HSBC Holdings plc
Annual Report and Accounts 2016
Connecting customers
to opportunities
Our purpose is to be where the growth is, enabling
businesses to thrive and economies to prosper, and
ultimately helping people to fulfil their hopes and
realise their ambitions.
As a reminder
Reporting currency
We use US dollars.
Adjusted measures
We supplement our IFRS
figures with adjusted
measures used by
management internally.
These measures are
highlighted with the
following symbol:
Further explanation may be
found on page 30.
Unless stated otherwise,
risk-weighted assets
and capital are calculated
and presented on a
transitional CRD IV
basis as implemented
by the Prudential
Regulation Authority.
Our photo
competition
winners
In 2016, we ran a Group-
wide photo competition
which attracted over 6,200
submissions from 1,100
employees. The joint overall
winning photos are featured
in this report. The image
on the inside front cover
shows a rice farmer at
harvest time in north-east
Vietnam, and the photo
on the inside back cover
was taken at sunrise at
Situ (Lake) Patenggang,
West Java, Indonesia.
Cover image
The Hong Kong-Zhuhai-Macau
Bridge is one of the most ambitious
infrastructure projects in the Pearl
River Delta. It will link three key
cities, cutting transport costs and
travelling times, and boosting
economic development. HSBC has
extended a HK$700m receivables
finance facility to one of the
companies building the bridge.
Receivables finance is an area
where HSBC has particular
expertise, and this facility is
the largest it has provided for
infrastructure in the region.
Contents
Strategic Report
An overview of how we are structured,
what we do and where, our strategic
actions, the principal risks we face, and
high-level performance information. The
section is introduced by both the Group
Chairman and the Group Chief Executive,
and also explains the role of the Board.
This Strategic Report was approved
by the Board on 21 February 2017.
Highlights
Group Chairman’s Statement
Group Chief Executive’s Review
2
4
7
10 Our strategy
12 Strategic actions
14 Financial overview
18 Global businesses
20 Regions
22 How we do business
25 Tax
26 Risk overview
28 Remuneration
Douglas Flint, Group Chairman
Financial Review
Detailed reporting of our financial
performance, at Group level as well
as within our matrix structure. It also
includes our full risk report and
reporting on how we manage capital.
30 Financial summary
44
Global businesses and
geographical regions
64 Risk
127 Capital
Corporate Governance
Details of our Board of Directors
and senior management, and our
approach to corporate governance
and remuneration.
132 Corporate Governance Report
133 Biographies of Directors
and senior management
138 Board of Directors
140 Board committees
145 Internal control
146 Going concern and viability
147 Share capital and other disclosures
150 Employees
153 Directors’ Remuneration Report
173 Directors’ Responsibility Statement
Financial Statements
Our financial statements and related
notes and reports.
174 Report of the Independent
Auditors
183 Financial Statements
194 Notes on the Financial Statements
274 Shareholder information
279 Forward-looking statements
and Certain defined terms
280 Abbreviations
Other Information
Important information for our
shareholders, including contact
information. Like any industry
and company, we have our set
of abbreviations and terminology.
Accordingly, we provide an
explanation of the abbreviations
used. A glossary of key terms
is available online at
www.hsbc.com/investor-relations.
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Strategic ReportFinancial Review Corporate Governance Financial Statements Shareholder Information HSBC Holdings plc Annual Report and Accounts 2016
Highlights
We are one of the most international banking
and financial services organisations in the world.
For year ended 31 Dec 2016
Reported profit before tax
($bn)
Adjusted profit before tax
($bn)
Reported revenue
($bn)
2016
2015
2014
(2015: $18.9bn)
$7.1bn
At 31 Dec 2016
Risk-weighted assets
($bn)
2016
2015
2014
(2015: $1,103bn)
$857bn
7.1
18.9
18.7
2016
2015
2014
19.3
19.5
21.6
2016
2015
2014
(2015: $19.5bn)
$19.3bn
(2015: $59.8bn)
$48.0bn
Common equity tier 1 ratio
(%)
Total assets
($bn)
857
1,103
1,220
2016
2015
2014
(2015: 11.9%)
13.6%
13.6
11.9
10.9
2016
2015
2014
(2015: $2,410bn)
$2,375bn
48.0
59.8
61.2
2,375
2,410
2,634
Our operating model
consists of four global
businesses, a Corporate
Centre and five geographical
regions, supported by 11
global functions.
During the year, we changed
our reportable segments from
regions to global businesses.
We also moved certain business
portfolios and functions into the
newly created Corporate Centre.
For further details,
see page 19.
Performance highlights
for 2016
Strategy execution
– Following our sale of
operations in Brazil,
we completed a $2.5bn
share buy-back.
– We further reduced our
risk-weighted assets (‘RWAs’)
as a result of our sale of
operations in Brazil and
other management actions.
– Investment in costs to achieve
of $4.0bn to date has
generated annual run rate
savings of $3.7bn.
– We now expect to deliver
annualised cost savings of
around $6bn by the end of
2017, around $1bn above the
top end of our original target,
while continuing to invest in
regulatory programmes and
compliance. We will invest
an equivalent total of around
$6bn over the same timeframe.
– We increased market share in
a number of key markets and
international product areas,
including trade finance in
Hong Kong and Singapore.
Financial performance
– Reported profit before
tax of $7.1bn was $11.8bn
lower than in 2015, and
was adversely impacted
by significant items of $12.2bn.
These included a $3.2bn write-
off of goodwill in our Global
Private Banking (‘GPB’)
business in Europe, costs to
achieve of $3.1bn, adverse fair
value movements of $1.8bn
arising from changes in credit
spreads on our own debt
designated at fair value, and
the impact of our sale of
operations in Brazil.
– Reported revenue of $48.0bn
was down $11.8bn. Loan
impairment charges and other
credit risk provisions (‘LICs’)
fell by $0.3bn and reported
operating expenses rose
by $40m.
– Adjusted profit before tax
of $19.3bn, down $0.2bn,
reflected lower revenue
and higher LICs, partly offset
by a reduction in operating
expenses. In 2016, we
achieved positive adjusted
jaws of 1.2%.
– Adjusted revenue fell by
$1.3bn or 2% despite
improved performance in
Commercial Banking (‘CMB’)
and Global Banking and
Markets (‘GB&M’). Retail
Banking and Wealth
Management (‘RBWM’)
and GPB were impacted
by challenging
market conditions.
– Adjusted operating expenses
fell by $1.2bn or 4%, reflecting
our cost-saving initiatives and
focus on cost management.
We continued to invest in
regulatory programmes
and compliance.
Capital
– Our capital position further
strengthened during the year,
with a common equity tier 1
(‘CET1’) ratio at 31 December
2016 of 13.6%, up from 11.9%
at 31 December 2015, mainly
due to RWA reduction
initiatives and the change
in the regulatory treatment
of our holding in Bank of
Communications Co.,
Limited (‘BoCom’).
2
GroupStrategic ReportHSBC Holdings plc Annual Report and Accounts 2016 0.8%
Return on equity
1.2%
Adjusted jaws
(see page 17)
$0.51
Dividends per ordinary
share in respect
of 2016
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Retail Banking and
Wealth Management
(‘RBWM’)
Commercial
Banking
(‘CMB’)
Global Banking
and Markets
(‘GB&M’)
Global Private
Banking
(‘GPB’)
We help millions of people
across the world to manage
their finances, buy their
homes, and save and
invest for the future.
Our Insurance and Asset
Management businesses
support all our global
businesses in meeting
their customers’ needs.
We support approximately
two million business
customers in 54 countries
with banking products
and services to help
them operate and grow.
Our customers range
from small enterprises
focused primarily on their
domestic markets, through
to large companies
operating globally.
We provide financial
services and products to
companies, governments
and institutions. Our
comprehensive range
of products and solutions,
across capital financing,
advisory and transaction
banking services, can
be combined and
customised to meet
clients’ specific objectives.
Adjusted profit before tax
We help high net worth
individuals and their
families to grow, manage
and preserve their wealth.
$5.3bn
$6.1bn
$5.6bn
$0.3bn
Risk-weighted assets
$115.1bn $275.9bn $300.4bn $15.3bn
Reported profit/(loss) before tax
($bn)
Adjusted profit before tax
($bn)
Risk-weighted assets*
($bn)
Europe
Asia
Middle East and
North Africa
North America
Latin America
(6.8)
13.8
1.5
0.2
(1.6)
1.6
14.2
1.6
1.3
0.6
1
2
3
4
5
* RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.
