US$900m
series 2
Additional 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
Tier 2 securities issued by HSBC Bank plc
£500m
£350m
£300m
£350m
£500m
£225m
£600m
€500m
US$300m
US$750m
US$500m
US$300m
4.75% callable subordinated notes3
5.00% callable subordinated notes4
6.50% subordinated notes
5.375% callable subordinated step-up notes5
5.375% subordinated notes
6.25% subordinated notes
4.75% subordinated notes
Callable subordinated floating rate notes6
7.65% subordinated notes
Undated floating rate primary capital notes
Undated floating rate primary capital notes
Undated floating rate primary capital notes, series 3
First call
date
Maturity
date
Mar 2014
Jun 2015
Mar 2016
Jun 2030
Apr 2020
Nov 2031
Sep 2015
Mar 2018
–
Nov 2025
–
–
–
Sep 2015
–
Jun 1990
Sep 1990
Jun 1992
Sep 2020
Mar 2023
Jul 2023
Nov 2030
Aug 2033
Jan 2041
Mar 2046
Sep 2020
May 2025
2014
US$m
–
779
979
891
2,649
515
1,091
1,606
802
605
466
620
905
349
924
588
400
750
500
300
2013
US$m
2,022
825
1,129
891
4,867
534
1,157
1,691
866
635
494
602
884
370
980
655
380
751
499
299
7,209
7,415
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Notes on the Financial Statements (continued)
30 – Subordinated liabilities
Tier 2 securities issued by 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
Jul 1991
First call
date
Maturity
date
Tier 2 securities issued by HSBC Bank Australia Limited
AUD200m
Callable subordinated floating rate notes
Tier 2 securities issued by HSBC Bank Malaysia Berhad
MYR500m
MYR500m
4.35% subordinated bonds
5.05% subordinated bonds
Tier 2 securities issued by HSBC USA Inc.
7.808% capital securities
US$200m
8.38% capital securities
US$200m
9.50% subordinated debt7
US$150m
7.75% Capital Trust pass through securities
US$150m
5.00% subordinated notes
US$750m
7.20% subordinated debentures
US$250m
Other subordinated liabilities each less than US$150m
Tier 2 securities issued by HSBC Bank USA, N.A.
US$1,000m
US$500m
US$1,250m
US$1,000m
US$750m
US$700m
4.625% subordinated notes7
6.00% subordinated notes
4.875% subordinated notes
5.875% subordinated notes
5.625% subordinated notes
7.00% subordinated notes
Tier 2 securities issued by HSBC Finance Corporation
US$1,000m
US$2,939m
5.911% trust preferred securities8
6.676% senior subordinated notes9
Tier 2 securities issued by HSBC Bank Brazil S.A.
BRL383m
BRL500m
Subordinated certificates of deposit
Subordinated floating rate certificates of deposit
Other subordinated liabilities each less than US$150m10
Tier 2 securities issued by HSBC Bank Canada
CAD400m
CAD200m
CAD39m
4.80% subordinated debentures
4.94% subordinated debentures
Floating rate debentures
Securities issued by HSBC Mexico, S.A.
MXN1,818m
MXN2,273m
US$300m
Non-convertible subordinated obligations11
Non-convertible subordinated obligations11
Non-convertible subordinated obligations11,12
Securities issued by other HSBC subsidiaries
Other subordinated liabilities each less than US$200m11
Total of subordinated liabilities issued by HSBC subsidiaries
Nov 2015
Nov 2020
Jun 2017
Nov 2022
Jun 2022
Nov 2027
Dec 2006
May 2007
–
Nov 2006
–
–
Dec 2026
May 2027
Apr 2014
Nov 2026
Sep 2020
Jul 2097
–
–
–
–
–
–
Apr 2014
Aug 2017
Aug 2020
Nov 2034
Aug 2035
Jan 2039
Nov 2015
–
Nov 2035
Jan 2021
–
–
Feb 2015
Dec 2016
Apr 2017
Mar 2016
Oct 1996
Apr 2022
Mar 2021
Nov 2083
Sep 2013
Dec 2013
Jun 2014
Sep 2018
Dec 2018
Jun 2019
2014
US$m
403
401
400
1,204
164
164
143
144
287
200
200
–
150
738
216
297
2013
US$m
404
402
400
1,206
179
179
152
154
306
200
200
151
150
746
215
299
1,801
1,961
–
508
1,210
1,245
934
676
4,573
998
2,185
3,183
144
188
81
413
367
172
34
573
124
154
240
518
524
1,000
513
1,262
1,081
811
696
5,363
996
2,182
3,178
162
212
224
598
403
188
37
628
138
173
240
551
640
24,704
28,583
1 See paragraph below, ‘Guaranteed by HSBC Holdings or HSBC Bank’.
2 In March 2014, HSBC called and redeemed the €1,400m 5.3687% non-cumulative step-up perpetual preferred securities at par.
3 The interest rate payable after September 2015 is the sum of the three-month sterling Libor plus 0.82%.
4 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%.
5 The interest rate payable after November 2025 is the sum of the three-month sterling Libor plus 1.50%.
6 The interest margin increases by 0.5% from September 2015.
7 In April 2014, HSBC redeemed the $1,000m 4.625% subordinated notes and the 9.5% subordinated debt security at par.
8 The distributions change in November 2015 to three-month dollar Libor plus 1.926%.
9 Approximately 25% of the senior subordinated notes are held by HSBC Holdings.
10 Some securities included here are ineligible for inclusion in the capital base of HSBC in accordance with guidance in PRA’s GENPRU as applied in
2013 and CRD IV rules as applied in 2014.
11 These securities are ineligible for inclusion in the capital base of HSBC in accordance with guidance in PRA’s GENPRU as applied in 2013 and
CRD IV rules as applied in 2014.
12 Approximately US$60m of the subordinated obligations are held by HSBC Holdings.
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HSBC Holdings
Subordinated liabilities:
– at amortised cost
– designated at fair value (Note 25)
At 31 December
HSBC Holdings’ subordinated liabilities
Tier 2 securities issued by HSBC Holdings plc
Amounts owed to third parties
US$488m
US$222m
US$2,000m
US$2,500m
US$1,500m
US$2,000m
US$1,500m
£900m
£650m
£650m
£750m
£900m
€1,600m
€1,750m
€700m
€1,500m
7.625% subordinated notes1
7.35% subordinated notes1
6.5% subordinated notes1
6.5% subordinated notes1
6.8% subordinated notes1
4.25% subordinated notes2,5
5.25% subordinated notes2,5
6.375% callable subordinated notes1,3
5.75% subordinated notes2
6.75% subordinated notes2
7.0% subordinated notes2
6.0% subordinated notes2
6.25% subordinated notes2
6.0% subordinated notes2
3.625% callable subordinated notes1,4
3.375% callable subordinated notes1,2,5
Amounts owed to HSBC undertakings
€1,400m
£500m
€750m
US$900m
5.3687% fixed/floating subordinated notes6
8.208% subordinated step-up cumulative notes
5.13% fixed/floating subordinated notes
10.176% subordinated step-up cumulative notes
At 31 December
2014
US$m
17,255
10,494
27,749
2013
US$m
14,167
12,921
27,088
First call
date
Maturity
date
2014
US$m
2013
US$m
–
–
–
–
–
–
–
Oct 2017
–
–
–
–
–
–
Jun 2015
Jan 2019
May 2032
Nov 2032
May 2036
Sep 2037
Jun 2038
Mar 2024
Mar 2044
Oct 2022
Dec 2027
Sep 2028
Apr 2038
Mar 2040
Mar 2018
Jun 2019
Jun 2020
Jan 2024
Mar 2014
Jun 2015
Mar 2016
Jun 2030
Dec 2043
Jun 2040
Dec 2044
Jun 2040
538
278
2,029
3,278
1,487
2,069
1,735
1,558
1,176
1,005
1,217
1,379
1,950
2,623
878
1,898
554
278
2,029
3,039
1,487
–
–
1,672
1,158
1,066
1,288
1,464
2,210
2,884
1,007
2,075
25,098
22,211
–
779
981
891
2,651
27,749
2,024
825
1,137
891
4,877
27,088
1 Amounts owed to third parties represent securities included in the capital base of HSBC as tier 2 securities in accordance with the grandfathering
provisions under CRD IV rules.
2 These securities are included in the capital base of HSBC as fully CRD IV compliant tier 2 securities on an end point basis.
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 These subordinated notes are measured at amortised cost in HSBC Holdings, where the interest rate risk is hedged using a fair value hedge,
while they are measured at fair value in the Group.
6 In March 2014, HSBC Holdings called and redeemed the €1,400m 5.3687% fixed/floating subordinated notes at par.
Additional tier 1 capital securities
Additional tier 1 capital securities are included in HSBC’s capital base as tier 1 capital and 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. The eligibility criteria for tier 1 securities changed on the introduction of CRD IV rules on 1 January 2014.
For further guidance on the criteria for additional tier 1 securities, see note 35. Instruments issued before CRD IV comes
into effect which do not meet the identifying criteria in full are eligible as regulatory capital subject to grandfathering
limits and progressive phase-out. Capital securities that have been issued during 2014 are recognised as fully CRD IV
compliant additional tier 1 capital securities on an end point basis and are accounted for as equity and detailed in Note 35.
Guaranteed by HSBC Holdings or HSBC Bank
The six capital securities guaranteed on a subordinated basis by HSBC Holdings or 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 guarantors by the limited partnerships in the form of subordinated notes. These preferred securities qualify as
additional tier 1 capital for HSBC under CRD IV by virtue of application of grandfathering provisions and the two capital
securities guaranteed by HSBC Bank also qualify as additional tier 1 capital for HSBC Bank (on a solo and a consolidated
basis) under CRD IV by virtue of application of grandfathering provisions.
HSBC HOLDINGS PLC
425
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Notes on the Financial Statements (continued)
30 – Subordinated liabilities / 31 – Maturity analysis
These preferred securities, together with the guarantee, are intended to provide investors with economic rights
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 have insufficient distributable reserves (as defined).
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 their
ordinary shares, or effect repurchases or redemptions of their ordinary shares, until the distribution on the 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, 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
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.
Tier 2 capital securities
These capital securities are included within HSBC’s capital base as tier 2 capital under CRD IV by virtue of application of
grandfathering provisions (with the exception of identified HSBC Holding securities which are compliant with CRD IV end
point rules). Tier 2 capital securities are either perpetual subordinated securities or dated securities on which there is an
obligation to pay coupons. In accordance with CRD IV, the capital contribution of all tier 2 securities is amortised for
regulatory purposes in their final five years before maturity.
31 Maturity analysis of assets, liabilities and off-balance sheet commitments
The table on page 427 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 not more than 1 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
5 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 5 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 5 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 5 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 5 years’ time bucket.
Loan and other credit-related commitments are classified on the basis of the earliest date they can be drawn down.
HSBC HOLDINGS PLC
426
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31 – Maturity analysis
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HSBC HOLDINGS PLC
429
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Notes on the Financial Statements (continued)
31 – Maturity analysis
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S
HSBC HOLDINGS PLC
433
Notes on the Financial Statements (continued)
32 – Offsetting of financial assets and financial liabilities / 33 – Foreign exchange exposure
32 Offsetting of financial assets and financial liabilities
Accounting policy
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 (‘the offset criteria’).
Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements
Gross
amounts of
recognised
financial
assets
US$m
Gross
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balance
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US$m
Amounts
presented
in the
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US$m
Amounts not set off in
the balance sheet
Financial
instruments1
US$m
Cash
collateral
received
US$m
Net
amount
US$m
595,473
(250,465)
345,008
(271,040)
(42,260)
31,708
259,655
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170,979
(166,958)
9,656
249,999
101,220
956,348
(390)
(88,286)
(37,527)
(376,668)
9,266
161,713
63,693
579,680
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(157,702)
(55,989)
(493,987)
(249)
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(249)
(310)
(42,819)
3,772
10
3,762
7,394
42,874
569,595
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282,265
(215,957)
(36,387)
29,921
288,903
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200,128
(197,287)
39,008
249,895
192,437
1,050,935
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(70,205)
(92,654)
(468,759)
20,438
179,690
99,783
582,176
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(176,849)
(89,419)
(502,663)
(57)
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(57)
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2,784
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2,784
10,364
43,069
Derivatives2 (Note 16)
Reverse repos, stock borrowing
and similar agreements3
Classified as:
– trading assets
– non-trading assets
Loans and advances to customers
at amortised cost4
At 31 December 2014
Derivatives2 (Note 16)
Reverse repos, stock borrowing
and similar agreements3
Classified as:
– trading assets
– non-trading assets
Loans and advances to customers
at amortised cost4
At 31 December 2013
1 Including non-cash collateral.
2 Including amounts that are both subject to and not subject to enforceable master netting agreements and similar agreements.
3 For the amount of reverse repos, stock borrowing and similar agreements recognised in the balance sheet, see the ‘Funding sources and uses’
table on page 168. In the analysis above, the US$9,266m (31 December 2013: US$20,438m) of trading assets presented in the balance sheet
comprised US$1,297m of reverse repos (31 December 2013: US$10,120m) and US$7,969m of stock borrowing (31 December 2013:
US$10,318m).
4 At 31 December 2014, the total amount of loans and advances to customers at amortised cost was US$974,660m (31 December 2013:
US$992,089m) of which US$63,693m (31 December 2013: US$99,783m) was subject to offsetting. For the amount of loans and advances to
customers at amortised cost recognised in the balance sheet, see the ‘Funding sources and uses’ table on page 168.
HSBC HOLDINGS PLC
434
Financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements
Gross
amounts of
recognised
financial
liabilities
US$m
Gross
amounts
offset in the
balance
sheet
US$m
Amounts
presented
in the
balance
sheet
US$m
Amounts not set off in
the balance sheet
Financial
instruments1
US$m
Cash
collateral
pledged
US$m
591,134
(250,465)
340,669
(272,815)
(40,291)
211,938
(88,676)
123,262
(121,722)
16,220
195,718
107,088
910,160
(390)
(88,286)
(37,527)
(376,668)
15,830
107,432
69,561
533,492
(15,828)
(105,894)
(55,989)
(450,526)
(105)
–
(105)
–
(40,396)
Net
amount
US$m
27,563
1,435
2
1,433
13,572
42,570
561,614
(287,330)
274,284
(216,596)
(29,093)
28,595
282,634
(88,775)
193,859
(193,354)
48,209
234,425
195,153
(18,570)
(70,205)
(92,654)
29,639
164,220
102,499
570,642
(29,625)
(163,729)
(89,394)
(499,344)
(81)
–
(81)
–
(29,174)
424
14
410
13,105
42,124
Derivatives2 (Note 16)
Repos, stock lending and similar
agreements3
Classified as:
– trading liabilities
– non-trading liabilities
Customer accounts at amortised cost4
At 31 December 2014
Derivatives2 (Note 16)
Repos, stock lending and similar
agreements3
Classified as:
– trading liabilities
– non-trading liabilities
Customer accounts at amortised cost4
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At 31 December 2013
1,039,401
(468,759)
1 Including non-cash collateral.
2 Including amounts that are both subject to and not subject to enforceable master netting agreements and similar agreements.
3 For the amount of repos, stock lending and similar agreements recognised in the balance sheet, see the ‘Funding sources and uses’ table on
page 168. In the analysis above, the US$15,830m (31 December 2013: US$29,639m) of trading liabilities presented in the balance sheet
comprised US$3,798m of repos (31 December 2013: US$17,421m) and US$12,032m of stock lending (31 December 2013: US$12,218m).
4 At 31 December 2014, the total amount of customer accounts at amortised cost was US$1,350,642m (31 December 2013: US$1,361,297m) of
which US$69,561m (31 December 2013: US$102,499m) was subject to offsetting. For the amount of customer accounts at amortised cost
recognised in the balance sheet, see the ‘Funding sources and uses’ table on page 168.
The ‘Amounts not set off in the balance sheet’ for derivatives and reverse repurchase/repurchase, stock borrowing/
lending and similar agreements include transactions where:
• the counterparty has an offsetting exposure with HSBC and a master netting or similar arrangement is in place with a
right of set off only in the event of default, insolvency or bankruptcy, or the offset criteria are otherwise not satisfied;
and
• cash and non-cash collateral received/pledged in respect of the transactions described above.
For loans and advances to customers and Customer accounts at amortised cost the amounts included in the table above
typically relate to transactions entered into with corporate and commercial customers for working capital management
purposes. The ‘Amounts not set off in the balance sheet’ relate to transactions where the customer has an offsetting
exposure with HSBC and an agreement is in place with the right of offset but the offset criteria are otherwise not satisfied.
For risk management purposes, the net amounts of such exposures are subject to limits which are monitored and the
relevant customer agreements are subject to review and updated, as necessary, to ensure the legal right of offset remains
appropriate.
33 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 181.
HSBC HOLDINGS PLC
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Notes on the Financial Statements (continued)
34 – Non-controlling interests / 35 – Share capital and other equity instruments
Net structural foreign exchange exposures
Currency of structural exposure
Pound sterling1
Chinese renminbi
Hong Kong dollars
Euros
Mexican pesos
Brazilian real
Canadian dollars
Indian rupees
Saudi riyals
Malaysian ringgit
UAE dirhams
Swiss francs
Taiwanese dollars
Australian dollars
Turkish lira
Korean won
Indonesian rupiah
Singapore dollars
Argentine pesos
Egyptian pounds
Others, each less than US$700m
At 31 December
2014
US$m
30,071
24,578
24,028
20,378
5,249
4,910
4,187
3,466
2,910
2,219
2,199
1,864
1,721
1,516
1,366
1,360
1,352
1,185
1,059
868
5,918
2013
US$m
28,403
20,932
18,974
22,014
5,932
5,581
4,372
3,222
2,531
2,194
3,069
1,940
1,527
1,515
1,533
1,373
1,244
849
1,067
739
6,157
142,404
135,168
1 During 2014, we entered into a forward foreign exchange contract amounting to US$1.6bn in order to manage our sterling structural foreign
exchange exposure.
Shareholders’ equity would decrease by US$2,522m (2013: US$2,521m) if euro and sterling foreign currency exchange
rates weakened by 5% relative to the US dollar.
34 Non-controlling interests
Non-controlling interests attributable to holders of ordinary shares in subsidiaries
Preferred securities issued by subsidiaries
At 31 December
Preferred securities issued by subsidiaries
2014
US$m
7,104
2,427
9,531
9 31
2013
US$m
5,900
2,688
8,588
Preferred securities are securities for which there is no obligation to pay a dividend and, if the dividend is not paid, it
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 PRA and, where relevant, the consent of the local banking
regulator. Dividends on 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 additional tier 1 capital and
cumulative preferred securities classified as tier 2 capital in accordance with CRD IV rules, by virtue of the application of
grandfathering provisions.
Preferred securities issued by HSBC’s subsidiaries
HSBC USA Inc.