298.4
334.0
59.1
150.7
34.3
3
Our global businessesGeographical regionsKey highlightsFinancial Review Corporate Governance Financial Statements Shareholder Information HSBC Holdings plc Annual Report and Accounts 2016
Strategic Report
Group Chairman’s
Statement
The Group has improved its productivity, embraced
technological change and continues to reinforce its
standards of business conduct. It has a strong capital
position and is gaining market share in important areas.
The Group’s reported profit before tax amounted
to $7.1bn, some 62% lower than the prior year.
This decline principally reflected the impact of
significant items, most of which had no impact
on capital, even though they were material in
accounting terms. On the adjusted basis used to
measure management and business performance,
profit before tax was $19.3bn, broadly in line with
the $19.5bn achieved in the prior year. This
outcome was largely driven by improved cost
performance as prior year initiatives gained
traction and substantially offset lower revenues,
while loan impairment charges were marginally
higher. Earnings per share of $0.07 compared
with $0.65 in 2015.
The Group’s core capital position improved
materially. A change to the regulatory treatment
of our associate in mainland China, continued
run-off of legacy assets, planned reduction in
certain segments of our trading books and
inadequately remunerated assets, together with
capital released from business disposals, notably
our operations in Brazil, drove this improvement.
This created the capacity to return $2.5bn of capital
by way of a share buy-back, which was completed
in December. We met our objective of maintaining
the annual dividend in respect of the year at $0.51,
as indicated at the interim stage. This was delivered
through the declaration today of a fourth interim
dividend of $0.21. Reflecting on the strength
of the Group’s capital position, the Board also
approved a further share buy-back of up to $1bn,
which is expected to commence shortly.
Strategic actions are now bearing fruit
In reviewing performance in 2016, the Board
noted with approval the traction now evidenced
from management actions to reshape the Group
and address the challenges brought about by
the continuing low interest rate environment.
Greater focus on the trade and investment
corridors where HSBC has strong market
positioning generated solid market share gains
and broader product penetration, particularly
in servicing outbound China investment flows.
This is recognised in the leading industry awards
highlighted in Stuart Gulliver’s review.
Douglas Flint Group Chairman
2016 will be long remembered for its significant and
largely unexpected economic and political events.
These foreshadowed changes to the established
geopolitical and economic relationships that have
defined interactions within developed economies
and between them and the rest of the world. The
uncertainties created by such changes temporarily
influenced investment activity and contributed
to volatile financial market conditions. Against
this background, HSBC’s performance in 2016
was broadly satisfactory. Encouragingly, operating
performance in the second half of the year was much
stronger than expected and compared with the prior
year, as businesses and financial markets responded
more optimistically than predicted to these events.
‘Greater focus on the trade and investment
corridors where HSBC has strong market
positioning generated solid market share gains
and broader product penetration’
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HSBC Holdings plc Annual Report and Accounts 2016 Group Chairman’s Statement
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Significant investment in technology and process
redesign is now not only delivering greater cost
efficiency but also is poised to markedly enhance
our ability to detect and prevent financial crime.
In addition, 2017 will see the progressive launch
of applications that will materially improve our
customers’ digital experience, enhance their
online security and bring greater personalisation
of product offerings.
While there is still a long way to go, it was
encouraging to see the significant improvement
in performance across all business units in
Mexico following the substantial repositioning
of the Group’s operations there. This contributed
to the Group’s success in replacing substantially
all of the revenues given up through continuing
run-off of legacy portfolios, risk mitigation in
areas exposed to higher threat of financial crime
and reduction in trading books.
Furthermore, HSBC is safer today from the threat
of financial crime because of the investments
we have been making in our Global Standards
programme. The Board remains fully committed
to our work in this area in 2017 and beyond.
Regulatory matters
It was extremely disappointing that the regulatory
community was unable to achieve its targeted
completion of the Basel III framework in January
2017 on the consensual basis expected. It is now
almost 10 years since the commencement of the
global financial crisis and it is time to draw a line
under further regulatory changes, particularly since
there is no doubt that our industry is more strongly
capitalised, better governed and more risk aware
than it was a decade ago. Finalisation of the
structure and calibration of the capital framework
is crucial to give banks certainty over prospective
capital allocations in support of lending and market
activities. This is particularly important at this time
when public policy is focusing on encouraging
greater support for longer-dated assets, including
infrastructure, and seeking to build out the capital
markets of Europe and emerging markets. It is
hugely important that regulators and policy makers
now move as quickly as possible to finalise the
capital framework in line with their stated
commitment to deliver that framework without
a significant, broad-based increase in capital
requirements. Equally important is the avoidance
of fragmentation in the global regulatory
architecture as the new US administration
reconsiders its participation in international
regulatory forums. The best outcome would be
early global agreement on unresolved issues,
followed by an extended period of regulatory
stability to allow familiarity and experience to be
gained from what has been put in place.
We made further progress in 2016 on completing
the resolution planning required of us as a global
systemically important bank (‘G-SIB’). This involved
removing or mitigating residual constraints on the
clarity of the Group’s core college of regulators’
approach to winding down the Group, should
this ever be necessary. While clearly we do
not envisage such circumstances as other
than extremely remote, completion of a
comprehensive resolution framework is a
necessary pillar supporting HSBC’s ability to
continue to operate as one of the world’s G-SIBs.
Indeed, our strategy is built around maintaining
the scale and the reach of our international
network, which in 2016 again demonstrated its
resilience and competitive advantages.
Tangible benefits accrue to our shareholders
from the detailed work done with our regulators
to demonstrate the strength of our capital position
and the effectiveness of our resolution planning.
Beyond supporting the maintenance of our
dividend, in 2016 management’s efforts created
the capacity to return capital to shareholders
by way of a share buy-back and demonstrated
justification for a reduction in the additional
capital buffer applied to HSBC as a G-SIB.
UK referendum on EU membership
Not a great deal has changed since we reported
at the interim stage, given that the UK has still to
trigger its formal exit notice and so no negotiations
have taken place. We welcomed, however, the
additional clarity given to the Government’s
position in the recent speech by the Prime Minister.
The scale of the challenge of negotiating across the
entire economic landscape, as well as addressing
the legislative and other public policy adjustments
that will be required, has become clearer. We
believe there is now, as a consequence, a widely
shared recognition that an implementation phase
between the current position and the one that
is ultimately negotiated will be necessary; we
strongly endorse this view.
Since the referendum we have focused on
advising clients on the implications of leaving
the EU for their businesses. We have also been
responding to UK Government outreach seeking
guidance on which elements of the current
EU-based legal and regulatory arrangements
it should focus on to preserve the essential role
that financial markets based in the UK play in
supporting European trade and investment activity.
For our own part, we have broadly all the licences
and infrastructure needed to continue to support
our clients once the UK leaves the EU. This largely
derives from our position in France where we
are the sixth largest bank with a full range of
capabilities. Current contingency planning suggests
we may need to relocate some 1,000 roles from
London to Paris progressively over the next two
years, depending on how negotiations develop.
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Financial Review Corporate Governance Financial Statements Shareholder Information HSBC Holdings plc Annual Report and Accounts 2016
Strategic Report | Group Chairman’s Statement
Board changes
We welcomed Jackson Tai to the Board on
12 September last year. Jack brings a rare
combination of hands-on banking expertise,
top level governance experience and a deep
knowledge of Asia and China. These attributes
were accumulated in a 25-year career at
J.P. Morgan & Co., both in the US and in Asia,
and subsequently in senior roles at DBS, the
leading Singapore-based regional banking group,
where Jack latterly led its regional expansion as
Vice Chairman and CEO. Jack was appointed a
member of the Financial System Vulnerabilities
Committee and the Group Risk Committee.
At the forthcoming AGM we shall bid farewell to
our two longest-serving independent directors,
namely, our Senior Independent Director, Rachel
Lomax, and Sam Laidlaw. Rachel during her tenure
has served on the Audit, Risk and Nomination
Committees, and took responsibility as the first
Chair of the Conduct & Values Committee to
establish its terms of reference and its agenda.
Sam served on, and latterly chaired, both the
Remuneration and Nomination Committees.
Together, Rachel and Sam have also been leading
the process to manage my own succession. Their
combined knowledge of regulatory and public
policy, business leadership, corporate governance
and consumer issues has been invaluable to the
Board. On behalf of all shareholders, I want to
thank them for their dedication and commitment.
Chairman succession
In the Circular inviting shareholders to the 2016
AGM, I indicated that the process to find my own
successor had been initiated with the intention of
having this concluded during 2017. This process
remains on track and an announcement will be
made in due course.
Outlook
We have recently upgraded our forecasts for global
economic growth reflecting the likelihood of a shift
in US fiscal policy and a broader based cyclical
recovery. As in recent years, incremental growth is
expected to be driven by emerging economies in
which HSBC is well represented. Risks to this
central scenario, however, remain high. In
particular, we highlight the threat of populism
impacting policy choices in upcoming European
elections, possible protectionist measures from the
new US administration impacting global trade,
uncertainties facing the UK and the EU as they
enter Brexit negotiations, and the impact of a
stronger dollar on emerging economies with
high debt levels.
Countering these factors are signs of a cyclical
upturn. Global purchasing manager indices are
at their strongest for some time, the US economy
looks robust and growth in China has held up
well, defying the concerns reflected in the market
retrenchment seen in the first quarter of 2016.
Additionally, commodity prices have risen,
reflecting optimism regarding growth in
infrastructure investment as well as agreement
reached to cut oil supply. These factors also imply
reflation across the major economies and rising
interest rates, which would benefit HSBC’s
conservative balance sheet structure.
‘We enter 2017 with the restructuring
of the Group essentially completed,
and with a strong capital position
and a conservative balance sheet’
However, it is fair to reflect that the upgrades to
economic growth we are now forecasting are
largely the partial reversal of downgrades made
last year when uncertainty was elevated as a result
of the unexpected political events. Forecast global
growth remains slightly lower than its long-term
trend with risks largely to the downside.
We enter 2017 with the restructuring of the Group
essentially completed, and with a strong capital
position and a conservative balance sheet. We are
gaining market share in areas of importance to
HSBC as others scale back and our offerings
become more competitive. Much of the heavy
investment in reshaping the Group to improve
productivity, embrace technological change and
reinforce global standards of business conduct
has been made.
As ever, we owe a huge amount to our 235,000
colleagues who have delivered this change at the
same time as working tirelessly to meet customers’
expectations of them. On behalf of the Board,
I want to thank them all for their dedication
and commitment.
Douglas Flint
Group Chairman
21 February 2017
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HSBC Holdings plc Annual Report and Accounts 2016 Group Chief Executive’s Review
Group Chief
Executive’s Review
The strength of our network gives us an unrivalled
ability to help clients navigate complexity and uncover
new opportunities.
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border mergers and acquisitions. HSBC was
recognised as the ‘World’s Best Investment Bank’
and ‘World’s Best Bank for Corporates’ at the
Euromoney Awards for Excellence 2016.
Commercial Banking performed well, particularly
in the UK and Hong Kong, growing adjusted
revenue in spite of a slow-down in global trade.
Gains in Global Liquidity and Cash Management,
and Credit and Lending, exceeded the reduction
in trade finance revenue. Global Trade and
Receivables Finance continued to capture market
share in major markets including Hong Kong and
Singapore, maintaining our position as the world’s
number one trade finance bank.
Retail Banking and Wealth Management
performance was mixed. Overall adjusted revenue
was down, due largely to the impact of reduced
client activity in Hong Kong on our Wealth
Management businesses. At the same time, strong
mortgage balance growth in the UK, Hong Kong
and mainland China, and higher current account
and savings balances in the UK and Hong Kong,
helped increase revenue in Retail Banking. These
increased balances should support revenue growth
in 2017 and beyond.
We have considered it appropriate to write off
the remaining goodwill in the European private
banking business. This goodwill relates principally
to the original purchase of Safra Republic Holdings
in 1999. The restructuring of Global Private
Banking is now largely complete, and although
Global Private Banking is now much smaller
than it was three years ago, it is deliberately
positioned for sustainable growth with a focus
on serving the personal wealth management
needs of the leadership and owners of the
Group’s corporate clients.
Our cost-reduction programmes continue to
bring down our adjusted operating expenses.
The traction that these programmes have gained in
the last 18 months has enabled us to increase the
amount of costs that we are able to remove from
the business. We now expect to deliver annualised
cost savings of around $6bn by the end of 2017,
and will invest an equivalent total of around $6bn
over the same time-frame in order to achieve this.
7
Stuart Gulliver Group Chief Executive
We made good progress in 2016. The
implementation of our strategic actions is well
advanced and our global universal business model
performed well in challenging conditions. Our
reported profit before tax reflected a number of
large significant items, including a write-off of all
the remaining goodwill in Global Private Banking in
Europe, an accounting loss on the sale of our Brazil
business, and investments to achieve our cost-
saving target. Our adjusted profits were broadly
unchanged year on year following solid
performances by our global businesses. These
enabled us to capture market share in strategic
product areas and build a platform for future
growth. We delivered positive adjusted jaws in 2016.
Performance
Global Banking and Markets recovered from a
sector-wide slow start to generate higher adjusted
revenue than for 2015. Our Markets businesses
performed well in challenging conditions,
particularly in Fixed Income products. Our
transaction banking businesses also grew revenue,
especially Global Liquidity and Cash Management.
We made market share gains in Fixed Income in
Europe, and achieved our best ever league table
rankings in global debt capital markets and cross-
Strategic ReportFinancial Review Corporate Governance Financial Statements Shareholder Information HSBC Holdings plc Annual Report and Accounts 2016
Strategic Report | Group Chief Executive’s Review
These savings should more than compensate for
additional investment in regulatory programmes
and compliance.
We continue to make strong progress in
implementing our strategic actions to improve
returns and gain maximum value from our
international network. We are on course to
complete the majority of these actions by the
end of 2017 (see pages 12 to 13), in line with our
targets. Our targeted reduction of risk-weighted
assets is 97% complete, and the success of our
cost saving programmes means that we now
expect to exceed our cost reduction target.
The turnaround of our Mexico business
continues to accelerate. Improved lending and
deposit balances, interest rate rises and better
collaboration between businesses helped generate
significantly higher profits compared with 2015.
We also made significant market share gains,
particularly in consumer lending.
We have continued to enhance our business
in Asia-Pacific, launching our first exclusively
HSBC-branded credit card in mainland China,
growing assets under management and insurance
new business premiums, and increasing loans
in the Pearl River Delta. We also extended our
leadership of the offshore renminbi bond market
and achieved our best ranking for China outbound
mergers and acquisitions since 2003.
We are better protected from financial crime
because of the investment we have made in
our Global Standards programme. Our Monitor
has raised certain concerns, but we have
continued to progress and our commitment
remains unwavering. By the end of this year, we
are on track to have our anti-money laundering
and sanctions policy framework in place and to
have introduced major compliance IT systems
across the Group. Beyond 2017, we will continue
to work to fine tune those systems and to ensure
that our improvements are fully integrated into
our day-to-day risk management practices.
Our strong common equity tier 1 ratio of 13.6%
reinforces our ability to support the dividend,
invest in the business and manage the continuing
uncertain regulatory environment.
Delivering value for shareholders
In December, we completed the $2.5bn equity
buy-back that we commenced at the half-year.
We are also now in a position to retire more of
the capital that previously supported the Brazil
business. Having received the appropriate
regulatory clearances, we will therefore execute
a further share buy-back of up to $1bn in the first
half of 2017. This will bring the total value of shares
repurchased since last August to $3.5bn.
We will continue to contemplate further share
buy-backs as circumstances permit, and
we remain confident of sustaining the annual
dividend at the current level for the foreseeable
future through the long-term earnings capacity
of the business.
A business fit for the future
While our strategic actions are improving our
network, we are also anticipating and adapting
to the social, economic and technological trends
that are changing our operating environment and
our customers’ needs and expectations.