US$150m
Depositary shares each representing 25% interest in a share of
adjustable-rate cumulative preferred stock, series D
US$150m
US$518m
US$374m
US$374m
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$575m
6.36% non-cumulative preferred stock, series B
HSBC Bank Canada
CAD175m
CAD175m
CAD250m1
Non-cumulative redeemable class 1 preferred shares, series C
Non-cumulative class 1 preferred shares, series D
Non-cumulative 5 year rate reset class 1 preferred shares, series E
First call
date
2014
US$m
2013
US$m
Jul 1999
Oct 2007
Apr 2010
Jan 2011
Jul 2011
Jun 2010
Jun 2010
Dec 2010
Jun 2014
150
150
518
374
374
559
151
151
–
150
150
518
374
374
559
164
164
235
At 31 December
2,427
2,688
1 In June 2014, HSBC redeemed its non-cumulative 5 year reset class 1 preferred shares series E for US$234m.
HSBC HOLDINGS PLC
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35 Called up share capital and other equity instruments
Accounting policy
Financial instruments issued are classified as equity when there is no contractual obligation to transfer cash, other financial assets or
issue a variable number of own equity instruments. 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 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.
Issued and fully paid
HSBC Holdings ordinary shares of US$0.50 each
HSBC Holdings ordinary shares1 at 31 December
At 1 January 2014
Shares issued under HSBC employee share plans
Shares issued in lieu of dividends
At 31 December 2014
At 1 January 2013
Shares issued under HSBC employee share plans
Shares issued in lieu of dividends
At 31 December 2013
HSBC Holdings non-cumulative preference shares of US$0.01 each
At 1 January 2014 and 31 December 20142
At 1 January 2013 and 31 December 2013
2014
US$m
9,609
Number
18,830,007,039
119,391,238
268,475,983
19,217,874,260
18,476,008,664
120,033,493
233,964,882
18,830,007,039
Number
1,450,000
1,450,000
2013
US$m
9,415
US$m
9,415
60
134
9,609
9,238
60
117
9,415
US$m
–
–
1 All HSBC Holdings ordinary shares in issue confer identical rights, including in respect of capital, dividends and voting.
2 Included in the capital base of HSBC as additional tier 1 capital in accordance with the CRD IV rules, by virtue of the application of grandfathering
provisions.
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 PRA 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 PRA.
HSBC Holdings non-cumulative preference share of £0.01
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 comprise of additional tier 1 capital
securities and additional tier 1 – contingent convertible securities.
HSBC HOLDINGS PLC
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Notes on the Financial Statements (continued)
35 – Called up share capital / 36 – Notes on the statement of cash flows
Additional tier 1 capital securities
Additional 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. These securities have been included in the capital base of
HSBC in accordance with CRD IV rules by virtue of the application of grandfathering provisions.
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 ranking pari passu
with the dollar and sterling preference shares in issue. The preference shares would 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. These
securities may be called and redeemed by HSBC subject to prior notification to the PRA.
HSBC’s additional tier 1 capital securities in issue which are accounted for in equity
US$2,200m
US$3,800m
8.125% perpetual subordinated capital securities
8.00% perpetual subordinated capital securities, Series 2
At 31 December
Additional tier 1 capital – contingent convertible securities
First call
date
Apr 2013
Dec 2015
2014
US$m
2,133
3,718
5,851
2013
US$m
2,133
3,718
5,851
During 2014, HSBC issued new contingent convertible securities that are included in HSBC’s capital base as fully CRD IV
compliant additional tier 1 capital securities on an end point basis. The net proceeds of the issuances will be used for
general corporate purposes and to further strengthen the capital base pursuant to requirements under CRD IV. These
securities bear a fixed rate of interest until their initial call dates. After the initial call dates, in the event they are not
redeemed, the securities will bear interest at rates which are fixed periodically in advance for five year periods based on
prevailing market rates. Interest on the contingent convertible securities will be due and payable only at the sole
discretion of HSBC, and HSBC has sole and absolute discretion at all times and for any reason to cancel (in whole or in
part) any interest payment that would otherwise be payable on any interest payment date. There are limitations on the
payment of distributions if such payments are prohibited under UK banking regulations, or other requirements, if HSBC
Holdings has insufficient reserves available for distribution or if HSBC fails to satisfy the solvency condition as defined in
the securities’ terms.
The contingent convertible securities are undated and are repayable, at the option of HSBC, in whole at the initial call
date, or on any fifth anniversary after the initial call date. In addition, the securities are repayable at the option of HSBC
in whole for certain regulatory or tax reasons. Any repayments require the prior consent of the PRA. These securities rank
pari passu with HSBC’s dollar and sterling preference shares and are therefore ahead of ordinary shares. The contingent
convertible securities will be converted into ordinary shares of HSBC, at a pre-determined price, should HSBC’s
consolidated, end-point CET1 ratio fall below 7.0%. Therefore, per the terms of the securities, on bail-in the securities
will convert into ordinary shares at a conversion price of £2.70 subject to certain anti-dilution and foreign exchange
adjustments and will rank pari passu with the fully paid ordinary shares in issue.
HSBC’s additional tier 1 capital – contingent convertible securities in issue which are accounted for in equity
US$2,250m
US$1,500m
€1,500m
6.375% perpetual subordinated contingent convertible securities
5.625% perpetual subordinated contingent convertible securities
5.25% perpetual subordinated contingent convertible securities
At 31 December
Shares under option
First call
date
Sep 2024
Jan 2020
Sep 2022
2014
US$m
2,244
1,494
1,943
5,681
2013
US$m
–
–
–
–
For 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, see Note 6.
HSBC HOLDINGS PLC
438
Aggregate options outstanding under these plans
31 December 2014
31 December 2013
31 December 2012
Number of
HSBC Holdings
ordinary shares
63,918,042
6,468,782
571,502
1,867,328
119,085,250
24,215,341
1,574,652
3,997,069
159,703,771
31,637,840
2,180,263
6,488,894
Period of exercise
Exercise price
2014 to 2020
2014 to 2018
2014 to 2018
2014 to 2018
2013 to 2019
2013 to 2018
2013 to 2018
2013 to 2018
2013 to 2018
2013 to 2018
2013 to 2018
2013 to 2018
£3.3116 – 7.9911
HK$37.8797 – 63.9864
€3.6361 – 6.0657
US$4.8876 – 8.2094
£3.3116 – 7.9911
HK$37.8797 –92.5881
€3.6361 – 7.5571
US$4.8876 – 11.8824
£3.3116 – 7.9911
HK$37.8797 – 94.5057
€3.6361 – 9.5912
US$4.8876 – 12.0958
Maximum obligation to deliver HSBC Holdings ordinary shares
At 31 December 2014, the maximum obligation to deliver HSBC Holdings ordinary shares under all of the above option
arrangements, together with GPSP awards and restricted share awards granted under the HSBC Share Plan and/or the
HSBC Share Plan 2011, was 193,154,512 (2013: 265,534,885). The total number of shares at 31 December 2014 held by
employee benefit trusts that may be used to satisfy such obligations to deliver HSBC Holdings ordinary shares was
7,943,191 (2013: 12,068,136).
36 Notes on the statement of cash flows
Other non-cash items included in profit before tax
Depreciation, amortisation and impairment
(Gains)/losses arising from dilution of interests in associates
Revaluations on investment property
Share-based payment expense
Loan impairment losses gross of recoveries and other credit
risk provisions
Provisions
Impairment/(release of impairment) of financial investments
Charge/(credit) for defined benefit plans
Accretion of discounts and amortisation of premiums
2014
US$m
2,251
32
(120)
732
5,125
3,074
54
535
(421)
HSBC
2013
US$m
2,330
(1,051)
(113)
630
7,356
2,578
(36)
121
180
2012
US$m
2,531
–
(72)
988
9,358
5,732
519
476
246
Year ended 31 December
11,262
11,995
19,778
Change in operating assets
Change in loans to HSBC undertakings
Change in net trading securities and net derivatives
Change in loans and advances to banks
Change in loans and advances to customers
Change in reverse repurchase agreements – non-trading
Change in financial assets designated at fair value
Change in other assets
Year ended 31 December
Change in operating liabilities
Change in deposits by banks
Change in customer accounts
Change in repurchase agreements – non-trading
Change in debt securities in issue
Change in financial liabilities designated at fair value
Change in other liabilities
Year ended 31 December
2014
US$m
–
(18,498)
5,147
12,666
18,900
3,269
4,393
25,877
2014
US$m
(9,081)
(8,362)
(56,788)
(8,133)
(10,734)
(716)
(93,814)
HSBC
2013
US$m
–
(24,870)
(4,739)
(46,551)
(70,403)
(4,922)
2,586
2012
US$m
–
(36,829)
1,174
(79,388)
6,678
(2,698)
(5,458)
(148,899)
(116,521)
HSBC
2013
US$m
(7,781)
57,365
123,653
(15,381)
994
5,907
164,757
2012
US$m
274
92,238
(7,834)
(11,552)
2,549
13,395
89,070
HSBC HOLDINGS PLC
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HSBC Holdings
2014
US$m
2013
US$m
39
–
–
74
–
–
–
–
(62)
51
35
–
–
49
–
–
–
–
(10)
74
HSBC Holdings
2014
US$m
1,364
483
–
–
–
–
7
1,854
2013
US$m
(11,669)
923
–
–
–
–
(49)
(10,795)
HSBC Holdings
2014
US$m
2013
US$m
–
–
–
(149)
(694)
(9,071)
(9,914)
–
–
–
98
(550)
(609)
(1,061)
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Notes on the Financial Statements (continued)
36 – Notes on the statement of cash flows / 37 – Contingent liabilities, contractual commitments and guarantees
Cash and cash equivalents
Accounting policy
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
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
Reverse repurchase agreements with banks of one month
2014
US$m
–
129,957
4,927
89,285
HSBC
2013
US$m
–
166,599
6,021
96,584
2012
US$m
–
141,532
7,303
119,400
or less
68,930
68,007
28,832
Treasury bills, other bills and certificates of deposit less than
three months
Less: items in the course of transmission to other banks
At 31 December
1 Measured at amortised cost from 2013.
Interest and dividends
14,192
(5,990)
301,301
15,980
(6,910)
346,281
25,379
(7,138)
315,308
HSBC Holdings
2014
US$m
249
–
–
–
–
–
–
2013
US$m
407
–
–
–
–
–
–
249
407
Interest paid
Interest received
Dividends received
2014
US$m
(15,633)
51,522
1,199
HSBC
2013
US$m
(17,262)
50,823
1,133
2012
US$m
(18,412)
61,112
766
HSBC Holdings
2014
US$m
(2,463)
1,945
9,077
2013
US$m
(2,705)
1,986
20,925
The amount of cash and cash equivalents not available for use by HSBC at 31 December 2014 was US$43,738m (2013:
US$38,019m), of which US$29,883m (2013: US$21,811m) related to mandatory deposits at central banks.
Disposal of subsidiaries and businesses
During 2014, we completed the disposals of HSBC Bank Middle East Limited’s banking business in Jordan and operations
in Pakistan. This resulted in a net US$303m outflow of cash and cash equivalents which is included under ‘Cash flow from
investing activities’ in the Consolidated statement of cash flows on page 338.
In October 2013, we completed the disposal of HSBC Bank (Panama) S.A., receiving total cash consideration of US$2,210m
which is included under ‘Cash flow from investing activities’ in the Consolidated statement of cash flows on page 338.
The effect of disposals of subsidiaries and businesses in 2012 is tabulated below.
Total assets excluding cash and cash equivalents
Total liabilities
Aggregate net assets at date of disposal, excluding cash and cash
equivalents
Non-controlling interests disposed
Gain on disposal including costs to sell
Add back: costs to sell
Selling price
Satisfied by:
Cash and cash equivalents received/(paid) as consideration
Cash and cash equivalents sold
Cash consideration received/(paid) up to 31 December 2012
Cash still to be received at 31 December 2012
Total cash consideration
US cards
business
US$m
28,007
161
27,846
–
3,148
72
31,066
31,066
–
31,066
–
31,066
2012
US branch
network
US$m
2,166
13,206
Other
disposals
US$m
7,302
8,463
(11,040)
–
864
15
(10,161)
(10,091)
(70)
(10,161)
–
(10,161)
(1,161)
(81)
355
56
(831)
(542)
(321)
(863)
32
(831)
Total
US$m
37,475
21,830
15,645
(81)
4,367
143
20,074
20,433
(391)
20,042
32
20,074
HSBC HOLDINGS PLC
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37 Contingent liabilities, contractual commitments and guarantees
Accounting policy
Contingent liabilities
Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security and contingent liabilities related
to legal proceedings or regulatory matters (see Note 40), 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.
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 present value of the fee 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. HSBC elects to account for certain
guarantees as insurance contracts in HSBC Holdings’ financial statements, in which case they are measured and recognised as insurance
liabilities. This election is made on a contract by contract basis, and is irrevocable.
Contingent liabilities, contractual commitments and guarantees
Guarantees and contingent liabilities
Guarantees
Other contingent liabilities
At 31 December
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
At 31 December
HSBC
2014
US$m
86,385
346
86,731
12,082
823
2013
US$m
84,554
182
84,736
12,154
1,005
638,475
651,380
574,444
587,603
HSBC Holdings
2014
US$m
52,023
–
52,023
–
–
16
16
2013
US$m
52,836
–
52,836
–
–
1,245
1,245
The above table discloses the nominal principal amounts of commitments, guarantees and other contingent liabilities.
Contingent liabilities arising from legal proceedings, regulatory and other matters against Group companies are disclosed
in Notes 29 and 40. Nominal principal amounts represent the amounts at risk should the contracts be fully drawn upon
and clients default. 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.
Social Security tax claims in Brazil
In April 2008, a final judicial decision was issued in favour of HSBC insurance and leasing companies in Brazil, clarifying
that the Profit participation contribution (‘PIS’) and the Social security financing contribution (‘COFINS’) should only be
levied on the revenues from the sale of goods and services and not on income derived from insurance premiums and
financial revenue. The resulting reduction of the tax basis and the offsetting of tax credits was made by HSBC at that time,
in accordance with this decision, but later challenged by the Brazilian tax authority claiming that the basis of those taxes
should include all revenues from the corporate activity of the tax payer. With the enactment of a new law in force from 1
January 2015, the tax base for PIS and COFINS has been expanded to include all revenue from corporate activity, including
insurance and financing income; therefore, any possible obligation for HSBC to pay any additional taxes only relates to tax
years up to the end of 2014. These tax assessments are in various stages of the administrative process. Based on the facts
currently known, it is not practicable for HSBC to predict the timing of the resolution of these matters.
HSBC HOLDINGS PLC
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Notes on the Financial Statements (continued)
38 – Lease commitments / 39 – Structured entities
Guarantees
Guarantee type
Financial guarantees1
Credit-related guarantees2
Other guarantees
At 31 December
2014
2013
Guarantees by
HSBC Holdings
in favour of
other
Group entities
US$m
36,800
15,223
–
52,023
Guarantees
in favour of
third parties
US$m
30,406
16,672
39,307
86,385
Guarantees by
HSBC Holdings
in favour of
other
Group entities
US$m
36,800
16,036
–
52,836
Guarantees
in favour of
third parties
US$m
31,224
15,076
38,254
84,554
1 Financial guarantees are contracts that require HSBC to make specified payments to reimburse the holder for a loss incurred because a specified
debtor fails to make payment when due.
2 Credit-related guarantees are contracts that have similar features to financial guarantee contracts but fail to meet the definition of a financial
guarantee contract 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. 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
The Financial Services Compensation Scheme (‘FSCS’) has provided compensation to consumers following the collapse of a
number of deposit takers. The compensation paid out to consumers is currently funded through loans from the Bank of
England and HM Treasury which at 31 December 2014 stood at approximately £16bn (US$24.9bn).
In order to repay the loan principal which is not expected to be recovered, the FSCS levies participating financial
institutions. In January 2015, the FSCS announced that the expected levy on participating financial institutions for Scheme
Year 2015/2016 would be £347m (US$541m) (2014/2015: £399m (US$660m)).
The ultimate FSCS levy to the industry as a result of the collapses cannot currently be estimated reliably as it is dependent
on various uncertain factors including the potential recoveries of assets by the FSCS and changes in the level of protected
deposits and the population of FSCS members at the time.
Capital commitments
In addition to the commitments disclosed on page 441, at 31 December 2014 HSBC had US$656m (2013: US$401m) of
capital commitments contracted but not provided for and US$101m (2013: US$112m) of capital commitments authorised
but not contracted for.
Associates
HSBC’s share of associates’ contingent liabilities amounted to US$47,593m at 31 December 2014 (2013: US$46,574m).
No matters arose where HSBC was severally liable.
38 Lease commitments
Accounting policy
Agreements which transfer substantially all the risks and rewards incidental to the ownership of assets are classified as finance leases.
As a lessor under finance leases, HSBC presents the amounts due under the leases, after deduction of unearned charges, in ‘Loans and
advances to banks’ or ‘Loans and advances to customers’. As a lessee under finance leases, HSBC presents the leased assets in ‘Property,
plant and equipment’ with the corresponding liability included in ‘Other liabilities’. A finance lease asset and its corresponding liability
are recognised initially at the fair value of the asset or, if lower, the present value of the minimum lease payments.
All other leases are classified as operating leases. As lessor, HSBC presents assets subject to operating leases in ‘Property, plant and
equipment’. Impairment losses are recognised to the extent that carrying values are not fully recoverable. As a lessee, leased assets are
not recognised on the balance sheet.
Finance income or charges on the finance lease are recognised in ‘Net interest income’ over the lease periods so as to give a constant
rate of return. Rentals payable or receivable under operating leases are spread on a straight-line basis over the lease periods and are
recognised in ‘General and administrative expenses’ or in ‘Other operating income’.
Operating lease commitments
At 31 December 2014, future minimum lease payments under non-cancellable operating leases for land, buildings and
equipment were US$5,372m (2013 US$5,496m).
HSBC HOLDINGS PLC
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Finance lease receivables
HSBC leases a variety of assets to third parties under finance leases, including transport assets (such as aircraft), property
and general plant and machinery. At the end of lease terms, assets may be sold to third parties or leased for further terms.
Rentals are calculated to recover the cost of assets less their residual value, and earn finance income.
Total future
minimum
payments
US$m
3,383
8,089
5,013
16,485
2014
Unearned
finance
income
US$m
(374)
(980)
(744)
(2,098)
Total future
minimum
payments
2013
Unearned
finance
income
US$m
US$m
Present
value
US$m
Present
value
US$m
3,009
3,370
(360)
3,010
7,109
4,269
14,387
7,933
5,064
(990)
(856)
16,367
(2,206)
6,943
4,208
14,161
Lease receivables:
– no later than one year
– later than one year and no later
than five years
– later than five years
At 31 December
39 Structured entities
Accounting policy
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A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who
controls the entity, for example when any voting rights relate to administrative tasks only, and key activities are directed by contractual
arrangements. Structured entities often have restricted activities and a narrow and well defined objective.
Structured entities are assessed for consolidation in accordance with the accounting policy set out in Note 1(h).
HSBC is involved with structured entities, mainly through securitisation of financial assets, conduits and investment funds.
HSBC arrangements that involve structured entities are authorised centrally when they are established to ensure
appropriate purpose and governance. The activities of structured entities administered by HSBC are closely monitored by
senior management. HSBC has involvement with both consolidated and unconsolidated structured entities, which may be
established by HSBC or by a third party, as detailed below.