The adoption of rapidly evolving digital
technologies by our customers is arguably the
most transformative force for the financial services
industry. Through our global network, we are able
to identify and respond to digital trends across
70 countries and territories, applying the
technologies that provide the greatest benefit to
our customers. We are investing $2.1bn in digital
transformation in Retail Banking and Wealth
Management, Commercial Banking, and Global
Banking and Markets between 2015 and the
end of 2020, and we have already launched
innovative ways to make banking faster, easier
and safer. HSBC is now the biggest financial
services user of biometrics globally, and we
continue to roll out voice recognition and
fingerprint technology across our network. In 2016,
we enhanced our internet and mobile banking
platforms in several of our key markets, including
the UK and Hong Kong, and launched innovation
labs around the world dedicated to the application
of artificial intelligence, data management and
improvements in cybersecurity. These labs,
together with our fintech partnerships, will help
us use technology to deliver better banking for
our customers.
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HSBC Holdings plc Annual Report and Accounts 2016 Group Chief Executive’s Review
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If digital technology is mankind’s greatest
opportunity, preventing climate change is its
greatest challenge. The Paris Agreement of
December 2015 reflected a new consensus on
the need to strengthen the global response to
climate change. Major injections of capital are
now required to finance new technologies,
infrastructure and the transition of traditional
industries from high to low carbon, and to cover
the costs of climate adaptation. As the principal
intermediaries between entrepreneurs, businesses
and investors, banks have a responsibility to help
direct this flow of capital. We are already working
with our clients and with investors to help them
allocate capital and direct finance towards lower-
carbon, carbon-resilient activities, and in 2016
we established a Sustainable Financing Unit to
coordinate this work across business lines.
Headquartered in London, but with resources
in New York and Hong Kong, this new unit will
support colleagues tasked with creating and
delivering innovative climate products, and help
them uncover new sources of sustainable finance.
‘The changes we have made since 2011 have
equipped HSBC to improve returns and gain
maximum value from our international network’
We are also seeking to influence client practices
and to build the data, the tools and the
transparency necessary to embed understanding
of climate risk into the way that markets function.
In 2016, HSBC Global Research expanded its
coverage of environment, social and corporate
governance factors to give our clients the
information they need to inform their investment
decisions. This builds on the work of the world-
leading HSBC Climate Change Centre for
Excellence, which in 2017 celebrates 10 years
of delivering market-leading information on climate
policy to clients across the globe. Work is also
underway to expand the Group’s disclosure of
non-financial data to meet the needs of
shareholders and other stakeholders.
We are investing to adapt to the changing face
of trade. As the world’s largest trade finance bank
with more than 150 years’ experience at both ends
of the world’s busiest trade routes, we are perfectly
placed to help modernise and digitise long-
standing trade finance methods, many of which
would still be recognisable to HSBC’s founders.
We are already working with a broad coalition
of partners around the world to make the promise
of blockchain technology a reality with regards
to trade finance. HSBC has already helped develop
a blockchain prototype for a letter of credit that
confirms the possibility of sharing information
between all parties on a private distributed
ledger. In early 2017, we signed a memorandum
of understanding with six other banks to make
domestic and cross-border commerce easier
for European SMEs using blockchain technology.
We are also seeking to create ways of financing
the growing services trade, which we estimate
will account for a quarter of global trade by 2030.
At a time when international politics threaten to
increase rather than decrease the cost of trade,
we will continue to invest both time and resources
to find ways of making trade finance cheaper,
faster, simpler and more secure for our customers.
Looking forward
We anticipate new challenges in 2017 from
geopolitical developments, heightened trade
barriers and regulatory uncertainty. However, the
changes we have made since 2011 have equipped
HSBC to manage the complexity of today’s global
business environment. HSBC is a strong and
resilient business with a global universal business
model geared to find growth opportunities in a
low-growth world. If globalisation continues to
retreat, as seems likely, we are in a strong position
to capitalise on the regional opportunities that this
will present, particularly in Asia and Europe. Most
importantly, the strength of our network gives us
an unrivalled ability to help our clients navigate
that same complexity and overcome their own
challenges, whether exploring new markets or
making the transition to a low-carbon economy.
Stuart Gulliver
Group Chief Executive
21 February 2017
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Financial Review Corporate Governance Financial Statements Shareholder Information HSBC Holdings plc Annual Report and Accounts 2016
Our strategy
We have developed a long-term strategy
that reflects our purpose and enables us to
capture value from our international network.
Develop our
international network
To facilitate international trade and capital flows and
serve our clients, with potential to help them grow
from small enterprises into large multinationals.
Invest in wealth and
retail businesses with local scale
To make the most of global social mobility, wealth
creation and long-term demographic changes
in our priority markets.
Value of the network and our strategy
Access to global
growth opportunities
Our unparalleled network
covers countries accounting for
more than 90% of global GDP,
trade and capital flows. We have
a leading presence in large and
fast-growing economies.
Our priority markets cover both
sides of 11 of the world’s 15 largest
trade corridors for goods and
services forecast for 2030, and
represent at least one side of the
other four corridors. Six of the 15
corridors are within Asia and five
connect countries between two
geographical regions.
Lower risk profile and volatility
from our diversified, universal
banking model
Our 10-year profit before tax
volatility of 0.9x compares
favourably with our peers.
Transaction banking product
revenue of $14.7bn on an adjusted
basis leads the industry. More than
45% of our client revenue comes
from businesses and individuals
with an international presence.
Business synergies of $10.5bn,
equivalent to 22% of reported
revenue reflect products and
services provided across our
global businesses.
Strong capital and funding base
CET1 ratio of 13.6%, supported by
increased shareholders’ equity to
meet new regulatory requirements
since the end of 2010.
Four interconnected, global
businesses share balance sheets
and liquidity in addition to strong
commercial links.
Stable shareholder returns
Industry leading dividend –
approximately $55bn declared from
2011 to 2016, as well as circa
$2.5bn of share repurchases.
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Two-part long-term strategyStrategic ReportHSBC Holdings plc Annual Report and Accounts 2016 Our strategy
Long-term trends
Our strategy positions us
to capitalise on several
long-term trends.
Increasing connectivity and
global flows of trade, finance
and data are key drivers of
GDP growth.
Business to consumer cross-border
e-commerce transactions
($tn)
2015
2020
Source: McKinsey Global Institute, Digital
globalization: The new era of global flows (2016)
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1.0
Economic weight is shifting
to Asian and Middle Eastern
economies, which are
expected to grow GDP
threefold by 2050.
Shipping volumes, measured by
weight of goods unloaded
1990: 4,126m
metric tonnes
2015: 10,033m
metric tonnes
33%
62%
Key
Emerging
and transition
markets
Developed
markets
Source: United Nations Conference on
Trade and Development
Size of middle class population
(bn)
2010
2020
2030
Key
28%
54%
66%
1.8
3.2
5.0
Asia
Rest of the world
Source: OECD Development Centre, Emerging
Middle Class in Developing Countries (2010)
The middle class is expected
to grow from one-third to
two-thirds of the world’s
population by 2030, while the
number of people over age 60
is expected to more than
double by 2050.
Client examples
ATN International (‘ATNI’):
US, telecommunications
and renewable energy
International portfolio
of businesses in US and
elsewhere. ATNI sought
out HSBC’s international
capabilities while pursuing
renewable energy
investments in India.
In 2016, we helped ATNI
with custodian services
and provided finance
structuring advice for its
Singaporean and Indian
subsidiaries. We provide
ATNI with trade, cash
management, foreign
exchange and
other services.
Mubea:
Germany, automotive
Tangle Teezer:
UK, consumer goods
Automotive parts
manufacturer operating
across 20 countries in
Europe, Asia and the
Americas. HSBC expanded
its relationship with Mubea
to also serve its subsidiaries
in the US and Mexico, and
provide centralised
international cash and
liquidity management.
UK-based hairbrush
manufacturer with its first
product launch in 2008,
and a range of products
now sold in more than 70
markets. Since 2009, HSBC
has helped Tangle Teezer
expand internationally
through our knowledge
and capabilities around the
world. In 2016, we assisted
it in developing its presence
in the US, China and
Hong Kong.
Grupo Aeroportuario
(‘GACM’):
Mexico, infrastructure
Responsible for the
construction, administration
and operation of Mexico
City’s new international
airport. In 2016, we advised
and coordinated financing
for GACM including a
$1bn 30-year green bond
issuance, the largest green
bond in Latin America, and
the first emerging market
green bond to receive a
Green Bond Assessment
grade from Moody’s.