Consolidated structured entities
Total assets of HSBC’s consolidated structured entities, split by entity type
At 31 December 2014
At 31 December 2013
Conduits
Conduits
US$bn
Securitisations
US$bn
27.2
38.9
7.9
7.1
HSBC
managed
funds
US$bn
11.2
13.9
Other
US$bn
6.7
8.2
Total
US$bn
53.0
68.1
HSBC has established and manages two types of conduits: securities investment conduits (‘SIC’s) and multi-seller conduits.
These entities have been designed so that voting or similar rights are not the dominant factor in deciding who has control;
in such cases, the relevant activities are directed by means of contractual arrangement. The conduits are consolidated as
HSBC is exposed or has the right to variable returns from its involvement with the entity and has the ability to affect its
returns through its power over the entity.
Securities investment conduits
Solitaire, HSBC’s principal SIC, purchases highly rated ABSs to facilitate tailored investment opportunities. At 31 December
2014, Solitaire held US$8.0bn of ABSs (2013: US$9.0bn). These are included within the disclosures of ABSs ‘held through
consolidated structured entities’ on page 162. HSBC’s other SICs, Mazarin, Barion and Malachite, evolved from the
restructuring of HSBC’s structured investment vehicles in 2008.
• Solitaire – Solitaire is currently funded entirely by commercial paper ‘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. At 31 December 2014, HSBC held US$9.5bn of CP (2013: US$11.0bn).
• Mazarin – HSBC is exposed to the par value of Mazarin’s assets through the provision of a liquidity facility equal to the
lesser of the amortised cost of issued senior debt and the amortised cost of non-defaulted assets. At 31 December
2014, this amounted to US$3.9bn (2013: US$7.4bn). First loss protection is provided through the capital notes issued
by Mazarin, which are substantially all held by third parties.
At 31 December 2014, HSBC held 1.2% of Mazarin’s capital notes (2013: 1.3%) with a par value of US$10m (2013:
US$17m) and a carrying amount of US$1.4m (2013: US$0.3m).
HSBC HOLDINGS PLC
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Notes on the Financial Statements (continued)
39 – Structured entities
• 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 2014, this amounted to US$3.0bn (2013:
US$6.3bn). First loss protection is provided through the capital notes issued by these vehicles, which are substantially
all held by third parties.
At 31 December 2014, HSBC held 9.9% of the capital notes (2013: 3.8%) issued by these vehicles with a par value of
US$54.8m (2013: US$37m) and a carrying amount of US$10.1m (2013: US$3.3m).
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 bears risk equal to transaction-specific liquidity facilities offered to the multi-seller conduits amounting to
US$15.4bn at 31 December 2014 (2013: US$15.7bn). 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.
Securitisations
HSBC uses structured entities to securitise customer loans and advances that it has originated in order to diversify its
sources of funding for asset origination and capital efficiency purposes. The loans and advances are transferred by HSBC
to the structured entities for cash or synthetically through credit default swaps, and the structured entities issue debt
securities to investors.
HSBC managed funds
HSBC has established a number of money market and non-money market funds. Where it is deemed to be acting as
principal rather than agent in its role as investment manager, HSBC controls and hence consolidates these funds.
Other
HSBC has also entered into a number of transactions in the normal course of business which include asset and structured
finance transactions where it has control of the structured entity. In addition, HSBC is deemed to control a number
of third-party managed funds through its involvement as a principal in the funds.
Unconsolidated structured entities
The term ‘unconsolidated structured entities’ refers to all structured entities that are not controlled by HSBC. HSBC
enters into transactions with unconsolidated structured entities in the normal course of business to facilitate customer
transactions and for specific investment opportunities.
The table below shows the total assets of unconsolidated structured entities in which HSBC had an interest at the
reporting date and its maximum exposure to loss in relation to those interests.
Nature and risks associated with HSBC interests in unconsolidated structured entities
At 31 December 2014
Total assets of the entities
HSBC’s interest – assets
Trading assets
Financial assets designated at fair value
Derivatives
Loans and advances to banks
Loans and advances to customers
Financial investments
Other assets
Total assets in relation to HSBC’s interests in
the unconsolidated structured entities
HSBC’s interest – liabilities
Other liabilities
Total liabilities in relation to HSBC’s interests in
the unconsolidated structured entities
HSBC’s maximum exposure
Total income from HSBC interests1
Securitisations
US$bn
HSBC
managed
funds
US$bn
Non-HSBC
managed
funds
US$bn
Other
US$bn
Total
US$bn
11.0
308.5
2,899.9
32.8
3,252.2
–
–
–
–
0.8
–
–
0.8
–
–
0.8
–
0.1
5.2
–
–
–
2.5
–
7.8
–
–
7.8
0.1
0.1
2.3
–
–
–
5.9
–
8.3
–
–
8.3
0.3
4.6
–
1.3
0.1
1.5
0.1
0.1
7.7
0.1
0.1
11.1
0.4
4.8
7.5
1.3
0.1
2.3
8.5
0.1
24.6
0.1
0.1
28.0
0.8
HSBC HOLDINGS PLC
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At 31 December 2013
Total assets of the entities
HSBC’s interest – assets
Trading assets
Financial assets designated at fair value
Derivatives
Loans and advances to customers
Financial investments
Other assets
Total assets in relation to HSBC’s interests in
the unconsolidated structured entities
HSBC’s interest – liabilities
Trading liabilities
Total liabilities in relation to HSBC’s interests in
the unconsolidated structured entities
HSBC’s maximum exposure
Total income from HSBC interests1
Securitisations
US$bn
HSBC
managed
funds
US$bn
Non-HSBC
managed
funds
US$bn
Other
US$bn
Total
US$bn
9.6
–
–
–
0.9
–
–
0.9
–
–
1.0
–
290.3
2,843.3
26.7
3,169.9
0.1
5.1
–
–
2.3
0.1
7.6
–
–
7.6
0.1
0.2
1.4
–
–
5.4
–
7.0
–
–
7.0
0.3
3.8
–
1.2
1.5
0.1
–
6.6
0.1
0.1
10.6
0.3
4.1
6.5
1.2
2.4
7.8
0.1
22.1
0.1
0.1
26.2
0.7
1 Income includes recurring and non-recurring fees, interest, dividends, gains or losses on the re-measurement or derecognition of interests in
structured entities, any mark-to-market gains/losses on a net basis and gains or losses from the transfer of assets and liabilities to the structured
entity.
The maximum exposure to loss from HSBC’s interests in unconsolidated structured entities represents the maximum loss
that HSBC could incur as a result of HSBC’s involvement with unconsolidated structured entities regardless of the
probability of the loss being incurred.
• For commitments and guarantees, and written credit default swaps, the maximum exposure to loss is the notional
amount of potential future losses.
• For retained and purchased investments in and loans to unconsolidated structured entities, the maximum exposure to
loss is the carrying value of these interests at the balance sheet reporting date.
The maximum exposure to loss is stated gross of the effects of hedging and collateral arrangements entered into to
mitigate HSBC’s exposure to loss.
Securitisations
HSBC has interests in unconsolidated securitisation vehicles through holding notes issued by these entities. In addition,
HSBC has investments in asset-backed securities issued by third party structured entities as set out on page 162.
HSBC managed funds
HSBC establishes and manages money market funds and non-money market investment funds to provide customers with
investment opportunities. Further information on ‘Funds under management’ is provided on page 106.
HSBC, as fund manager, may be entitled to receive management and performance fees based on the assets under
management. HSBC may also retain units in these funds.
Non-HSBC managed funds
HSBC purchases and holds units of third-party managed funds in order to facilitate both business and customer needs.
In addition, HSBC enters into derivative contracts to facilitate risk management solutions for non-HSBC managed funds. At
31 December 2014, the fair value of HSBC’s derivative exposures to non-HSBC managed funds was US$6.5bn. Note 16 sets
out information in respect of derivatives entered into by HSBC.
Other
HSBC has established structured entities in the normal course of business such as structured credit transactions for
customers, to provide finance to public and private sector infrastructure projects, and for asset and structured finance
transactions.
HSBC sponsored structured entities
Accounting policy
HSBC is considered to sponsor another entity if, in addition to ongoing involvement with the entity, it had a key role in establishing that
entity or in bringing together the relevant counterparties so that the transaction, which is the purpose of the entity, could occur. HSBC is
generally not considered a sponsor if the only involvement with the entity is merely administrative in nature.
HSBC HOLDINGS PLC
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Notes on the Financial Statements (continued)
40 – Legal proceedings and regulatory matters
The amount of assets transferred to and income received from such sponsored entities during 2014 and 2013 was not
significant.
40 Legal proceedings and regulatory matters
HSBC is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business
operations. Apart from the matters described below, HSBC considers that none of these matters are material. The
recognition of provisions is determined in accordance with the accounting policies set out in Note 29. While the outcome
of legal proceedings and regulatory matters is inherently uncertain, management believes that, based on the information
available to it, appropriate provisions have been made in respect of these matters as at 31 December 2014 (see Note 29).
Where an individual provision is material, the fact that a provision has been made is stated and quantified. Any provision
recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate
estimate of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.
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 states and the District of Columbia relating to real estate lending practices,
Household International and certain former officers were named as defendants in a class action lawsuit, Jaffe v.
Household International, Inc., et al., filed in August 2002 in the US District Court for the Northern District of Illinois (the
‘Illinois District Court’). The complaint asserted claims under the US Securities Exchange Act and alleged that the
defendants knowingly or recklessly made false and misleading statements of material fact relating to Household
International’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.
Ultimately, a class was certified on behalf of all persons who acquired and disposed of Household International common
stock between July 1999 and October 2002.
A jury trial concluded in April 2009, which was decided partly in favour of the plaintiffs. Various legal challenges to the
verdict were raised in post-trial briefing.
In December 2011, following the submission of claim forms by class members, the court-appointed claims administrator
to the Illinois District Court reported 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$2.2bn. The defendants filed legal challenges regarding the
presumption of reliance as to the class and compliance with the claim form requirements, which the Illinois District Court,
in September 2012, rejected for the most part. The Illinois District Court directed further proceedings before a court-
appointed Special Master to address certain claims submission issues.
In October 2013, the Illinois District Court denied the defendants’ additional post-trial motions for judgement as a matter
of law or, in the alternative, for a new trial, and granted plaintiffs’ motions for a partial final judgement and awarded pre-
judgement interest at the prime rate, compounded annually. Subsequently, in October 2013, the Illinois District Court
entered a partial final judgement against the defendants in the amount of approximately US$2.5bn (including pre-
judgement interest). In addition to the partial judgement that has been entered, there also remain approximately
US$625m in claims, prior to imposition of pre-judgement interest, that still are subject to objections that have not yet
been ruled upon by the Illinois District Court.
The defendants filed a Notice of Appeal of the partial final judgement, and oral argument was heard by the US Court of
Appeals for the Seventh Circuit (the ‘Court of Appeals’) in May 2014. We await a decision from the Court of Appeals. The
defendants have also filed a supersedeas bond in the approximate amount of the partial final judgement (US$2.5bn) in
order to stay execution on the judgement pending appeal. Despite the jury verdict, the various rulings of the Illinois
District Court, and the partial final judgement, we continue to believe that we have meritorious grounds for relief on
appeal.
The timing and outcome of the ultimate resolution of this matter is uncertain. 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 outcomes. If the Court of Appeals rejects or only partially accepts our arguments, the amount of damages, based
upon that partial final judgement, and other pending claims and the application of pre-judgement interest on those
pending claims, may lie in a range from a relatively insignificant amount to an amount up to or exceeding US$3.6bn. Once
a judgement is entered (such as the approximately US$2.5bn partial final judgement entered in October 2013), post-
judgement interest accrues on the judgement at a rate equal to the weekly average of the one-year constant maturity
treasury yield as published by the Federal Reserve System. A provision has been made based on management’s best
estimate of probable outflows.
HSBC HOLDINGS PLC
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Bernard L. Madoff Investment Securities LLC
Bernard L. Madoff (‘Madoff’) was arrested in December 2008, and ultimately pleaded guilty to running a Ponzi scheme. He
has acknowledged, in essence, that while purporting to invest his customers’ money in securities, he in fact never invested
in securities and used other customers’ money to fulfil requests to return investments. His firm, Bernard L. Madoff
Investment Securities LLC (‘Madoff Securities’), is being liquidated by a trustee (the ‘Trustee’).
Various non-US HSBC companies provided custodial, administration and similar services to a number of funds
incorporated outside the US whose assets were invested with Madoff Securities. Based on information provided by
Madoff Securities, as at 30 November 2008, the purported aggregate value of these funds was US$8.4bn, an amount that
includes fictitious profits reported by Madoff. Based on information available to HSBC, we have estimated 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. Various HSBC companies have been named as defendants in lawsuits
arising out of Madoff Securities’ fraud.
US/UK Litigation: The Trustee has brought suits against various HSBC companies in the US Bankruptcy Court and in the
English High Court. The Trustee’s US actions included common law claims, alleging that HSBC aided and abetted Madoff’s
fraud and breach of fiduciary duty. Those claims were dismissed on grounds of lack of standing. The Trustee’s remaining
US claims seek recovery of prepetition transfers pursuant to US bankruptcy law. The amount of these remaining claims
has not been pleaded or determined as against HSBC.
Alpha Prime Fund Ltd (‘Alpha Prime’) and Senator Fund SPC, co-defendants in the Trustee’s US actions, have brought
cross-claims against HSBC. These funds have also sued HSBC in Luxembourg (discussed below).
The Trustee’s English action seeks recovery of unspecified transfers from Madoff Securities to or through HSBC. HSBC has
not yet been served with the Trustee’s English action. The Trustee’s deadline for serving the claim has been extended
through the third quarter of 2015.
Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (collectively, ‘Fairfield’), funds whose assets
were invested with Madoff Securities, commenced multiple suits in the US and the British Virgin Islands (the ‘BVI’) against
fund shareholders, including various HSBC companies that acted as nominees for HSBC clients, seeking restitution of
payments made in connection with share redemptions. The US actions brought by Fairfield are stayed pending the
outcome of the Fairfield cases in the BVI (discussed below).
In September 2013, the US Court of Appeals for the Second Circuit affirmed the dismissal of purported class action claims
against HSBC and others brought by investors in three Madoff-invested funds on grounds of forum non conveniens. The
plaintiffs’ petitions for certiorari to the US Supreme Court were filed in December 2014. The Supreme Court’s decision on
whether to grant certiorari review is expected in the first half of 2015.
In December 2014, three new Madoff-related actions were filed. The first is a purported class action brought by direct
investors in Madoff Securities who were holding their investments as of December 2008, asserting various common law
claims and seeking to recover damages lost to Madoff Securities’ fraud on account of HSBC’s purported knowledge and
alleged furtherance of the fraud. The other two actions were filed by SPV Optimal SUS Ltd (‘SPV Optimal’), the purported
assignee of the Madoff Securities-invested company, Optimal Strategic US Equity Ltd. One of these actions was filed in
New York state court and the other in US federal district court. In January 2015, SPV Optimal dismissed its federal lawsuit
against HSBC. The state court action against HSBC remains pending.
BVI Litigation: Beginning in October 2009, the Fairfield funds, whose assets were directly or indirectly invested with
Madoff Securities, commenced multiple suits in the BVI 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 funds are seeking restitution of redemption payments made by the funds to defendants on
the grounds that they were mistakenly based on inflated net asset values. In April 2014, the UK Privy Council issued a
ruling on two preliminary issues in favour of other defendants in the BVI actions, and issued its order in October 2014.
There is also a pending motion brought by other defendants before the BVI court challenging the Fairfield liquidator’s
authorisation to pursue its claims in the US. The BVI court has adjourned the hearing on that pending motion until March
2015.
Bermuda Litigation: In January 2009, Kingate Global Fund Limited and Kingate Euro Fund Limited (collectively, ‘Kingate’),
funds whose assets were directly or indirectly invested with Madoff Securities, commenced an action in Bermuda against
HSBC Bank Bermuda Limited for recovery of funds held in Kingate’s accounts, fees and dividends. This action is currently
pending, but is not expected to move forward until there is a resolution as to the Trustee’s separate US actions against
Kingate and HSBC Bank Bermuda Limited.
Thema Fund Limited (‘Thema’) and Hermes International Fund Limited (‘Hermes’), funds invested with Madoff Securities,
each also brought three actions in Bermuda in 2009. The first set of actions were brought against HSBC Institutional Trust
Services (Bermuda) Limited and seek recovery of funds in frozen accounts held at HSBC. The second set of actions asserts
liability against HSBC Institutional Trust Services (Bermuda) Limited in relation to claims for mistake, recovery of fees and
damages for breach of contract. The third set of actions seeks return of fees from HSBC Bank Bermuda Limited and HSBC
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Securities Services (Bermuda). There has been little progress in these actions for several years, although in January 2015,
Thema and Hermes served notice of intent to proceed in respect of the second set of actions referred to above.
Cayman Islands Litigation: In February 2013, Primeo Fund, a Cayman Islands-based fund invested in Madoff Securities,
brought an action against the fund administrator, Bank of Bermuda (Cayman), and the fund custodian, HSBC Securities
Services (Luxembourg) (‘HSSL’), alleging breaches of contract. Primeo Fund claims damages from defendants to
compensate it for alleged losses, including loss of profit and any liability to the Trustee. Trial has been postponed to
January 2016.
Luxembourg Litigation: In April 2009, Herald Fund SPC (‘Herald’) (in official liquidation since July 2013) commenced action
against HSSL before the Luxembourg District Court seeking restitution of all cash and securities Herald purportedly lost
because of Madoff Securities’ fraud, or in the alternative, money damages in the same amount. In March 2013, the
Luxembourg District Court dismissed Herald’s restitution claim for the return of the securities. Herald’s restitution claim
for return of the cash and claim for money damages were reserved. Herald appealed this judgement in May 2013.
Judgement on the issue of a judicial bond is expected to be rendered in May 2015. Proceedings on the reserved
restitution claim were suspended pending resolution of the appeal.
In October 2009, Alpha Prime sued HSSL before the Luxembourg District Court, alleging breach of contract and negligence
in the appointment of Madoff Securities as a sub-custodian of Alpha Prime’s assets. Alpha Prime was ordered to provide a
judicial bond. Alpha Prime requested a stay of these proceedings pending its negotiations with the Trustee in the US
proceedings. The matter has been temporarily suspended.
In March 2010, Herald (Lux) SICAV (‘Herald (Lux)’) (in official liquidation since April 2009) brought an action against HSSL
before the Luxembourg District Court seeking restitution of securities, or the cash equivalent, or money damages in the
alternative. Herald (Lux) has also requested the restitution of fees paid to HSSL as custodian and service agent of the fund.
The last preliminary hearing is scheduled to take place in March 2015.
In December 2014, Senator Fund SPC commenced an action against HSSL before the Luxembourg District Court, seeking
the restitution of securities held as of the latest net asset value statement from November 2008, or in the alternative,
money damages. The first preliminary hearing is scheduled to take place in February 2015.
HSSL has been sued in various actions by shareholders in the Primeo Select Fund, Herald, Herald (Lux), and Hermes funds.
These actions are in different stages, most of which have been dismissed, suspended or postponed.