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Financial Review Corporate Governance Financial Statements Shareholder Information HSBC Holdings plc Annual Report and Accounts 2016
Strategic actions
We are well on our way towards achieving the
actions outlined in our June 2015 Investor Update.
Capturing value from our international network
In June 2015, we outlined a series
of strategic actions to make the most
of our competitive advantages and
respond to a changing environment.
These actions are focused on
improving efficiency in how we use
our resources, and on investing for
growth in line with our strategy. Each
action has targets defined to the end
of 2017. The table opposite contains a
summary of our progress in 2016 with
additional details provided below.
Resizing and simplifying
our business
We have made significant progress in
resizing and simplifying our business.
In 2016, management actions reduced
RWAs in GB&M and legacy credit by
$46bn and we completed asset sales
totalling $10.1bn from our US
consumer and mortgage lending
(‘CML’) run-off portfolio.
As part of our initiative to optimise
our network, we completed the sale
of HSBC Bank Brazil on 1 July 2016.
We will continue to serve the
international and cross-border
needs of our large corporate clients
in Brazil through HSBC Brasil S.A. –
Banco de Investimento.
In the NAFTA region, we grew
adjusted revenue in Mexico by 18%
compared with 2015, supported by
market share gains in RBWM across
key lending products and a doubling
of personal loans issued. In the US,
we grew adjusted revenue in GB&M
and RBWM compared with 2015
and continued to support our clients
internationally. Revenues from
international subsidiaries of our
US clients increased by 11%
compared with 2015.
We have made good progress in our
cost-saving programme and are on
track to exceed our exit rate target
set for the end of 2017. We expect
to achieve total cost savings of $6.0bn
through one-off investments (‘costs
to achieve’) of $6.0bn. The additional
savings will fund increased costs
related to regulatory programmes
and compliance. In 2016, operating
expenses fell by 4% on an adjusted
basis compared with 2015, facilitated
by increased efficiency in our processes.
For example, we launched a new
customer-facing digital portal to
standardise and accelerate the
onboarding process in 26 markets
covering more than 70% of CMB
corporate clients, and we decreased the
number of manual payments by 80%.
Redeploying capital to grow
our business
At the heart of our business is our
international network. We are focusing
efforts to grow our businesses by
looking at customers’ needs across
products, geographies and supply
chains. In 2016, revenue from
transaction banking products was up
2% despite difficult macroeconomic
conditions. We grew revenues in our
Global Liquidity and Cash Management
(GLCM) business. In 2016, we were
named ‘Best Bank for Corporates’ by
Euromoney and ‘Best Supply-Chain
Finance Bank Global’ by the Trade
Finance Awards.
We continue to invest for growth in
Asia. In December, we launched our
own HSBC-branded credit cards in
mainland China with a full range of
digital features. We increased the
number of new RBWM clients in China’s
Pearl River Delta by 51% compared
with 2015, and grew our mortgage
loan books by more than 51%. We grew
revenues from international subsidiaries
of our ASEAN-region commercial
banking clients, and in Singapore
our innovation lab is developing
cloud-based treasury services for
businesses and exploring blockchain
technology to support documentary
trade transactions.
We remain recognised as the leading
bank for international renminbi (‘RMB’)
products and services. We were the first
bank to facilitate overseas institutional
investment into the China interbank bond
market since access was expanded in
early 2016. We were also the first to be
appointed custodian bank in the two
newly active RMB qualified foreign
institutional investor (‘RQFII’) markets
of the US and Thailand this year.
Finally, we continue to strengthen
our efforts to protect customers
and the wider financial system from
financial crime. In 2016, this included
further upgrades to our systems, as
well as additional training for our
employees. Further detail can be found
under the Financial Crime Risk section
of www.hsbc.com/financial-crime-risk.
Selected awards and
recognition 2016
Euromoney Awards for Excellence 2016
Best Bank for Corporates
Best Investment Bank
Euromoney Cash Management
Survey 2016
Best Global Cash Manager
(Non-Financial Institutions)
#1 Global For All Transactions
(Financial Institutions)
Trade Finance Awards 2016
Best Supply-Chain Finance Bank Global
Asiamoney Offshore RMB Poll 2016
Best Overall Offshore RMB
Products / Services
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Strategic ReportHSBC Holdings plc Annual Report and Accounts 2016 Strategic actions
Progress against strategic actions
Actions to resize and simplify the Group
Strategic actions
Reduce Group
risk-weighted
assets (‘RWAs’)
by circa $290bn
Targeted
outcome by the
end of 2017
– Group RWA
reduction
$290bn
Group total
– Return GB&M
to Group target
profitability; <1/3
of Group RWAs
Progress
Key performance indicators
Status
– Further reduction of $143.2bn in 2016,
notably in GB&M
– GB&M RWAs of $300.4bn, 37% of the
– RWA reduction from management
actions: circa $267bn (circa 97%
of 2015–17 target on a constant
currency basis)
Optimise global
network
– Reduced
footprint
Rebuild NAFTA
region profitability
– US profit before
tax circa $2bn
– Mexico profit
before tax circa
$0.6bn
– Completed our sale of Brazil operations
– Present in 70 countries and
on 1 July 2016; maintained a Brazil
presence to serve large corporate
clients’ international needs
– Successfully achieved a non-objection
to our US capital plan, which includes a
dividend payment to HSBC Holdings plc
in 2017, as part of the Comprehensive
Capital Analysis and Review (‘CCAR’)
– Mexico market share gains across key
RBWM lending products
territories at end of 2016 (down
from 73 at end of 2014)
– US (excluding CML run-off portfolio)
adjusted profit before tax: $0.4bn
(down 22% on 2015)
– Mexico adjusted profit before tax:
$0.3bn (up 354% on 2015)
–
1
Set up UK ring-
fenced bank
– Completed
by 2018
– Appointed Chair and CEO of HSBC UK;
other senior appointments in progress
– Implementation in progress
Deliver $4.5-5.0bn
of cost savings
– 2017 exit rate
to equal 2014
operating
expenses
– Migration of key roles underway with circa
35% of Birmingham positions filled
– $2.2bn cost savings realised in 2016
– Positive jaws in 2016 compared with 2015
– FTE reduction of circa 900 in 2016
Actions to redeploy capital and invest
– Adjusted costs (excluding Brazil)
down 4% on 2015
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Deliver growth
above GDP from
international
network
– Revenue growth
of international
network above
GDP
Investments in
Asia – prioritise
and accelerate
– Market share
gains
– Circa 10%
growth per
annum in
assets under
management
in Asia
– GLCM revenue up 6% on 2015 driven by
growth in deposits and the effect of US
rate rises
– Global Trade and Receivables Finance
(‘GTRF’) revenue down 7% on 2015,
reflecting a decline in market conditions
– Awarded Asia’s ‘Best Investment Bank’
and Asia’s ‘Best Bank for Financing’ by
Euromoney Awards for Excellence 2016
– Transaction banking revenue:
$14.7bn (up 2% on 2015)
– Revenue synergies: $10.5bn
(down 5% on 2015)
– Guangdong loans: $4.7bn (up 16%
on 2015)
– ASEAN adjusted revenue: $3.1bn
– Launched digital banking platform (HSBCnet)
(down 2% on 2015)
for SMEs in Guangdong allowing faster
payment services with Hong Kong
– Growing business around China’s Belt and
Road initiative, including energy sector deals
linking China to Malaysia and Egypt
– Asset Management assets under
management distributed in Asia:
$143bn (up 11% on 2015)
– Insurance manufacturing annualised
new business premiums in Asia:
$2.3bn (up 13% on 2015)
– RMB internationalisation revenue,
from offshore business partly or
wholly denominated in RMB as well
as selected products in mainland
China: $1.25bn (down 25% on 2015)
– By end 2017: AML and sanctions
policy framework in place; major
compliance IT systems introduced
across the Group, including for
customer due diligence, transaction
monitoring and sanctions screening
Grow business
from renminbi
(‘RMB’)
internationalisation
– $2.0–2.5bn
revenue
– 52% RQFII custodian market share
(in Securities Services); ranked first
by market share in all active RQFII markets
Global Standards
– safeguarding
against financial
crime3
– Implementation
completed
– Joint lead manager for China’s Ministry of
Finance RMB3bn bond in the UK, the first
sovereign RMB bond issued outside China
– Continued progress towards putting in place
an effective and sustainable AML and
sanctions compliance programme, including
through the creation of a new Financial Crime
Risk function and improvements in technology
and systems to manage financial crime risk
1 On track to achieve equivalent profit before tax target on a local currency basis;
US dollar target set using the 2014 average exchange rate.