Ireland Litigation: In November 2013, Defender Limited, a fund invested with Madoff securities, commenced an action
against HSBC Institutional Trust Services (Ireland) Limited (‘HTIE’), alleging breach of the custodian agreement and
claiming damages and indemnification for claims against Defender Limited for fund losses. The action also includes four
non-HSBC parties, who served as directors and investment managers to Defender Limited.
In July 2013 and December 2013, settlements were reached in respect of claims filed against HTIE in the Irish High Court
by Thema International Fund plc (‘Thema International’) and Alternative Advantage Plc (‘AA’), respectively. Five actions by
individual Thema International shareholders remain pending.
In December 2014, a new proceeding against HTIE and HSBC Securities Services (Ireland) Limited was brought by SPV
Optimal, alleging breach of the custodian agreement and claiming damages and indemnification for fund losses.
There are many factors that may affect the range of possible outcomes, and the resulting financial impact, of the various
Madoff-related proceedings described above, including but not limited to the multiple jurisdictions in which the
proceedings have been brought and the number of different plaintiffs and defendants in such proceedings. For these
reasons, amongst 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 claims in the various Madoff-related proceedings, but they could be
significant.
US mortgage-related investigations
In April 2011, following completion of a broad horizontal review of industry residential mortgage foreclosure practices,
HSBC Bank USA N.A. (‘HSBC Bank USA’) entered into a consent cease-and-desist order with the Office of the Comptroller
of the Currency (the ‘OCC’). HSBC Finance Corporation (‘HSBC Finance’) and HSBC North America Holdings Inc. (‘HNAH’)
also entered into a similar consent order with the Federal Reserve Board (the ‘FRB’) (together with the OCC order, the
‘Servicing Consent Orders’). The Servicing 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 OCC and the FRB to align their processes with the requirements of the consent orders and are implementing
operational changes as required.
Pursuant to the Servicing Consent Orders, an independent consultant was retained to conduct an independent review of
foreclosures pending or completed between January 2009 and December 2010 (the ‘Independent Foreclosure Review’) to
determine if any borrower was financially injured as a result of an error in the foreclosure process. In February 2013, HSBC
Bank USA entered into an agreement with the OCC, and HSBC Finance and HNAH entered into an agreement with the FRB
(together, the ‘IFR Settlement Agreements’), pursuant to which the Independent Foreclosure Review was replaced by a
broader framework under which HSBC and 12 other participating servicers agreed to provide, in the aggregate, over
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US$9.3bn in cash payments and other assistance to help eligible borrowers. Pursuant to the IFR Settlement Agreements,
HNAH made a cash payment of US$96m into a fund used to make payments to borrowers that were in active foreclosure
during 2009 and 2010, and in addition, is providing other assistance (e.g. loan modifications) to help eligible borrowers.
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 the IFR Settlement Agreements will
satisfy the Independent Foreclosure Review requirements of the Servicing Consent Orders, including the wind-down of
the Independent Foreclosure Review.
The Servicing 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 (the ‘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 Servicing Consent Orders. Pursuant to the IFR Settlement Agreement with the OCC,
however, the OCC 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 Servicing Consent Orders, provided
the terms of the IFR Settlement Agreements are fulfilled. The OCC’s agreement not to assess civil money penalties is
further conditioned on HNAH 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. The FRB has agreed that any
assessment of civil money penalties by the FRB 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. The IFR Settlement Agreements do not preclude private litigation concerning
these practices.
Separate from the Servicing Consent Orders and the settlements related to the Independent Foreclosure Review
discussed above, in February 2012, five of the largest US mortgage servicers (not including any HSBC companies) 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. Following the February 2012 settlement, these
government agencies initiated discussions with other mortgage industry servicers, including HSBC, HSBC Bank USA, HSBC
Finance and HNAH have had discussions with US bank regulators and other governmental agencies regarding a potential
resolution. Any such settlement, however, may not completely preclude other enforcement actions by state or federal
agencies, bank 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. These practices have in the
past resulted in private litigation, and such a settlement would not preclude further private litigation concerning these
practices.
US mortgage securitisation activity and litigation
HSBC Bank USA has been involved as a sponsor/seller of loans used to facilitate whole loan securitisations underwritten
by HSBC Securities (USA) Inc. (‘HSI’). From 2005 to 2007, HSBC Bank USA purchased and sold US$24bn of such loans to HSI
which were subsequently securitised and sold by HSI to third parties. The outstanding principal balance on these loans
was approximately US$5.7bn as at 31 December 2014.
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 any related liabilities are properly those of the servicer of each trust, HSBC continues to
receive significant adverse publicity in connection with these and similar matters, including foreclosures that are serviced
by others in the name of ‘HSBC, as trustee’.
Between June and December 2014, a number of lawsuits were filed in state and federal court in New York against HSBC
Bank USA as trustee of over 250 mortgage securitisation trusts. These lawsuits are brought derivatively on behalf of the
trusts by a class of investors including, amongst others, BlackRock and PIMCO funds. Similar lawsuits were filed
simultaneously against other non-HSBC financial institutions that served as mortgage securitisation pool trustees. The
complaints against HSBC Bank USA allege that the trusts have sustained losses in collateral value of over US$34bn. The
lawsuits seek unspecified damages resulting from alleged breaches of the US Trust Indenture Act, breach of fiduciary
duties, negligence, breach of contract and breach of the common law duty of trust. HSBC filed a motion to dismiss three of
these lawsuits in January 2015.
Various HSBC companies have also 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. In September 2011, an action was filed by the Federal Housing
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Finance Agency (‘FHFA’), acting in its capacity as conservator for the Federal National Mortgage Association (‘Fannie Mae’)
and the Federal Home Loan Mortgage Corporation (‘Freddie Mac’) in the US District Court for the Southern District of New
York (the ‘New York District Court’) against HSBC Bank USA, HNAH, HSI and HSI Asset Securitization (‘HASCO’), as well as
five former and current officers and directors of HASCO. FHFA sought money damages or rescission of mortgage-backed
securities purchased by Fannie Mae and Freddie Mac that were either underwritten or sponsored by HSBC companies. As
announced in September 2014, this matter was resolved between the parties by final settlement requiring HSBC to pay a
total of US$550m to FHFA.
HSBC Bank USA, HSBC Finance and Decision One Mortgage Company LLC (an indirect subsidiary of HSBC Finance) have
been named as defendants in various mortgage loan repurchase actions brought by trustees of securitisation trusts. In the
aggregate, these actions seek to have the HSBC defendants repurchase mortgage loans, or pay compensatory damages in
lieu of repurchase totalling at least US$1bn. Motions to dismiss have been filed and are fully briefed and pending in two of
these actions.
Since 2010, various HSBC entities have received subpoenas and requests for information from US authorities seeking the
production of documents and information regarding HSBC’s involvement, and the involvement of its affiliates, in
particular private-label RMBS transactions as an issuer, sponsor, underwriter, depositor, trustee, custodian or servicer.
HSBC continues to cooperate with these US authorities. In November 2014, HNAH, on behalf of itself and various
subsidiaries including, but not limited to, HSBC Bank USA, HASCO, HSI, HSI Asset Loan Obligation, HSBC Mortgage
Corporation (USA), HSBC Finance and Decision One Mortgage Company LLC, received a subpoena from the US Attorney’s
Office for the District of Colorado, pursuant to the Financial Industry Reform, Recovery and Enforcement Act, concerning
the origination, financing, purchase, securitisation and servicing of subprime and non-subprime residential mortgages.
This matter is at an early stage and HSBC is cooperating fully.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters,
including the timing or any possible impact on HSBC.
HSBC expects the focus on mortgage securitisations to continue. As a result, HSBC companies may be subject to additional
claims, litigation and governmental or regulatory scrutiny relating to its participation in the US mortgage securitisation
market, either as a member of a group or individually.
Anti-money laundering and sanctions-related matters
In October 2010, HSBC Bank USA entered into a consent cease-and-desist order with the OCC, and HNAH entered into a
consent cease-and-desist order with the FRB (the ‘Orders’). These Orders required improvements to establish an effective
compliance risk management programme across HSBC’s US businesses, including risk management related to US Bank
Secrecy Act (the ‘BSA’) and anti-money laundering (‘AML’) compliance. Steps continue to be taken to address the
requirements of the Orders.
In December 2012, HSBC Holdings plc (‘HSBC Holdings’), HNAH and HSBC Bank USA entered into agreements with US and
UK government agencies regarding past inadequate compliance with the BSA, AML and sanctions laws. Among those
agreements, HSBC Holdings and HSBC Bank USA entered into a five-year deferred prosecution agreement with the DoJ,
the US Attorney’s Office for the Eastern District of New York, and the US Attorney’s Office for the Northern District of
West Virginia (the ‘US DPA’); HSBC Holdings entered into a two-year deferred prosecution agreement with the New York
County District Attorney (the ‘DANY DPA’); and HSBC Holdings consented to a cease-and-desist order and HSBC Holdings
and HNAH consented to a civil money penalty order with the FRB. In addition, HSBC Bank USA entered into a civil money
penalty order with FinCEN and a separate civil money penalty order with the OCC. HSBC Holdings also entered into an
agreement with the Office of Foreign Assets Control (‘OFAC’) regarding historical transactions involving parties subject to
OFAC sanctions and an undertaking with the UK Financial Conduct Authority (the ‘FCA’) to comply with certain forward-
looking AML and sanctions-related obligations.
Under these agreements, HSBC Holdings and HSBC Bank USA made payments totalling US$1.9bn to US authorities and are
continuing to comply with ongoing obligations. In July 2013, the US District Court for the Eastern District of New York
approved the US DPA and retained authority to oversee implementation of that agreement. Under the agreements with
the DoJ, FCA, and FRB, an independent monitor (who is, for FCA purposes, a ‘skilled person’ under Section 166 of the
Financial Services and Markets Act) is evaluating and regularly assessing the effectiveness of HSBC’s AML and sanctions
compliance function and HSBC’s progress in implementing its remedial obligations under the agreements.
HSBC Holdings has fulfilled all of the requirements imposed by the DANY DPA, which expired by its terms at the end of the
two-year period of that agreement in December 2014. If HSBC Holdings and HSBC Bank USA fulfil all of the requirements
imposed by the US DPA, the DoJ charges against those entities will be dismissed at the end of the five-year period of that
agreement. The DoJ may prosecute HSBC Holdings or HSBC Bank USA in relation to any matters that are the subject of the
US DPA if HSBC Holdings or HSBC Bank USA breaches the terms of the US DPA.
HSBC Bank USA also entered into a separate consent order with the OCC, requiring it to correct the circumstances and
conditions as noted in the OCC’s then most recent report of examination, and imposing certain restrictions on HSBC Bank
USA directly or indirectly acquiring control of, or holding an interest in, any new financial subsidiary, or commencing a
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new activity in its existing financial subsidiary, unless it receives prior approval from the OCC. HSBC Bank USA also entered
into a separate consent order with the OCC requiring it to adopt an enterprise-wide compliance programme.
These settlements with US and UK authorities have led to private litigation, and do not preclude further private litigation
related to HSBC’s compliance with applicable BSA, AML and sanctions laws or other regulatory or law enforcement actions
for BSA, AML, sanctions or other matters not covered by the various agreements.
In May 2014, a shareholder derivative action was filed by a shareholder of HSBC Holdings purportedly on behalf of HSBC
Holdings, HSBC Bank USA, HNAH and HSBC USA Inc. (the ‘Nominal Corporate Defendants’) in New York State Supreme
Court against certain current and former directors and officers of those HSBC companies (the ‘Individual Defendants’). The
complaint alleges that the Individual Defendants breached their fiduciary duties to the Nominal Corporate Defendants and
caused a waste of corporate assets by allegedly permitting and/or causing the conduct underlying the US DPA. In October
2014, the Nominal Corporate Defendants moved to dismiss the action, and the Individual Defendants who had been
served also responded to the complaint. Plaintiff filed an amended complaint in February 2015.
In July 2014, a claim was filed in the Ontario Superior Court of Justice against HSBC Holdings and a former employee
purportedly on behalf of a class of persons who purchased HSBC common shares and ADSs between July 2006 and July
2012. The complaint, which seeks monetary damages of up to CA$20bn, alleges that the defendants made statutory and
common law misrepresentations in documents released by HSBC Holdings and its wholly owned subsidiary, HSBC Bank
Canada, relating to HSBC’s compliance with BSA, AML, sanctions and other laws.
In November 2014, a complaint was filed in the US District Court for the Eastern District of New York on behalf of
representatives of US persons killed or injured in Iraq between April 2004 and November 2011. The complaint was filed
against HSBC Holdings, HSBC Bank plc, HSBC Bank USA and HSBC Bank Middle East, as well as other non-HSBC banks and
the Islamic Republic of Iran (together, the ‘Defendants’). The plaintiffs allege that defendants conspired to violate the US
Anti-Terrorism Act, by altering or falsifying payment messages involving Iran, Iranian parties and Iranian banks for
transactions processed through the US. Defendants’ motion to dismiss is due to be filed in March 2015.
These private lawsuits are at an early stage. 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 or any possible impact on HSBC.
Tax and broker-dealer investigations
HSBC continues to cooperate in ongoing investigations by the DoJ and the US Internal Revenue Service regarding whether
certain HSBC companies and employees acted appropriately in relation to certain customers who had US tax reporting
obligations. In connection with these investigations, HSBC Private Bank (Suisse) SA (‘HSBC Swiss Private Bank’), with due
regard for Swiss law, has produced records and other documents to the DoJ. In August 2013, the DoJ informed HSBC Swiss
Private Bank that it was not eligible for the ‘Program for Non-Prosecution Agreements or Non-Target Letters for Swiss
Banks’ since a formal investigation had previously been authorised. The DoJ has requested additional information from
HSBC Swiss Private Bank and other Swiss banks regarding the transfer of assets to and from US person-related accounts
and employees who serviced those accounts. HSBC Swiss Private Bank is preparing this data, in a manner consistent with
Swiss law.
Other HSBC companies have received subpoenas and requests for information from US and other authorities, including
with respect to US-based clients of an HSBC company in India.
In November 2014, HSBC Swiss Private Bank reached a final settlement with the SEC relating to cross-border brokerage
and advisory services provided by HSBC Swiss Private Bank and its predecessor entities to US resident clients between
2003 and 2011.
In addition, various tax administration, regulatory and law enforcement authorities around the world, including in
Belgium, France, Argentina, Switzerland and India, are conducting investigations and reviews of HSBC Swiss Private Bank
in connection with allegations of tax evasion or tax fraud, money laundering and unlawful cross-border banking
solicitation. HSBC Swiss Private Bank has been placed under formal criminal examination by magistrates in both Belgium
and France. In February 2015, HSBC was informed that the French magistrates are of the view that they have completed
their investigation with respect to HSBC Swiss Private Bank and have referred the matter to the public prosecutor for a
recommendation on any potential charges to be brought, whilst reserving the right to continue investigating other
conduct at HSBC. In addition, in November 2014, the Argentine tax authority filed a complaint alleging an unlawful
association between HSBC Swiss Private Bank, HSBC Bank Argentina, HSBC Bank USA and certain current and former HSBC
officers, which allegedly enabled HSBC customers to evade Argentine tax obligations. In February 2015, a public
prosecutor in Switzerland commenced an investigation of HSBC Swiss Private Bank, and the Indian tax authority issued a
summons and request for information to an HSBC company in India.
With respect to each of these ongoing matters, HSBC is cooperating with the relevant authorities. Based on the facts
currently known, there is a high degree of uncertainty as to the terms on which they will be resolved and the timing of
such resolutions, including the amounts of fines, penalties and/or forfeitures imposed on HSBC, which could be significant.
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In light of the recent media attention regarding these matters, it is possible that other tax administration, regulatory or
law enforcement authorities will also initiate or enlarge similar investigations or regulatory proceedings.
London interbank offered rates, European interbank offered rates and other benchmark interest rate
investigations and litigation
Various regulators and competition and law enforcement authorities around the world, including in the UK, the US, the
EU, Switzerland and elsewhere, 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 rates. As certain HSBC companies are
members of such panels, HSBC has been the subject of regulatory demands for information and is cooperating with those
investigations and reviews.
In December 2013, the European Commission (the ‘Commission’) announced that it had imposed fines on eight financial
institutions under its cartel settlement procedure for their participation in illegal activity related to euro interest rate
derivatives and/or yen interest rate derivatives. Although HSBC was not one of the financial institutions fined, the
Commission announced that it had opened proceedings against HSBC in connection with its Euribor-related investigation
of euro interest rate derivatives only. This investigation will continue under the standard Commission cartel procedure. In
May 2014, HSBC received a Statement of Objections from the Commission, alleging anti-competitive practices in
connection with the pricing of euro interest rate derivatives. The Statement of Objections sets out the Commission’s
preliminary views and does not prejudge the final outcome of its investigation. HSBC responded partially to the
Commission’s Statement of Objections in November 2014, and will have the opportunity to complete its response on a
date to be decided by the Commission, once various procedural issues are resolved.
Based on the facts currently known, with respect to each of these ongoing investigations, there is a high degree of
uncertainty as to the terms on which they will be resolved and the timing of such resolution, including the amounts of
fines and/or penalties, which could be significant.
In addition, HSBC and other US dollar Libor panel banks have been named as defendants in a number of private lawsuits
filed in the US with respect to the setting of US dollar Libor. The complaints assert claims under various US laws, including
US antitrust and racketeering laws, the US Commodity Exchange Act (‘CEA’), and state law. The lawsuits include individual
and putative class actions, most of which have been transferred and/or consolidated for pre-trial purposes before the
New York District Court.
In March 2013, the New York District Court overseeing the consolidated proceedings related to US dollar Libor issued a
decision in the six oldest actions, dismissing the plaintiffs’ federal and state antitrust claims, racketeering claims, and
unjust enrichment claims in their entirety, but allowing certain of their CEA claims that were not barred by the applicable
statute of limitations to proceed. Some of those plaintiffs appealed the New York District Court’s decision to the US Court
of Appeals for the Second Circuit, which later dismissed those appeals. In January 2015, the US Supreme Court reversed
the Court of Appeals’ decision and remanded the case to the Court of Appeals for consideration of the merits of the
plaintiffs’ appeal.
Other plaintiffs sought to file amended complaints in the New York District Court to assert additional allegations. In June
2014, the New York District Court issued a decision that, amongst other things, denied the plaintiffs’ request for leave to
amend their complaints to assert additional theories of Libor manipulation against HSBC and certain non-HSBC banks, but
granted leave to assert such manipulation claims against two other banks; and granted defendants’ motion to dismiss
certain additional claims under the CEA as barred by the applicable statute of limitations. Proceedings with respect to all
other actions in the consolidated proceedings were stayed pending this decision. The stay was lifted in September 2014.
Amended complaints were filed in previously stayed non-class actions in October 2014; and amended complaints were
filed in several of the previously stayed class actions in November 2014. Motions to dismiss were filed in November 2014
and January 2015, respectively, and remain pending.