2 As set out under ‘Key performance indicators’.
3 Further detail on the Monitor and the US deferred prosecution agreement and related agreements
and consent orders can be found on pages 82 and 66, respectively.
– Post-2017: Policy framework and
associated operational processes
fully integrated in day-to-day financial
crime risk management practices in
an effective and sustainable way; IT
systems continue to be fine-tuned
–
–
2
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Strategic Report
Financial overview
Reported results
This table shows our reported results for
the last three years, ended 31 December
2016, 2015 and 2014.
Reported profit before tax
Reported profit before tax of $7.1bn
was $11.8bn or 62% lower than in
2015. This was primarily due to net
adverse movements relating to
significant items and the unfavourable
effects of foreign currency translation,
which are described in more detail on
page 30. Excluding significant items
and currency translation, profit before
tax fell by $0.2bn.
Reported revenue
Reported revenue of $48.0bn was
$11.8bn or 20% lower than in 2015,
in part due to a net unfavourable
movement in significant items of
$7.6bn, which included:
– adverse fair value movements of
$1.8bn arising from changes in credit
spreads on our own debt designated
at fair value, compared with favourable
movements of $1.0bn in 2015;
– a $3.6bn reduction in revenue resulting
from our sale of operations in Brazil to
Banco Bradesco S.A., which includes
a $1.7bn accounting loss recognised
on the sale; and
– the non-recurrence of a $1.4bn gain on
the sale of part of our shareholding in
Industrial Bank Co. Limited (‘Industrial
Bank’) in 2015; partly offset by
– a $0.6bn gain on the disposal of our
membership interest in Visa Europe
in the second quarter of 2016 and
a $0.1bn gain on disposal of our
membership interest in Visa US
in the fourth quarter of 2016.
In addition, foreign currency translation
differences between the periods had
an adverse effect of $3.0bn.
These factors contributed to a fall
in reported revenue in all our global
14
Reported results
Net interest income
Net fee income
Net trading income
Other income
Net operating income before loan impairment
charges and other credit risk provisions (‘revenue’)
Loan impairment charges and other credit risk provisions
(‘LICs’)
Net operating income
Total operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
2016
$m
2015
$m
2014
$m
29,813
32,531
34,705
12,777
14,705
15,957
9,452
(4,076)
8,723
3,841
6,760
3,826
47,966
59,800
61,248
(3,400)
(3,721)
(3,851)
44,566
56,079
57,397
(39,808)
(39,768)
(41,249)
4,758
2,354
16,311
16,148
2,556
2,532
7,112
18,867
18,680
businesses and Corporate Centre.
Excluding significant items and the
adverse effects of foreign currency
translation differences between the
periods, revenue fell by $1.3bn or 2%.
– costs to achieve of $3.1bn compared
with $0.9bn in 2015; partly offset by
– a reduction of $1.0bn in settlements
and provisions in connection with
legal matters.
Reported LICs
Reported LICs of $3.4bn were
$0.3bn lower than in 2015 as reductions
in RBWM and CMB more than offset
an increase in GB&M. The reduction
included favourable effects of foreign
currency translation differences
between the periods of $0.2bn, and
the impact of LICs incurred in the
disposed Brazil operations of $0.7bn
compared with $0.9bn in 2015.
Reported operating expenses
Reported operating expenses of
$39.8bn were $40m or 0.1% higher
than in 2015. This includes favourable
effects of currency translation
differences of $2.1bn between
the periods, and an increase in
significant items of $3.3bn, including:
– a $3.2bn write-off of goodwill in
our GPB business in Europe; and
In addition, the reported results include
the operating expenses incurred in our
Brazil business of $1.1bn compared with
$2.5bn in 2015.
Excluding significant items and the
adverse effects of foreign currency
translation differences between the
periods, operating expenses fell by
$1.2bn. Reductions in all our global
businesses reflected the effects of
our cost-saving initiatives.
Reported income
from associates
Reported income from associates
and joint ventures of $2.4bn
decreased by $0.2bn.
On 21 February 2017, the Board
announced a fourth interim dividend
of $0.21 per ordinary share.
HSBC Holdings plc Annual Report and Accounts 2016 Financial overview
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Adjusted performance
Our reported results are prepared
in accordance with IFRSs as detailed
in the Financial Statements on
page 194. We also present adjusted
performance measures to align internal
and external reporting, identify and
quantify items management believes
to be significant, and provide insight
into how management assesses
period-on-period performance. Adjusted
performance measures are highlighted
with the following symbol:
To derive adjusted performance,
we adjust for:
– the year-on-year effects of foreign
currency translation differences; and
– the effect of significant items that
distort year-on-year comparisons
and are excluded in order to
understand better the underlying
trends in the business.
For reconciliations of our reported results to an
adjusted basis, including lists of significant items,
see page 47.
Adjusted results
This table shows our adjusted results
for 2016 and 2015. These are discussed
in more detail on the following pages.
Adjusted results
Net operating income before loan impairment charges and other
credit risk provisions (revenue)
2016
$m
2015
$m
50,153
51,419
Loan impairment charges and other credit risk provisions (‘LICs’)
(2,652)
(2,604)
Total operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
(30,556)
(31,730)
16,945
2,355
17,085
2,443
19,300
19,528
Movement in adjusted profit before tax compared with 2015
2016 ($m)
Adverse
Favourable
(%)
Share of profits in associates and joint ventures
2,355
Profit before tax
19,300
50,153
(1,266)
(2,652)
(30,556)
1,174
(48)
(88)
(228)
Adjusted profit before tax
On an adjusted basis, profit before tax
of $19.3bn was $0.2bn or 1.2% lower
than in 2015. This primarily reflected
lower revenue, higher LICs and a
reduction in our share of profits from
associates. This was partly offset by
a decrease in operating expenses.
Revenue
LICs
Operating expenses
(2)
(2)
4
(4)
(1)
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Strategic Report | Financial overview
Adjusted performance continued
Movement in adjusted revenue compared with 2015
2016
$m
18,925
12,887
14,919
1,757
1,665
50,153
2015
$m
Variance
$m
19,242
12,753
14,566
1,965
2,893
51,419
(317)
134
353
(208)
(1,228)
(1,266)
%
(2)
1
2
(11)
(42)
(2)
Asia resulted in a reduction in
Equities revenue.
– In CMB, revenue rose (up $0.1bn),
notably in GLCM reflecting balance
growth and wider spreads in Hong
Kong. Revenue also increased in
Credit and Lending as a result of loan
growth in the UK.
For further details on the performance of our
global businesses, see page 18.
Adjusted LICs
Adjusted LICs of $2.7bn were $48m
higher than in 2015, reflecting increases
in GB&M resulting from a small number
of individually assessed LICs within the
oil and gas, and metals and mining
sectors, notably in the first half of 2016
in the US. LICs also increased in RBWM,
particularly in Mexico. These increases
were largely offset by a reduction in
LICs in CMB.
Adjusted operating expenses
Adjusted operating expenses of $30.6bn
were $1.2bn or 4% lower than in 2015.
This primarily reflected cost savings
of $2.2bn realised in 2016, with run-rate
savings of around $3.7bn since the
commencement of our cost-saving
programme. The fall in operating
expenses also included a reduction of
$0.5bn in the UK bank levy. These
Adjusted operating expenses
($bn)
reductions were partly offset by the
impact of inflation and our continued
investment in regulatory programmes
and compliance.
Run-the-bank costs of $26.9bn were
$0.3bn lower, and change-the-bank
costs of $2.7bn were $0.4bn lower,
both compared with 2015. Within these,
our total expenditure on regulatory
programmes and compliance,
comprising both run-the-bank
and change-the-bank elements, was
$3.0bn, up $0.4bn or 14% compared
with 2015. This reflected the ongoing
implementation of our Global Standards
programme to enhance our financial
crime risk controls and capabilities,
and to meet our external commitments.
In the fourth quarter of 2016,
our adjusted operating expenses
increased compared with the third
quarter reflecting a small number
of specific items. This included the
write-off of software.