Separately, HSBC and other panel banks have also been named as defendants in a putative class action filed in the New
York District Court on behalf of persons who transacted in euroyen futures and options contracts related to the euroyen
Tokyo interbank offered rate (‘Tibor’). The complaint alleges, amongst other things, misconduct related to euroyen Tibor,
although HSBC is not a member of the Japanese Bankers Association’s euroyen Tibor panel, as well as Japanese yen Libor,
in violation of US antitrust laws, the CEA, and state law. In March 2014, the New York District Court issued an opinion
dismissing the plaintiffs’ claims under US antitrust law and state law, but sustaining their claims under the CEA. In June
2014, the plaintiffs moved for leave to file a third amended complaint. HSBC has opposed that motion, which remains
pending.
In November 2013, HSBC and other panel banks were also named as defendants in a putative class action filed in the New
York District Court on behalf of persons who transacted in euro futures contracts and other financial instruments related
to Euribor. The complaint alleges, amongst other things, misconduct related to Euribor in violation of US antitrust laws,
the CEA and state law. The plaintiffs filed a second and later third amended complaint in May 2014 and October 2014,
respectively. HSBC intends to respond to the third amended complaint once a court-ordered stay expires, currently set for
May 2015.
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In September and October 2014, HSBC Bank plc and other panel banks were named as defendants in a number of putative
class actions that were filed and consolidated in the New York District Court on behalf of persons who transacted in
interest rate derivative transactions or purchased or sold financial instruments that were either tied to USD ISDAfix rates
or were executed shortly before, during, or after the time of the daily ISDAfix setting window. The complaint alleges,
amongst other things, misconduct related to these activities in violation of US antitrust laws, the CEA and state law. In
October 2014, the plaintiffs filed a consolidated amended complaint. A motion to dismiss that complaint was filed in
December 2014 and remains pending. In February 2015, plaintiffs filed a second consolidated amended complaint
replacing HSBC Bank plc with HSBC Bank USA.
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 or any possible impact on HSBC.
Foreign exchange rate investigations and litigation
Various regulators and competition and law enforcement authorities around the world, including in the UK, the US, the EU
and elsewhere, are conducting investigations and reviews into a number of firms, including HSBC, related to trading on
the foreign exchange markets.
In November 2014, HSBC Bank plc entered into regulatory settlements with the FCA and the US Commodity Futures
Trading Commission (‘CFTC’) in connection with their respective investigations of HSBC’s trading and other conduct
involving foreign exchange benchmark rates. Under the terms of those settlements, HSBC Bank plc agreed to pay a
financial penalty of £216m (US$336m) to the FCA and a civil monetary penalty of US$275m to the CFTC, and to undertake
various remedial actions.
In December 2014, the Hong Kong Monetary Authority (‘HKMA’) announced the completion of its investigation into the
foreign exchange trading operations of The Hongkong and Shanghai Banking Corporation Limited (‘HBAP’). The
investigation found no evidence of market manipulation by HBAP and no monetary penalty was imposed. HBAP was
required to implement various remedial actions.
The remaining investigations and reviews in the UK, the US and elsewhere are ongoing. Based on the facts currently
known there is a high degree of uncertainty as to the terms on which they will be resolved and the timing of such
resolutions, including the amounts of fines and/or penalties, which could be significant. As at 31 December 2014, HSBC
has recognised a provision in the amount of US$550m in respect of these matters.
In addition, in late 2013 and early 2014, HSBC Holdings, HSBC Bank plc, HNAH and HSBC Bank USA were named as
defendants, amongst other banks, in various putative class actions filed in the New York District Court. In March 2014, the
plaintiffs filed a consolidated amended complaint alleging, amongst other things, that defendants conspired to manipulate
the WM/ Reuters foreign exchange benchmark rates by sharing customers’ confidential order flow information, thereby
injuring plaintiffs and others by forcing them to pay artificial and non-competitive prices for products based on these
foreign currency rates (‘the Consolidated Action’). Separate putative class actions were also brought on behalf of non-US
plaintiffs (the ‘Foreign Actions’). Defendants moved to dismiss all actions. In January 2015, the court denied defendants’
motion to dismiss as to the Consolidated Action, but granted defendants’ motion to dismiss as to the Foreign Actions.
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 or any possible impact on HSBC.
Precious metals fix-related litigation and investigations
Since March 2014, numerous putative class actions have been filed in the US District Courts for the Southern District of
New York, the District of New Jersey and the Northern District of California naming HSBC Bank USA, HSBC Bank plc, HSI
and other members of The London Gold Market Fixing Limited as defendants. The complaints allege that, from January
2004 to the present, defendants conspired to manipulate the price of gold and gold derivatives during the afternoon
London gold fix in order to reap profits on proprietary trades. These actions have been assigned to and consolidated in the
New York District Court. An amended consolidated class action complaint was filed in December 2014, and HSBC’s
response was filed in February 2015.
Since July 2014, putative class actions were filed in the US District Court for the Southern District of New York and the
Eastern District of New York naming HSBC Holdings, HNAH, HSBC Bank USA, HSBC USA Inc. and other members of The
London Silver Market Fixing Ltd as defendants. The complaints allege that, from January 2007 to the present, defendants
conspired to manipulate the price of physical silver and silver derivatives for their collective benefit in violation of US
antitrust laws and the CEA. These actions have been assigned to and consolidated in the New York District Court. An
amended consolidated class action complaint was filed in January 2015, and HSBC’s response is due in March 2015.
Between late 2014 and early 2015, numerous putative class actions were filed in the New York District Court naming HSBC
Bank USA and other members of The London Platinum and Palladium Fixing Company Limited as defendants. The
complaints allege that, from January 2007 to the present, defendants conspired to manipulate the price of physical
Platinum Group Metals (‘PGM’) and PGM-based financial products for their collective benefit in violation of US antitrust
laws and the CEA.
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Notes on the Financial Statements (continued)
40 – Legal proceedings and regulatory matters / 41 – Related party transactions
In November 2014, the DoJ issued a document request to HSBC Holdings, seeking the voluntary production of certain
documents relating to a criminal antitrust investigation that the DoJ is conducting in relation to precious metals. In
January 2015, the CFTC issued a subpoena to HSBC Bank USA, seeking the production of certain documents related to
HSBC Bank USA’s precious metals trading operations. HSBC is cooperating with the US authorities in their respective
investigations.
These matters are at an early stage. Based on the facts currently known, it is not practicable at this time for HSBC to
predict the resolution of these matters, including the timing or any possible impact on HSBC.
Credit default swap regulatory investigation and litigation
In July 2013, HSBC received a Statement of Objections from the Commission relating to its ongoing investigation of alleged
anti-competitive activity by a number of market participants in the credit derivatives market between 2006 and 2009. The
Statement of Objections sets out the Commission’s preliminary views and does not prejudge the final outcome of its
investigation. HSBC has submitted a response and attended an oral hearing in May 2014. Following the oral hearing, the
Commission decided to conduct a further investigation phase before deciding whether or how to proceed with the case.
HSBC is cooperating with this further investigation. Based on the facts currently known, it is not practicable at this time for
HSBC to predict the resolution of this matter, including the timing or any possible impact on HSBC.
In addition, HSBC Bank USA, HSBC Holdings and HSBC Bank plc have been named as defendants, amongst others,
in numerous putative class actions filed in the New York District Court and the Illinois District Court. These class actions
allege that the defendants, which include ISDA, Markit and several other financial institutions, conspired to restrain trade
in violation of US antitrust laws by, amongst other things, restricting access to credit default swap pricing exchanges and
blocking new entrants into the exchange market, with the purpose and effect of artificially inflating the bid/ask spread
paid to buy and sell credit default swaps in the US. The plaintiffs in these suits purport to represent a class of all persons
who purchased credit default swaps from or sold credit default swaps to defendants primarily in the US.
In October 2013, these cases were consolidated in the New York District Court. An amended consolidated complaint was
filed in January 2014, naming HSBC Bank USA and HSBC Bank plc as defendants, amongst other non-HSBC defendants.
Following the filing of defendants’ initial motions to dismiss in March 2014, plaintiffs filed a second amended consolidated
complaint, which defendants also moved to dismiss. In September 2014, the court granted in part and denied in part the
defendants’ motion to dismiss. Discovery is in process.
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 or any possible impact on HSBC.
Economic plans: HSBC Bank Brasil S.A.
In the mid-1980s and early 1990s, certain economic plans were introduced by the government of Brazil to reduce
escalating inflation. The implementation of these plans adversely impacted savings account holders, thousands of which
consequently commenced legal proceedings against financial institutions in Brazil, including HSBC Bank Brasil S.A. (‘HSBC
Brazil’), alleging, amongst other things, that savings account balances were adjusted by a different price index than that
contractually agreed, which caused them a loss of income. Certain of these cases have reached the Brazilian Supreme
Court (the ‘Supreme Court’). The Supreme Court has suspended all cases pending before lower courts until it delivers
a final judgement on the constitutionality of the changes resulting from the economic plans. It is anticipated that the
outcome of the Supreme Court’s final judgement will set a precedent for all cases pending before the lower courts.
Separately, the Brazilian Superior Civil Court (the ‘Superior Civil Court’) is considering matters relating to, amongst other
things, contractual and punitive interest rates to be applied to calculate any loss of income.
There is a high degree of uncertainty as to the terms on which the proceedings in the Supreme Court and Superior Civil
Court will be resolved and the timing of such resolutions, including the amount of losses that HSBC Brazil may be liable to
pay in the event of an unfavourable judgement. Such losses may lie in a range from a relatively insignificant amount to an
amount up to US$800m, although the upper end of this range is considered unlikely.
Regulatory Review of Consumer ‘Enhancement Services Products’
HSBC Finance, through its legacy Cards and Retail Services business, offered or participated in the marketing, distribution,
or servicing of products, such as identity theft protection and credit monitoring products, that were ancillary to the
provision of credit to the consumer. HSBC Finance ceased offering these products by May 2012. The offering and
administration of these and other enhancement services products, such as debt protection products, has been the subject
of enforcement actions against other institutions by regulators, including the Consumer Financial Protection Bureau, the
OCC, and the Federal Deposit Insurance Corporation. Such enforcement actions have resulted in orders to pay restitution
to customers and the assessment of penalties in substantial amounts. We have made restitution to certain customers in
connection with certain enhancement services products, and we continue to cooperate with our regulators in connection
with their ongoing review. In light of the actions that regulators have taken in relation to other non-HSBC credit card
issuers regarding their enhancement services products, one or more regulators may order us to pay additional restitution
to customers and/or impose civil money penalties or other relief arising from the prior offering and administration of such
enhancement services products by HSBC Finance. There is a high degree of uncertainty as to the terms on which this
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matter will be resolved and the timing of such resolution, including the amount of any additional remediation which may
lie in a range from zero to an amount up to US$500m.
41 Related party transactions
Related parties of the Group and HSBC Holdings include subsidiaries, associates, joint ventures, post-employment benefit
plans for HSBC employees, Key Management Personnel, close family members of Key Management Personnel and entities
which are controlled or jointly controlled by Key Management Personnel or their close family members.
Key Management Personnel are defined as those persons having authority and responsibility for planning, directing and
controlling the activities of HSBC Holdings, being the Directors and Group Managing Directors of HSBC Holdings.
Compensation of Key Management Personnel
Short-term employee benefits
Post-employment benefits
Other long-term employee benefits
Share-based payments
Year ended 31 December
2014
US$m
41
1
7
54
103
HSBC
2013
US$m
38
2
10
35
85
2012
US$m
37
1
10
43
91
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 2014 with Directors, disclosed pursuant to section 413 of the Companies Act 2006, are shown below:
Advances and credits at 31 December
2014
US$m
5
2013
US$m
7
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.
Key Management Personnel1
Advances and credits
Guarantees
2014
2013
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
194
–
227
–
146
–
171
8
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.
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 Bank 2.875% Notes 2015 held beneficially and non-beneficially
At 31 December
Transactions with other related parties of HSBC
Associates and joint ventures
2014
(000s)
28
17,533
5
17,566
2013
(000s)
225
14,704
5
14,934
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
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Notes on the Financial Statements (continued)
41 – Related party transactions / 42 – Events after the balance sheet date
are given in Note 20. Transactions and balances during the year with associates and joint ventures were as follows:
Amounts due from joint ventures:
– subordinated
– unsubordinated
Amounts due from associates:
– subordinated
– unsubordinated
At 31 December
Amounts due to joint ventures
Amounts due to associates
At 31 December
Commitments
2014
2013
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
–
205
58
5,451
5,714
–
650
650
17
–
205
–
4,273
4,478
–
162
162
–
1
300
–
4,884
5,185
7
1,178
1,185
70
–
300
–
4,084
4,384
7
290
297
17
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 2014, US$4.5bn (2013: US$5.2bn) of HSBC post-employment benefit plan assets were under
management by HSBC companies. Fees of US$12m (2013: US$23m) 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$223m (2013: US$620m) with its banking subsidiaries, on which interest payable to the schemes amounted
to US$6m (2013: US$1m). 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 2014, the gross notional value of the swaps was US$24bn
(2013: US$38bn), the swaps had a positive fair value of US$0.9bn (2013: positive fair value of US$2.8bn) to the scheme
and HSBC had delivered collateral of US$2.0bn (2013: US$3.8bn) to the scheme in respect of these swaps, on which HSBC
earned US$5m of interest (2013: US$33m). All swaps were executed at prevailing market rates and within standard
market bid/offer spreads. Over the year, the Scheme reduced its level of swap transactions with HSBC.
The International Staff Retirement Benefit Scheme entered into swap transactions with HSBC to manage the inflation and
interest rate sensitivity of the liabilities and selected assets. At 31 December 2014, the gross notional value of the swaps
was US$1.9bn (2013: US$1.8bn) and the swaps had a net negative fair value of US$107m to the scheme (2013: US$399m
positive). All swaps were executed at prevailing market rates and within standard market bid/offer spreads.
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HSBC Holdings
Details of HSBC Holdings’ principal subsidiaries are shown in Note 22. Transactions and balances during the year with
subsidiaries were as follows:
Assets
Cash at bank
Derivatives
Loans and advances
Financial investments
Investments in subsidiaries
2014
2013
Highest balance
during the year1
US$m
Balance at
31 December1
US$m
Highest balance
during the year1
US$m
Balance at
31 December1
US$m
436
3,179
55,026
4,073
96,264
249
2,771
43,910
4,073
96,264
420
3,768
53,344
1,220
92,695
407
2,789
53,344
1,210
92,695
Total related party assets at 31 December
158,978
147,267
151,447
150,445
Liabilities
Amounts owed to HSBC undertakings
Derivatives
Subordinated liabilities:
– at amortised cost
– designated at fair value
Total related party liabilities at 31 December
Guarantees
Commitments
12,046
1,169
1,743
3,186
18,144
53,180
1,245
2,892
1,169
1,670
981
6,712
52,023
16
12,856
1,154
1,716
4,350
20,076
52,836
1,245
11,685
704
1,716
3,161
17,266
52,836
1,245
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 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.
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 6 to the accounts.
42 Events after the balance sheet date
A fourth interim dividend for 2014 of US$0.20 per ordinary share (a distribution of approximately US$3,844m) was
declared by the Directors after 31 December 2014.
These accounts were approved by the Board of Directors on 23 February 2015 and authorised for issue.
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Shareholder information
Interim dividends / Shareholder profile / 2014 AGM
Shareholder information
Stock symbols
Investor relations
Fourth interim dividend for 2014
Interim dividends for 2015
Shareholder profile
2014 Annual General Meeting
Interim Management Statements and Interim Results
Shareholder enquiries and communications
458
458
458
459
459
460
Where more information about HSBC is available
Simplified structure chart
Taxation of shares and dividends
Abbreviations
Glossary and Index
461
461
461
462
463
466
470
Fourth interim dividend for 2014
The Directors have declared a fourth interim dividend for 2014 of US$0.20 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 20 March 2015. The timetable for the dividend is:
Announcement
ADSs quoted ex-dividend in New York
Shares quoted ex-dividend in London, Hong Kong, Paris and Bermuda
Record date – London, Hong Kong, New York, Paris, Bermuda1
Mailing of Annual Report and Accounts 2014 and/or Strategic Report 2014, Notice of Annual General Meeting and dividend
23 February 2015
4 March 2015
5 March 2015
6 March 2015
documentation
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 and
shares credited to stock accounts in CREST
1 Removals to and from the Overseas Branch register of shareholders in Hong Kong will not be permitted on this date.
20 March 2015
16 April 2015
20 April 2015
30 April 2015
Interim dividends for 2015
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 2015 will be US$0.10 per ordinary share.
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.
Shareholder profile
At 31 December 2014 the share register recorded the following details:
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
Total
Number of
shareholders
Total ordinary
shares held
37,254
28,970
7,269
30,675
70,515
18,455
10,964
6,616
3,229
713
1,086,273
7,109,335
3,294,206
22,589,447
166,806,864
130,271,174
152,651,126
203,096,923
296,665,889
223,855,824
1,092 18,010,447,199
215,752 19,217,874,260
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2014 Annual General Meeting
All resolutions considered at the 2014 Annual General Meeting held at 11.00am on 23 May 2014 at The Barbican Centre,
London EC2 were passed on a poll as follows:
Resolution
For1
%
Against
%
Total
%2
Withheld3
Votes
1
To receive the Annual Report and
Accounts 2013
To approve the Directors’
remuneration policy
To approve the Directors’
Remuneration Report
To approve the variable pay cap
To elect or re-elect the following
2
3
4
5
as Directors:
(a) Kathleen Casey
(b) Safra Catz
(c) Laura Cha
(d) Marvin Cheung
(e) Sir Jonathan Evans
(now Lord Evans of Weardale)
(f) Joachim Faber
(g) Rona Fairhead
(h) Renato Fassbind
(i) Douglas Flint
(j) Stuart Gulliver
(k) Sam Laidlaw
(l) John Lipsky
(m) Rachel Lomax
(n) Iain Mackay
(o) Marc Moses
(p) Sir Simon Robertson
(q) Jonathan Symonds
6 To reappoint KPMG Audit Plc as
auditor to the Company
To authorise the Group Audit
7
Committee to determine the
auditor’s remuneration
8
To authorise the Directors to allot
shares
9 To disapply pre-emption rights
10
To authorise the Directors to allot
9,757,667,883
98.77
121,991,215
1.23
9,879,659,098 51.81
67,631,467
7,762,051,505
79.35
2,019,902,686
20.65
9,781,954,191 51.29
167,509,544
8,180,579,271
9,722,737,304
83.95
98.01
1,563,541,883
197,867,631
16.05
1.99
9,744,121,154 51.10
9,920,604,935 52.06
205,528,859
29,824,365
9,919,351,912
9,907,586,080
9,780,982,617
9,896,844,476
9,919,562,434
9,777,856,091
9,850,526,539
8,877,803,961
9,648,640,713
9,901,917,449
9,905,841,880
9,916,726,269
9,907,427,658
9,896,296,230
9,903,345,079
8,879,523,428
9,909,069,564
99.90
99.79
99.65
99.68
99.90
99.57
99.23
89.45
97.44
99.73
99.76
99.88
99.78
99.67
99.76
89.43
99.80
9,703,995
21,027,161
34,767,318
32,093,388
9,445,023
41,751,739
75,986,608
1,047,345,520
253,257,525
27,013,216
23,398,827
11,952,583
21,476,877
32,591,433
24,023,003
1,049,218,853
19,845,278
0.10
0.21
0.35
0.32
0.10
0.43
0.77
10.55
2.56
0.27
0.24
0.12
0.22
0.33
0.24
10.57
0.20
9,929,055,907 52.07
9,928,613,241 52.06
9,815,749,935 51.47
9,928,937,864 52.07
9,929,007,457
52.07
9,819,607,830 51.49
9,926,513,147 52.05
9,925,149,481 52.05
9,901,898,238 51.92
9,928,930,665 52.07
9,929,240,707 52.07
9,928,678,852 52.06
9,928,904,535 52.07
9,928,887,663 52.06
9,927,368,082 52.06
9,928,742,281 52.06
9,928,914,842 52.07
22,579,886
22,549,669
134,402,361
22,444,096
22,647,584
130,404,838
23,410,104
26,491,483
49,764,237
22,318,409
22,425,383
22,478,974
22,307,009
22,328,752
22,605,039
22,459,665
22,747,741
9,858,281,428
99.29
70,691,207
0.71
9,928,972,635 52.07
22,181,297
9,899,311,128
99.70
30,047,667
0.30
9,929,358,795 52.07
22,178,082
8,960,671,117
9,782,952,816
90.89
98.97
898,368,702
101,914,263
9.11
1.03
9,859,039,819 51.70
9,884,867,079 51.83
92,477,179
66,129,918
repurchased shares
9,397,626,368
95.18
475,964,720
4.82
9,873,591,088 51.77
77,459,228
11
To authorise the Company to
purchase its own ordinary shares
9,785,002,326
99.58
41,076,933
0.42
9,826,079,259 51.53
123,932,000
12
To authorise the Directors to allot
equity securities in relation to
Contingent Convertible Securities
13
To disapply pre-emption rights in
relation to the issue of Contingent
Convertible Securities
14
To approve general meetings (other
than annual general meetings) being
called on a minimum of 14 clear
days’ notice
9,558,599,010
97.49
246,293,361
2.51
9,804,892,371 51.41
142,376,638
8,915,406,730
89.85
1,007,452,174
10.15
9,922,858,904 52.03
25,542,467
8,798,744,951
88.64
1,127,707,377
11.36
9,926,452,328 52.05
23,437,179
1 Includes discretionary votes.
2 Percentage of Issued Share Capital voted.
3 A ‘vote withheld’ is not a vote in law and is not counted in the calculation of the votes ‘For’ and ‘Against’ the resolution.
Interim Management Statements and Interim Results
Interim Management Statements are expected to be issued on or around 5 May 2015 and 2 November 2015. The Interim
Results for the six months to 30 June 2015 are expected to be issued on 3 August 2015.
HSBC HOLDINGS PLC
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Shareholder information (continued)
Shareholder enquiries / Stock symbols / Investor relations / Information on HSBC
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.investorcentre.com/hk
Investor Centre:
www.investorcentre.com/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.
Further copies of this Annual Report and Accounts 2014 may be obtained by writing to the following departments:
For those in Europe, the Middle East
and Africa:
Global Communications
HSBC Holdings plc
8 Canada Square
London E14 5HQ
United Kingdom
For those in Asia-Pacific:
For those in the Americas:
Communications (Asia)
The Hongkong and Shanghai Banking
Corporation Limited
1 Queen’s Road Central
Hong Kong
Global Publishing Services
HSBC – North America
SC1 Level, 452 Fifth Avenue
New York, NY 10018
USA
HSBC HOLDINGS PLC
460
Electronic communications
Shareholders may at any time choose to receive corporate communications in printed form or to receive notifications of
their availability on HSBC’s website. To receive 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 or, if you would like to receive future corporate
communications in printed form, please write or send an email (quoting your shareholder reference number) to the
appropriate Registrars at the address given above. Printed copies will be provided without charge.
Chinese translation
A Chinese translation of this Annual Report and Accounts 2014 is available upon request after 20 March 2015 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.
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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
HSBC
Euronext Paris
Bermuda Stock Exchange
HSB
HSBC.BH
Investor relations
Enquiries relating to HSBC’s strategy or operations may be directed to:
Senior Manager Investor Relations
HSBC Holdings plc
8 Canada Square
London E14 5HQ
United Kingdom
Telephone: 44 (0) 20 7991 3643
Email: investorrelations@hsbc.com
SVP Investor Relations
HSBC North America Holdings Inc.
26525 N Riverwoods Boulevard, Suite 100
Mettawa, Illinois 60045
USA
1 224 880 8008
investor.relations.usa@us.hsbc.com
Head of Investor Relations, Asia
The Hongkong and Shanghai Banking
Corporation Limited
1 Queen’s Road Central
Hong Kong
852 2822 4908
investorrelations@hsbc.com.hk
Where more information about HSBC is available
This Annual Report and Accounts 2014, 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).
HM Treasury has transposed the requirements set out under CRD IV and issued the Capital Requirements Country-by-
Country Reporting Regulations 2013, effective 1 January 2014. The legislation will require HSBC Holdings to publish
additional information, in respect of the year ended 31 December 2014, by 31 December 2015. This information will be
available at the time on HSBC’s website: www.hsbc.com.
HSBC HOLDINGS PLC
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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 HSBC Holdings ordinary
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 37.5%), respectively. 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 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 2013
fourth interim dividend and the first, second and third
interim dividends for 2014 was set out in the Secretary’s
letters to shareholders of 25 March, 5 June, 3 September
and 5 November 2014. 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
the HSBC Holdings ordinary 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 (‘HMRC’) 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.
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
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Shareholder information (continued)
Taxation of shares and dividends
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 in the UK for UK tax
purposes.
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.
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. For US tax purposes, 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 preferential 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
US holder generally will be subject to US tax at
preferential rates.
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.
HSBC HOLDINGS PLC
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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.
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Shareholder information (continued)
Abbreviations
Abbreviations
Abbreviation
Brief description
A
A$
ABCP
ABS1
ACF
ADR
ADS
AED
AIEA
ALCM
ALCO
AML
ARM1
ARS
B
Basel Committee
Basel II1
Basel III1
BBA
BoCom
Bps1
BRRD1
BRL
BSA
BSM
C
C$
CAPM
CCA
CCB1
CCR1
CCyB1
CD
CDO1
CDS1
CET11
CGU
CHF
CMB
CML1
CNY
COSO
CP1
CPB1
CPI
CRD1
CRR1
CRR/CRD IV
CRS
CVA1
D
DANY DPA
Dodd-Frank
DoJ
DPA
DPF
DVA1
Australian dollar
Asset-backed commercial paper
Asset-backed security
Advances to core funding
American Depositary Receipt
American Depositary Share
United Arab Emirates dirham
Average interest-earning assets
Asset, Liability and Capital Management
Asset and Liability Management Committee
Anti-money laundering
Adjustable-rate mortgage
Argentine peso
Basel Committee on Banking Supervision
2006 Basel Capital Accord
Basel Committee’s reforms to strengthen global capital and liquidity rules
British Bankers’ Association
Bank of Communications Co., Limited, one of China’s largest banks
Basis points. One basis point is equal to one-hundredth of a percentage point
Bank Recovery and Resolution Directive (EU)
Brazilian real
Bank Secrecy Act (US)
Balance Sheet Management
Canadian dollar
Capital Asset Pricing Model
Consumer Credit Act (UK)
Capital conservation buffer
Counterparty credit risk
Countercyclical capital buffer
Certificate of deposit
Collateralised debt obligation
Credit default swap
Common equity tier 1
Cash-generating unit
Swiss franc
Commercial Banking, a global business
Consumer and Mortgage Lending (US)
Chinese yuan
2013 Committee of the Sponsors of the Treadway Commission (US)
Commercial paper
Capital planning buffer
Consumer price index
Capital Requirements Directive
Customer risk rating
Capital Requirements Regulation and Directive
Card and Retail Services
Credit valuation adjustment
Two-year deferred prosecution agreement with the New York County District Attorney (US)
Dodd-Frank Wall Street Reform and Consumer Protection Act (US)
Department of Justice (US)
Deferred Prosecution Agreement (US)
Discretionary participation feature of insurance and investment contracts
Debit valuation adjustment
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Abbreviation
Brief description
E
EAD1
EBA
ECB
EDTF
EGP
EL1
EMIR
EU
Euribor
F
Fannie Mae
FCA
FCA Direction
FFVA
First Direct
FPC
FRB
Freddie Mac
FSA
FSB
FSC
FSVC
FTE
FTSE
FuM
G
GAAP
GAC
GB&M
GDP
GENPRU
GLBA
GMB
GPB
GPSP
GRC
Group
G-SIB1
G-SII
Exposure at default
European Banking Authority
European Central Bank
Enhanced Disclosure Task Force
Egyptian pound
Expected loss
European Market Infrastructure Regulation (EU)
European Union
European Interbank Offered Rate
Federal National Mortgage Association (US)
Financial Conduct Authority (UK)
Undertaking originally with the FSA to comply with certain forward-looking obligations with respect to
AML and sanctions requirements
Funding fair value adjustment estimation methodology on derivative contracts
A division of HSBC Bank plc
Financial Policy Committee (UK)
Federal Reserve Board (US)
Federal Home Loan Mortgage Corporation (US)
Financial Services Authority (UK)
Financial Stability Board
Forest Stewardship Council
Financial System Vulnerabilities Committee
Full-time equivalent staff
Financial Times – Stock Exchange index
Funds under management
Generally accepted accounting principles
Group Audit Committee
Global Banking and Markets, a global business
Gross domestic product
PRA’s rules, as set out in the General Prudential Sourcebook
Gramm-Leach-Bliley Act (US)
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
Global systemically important institution
H
Hang Seng Bank
HK$
HNAH
Hong Kong
HSBC
HSBC Bank
HSBC Bank Middle East
HSBC Bank USA
HSBC Canada
HSBC Finance
HSBC France
HSBC Holdings
Hang Seng Bank Limited, one of Hong Kong’s largest banks
Hong Kong dollar
HSBC North America Holdings Inc.
Hong Kong Special Administrative Region of the People’s Republic of China
HSBC Holdings together with its subsidiary undertakings
HSBC Bank plc
HSBC Bank Middle East Limited
HSBC Bank USA, N.A., HSBC’s retail bank in the US
The sub-group, HSBC Bank Canada, HSBC Trust Company Canada, HSBC Mortgage Corporation Canada
and HSBC Securities 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
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Shareholder information (continued)
Abbreviations
Abbreviation
Brief description
HSBC Premier
HSBC Private Bank (Suisse)
HSBC USA
HSI
HSSL
I
IAS
IASB
ICB
IFRSs
Industrial Bank
IRB1
ISDA
K
KPMG
L
LCR
LFRF
LGD1
Libor
LIC
LMU
LTV1
M
Madoff Securities
Mainland China
Markets
Mazarin
MBS
MENA
MME
Monoline1
MSCI
MTN
MXN
N
NII
NSFR
NYSE
O
OCC
OIS
ORMF
OTC1
P
PD1
PEFC
Performance Shares1
Ping An
PPI
PRA
HSBC’s premium personal 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,
consolidated for liquidity purposes
HSBC Securities (USA) Inc.
HSBC Securities Services (Luxembourg)
International Accounting Standards
International Accounting Standards Board
Independent Commission on Banking (UK)
International Financial Reporting Standards
Industrial Bank Co. Limited, a national joint-stock bank in mainland China in which Hang Seng Bank
Limited has a shareholding
Internal ratings-based
International Swaps and Derivatives Association
KPMG Audit Plc and its affiliates
Liquidity coverage ratio
Liquidity and funding risk management framework
Loss given default
London Interbank Offer Rate
Loan impairment charge and other credit risk provision
Loan Management Unit, part of Wholesale Credit and Market Risk
Loan-to-value ratio
Bernard L Madoff Investment Securities LLC
People’s Republic of China excluding Hong Kong
HSBC’s treasury and capital markets services in Global Banking and Markets
Mazarin Funding Limited, an asset-backed CP conduit
US mortgage-backed security
Middle East and North Africa
Mid-market enterprise
Monoline insurance company
Morgan Stanley Capital International index
Medium-term notes
Mexican peso
Net interest income
Net stable funding ratio
New York Stock Exchange
Office of the Comptroller of the Currency (US)
Overnight index swap
Operational risk management framework
Over-the-counter
Probability of default
Programme for the Endorsement of Forest Certification
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
Prudential Regulation Authority (UK)
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Abbreviation
Brief description
PRC
Premier
PVIF
PwC
Q
QIS
R
RBWM
Repo1
Restricted Shares
Reverse repo
Risk Management Meeting
RM
RMB
RMBS
RMs
RNIV
RoRWA
ROTE
RPI
RSPO
RTS
RWA1
S
SE
SEC
SIC
SME
Solitaire
SPE1
SRB1
T
The Hongkong and Shanghai
Banking Corporation
TLAC1
TRL
TSA
TSR
U
UAE
UK
US$
US
US DPA
US run-off portfolio
V
VaR1
Visa
VIU
People’s Republic of China
HSBC Premier, HSBC’s premium personal global banking service
Present value of in-force long-term insurance business and long-term investment contracts with DPF
PricewaterhouseCoopers LLP and its network of firms
Quantitative Impact Study
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
Security purchased under commitments to sell
A meeting of the Group Management Board providing oversight of enterprise-wide management of all
risks
Malaysian ringgit
Renminbi
Residential mortgage-backed securities
Relationship managers
Risk not in Var
Return on average risk-weighted assets
Return on tangible equity
Retail price index (UK)
Roundtable on Sustainable Palm Oil
Regulatory Technical Standards
Risk-weighted assets
Structured entity
Securities and Exchange Commission (US)
Securities investment conduit
Small and medium-sized enterprise
Solitaire Funding Limited, a special purpose entity managed by HSBC
Special purpose entity
Systemic Risk Buffer
The Hongkong and Shanghai Banking Corporation Limited, the founding member of HSBC
Total loss absorbing capacity
Turkish lira
Transition Servicing Agreement – relating to the sale of the CRS business in the US
Total shareholder return
United Arab Emirates
United Kingdom
United States dollar
United States of America
Five-year deferred prosecution agreement with the Department of Justice and others (US)
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
Value at risk
Visa Inc.
Value in use
1 Full definition included in Glossary on page 470.
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Shareholder information (continued)
Glossary
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 government
Alt-A
Arrears
Asset-backed securities
(‘ABS’s)
B
Back-testing
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.
Securities that represent an interest in an underlying pool of referenced assets. The referenced pool can 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 January 2011. The
Bank Recovery and Resolution
Directive (‘BRRD’)
amount payable is based on a percentage of the group’s consolidated liabilities and equity as at 31 December
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.
A European legislative package issued by the European Commission and adopted by EU Member States. This
directive was finalised in July 2014 with the majority of provisions coming into effect 1 January 2015. This
introduces a common EU framework for how authorities should intervene to address banks which are failing or
are likely to fail. The framework includes early intervention and measures designed to prevent failure and in
the event of bank failure for authorities to ensure an orderly resolution.
Basel II
The capital adequacy framework issued by the Basel Committee on Banking Supervision in June 2006 in the form of
Basel III
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 from 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.
Basis point (‘bps’)
One hundredth of a per cent (0.01%), so 100 basis points is 1%. For example, this is used in quoting movements in
interest rates or yields on securities.
C
Capital conservation buffer
(‘CCB’)
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.
Capital planning buffer
A capital buffer, prescribed by the PRA under Basel II, and designed to ensure banks build up capital buffers outside
(‘CPB’)
Capital requirements directive
(‘CRD’)
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.
A capital adequacy legislative package issued by the European Commission and adopted by EU member 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 CRD III amendment, 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 came into force on 1 January 2014.
Capital securities
Capital securities include perpetual subordinated capital securities and contingent convertible capital securities.
Central counterparty (‘CCP’)
An intermediary between a buyer and a seller (generally a clearing house).
Clawback
Remuneration already paid to an individual, which has to be returned to an organisation under certain
circumstances.
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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Term
Collectively assessed
impairment
Definition
Impairment assessment on a collective basis for homogeneous groups of loans that are not considered individually
significant and to cover losses which have been incurred but have not yet been identified on loans subject to
individual assessment.
Commercial paper (‘CP’)
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, comprising buildings or land, intended to generate a profit, either from capital gain or rental
income.
Common equity tier 1 capital
The highest quality form of regulatory capital under Basel III that comprises common shares issued and related
(‘CET1’)
CET 1 ratio
Common reporting
(‘COREP’)
Compliance risk
Comprehensive Capital
Analysis and Review (‘CCAR’)
Conduits
share premium, retained earnings and other reserves excluding the cash flow hedging reserve, less specified
regulatory adjustments.
A Basel III measure, of CET 1 capital expressed as percentage of total risk exposure amount.
Harmonised European reporting framework established in the Capital Requirements Directives, to be mandated by
the European Banking Authority.
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.
CCAR is an annual exercise by the Federal Reserve to ensure that institutions have robust, forward-looking capital
planning processes that account for their unique risks and sufficient capital to continue operations throughout
times of economic and financial stress.
HSBC sponsors and manages multi-seller conduits and ‘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 (‘CNAV’) 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 and Mortgage Lending
In the US, the CML portfolio consists of our Consumer Lending and Mortgage Services businesses, which are in run-
(‘CML’)
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 loan 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 which
point all the remaining outstanding principal and interest have been repaid.
Core tier 1 capital
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.
Core tier 1 capital ratio
A Basel II measure, of core tier 1 capital expressed as a percentage of the total risk-weighted assets.
Countercyclical capital buffer
A capital buffer prescribed by regulators under Basel III which aims to ensure that capital requirements take
(‘CCyB’)
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 (‘CDS’)
A derivative contract whereby a buyer pays a fee to a seller in return for receiving a payment in the event 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).
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 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
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.
Credit spread risk
The risk that movements in credit spreads will affect the value of financial instruments.
Credit valuation adjustment
An adjustment to the valuation of OTC derivative contracts to reflect the creditworthiness of OTC derivative
(‘CVA’)
counterparties.
Customer deposits
Money deposited by account holders. Such funds are recorded as liabilities.
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Shareholder information (continued)
Glossary
Term
Customer remediation
Definition
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 obligor PD.
CVA risk capital charge
A capital charge under CRDIV to cover the risk of mark-to-market losses on expected counterparty risk to
derivatives.
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
Financial 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 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.
Down-shock
Term given to the effect on our future net interest income of an incremental parallel fall in all yield curves
worldwide at the beginning of each quarter during the 12 months from 1 January 2015, assuming no
management response. An equivalent rise in yield curves is referred to as an up-shock.
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
Encumbered assets
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.
Assets on our balance sheet which have been pledged as collateral against an existing liability.
Enhanced Variable Net Asset
A fund that prices its assets on a fair value basis. Consequently, process may change from one day to the next.
Value Fund (‘ENAV’)
Equator Principles
Equity risk
Eurozone
The Equator Principles are used by financial institutions to reduce the potential impact of large projects, which they
finance, on people or on the environment.
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.
The 18 European Union countries using the euro as their common currency. The 18 countries are Austria, Belgium,
Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, Netherlands,
Portugal, Slovakia, Slovenia and Spain.