The number of employees expressed
in full-time equivalent staff (‘FTEs’)
at 31 December 2016 was 235,175, a
decrease of 20,028 from 31 December
2015. This included a 19,145 reduction
following our disposal of operations in
Brazil. Excluding Brazil, the decrease in
FTEs was 883, as a reduction of 17,855
FTEs realised across global businesses
and global functions was partly offset
by investment in our Global Standards
Programme of 5,694 FTEs, costs to
achieve FTEs of 8,073 and investment
for growth.
For further details on the categorisation
of run-the-bank and change-the-bank costs,
see page 38.
Adjusted income from
associates and joint ventures
Adjusted income from associates and
joint ventures of $2.4bn fell by $0.1bn
compared with 2015.
2015
$31.7bn
2016
$30.6bn
1.4
30.3
0.9
29.7
7.1
7.6
7.3
1.4
7.6
(0.1)
7.1
7.1
7.0
1.0
7.4
Key
Bank levy
Adjusted
operating
expenses
(excluding
bank levy)
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
2015
2016
RBWM
CMB
GB&M
GPB
Corporate Centre
Total
Adjusted revenue
Adjusted revenue of $50.2bn was
$1.3bn or 2% lower. The reduction
reflected the following:
– In RBWM, lower revenue (down
$0.3bn) was mainly a result of a fall
in income in our Wealth Management
business. The reduction resulted from
lower investment distribution income
compared with a strong performance
in 2015, notably in the first half of the
year, and adverse market impacts in
Insurance Manufacturing. By contrast,
revenue grew in savings and deposits,
as we grew balances in Hong Kong,
the UK and Mexico, and from wider
spreads in Hong Kong and
Latin America.
– In GPB, lower revenue (down $0.2bn)
reflected reduced brokerage and
trading activity due to the continued
repositioning of the business, together
with adverse market sentiment and
unfavourable market conditions.
– In Corporate Centre, revenue fell
(down $1.2bn), partly due to the
US CML portfolio (down $0.5bn)
as a result of continued run-off
and portfolio sales. Revenue also
fell in Central Treasury as a result of
higher adverse fair value movements
relating to the economic hedging
of our long-term debt ($0.2bn)
and higher interest expense on
our debt ($0.2bn).
These were partly offset:
– In GB&M, revenue increased (up
$0.4bn) despite adverse movements
in credit and funding valuation
adjustments of $0.3bn. In Rates and
Credit, higher revenue reflected growth
in market share in Europe.
We also increased revenue in Global
Liquidity and Cash Management
(‘GLCM’) from balance growth and
wider spreads. By contrast lower
trading volumes in Europe and
16
HSBC Holdings plc Annual Report and Accounts 2016
Financial overview
Balance sheet and capital
Balance sheet strength
Total reported assets were $2.4tn, 1% lower than at
31 December 2015 on a reported basis, and 5% higher
on a constant currency basis. We have maintained the
strength of our balance sheet, as targeted asset growth
was partly offset by reductions in our legacy portfolios and
the completion of our sale of operations in Brazil to Banco
Bradesco S.A. We also issued more than $30bn of senior
debt during the year from HSBC Holdings plc (‘HSBC
Holdings’) to build up the Group’s total loss absorbing
capacity in line with anticipated regulatory requirements.
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Distributable reserves
The distributable reserves of HSBC Holdings at 31 December
2016 were $42bn, and at 31 December 2015 were $47bn. The
reduction was driven by our share buy-back ($2.5bn) and the
effects of dividends paid ($11bn), which more than offset
profits of $7bn.
Capital strength
We manage our capital in an effort to ensure we exceed
current regulatory requirements and are well placed to meet
those expected in the future. We monitor our position using
capital ratios. These measure capital relative to a regulatory
assessment of risks taken. We quantify how these risks relate
to our businesses using RWAs.
Our CET1 ratio at 31 December 2016 was 13.6%, up from
11.9% at 31 December 2015.
Details of these risks are included on page 127.
Delivery against Group financial targets
Return on equity
(%)
2016
2015
2014
Return on equity
0.8
7.2
7.3
Our medium-term target is to achieve a return on equity
(‘RoE’) of more than 10%. In 2016, we achieved an RoE of
0.8% compared with 7.2% in 2015. In 2016, significant items,
which included a write-off of goodwill in GPB in Europe, costs
to achieve and adverse fair value movements arising from
changes in credit spread on our own debt designated at fair
value, had a significant effect on our reported RoE. Together
with the UK bank levy, significant items reduced the return
achieved by 6.9 percentage points.
Adjusted revenue down
Adjusted jaws
2.5%
Adjusted costs down
3.7%
Adjusted jaws
+1.2%
Jaws measures the difference between the rates of change
for revenue and costs. Positive jaws occurs when the figure
for the annual percentage change in revenue is higher than,
or less negative than, the corresponding rate for costs.
We calculate adjusted jaws using adjusted revenue and costs.
Our target is to maintain positive adjusted jaws.
In 2016, adjusted revenue fell by 2.5%, whereas our adjusted
operating expenses reduced by 3.7%. Adjusted jaws was
therefore positive 1.2%.
Total dividends declared in respect of the year
($bn)
2016
2015
2014
Dividends
10.1
10.0
9.6
In the current uncertain environment, we plan to sustain the
annual dividend in respect of the year at its current level for
the foreseeable future. Growing our dividend in the future will
depend on the overall profitability of the Group, delivering
further release of less efficiently deployed capital and meeting
regulatory capital requirements in a timely manner. Actions to
address these points were core elements of our Investor
Update in June 2015.
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Global businesses
We manage our products and services globally
through our global businesses.
Retail Banking and Wealth Management (‘RBWM’)
RBWM serves close to 36 million customers
worldwide through four main business
areas: Retail Banking, Wealth Management,
Asset Management and Insurance.
RBWM provides services to individuals
under the HSBC Premier and Advance
propositions aimed at mass affluent and
emerging affluent customers who value
international connectivity and benefit from
our global reach and scale. For customers
who have simpler everyday banking needs,
RBWM offers a full range of banking
products and services reflecting local
requirements.
Higher Retail Banking revenue,
but challenging market conditions
in Wealth Management
– Adjusted profit before tax of $5.3bn was
$0.4bn or 6% lower compared with 2015.
This was driven by lower revenue
in our Wealth Management business,
together with higher LICs. By contrast,
lower operating expenses reflected our
continued focus on cost management.
– Adjusted revenue of $18.9bn was
$0.3bn or 2% lower, as growth in Retail
Banking revenue was more than offset by
a fall in Wealth Management. The reduction
in Wealth Management (down 0.5bn) was
driven by decreased investment distribution
revenue as a result of lower mutual fund
and retail securities turnover due to weaker
market sentiment. This compared with
a strong performance in the first half of
2015. In addition, insurance manufacturing
revenue fell, reflecting adverse market
impacts ($345m), although this was partly
offset by the value of new business.
However, in Retail Banking revenue rose
$0.2bn or 1%, as revenue increased in
current accounts and savings (up $0.4bn)
from growth in balances, notably in
Hong Kong and the UK. We also benefited
from wider deposit spreads in Hong Kong
and Mexico. By contrast, revenue in
personal lending fell (down $0.2bn), despite
growth in balances of $9bn or 3%, notably
in Hong Kong, the UK and Mexico, driven
by spread compression (mainly in the UK).
– LICs increased by $0.1bn, notably in
Mexico, reflecting growth in unsecured
lending balances.
– Operating expenses were 1% lower as
inflation and investments were more than
Commercial Banking (‘CMB’)
CMB serves approximately two million
customers in 54 countries and territories.
Our customers range from small enterprises
focused primarily on their domestic markets
through to corporates operating globally.
It supports our customers with tailored
financial products and services to allow
them to operate efficiently and to grow.
Services provided include working capital,
term loans, payment services and
international trade facilitation, among other
services, as well as expertise in mergers
and acquisitions, and access
to financial markets.
Revenue growth in a challenging
market
– Adjusted profit before tax of $6.1bn
was 12% higher than in 2015 primarily
because of lower LICs, and revenue
growth despite challenges in global trade.
– Adjusted revenue rose by $0.1bn or 1%.