Expected loss (‘EL’)
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 PD (a percentage) by the EAD (an amount) and LGD
(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 Conduct Authority (‘FCA’)
The Financial Conduct Authority regulates the conduct of financial firms and, for certain firms, prudential standards
in the UK. It has a strategic objective to ensure that the relevant markets function well.
Financial Policy Committee (‘FPC’)
The Financial Policy Committee, at the Bank of England, is charged with a primary objective of identifying,
Financial Reporting
(‘FINREP’)
First lien
monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the
resilience of the UK financial system. The FPC has a secondary objective to support the economic policy of the
UK Government.
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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Term
Forbearance strategies
Funded exposure
Funding risk
G
Gap risk
Definition
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.
A situation where the notional amount of a contract is or has been exchanged.
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.
The risk of financial loss arising from a significant change in market price with no accompanying trading
opportunity.
Global systemically important bank
The FSB established in November 2011 a methodology to identify G-SIBs based on 12 principal indicators.
(‘G-SIB’)
Designation will result in the application of a CET1 buffer between 1% and 3.5%, to be phased in by 1 January
2019.
Government-sponsored enterprises
(‘GSE’s)
The list of G-SIBs is re-assessed through annual re-scoring of banks and a triennial review of the methodology.
National regulators have discretion to introduce higher charges than the minima. In CRD IV this is implemented
via the Global Systemically Important Institutions (G-SII) Buffer.
A group of financial services enterprises created by the US Congress 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 entitled,
Guarantee
H
Haircut
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.
Historical rating transition
The probability of a counterparty with a particular rating moving to a different rating over a defined time horizon.
matrices
Home equity lines of credit (‘HELoC’s)
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.
I
Impaired loans
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
impairment
Insurance Manufacturing
Insurance risk
Exposure to loss is assessed on all individually significant accounts and all other accounts that do not qualify for
collective assessment.
The writing of contracts that fall within the scope of insurance regulation by a Group subsidiary authorised to write
such business. The risks and rewards of writing the insurance business are retained by HSBC (or reinsured in
line with our reinsurance strategy). The balance sheet analysis presented in the Risk Management of Insurance
Operations section shows the aggregated full balance sheets of these entities.
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
The Group’s own assessment of the levels of capital that it needs to hold through an examination of its risk profile
Process
from regulatory and economic capital viewpoints.
Internal Model Method
One of three approaches defined in the Basel Framework to determine exposure values for counterparty credit
risk.
Internal ratings-based approach (‘IRB’) A method of calculating credit risk capital requirements using internal, rather than supervisory, estimates of risk
parameters.
Invested capital
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.
(‘AIRB’)
IRB foundation approach
A method of calculating credit risk capital requirements using internal PD models but with supervisory estimates of
(‘FIRB’)
LGD and conversion factors for the calculation of EAD.
ISDA Master agreement
Standardised contract developed by ISDA used as an umbrella contract under which bilateral derivatives contracts
are entered into.
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.
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Shareholder information (continued)
Glossary
Term
Legal proceedings
Definition
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.
Legal risk
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 due to an adverse dispute environment or the management of 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
Level 3 – valuation technique with
significant unobservable 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.
Financial instruments valued using valuation techniques where one or more significant inputs are unobservable.
Leveraged finance
Funding provided for entities with higher than average indebtedness, which typically arises from sub-investment
Leverage ratio
grade acquisitions or event-driven financing.
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 days. High
(‘LCR’)
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.
Liquidity enhancement
Liquidity enhancement makes funds available if required for reasons other than asset default, e.g. to ensure
timely repayment of maturing commercial paper.
Liquidity risk
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.
Loan modification
An account management action that results in a change to the original terms and conditions of a loan either
Loan re-age
Loans past due
Loan to value ratio (‘LTV’)
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 on which repayments are overdue.
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
Loss severity
M
Malus
default of a counterparty.
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.
An arrangement that permits an organisation to prevent vesting of all or part of the amount of a deferred
remuneration award in relation to risk outcomes or performance.
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)
Issued by corporates across a range of maturities. Under MTN Programmes notes are offered on a regular and
Mortgage-backed securities (‘MBS’s)
continuous basis to investors.
Securities that represent interests in groups of mortgages, which may be on residential or commercial 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
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 pricing mismatches in the current balance sheet, with suitable assumptions for balance sheet growth
in the future, and calculates the change in net interest income that would result from a set of defined interest
rate shocks.
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Term
Net principal exposure
Net stable funding ratio (‘NSFR’)
Non-conforming mortgages
Definition
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.
Non-trading portfolios
Portfolios that comprise positions that primarily arise from the interest rate management of our retail and
Non-trading risk
O
Offset mortgages
commercial banking assets and liabilities, financial investments designated as available for sale and held to
maturity, and exposures arising from our insurance operations.
The market risk arising from non-trading portfolios.
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 outstanding. 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 up to a pre-agreed limit.
Overnight Index Swap (‘OIS’)
A method of valuing collateralised interest rate derivatives which uses a discount curve that reflects the overnight
discounting
Operational risk
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
Personal lending
PRA standard rules
corporate performance conditions.
See ‘Retail loans’.
The method prescribed by the PRA for calculating market risk capital requirements in the absence of VaR model
approval.
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 one year.
Profit participation contribution (‘PIS’)
A federal tax which is imposed monthly on gross revenue earned by legal entities in Brazil. It is a mandatory
employer contribution to an employee savings initiative.
Prudential Regulation Authority
The Prudential Regulation Authority in the UK is responsible for prudential regulation and supervision of banks,
(‘PRA’)
R
Refi rate
building societies, credit unions, insurers and major investment firms.
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 PRA for the consolidated
Group and by local regulators for individual Group companies.
Regulatory matters
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.
Renegotiated loans
Loans for which the contractual payment terms have been changed because of significant concerns about the
borrower’s ability to meet the contractual payments when due.
Repo/reverse repo
(or sale and repurchase agreement)
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 or
Restricted Shares
representatives of the Group will damage HSBC’s reputation, leading, potentially, to a loss of business, fines or
penalties.
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 ordinary shareholders of the parent company divided by average ordinary shareholders’
equity.
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Shareholder information (continued)
Glossary
Term
Risk appetite
Risk capacity
Risk-weighted assets
(‘RWA’s)
Run-off portfolios
S
Sale and repurchase agreement
Second lien
Securitisation
Definition
The aggregate level and types of risk a firm is willing to assume within its risk capacity to achieve its strategic
objectives and business plan.
The maximum level of risk the firm can assume before breaching constraints determined by regulatory capital and
liquidity needs and its obligations, also from a conduct perspective, to depositors, policyholders, other
customers and shareholders.
Calculated by assigning a degree of risk expressed as a percentage (risk weight) to an exposure value in
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.
See repo above.
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 SE 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.
Securitisation swap
An interest rate or cross currency swap with notional linked to the size of the outstanding asset portfolio in a
securitisation. Securitisation swaps are typically executed by securitisation vehicles to hedge interest rate risk
arising from mismatches between the interest rate risk profile of the asset portfolio and that of the securities
issued by the vehicle.
Short sale
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 provided to a
conduit funding vehicle.
Six filters
An internal measure designed to improve capital deployment across the Group. Five of the filters examine 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.
Social security financing contribution
A federal tax imposed monthly on gross revenue earned by legal entities in Brazil. It is a contribution to finance
(‘COFINS’)
the social security system.
Sovereign exposures
Exposures to governments, ministries, departments of governments, embassies, consulates and exposures on
Special Purpose Entity (‘SPE’)
Structured entities
(‘SE’s)
Standardised approach
(‘STD’)
account of cash balances and deposits with central banks.
A corporation, trust or other non-bank entity, established for a narrowly defined purpose, including for 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.
An entity that has been designed so that voting or similar rights are not the dominant factor in deciding who
controls the entity, such as when voting rights relate to administrative tasks only and the relevant activities
are directed by means of contractual arrangements.
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
Structured finance/notes
trading portfolio
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.
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
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.
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Term
Definition
Systemic Risk Buffer (‘SRB’)
Systems risk
T
Tier 1 capital
A capital buffer prescribed in the EU under CRD IV, to address risks in the financial sector as a whole, or one or
more sub-sectors, to be deployed as necessary by each EU member state with a view to mitigate structural
macro-prudential risk. In the UK this was transposed in January 2015 and is to be applied to ring-fenced banks
and building societies over a certain threshold.
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 common equity tier 1 and additional tier 1. Additional tier 1 capital
includes eligible non-common equity capital securities and any related share premium.
Under Basel II, Tier 1 capital comprises of 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 eligible capital securities and any related share premium.
Total Loss Absorbing Capacity
(‘TLAC’)
Trading portfolios
Trading risk
Under Basel II, Tier 2 capital comprises of 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.
A proposal by the FSB and not yet finalised for global systemically important banks to have a sufficient amount of
specific types of liabilities which can be used to absorb losses and recapitalise a bank in resolution. These
proposals are intended to facilitate an orderly resolution that minimises any impact on financial stability,
ensures the continuity of critical functions, and avoids exposing taxpayers to loss.
Positions arising from market-making and warehousing of customer-derived positions.
Market risk arising from trading portfolios.
Troubled debt restructuring
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
Unfunded exposures
Up-shock
Assets on our balance sheet which have not been pledged as collateral against an existing liability.
An exposure where the notional amount of a contract has not been exchanged.
See down-shock.
US government agency and
Securities that are guaranteed by US government agencies such as Ginnie Mae, or by US government sponsored
US government sponsored enterprises
mortgage-related assets
entities including Fannie Mae and Freddie Mac.
V
Value-at-risk
(‘VaR’)
W
Wholesale loans
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.
Write-down/write-off
When a financial asset is written down or written off, a customer balance is partially or fully removed,
respectively, from the balance sheet. Loans (and 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.
Wrong-way risk
An adverse correlation between the counterparty’s PD and the mark-to-market value of the underlying transaction.
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Shareholder information (continued)
Index
Index
A
Abbreviations 466
Accounting
developments (future) 345
estimates and judgements 349, 366, 378, 403, 407, 420
policies (critical) 62
policies 345, 354, 355, 357, 359, 365, 371, 377, 378, 392, 394, 398,
399, 402, 403, 407, 410, 413, 416, 417, 418, 419, 420, 434, 437, 440,
441, 442, 443, 445
Accounts
approval 457
basis of preparation 63, 345
consolidation and related disclosures 348
presentation of information 347
Accruals, deferred income and other liabilities 418
Acquisitions and disposals 41, 241, 244, 260
Actuarial assumptions 363
Adjusted performance 29, 40
Advances to core funding ratio 165, 169, 216
Ageing analysis 136
Annual General Meeting293, 459
Anniversary (150th) 6,8
Anti-money laundering and sanctions 450
Areas of special interest 124
Asia 84
adjusted performance 87
balance sheet data 89, 375
collateral 147
constant currency/reported reconciliation 158
country business highlights 86
customer accounts 82
economic background 84
financial overview 85
impaired loans 137
lending 131, 132, 160
loan impairment charges/allowances 141, 142
mortgage loans 156
operating expenses 88
personal lending 151
principal operations 84
profit 84, 89, 374
profit/(loss) by country 85, 86
renegotiated loans 139, 140
reverse repos 151
risk-weighted assets 240
staff numbers 84
wholesale lending 144, 145
Asset-backed securities 214
Assets
average balance sheet 46
by country 376
by geographical region 78, 82, 89, 94, 99, 104, 375
by global business 63, 82, 89, 94, 99, 104
charged as security 401
constant currency/reported reconciliation 59
customer accounts 61
deferred tax 331, 365, 366, 367, 368
encumbered/unencumbered 171, 220, 472
financial accounting/regulatory reconciliation 249
five years 57
held for sale 349, 352, 416
held in custody and under administration 106
intangible 407, 410, 413
liquid assets of principal operating entities 166
maturity analysis 426
movement in 2014 58
other 416
risk-weighted 31, 62, 63, 78, 239-244, 476
total 30, 57, 59, 76, 82, 89, 94, 99, 104, 337, 341, 427
trading 377
transferred (accounting policy) 402
Associates and joint ventures 403
accounting policy 403
Bank of Communications 404
contingent liabilities 442
critical accounting estimates and judgements 403
interests in 332, 406
reported/adjusted reconciliation 44
share of profit in 30, 55
transactions with other related parties 456
Auditor
arrangements 279
remuneration 364
report 329
B
Back-testing 177, 224, 470
Balance sheet
average 46
consolidated 57, 337
constant currency/reported reconciliation 59
data 57, 76, 82, 89, 94, 99, 104
HSBC Holdings 341
insurance manufacturing subsidiaries 191
linkages 179
movement in 2014 30, 58
regulatory 248
Balance Sheet Management 181, 227
Bancassurance 190
Banking standards 5
Basel 31, 123, 164, 218, 239, 251, 470
Behaviouralisation 181, 218, 226
Board of Directors 270
balance and independence 272
changes 6
committees 15, 276
information and support 272
meetings 271
powers 271
Brand 32
Brazilian labour claims 422
Brazilian social security claims 441
Buffers (capital) 239, 252
Business model 12
C
Capital 239
generation 245, 258
management 257
measurement and allocation 258
movement in regulatory capital in 2014 245
overview 239
ratios 31, 239, 471
regulatory 245, 247
resources 57
risks to capital 257
strength 3, 31
structure 245
Carbon dioxide emissions 38
Cash and cash equivalents 440
accounting policy 440
Cash flow
consolidated statement 338
Hedges 397
HSBC Holdings 342
notes 439
payable by contractual maturities 173
Cautionary statement regarding forward-looking statements 2
Chairman’s Committee 15, 288
Chinese translation 461
Client assets 73
Climate business 37
Collateral and credit enhancements 146, 150, 156, 171, 213
management 220
Commercial Banking 16, 17, 22, 67
Commercial real estate 145
Committees (Board) 276
Communication with shareholders 298, 460
Compliance risk 115, 189
Concentration of exposure 132
Conduct & Values committee 15, 286
Conduits 443
Consent orders 120
Constant currency 41
Consumer Credit Act 422
Contents inside front cover
HSBC HOLDINGS PLC
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Contingent liabilities, contractual commitments and guarantees 441
accounting policy 441
Contractual maturity of financial liabilities 173
Corporate governance 263
codes report 275
Cost efficiency ratio 3, 28, 55, 79, 84, 91, 96, 101
Counterparty credit risk 243
Country business highlights 80, 86, 92
Credit default swap regulatory investigation 454
Credit exposure 130, 149
Credit quality 207
classifications 207
Credit risk 129, 206, 258, 260
in 2014 129
insurance 196
management thereof 206
policies and practices 206
risk-weighted assets 240
Credit valuation adjustment 382
Critical accounting estimates and judgements 349, 366, 378, 403,
407, 420
Cross-border exposures 169
Customer accounts 30, 61, 82, 89, 94, 99, 104
Customers 16, 17, 18
Customer deposit markets 164
Customer lending and deposit (combined) 60
Customers service and satisfaction 17
D
Dealings in HSBC Holdings plc shares 299
Debit valuation adjustment 382
Debt securities in issue 418
accounting policy 418
Defined terms inside front cover
Deposits
combined view 60
core 216
average balances and average rates 46
Derivatives 149, 382, 394, 422
accounting policy 394
Directors 270
appointments and re-election 271
benefits 318
biographies 264
conflicts of interest 274
emoluments 324, 364
executive 270
exit payments 318
fees 318
induction 273
interests 297, 320
loss of office 318
non-executive 270
other directorships 307
pensions 318
performance evaluation 274
relations with shareholders 274
remuneration (executive) 34, 300, 303, 311, 313
remuneration (non-executive) 306
responsibilities (statement of) 328
service contracts 306
training and development 273
variable pay 303, 309, 310
Disclosure philosophy 107
Disposal gains / groups 41
Disposals 440
Dispute risk 122
Diversity and inclusion 19, 291
Dividends 298, 370, 458
income 353
payout ratio 32
per share 3, 45
Donations 38
E
Earnings per share 29, 45, 371
Economic background
Asia 84
Europe 79
Latin America 101
Middle East and North Africa 91
North America 96
Economic contribution 33
Economic plans: HSBC Bank Brazil 454
Employees
compensation and benefits 356
development 19, 291
disabled 291
diversity and inclusion 19, 291
engagement 21, 288
gender balance 20
health, welfare and safety 20, 291
highest paid 325
material risk takers 327
numbers 1, 18, 54, 79, 84, 91, 96, 101
profile of leadership 19
relations 291
remuneration policy 34, 292
reward 291
risk 112
share plans 292
sign-on and severance 327
volunteering 37
whistleblowing 20
Encumbered assets 171, 220, 472
Enhanced Disclosure Task Force 108
Enquiries (from shareholders) 460
Equity
constant currency/reported reconciliation 59
movement in 2014 59
Equity securities 179, 226
Europe 79
adjusted performance 81
balance sheet data 82, 375
collateral 147
constant currency/reported reconciliation 158
country business highlights 80
customer accounts 61
economic background 79
financial overview 79
impaired loans 137
lending 131, 132, 160
loan impairment charges/allowances 141, 142
mortgage loans 156
operating expenses 81
personal lending 151
principal operations 79
profit/(loss) 79, 82, 374
profit/(loss) by country 80
regulatory update 254
profit/(loss) by country 80
renegotiated loans 139, 140
reverse repos 151
risk-weighted assets 240
staff numbers 79
wholesale lending 144, 145
Eurozone 126
Events after the balance sheet date 457
Executive risk 122
F
Fair value
accounting policy 378
adjustments 381
control framework 378
reconciliation 384
valuation bases 383
Fee income (net) 48, 353
Fiduciary risk 115, 200
Filters (six) 12
Financial assets 392
accounting policy 392, 402
designated at fair value 181
not qualifying for de-recognition 402
Financial crime compliance and regulatory compliance 124
Financial guarantee contracts 442
accounting policy 441
Financial instruments 378, 390
accounting policy (fair value) 378
HSBC HOLDINGS PLC
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Shareholder information (continued)
Index
accounting policy (valuation) 354
at fair value 330
credit quality 133, 207
critical accounting estimates and judgements (valuation) 378
net income from 50, 354
not at fair value 390
past due but not impaired 136
Financial investments 60, 399
accounting policy 399
gains less losses from 51
Financial liabilities designated at fair value 181, 379, 417
accounting policy 417
contractual maturities 173
Financial overview 79, 85, 91, 96, 101
Financial risks (insurance) 194
Financial Services Compensation Scheme 442
Financial System Vulnerabilities Committee 15, 282
Financial statements 334
changes to presentation 346
Five-year comparison 45, 57, 157, 159
Fixed pay 39, 40, 303, 311
Footnotes 39, 109, 202, 256, 344
Forbearance 139, 208, 350
Foreclosures 208, 449
Foreign currencies/exchange
accounting policy 348
exposures 435
investigations and litigation 453
rates 57
translation differences 41
Funding fair value adjustments 353
Funding sources (diversity) 168, 215
Funds transfer pricing 219
Funds under management 106
G
Geographical regions 13,78
Global businesses 16, 63
Global Banking and Markets 16, 17, 22, 70, 381
Global functions 13
Global People Survey 19
Global Private Banking 4, 16, 18, 22, 72, 124
Glossary 470
Going concern 290, 348
Goodwill 407
accounting policy 407
critical accounting estimates and judgements 407
impairment 331
Governance 15, 27
Group Audit Committee 15, 277, 290
Group CEO
annual performance 316
biography 264
bonus scorecard 264
interests in shares 320
remuneration 313
remuneration history 319
responsibilities 270
review 7
Group Chairman
biography 264
interest in shares 320
letter 263
responsibilities 270
statement 4
Group Chief Risk Officer
annual performance 317
biography 267
bonus scorecard 323
interests in shares 320
remuneration 311, 313
Group Company Secretary
biography 268
role 272
Group Finance Director
annual performance 317
biography 267
bonus scorecard 323
interests in shares 320
remuneration 311, 313
Group Management Board 15, 276
Group Remuneration Committee 15, 284, 300, 307
Group Risk Committee 15, 280, 290
Growth priorities 66, 68, 71, 74
Guarantees 442
H
Health and safety 291
Held for sale assets 349, 352
accounting policy 416
Highlights 3
HSBC Finance
foreclosures 153
loan modifications 154
HSBC Holdings plc
balance sheet 341
cash flow 174, 221, 342
credit risk 161
deferred tax 370
Directors’ emoluments 364
dividends 370
employee compensation 364
financial assets and liabilities 389
financial instruments not at fair value 392
foreign exchange VaR 183
liquidity and funding 174
market risk 183
maturity analysis of assets and liabilities 432
net income from financial instruments 354
operating model 13
related parties 457
repricing gap maturities 185
share capital 439
statement of changes in equity 343
structural foreign exchange exposures 435
subordinated liabilities 425
Human rights 38
I
Impairment
accounting policy 350
allowances 142, 159
assessment 212
available-for-sale financial assets 352
charges 29, 53, 141, 159
constant currency/reported reconciliation 158
critical accounting estimates and judgements 349
goodwill 407
impaired loans 137, 329
methodologies 213
movement by industry and geographical region 142
reported/adjusted reconciliation 44
Income statement (consolidated) 45, 335
Information on HSBC (availability thereof) 461
Insurance 190
accounting policy 354, 355
asset and liability matching 191
balance sheet of manufacturing subsidiaries 193
bancassurance model 190
claims incurred (net) and movements in liabilities to policyholders 53,
355
in 2014 191
net earned premiums 51
premium income 354
PVIF business 52
reinsurers’ share of liabilities 197
risk 116, 117, 194, 198
Intangible assets 410
accounting policy 410
movements 413
Interest income/expense (net) 46, 353
accounting policy 354
average balance sheet 46
sensitivities 181, 184
Interest rate derivatives 422
Interim management statements 459
Interim results 459
Internal control 288
Internet crime 123
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IFRSs and Hong Kong Financial Reporting Standards comparison 345
Investment criteria 12
Investment properties 416
Investor relations 461
J
Joint ventures 403, 406, 456
K
Key management personnel 455
Key performance indicators 29, 30, 31, 32
L
Latin America 101
adjusted performance 102
balance sheet data 104, 375
collateral 147
constant currency/reported reconciliation 158
country business highlights 102
customer accounts 61
economic background 101
financial overview 101
impaired loans 137
lending 131, 132, 160
loan impairment charges/allowances 141, 142
mortgage loans 156
operating expenses 103
personal lending 151
principal operations 101
profit 101, 104, 374
profit/(loss) by country 102
renegotiated loans 139, 140
reverse repos 151
risk-weighted assets 240
staff numbers 101
wholesale lending 144, 145
Lease commitments 442
accounting policy 442
Legal
proceedings and regulatory matters 330, 446
risk 229
Lending – combined view 60
Leveraged finance transactions 383, 474
Leverage ratio 251, 255, 261
Liabilities
average balance sheet 46
by geographical region 375
constant currency/reported reconciliation 59
deferred tax 367
financial accounting/regulatory reconciliations 249
five years 57
maturity analysis 426
movement in 2014 58
of disposal groups 418
other 418
retirement benefits 359
subordinated 423, 476
total 57, 59, 337, 341, 427
trading 417
under insurance contracts 28, 419
Libor, Euribor and other rates investigations 452
Liquidity and funding 163, 215
assets 166
behaviouralisation 218
description 164
funds transfer pricing 219
in 2014 164
insurance 197
management of risk 114, 165
net contractual cash flows 166
policies and procedures 215
primary sources of funding 168
regulation 164
Loans and advances
accounting policy 349
by country 160
by geographical region 131
by industry over 5 years 157
collateral 146, 150, 156, 171, 213
concentration of exposure 132
credit quality of 133
delinquency in the US 153
impairment 137, 141
past due but not impaired 136
renegotiated 138
to banks 291
to customers 30, 132
write-off 212
Loans Management Unit 213
M
Madoff 447
Market capitalisation 1, 33
Market risk 114, 175, 221, 259
balance sheet linkages 179
description 176
governance 222
in 2014 176
insurance 194
measures 223
risk-weighting assets 244
sensitivity analysis 181
Material risk takers 300, 327
Maturity analysis of assets and liabilities 426
Maximum exposure to credit risk 130
Middle East and North Africa 91
adjusted performance 92
balance sheet data 94, 375
collateral 147
constant currency/reported reconciliation 158
country business highlights 92
customer accounts 61
economic background 91
financial overview 91
impaired loans 137
lending 131, 132, 160
loan impairment charges/allowances 141, 142
mortgage loans 156
operating expenses 93
personal lending 151
principal operations 91
profit 91, 94, 374
profit/(loss) by country 92
renegotiated loans 139, 140
risk-weighted assets 240
staff numbers 91
wholesale lending 144, 145
Model risk 25, 122, 223
Monitor 27
Mortgages
lending 152
mortgage-backed securities 214, 474
US mortgage-related investigations 449
N
Nomination Committee 15, 284
Non-controlling interests 436
Non-GAAP measures 40
Non-interest income 353
Non-trading portfolios 178, 221, 225
North America 96
adjusted performance 97
balance sheet data 99, 375
collateral 147
constant currency/reported reconciliation 158
country business highlights 97
customer accounts 61
delinquency trends in the US 153
economic background 96
financial overview 96
impaired loans 137
lending 131, 132, 160
loan impairment charges/allowances 141, 142
mortgage lending 156
operating expenses 98
personal lending 151
principal operations 96
profit 96, 99, 374
profit/(loss) by country 97
renegotiated loans 139, 140
HSBC HOLDINGS PLC
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Shareholder information (continued)
Index
reverse repos 151
risk-weighted assets 240
staff numbers 96
wholesale lending 144
O
Offsetting 130, 434
accounting policy 434
Oil and gas prices 125
Operating expenses 30, 42, 54
by geographical region 81, 88, 93, 96, 103
by global business 65, 68, 71, 73, 75
reported/adjusted reconciliation 44
Operating income 52, 353, 375, 376
Operating profit 356
Operational risk 115, 186, 259
in 2014 187
losses/incidents 188
Ordinary shares 294
Organisation 13
Organisational structure chart 462
Other 75
Outlook 6
P
Paper use 37
Payment protection insurance 421
Pension plans 200, 237
accounting policy 359
defined benefit plans 183, 361
for directors 318
risk 116, 200
People risk 122
Performance 1, 5, 64
adjusted 29, 40, 65, 67, 70, 73, 75, 87, 92, 97, 102
reported 29, 64, 67, 70, 73, 75
Perpetual subordinated capital securities 370
Personal lending 151
Philanthropic and Community Investment Oversight Committee 15, 288
Pillar I, II and III 253, 258, 259, 260, 326
Ping An 77
Post-employment benefit plans 359, 456
accounting policy 359
Precious metals fix-related litigation and investigations 454
Preference shares 294, 437
Preferred securities 57
Prepayment, accrued income and other assets 416
accounting policy 416
Products and services 16, 371
Profit before tax 3, 28, 63, 76
by country 80, 85, 86, 92, 97, 102
by geographical region 44, 78, 79, 82, 84, 85, 89, 94, 96, 99, 101, 102,
104
by global business 44, 64, 65, 67, 70, 72, 73, 75, 76, 82, 89, 94, 99, 104
consolidated 45
reported/adjusted reconciliation 44
Profit for the year 28, 335, 372
Property plant and equipment 107, 416
accounting policy 416
Provisions 420
accounting policy 420
critical accounting estimates and judgements 420
Purpose 1
PVIF 52, 411
R
Ratios
advances to core funding 165, 169, 216
capital 239
capital strength 3, 31
common equity tier 1 31
core tier 1 (CET 1) 471
cost efficiency 3, 28, 55, 79, 84, 91, 96, 101, 104
customer advances to deposits 30
dividend payout 32
dividends per share 3
earnings per share 29, 45, 371
leverage 31, 251, 255, 261
return on average ordinary shareholders’ equity 3
return on average total assets 30
return on risk-weighted assets 32, 79, 84, 91, 96, 101
return on tangible equity 29
stressed coverage 165, 216
Reconciliation of reported and adjusted items 44
Reconciliation of RoRWA 62
Recovery and resolution 14, 255
Regulatory
balance sheet 248
capital 239, 258
capital buffers 252
CRD IV 470
developments 252
landscape 5
reconciliation to financial accounting 248
review of consumer enhancement services products 455
risk 119, 120
stress tests 125, 254, 257
structured banking reform 14, 255
systemically important banks 15, 252, 473
UK update 254
Related party transactions 455
Remuneration
adjustment, malus & clawback 306
benefits 311
bonus scorecards 323
business context 301
committee 284, 300
committee members 284, 307
Directors 73
exit factors 318
fixed pay 39, 40, 303, 311
GPSP 314
in 2014 318
in 2015/16 302, 322
letter 300
Pillar 3 remuneration policy 326
policy 35, 303, 304, 305, 306
report 307
reward strategy 34, 300
scenarios 313
single figure 311
variable pay 34, 309
Renegotiated loans 138, 154, 208
Renewable energy 37
Representations and warranties 162
Repricing gap 185
Repurchase and reverse repurchase agreements 48, 151, 219, 398
accounting policy 398
Reputational risk 115, 199
Resolution strategy 14
Retail Banking and Wealth Management 16, 22, 64
principal RBWM business 63
Revenue 29, 42
by country 81, 87, 92, 97, 102
by geographical region 81, 87, 92, 97, 102
by global business 65, 67, 70, 73, 75
Ring-fencing (UK) 14
Risk 111
appetite 25, 27, 205
banking risks 114
committee 16, 276, 280
compliance 115, 189
conduct of business 121
contingent liquidity 167
counterparty 150, 243, 261, 471
credit 114, 129, 196, 206
credit spread 178, 226
cross-currency 221
data management 123
de-peg 225
dispute 122
economic outlook 118
eurozone 126
execution 122
factors 113
fiduciary 115, 200
financial (insurance) 116, 194
HSBC HOLDINGS PLC
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foreign exchange 183
gap risk 225
geopolitical 118
governance 111, 204
in 2014 21
information security 123
insurance operations 116, 117, 190, 198
interest rate 181, 226
internet crime 123
investigations 120
legal 229
liquidity and funding 114, 197
management 24, 112, 117, 215
market 114
model 25, 122, 223
oil and gas prices 125
operational 115
overview 21
people 122
pension 116, 200
policies and practices 204
profile 111, 117
refinance 214
regulatory 119, 120
reputational 115, 199
Russia 126
security and fraud 187, 230
stress testing 117
sustainability 116, 201
systems 231
third party 124
top and emerging 22, 111, 118
vendor 190, 231
Risk-weighted assets 31, 62, 260, 476
adjusted reconciliation 62
by geographical region 78
by global businesses 63
developments 254
five year trend 57
movement in 2014 239-244
run-off portfolios 32
targets 257
RoRWA (reconciliation of measures) 62, 79, 84
Russia 126
S
Sale and repurchase agreements 398, 476
accounting policy 398
Securities litigation 446
Securitisation
exposures 161, 214, 445
litigation 449
Security and fraud risk 187, 230
Segmental analysis 371
accounting policy 371
Senior management
biographies 268
emoluments 324
Sensitivities to non-economic assumptions (insurance) 198
Share-based payments 357
accounting policy 357
Share capital 294, 437
accounting policy 437
five year trend 57
in 2014 296
notifiable interests 298
rights and obligations 294
treasury shares 297
Share information 33
Share options 321, 359
Share plans
for directors 297, 320
for employees 292, 296
Shareholder (communications with) 460
numbers 1
profile 458
Significant items (other) 42, 47, 49, 51, 52, 54
Sources of funds 168
Standards (Global) 26, 27
Statement of changes in equity 339
Statement of comprehensive income 336
Stock symbols 461
Strategy 1, 11, 26, 64, 67, 70, 72
Streamlining 27
Stress testing 117, 125, 216, 224
Stressed coverage ratios 165, 216
Structural banking reform 14, 255
Structural foreign exchange exposure 181, 226, 435
Structured entities 415, 443, 476
accounting policy 443
Subordinated loan capital 57
Subsidiaries 413, 440
accounting policy 413
Sustainable savings 32
Sustainability 9, 36
committee 286
risk 116, 201
Systemically important banks 15, 255, 473
Systems risk 231, 477
T
Targets 32
Tax 365
accounting policy 365
collected for government 33
critical accounting estimates and judgements 366
deferred tax 331, 365, 366, 367, 368
expense 56
of shares and dividends 463
paid 33
paid by region and country 106
reconciliation 366
tax and broker-dealer investigations 451
Three lines of defence 112, 186
Tier 1 capital 258, 425, 438, 477
Total loss absorbing capacity 256
Total shareholder return 33, 319
Trading assets 377
accounting policy 377
Trading income (net) 49, 353
Trading liabilities 417
accounting policy 417
Trading portfolios 176, 221, 225
U
Unobservable inputs 386
V
Value at risk 176, 178, 223
Value creation 9
Values (HSBC) 10, 19
Vendor risk management 231
Volunteering 37
W
Whistleblowing 20, 287
Wholesale funding 169, 218
Wholesale lending 144
HSBC HOLDINGS PLC
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ADR 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
Web: www.bnymellon.com/shareowner
Paying Agent (France)
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
Web: www.hsbc.fr
STOCKBROKERS
Goldman Sachs International
Peterborough Court
133 Fleet Street
London EC4A 2BB
United Kingdom
Credit Suisse Securities (Europe) Limited
1 Cabot Square
London E14 4QT
United Kingdom
HSBC Bank plc
8 Canada Square
London E14 5HQ
United Kingdom
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
Web: www.computershare.com/investor/bm
HSBC HOLDINGS PLC
484
Strategic Report
t
1 Overview
2 Cautionary statement regarding forward-looking statements
3 Highlights
4 Group Chairman’s Statement
7 Group Chief Executive’s Review
9 Strategic objectives
12 Business model
26 Strategic priorities
28 Outcomes
Report of the Directors
Financial Review
40 Financial summary
63 Global businesses
78 Geographical regions
106 Other information
111 Risk
238 Capital
Corporate Governance
263 Corporate Governance Report
264 Biographies of Directors and senior management
270 Board of Directors
276 Board committees
288 Internal control
290 Going concern
291 Employees
Directors’ Remuneration Report
300 Directors’ Remuneration Report
Financial Statements
328 Statement of Directors’ Responsibilities
329 Independent Auditor’s Report
334 Financial Statements
345 Notes on the Financial Statements
Shareholder Information
458 Shareholder information
466 Abbreviations
470 Glossary
478 Index
This document comprises the Annual Report and Accounts 2014
for HSBC Holdings plc and its subsidiaries. It contains the
Strategic Report, the Report of the Directors, the Directors’
Remuneration Report and the Financial Statements, together
with the Independent Auditor’s Report thereon, as required by
the UK Companies Act 2006 (Strategic Report and Directors’
Report) Regulations 2013. The Strategic Report on pages 1
to 39, the Report of the Directors on pages 40 to 299 and the
Directors’ Remuneration Report on pages 300 to 327 have each
been drawn up in accordance with the requirements of English
law, and liability in respect thereof is also governed by English
law.
Additional information, including commentary on 2013
compared with 2012, may be found in the Form 20-F filed
with the US Securities and Exchange Commission (‘SEC’) 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’
refer to HSBC Holdings together with its subsidiaries. Within this
document the Hong Kong Special Administrative Region of the
People’s Republic of China is referred to as ‘Hong Kong’. When
used in the terms ‘shareholders’ equity’ and ‘total shareholders’
equity’, ‘shareholders’ means holders of HSBC Holdings ordinary
shares and those preference shares and capital securities issued
by HSBC Holdings classified as equity. The abbreviations ‘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 could differ from IFRSs as issued by the IASB
if, at any point in time, new or amended IFRSs were not to be
endorsed by the EU. At 31 December 2014, there were no
unendorsed standards effective for the year ended 31
December 2014 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 2014 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 ‘adjusted’ is made in tables or
commentaries, the comparative information has been
expressed at constant currency (see page 40), the impact of fair
value movements in respect of credit spread charges on HSBC’s
own debt has been eliminated and the effects of other
significant items have been adjusted as reconciled on page 44.
Adjusted return on risk-weighted assets is defined and
reconciled on page 62.
The FSC® logo identifies products which contain wood
from well-managed forests certified in accordance with
the rules of the Forest Stewardship Council®.
Photography
Cover: (top) HSBC Archives; (bottom) Matthew Mawson
Group Chairman and Group Chief Executive by
George Brooks
© Copyright HSBC Holdings plc 2015
All rights reserved
No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording,
or otherwise, without the prior written permission of
HSBC Holdings plc.
Published by Group Finance, HSBC Holdings plc, London
Cover designed by Black Sun Plc, London; text pages
designed by Black Sun Plc and Group Finance, HSBC
Holdings plc, London
Printed by Park Communications Limited, London, on
Revive 100 White Offset paper using vegetable oil-based
inks. Made in the UK (cover board) and Austria (text
pages), the paper comprises 100% de-inked post-
consumer waste. Pulps used are totally chlorine-free.
Stock number 99383-8
HSBC: then and now
It is 150 years since HSBC was founded in
Hong Kong to finance trade between Asia
and Europe. Much has changed since
then, as our cover photos demonstrate.
The top photo shows Hong Kong
harbour, with the HSBC office (extreme
left) a few years after it was established
in 1865. The bottom image shows the
harbour today, with the HSBC building
sixth from left (partially hidden).
Hong Kong has been transformed both
physically and economically, from
trading outpost to international financial
centre. HSBC has mirrored Hong Kong’s
rise to global prominence, growing from
a small regional trading bank into one of
the world’s largest banking and financial
services organisations today.
HSBC’s Hong Kong office is still at
1 Queen’s Road Central, as it was in
1865. The current HSBC building is the
fourth to occupy the site, but the values
on which the bank was founded remain
the same. HSBC still aims to be where
the growth is, connecting customers to
opportunities, enabling businesses to
thrive and economies to prosper, and
helping people to fulfil their hopes and
realise their ambitions.
We are proud to have served our
customers with distinction for 150 years.
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HSBC Holdings plc
8 Canada Square
London E14 5HQ
United Kingdom
Telephone: 44 020 7991 8888
www.hsbc.com