This included growth of $0.2bn in GLCM
driven by increased balances and wider
spreads in Hong Kong. Revenue in Credit
and Lending also increased (up $0.1bn),
reflecting continued loan growth in
the UK. This was partly offset by lower
revenue in Global Trade and Receivables
Finance (‘GTRF’).
– LICs reduced by $0.4bn as 2016 included
lower levels of individually assessed LICs, as
well as a net release of collective allowances
primarily relating to charges made in the
fourth quarter of 2015, notably in the oil
and gas sector.
– Operating expenses reduced compared with
2015 as the effect of inflation was more than
offset by ongoing cost discipline and the
impact of our transformation initiatives. This
helped us achieve positive jaws of 2.1%.
– Management initiatives drove a further
reduction in RWAs of $23bn in 2016, leading
to a cumulative reduction of $46bn since
our Investor Update in 2015, $18bn above
our target.
Commentary is on an adjusted basis,
which is the GAAP measure for our
global businesses.
The comparative period has been
restated to reflect changes to reportable
segments, as described on page 44.
offset by transformation and other
cost-saving initiatives.
Key events:
– Our retail banking revenue rose by 1%,
with increases in current account and
savings partly offset by falls in credit card
and mortgage revenue, reflecting spread
compression, mainly in the UK.
– In the UK, growth in mortgage balances
was facilitated by our expansion into the
mortgage intermediary market, with 12
brokers added in 2016, which accounted
for 7% of our new mortgage originations
during 2016.
5.3
5.7
6.2
Profit before tax ($bn)
2016
2015
2014
Adjusted
Change in adjusted
profit before tax
-6%
Key events:
– Despite the fall in global trade, we gained
market share in key markets, including trade
finance in Hong Kong and Singapore, and
Receivables Finance in the UK.
– HSBC was named ‘2016 Best Trade Bank
in the World’ by Trade and Forfaiting Review,
and won the ‘Best Global Cash Manager
for Non-Financial Institutions’ at the
Euromoney Awards 2016.
Profit before tax ($bn)
2016
2015
2014
Adjusted
Change in adjusted
profit before tax
+12%
6.1
5.4
6.1
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Strategic ReportHSBC Holdings plc Annual Report and Accounts 2016 Global businesses
Global Banking and Markets (‘GB&M’)
GB&M serves approximately 4,100 clients
in more than 50 countries and territories.
It supports major government, corporate
and institutional clients worldwide. Our
product specialists continue to deliver a
comprehensive range of transaction banking,
financing, advisory, capital markets and risk
management services.
Markets revenue up despite challenging
market conditions
– Adjusted profit before tax of $5.6bn was
$63m higher than in 2015, as revenue
increased and operating expenses
decreased, reflecting transformational cost
savings, partly offset by an increase in LICs.
– Adjusted revenue of $14.9bn rose $353m
or 2%, despite adverse movements in
Credit and Funding valuation adjustments
compared with favourable movements in
2015 (net effect, down $297m), primarily
relating to movements on our own credit
spreads on structured liabilities. Excluding
these, revenue rose $650m or 5%, mainly
in Rates and Credit, as we gained market
share in Europe. In GLCM, revenue
increased as we grew average balances
and benefited from wider spreads. By
contrast, revenue fell in Equities, reflecting
lower trading volumes in Europe and Asia.
– LICs increased (up $0.4bn), predominantly
driven by a small number of individually
assessed exposures within the oil and gas,
and metals and mining sectors, notably
in the first half of 2016 in the US.
– Operating expenses fell by $93m, reflecting
reduced performance-related pay,
disciplined cost management, efficiency
improvements including technology
delivery rationalisation, and FTE reductions.
These reductions more than offset the
investments we made in the business.
Global Private Banking (‘GPB’)
GPB serves high net worth individuals and
families, including those with international
banking needs, through 13 booking centres
covering our priority markets.
Our products and services include Investment
Management, incorporating advisory,
discretionary and brokerage services; Private
Wealth Solutions, comprising trusts and estate
planning, designed to protect wealth and
preserve it for future generations; and
a full range of private banking services.
Lower revenue reflecting repositioning
and adverse market conditions
– Adjusted profit before tax of $0.3bn fell
by $0.1bn as revenue decreased, partly
offset by a reduction in costs.
– Adjusted revenue of $1.8bn fell by $0.2bn
or 11%, as brokerage and trading activity
in both Europe and Asia decreased. This
reflected the continued impact of client
repositioning, in addition to adverse market
sentiment and unfavourable market
conditions throughout the year.
– Operating expenses decreased by $0.1bn,
primarily as a result of reduced FTEs and
cost-saving initiatives.
Key events:
– There was negative net new money of $17bn,
reflecting the repositioning of the business.
However, we attracted positive net new
money in key markets targeted for growth,
notably in the UK, Channel Islands
and Hong Kong.
Corporate Centre
During 2016, we established the Corporate
Centre, to better reflect the way we manage
our businesses. Corporate Centre comprises
Central Treasury, including Balance Sheet
Management (‘BSM’), our legacy businesses,
interests in associates and joint ventures,
central stewardship costs that support our
businesses and the UK bank levy.
Lower revenue due to continued disposal
of legacy portfolios and Central Treasury,
partly offset by a reduction in costs
– Adjusted profit before tax of $2.0bn was
$0.5bn or 19% lower, driven by a fall in
revenue and lower income from associates,
partly offset by lower operating expenses,
notably a reduced charge relating to the
UK bank levy.
– Revenue fell by $1.2bn, partly driven
by reductions in our US CML portfolio
($0.5bn) as a result of lower average lending
balances and portfolio sales. Revenue
also fell in Central Treasury as a result
of higher adverse fair value movements
relating to the economic hedging of
our long-term debt ($0.2bn) and higher
interest expense ($0.2bn).
– LICs were broadly unchanged as increased
charges in the US CML portfolio were
broadly offset by higher releases of credit
risk provisions in the legacy credit portfolio.
– Operating expenses were $0.8bn lower,
partly reflecting the benefits of
transformational savings in our technology,
operations and other functions, and a lower
UK bank levy charge (down $0.5bn).
– Income from associates was $0.1bn
lower, primarily in Saudi Arabia.
Key events:
– Through 2016, we continued to focus
on delivery of our RWA reductions, and
achieved a reduction of $8bn, which
included $39bn through management
initiatives, partly offset by business growth.
– ‘World’s Best Investment Bank’ –
Euromoney Awards for Excellence 2016
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2016
2015
2014
Adjusted
Change in adjusted
profit before tax
+1%
5.6
5.5
4.9
– We recognised a $3.2bn write-off relating
to the goodwill of the business in Europe,
which is not reflected in the adjusted
performance. For additional information,
refer to Note 20 on page 238.
Profit before tax ($bn)
2016
2015
2014
Adjusted
Change in adjusted
profit before tax
-25%
Key events:
– Completed asset sales of $10bn from
our US CML run-off portfolio. As at
31 December 2016, gross lending
balances in this portfolio were $5.7bn.
Profit before tax ($bn)
2016
2015
2014
Adjusted
0.3
0.4
0.5
2.0
2.5
3.8
Change in adjusted
profit before tax
-19%
For further details on the financial performance
of our global businesses, see pages 45 to 51.
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Regions
We coordinate
activities across
global businesses
and supporting
functions through
a regional structure.
20
Asia
HSBC’s history is founded on financing trade
with Asia, and the continent remains central
to our strategy. We aim to grow our business
in China’s Pearl River Delta and the ASEAN
region, and we continue to strengthen our
leadership position in the internationalisation
of China’s renminbi currency.
Lower revenue, notably in Wealth
Management, offset by cost
management initiatives
– Reported profit before tax was $13.8bn,
$2.0bn lower than for 2015, notably due
to the non-recurrence of a gain of $1.4bn
on the disposal of part of our shareholding
in Industrial Bank.
– On an adjusted basis, profit before tax
was broadly unchanged, as a decrease in
revenue was offset by a reduction in costs.
– Reported revenue fell by $2.0bn, driven
by the non-recurrence of the gain on
Industrial Bank, as noted above, and the
adverse effects of currency translation
differences of $0.3bn. Adjusted revenue
decreased by $253m (1%). Lower adjusted
revenue in RBWM resulted from investment
distribution income falling, reflecting weaker
market sentiment compared with a strong
performance in the first half of 2015. This
was partly offset by wider deposit spreads
and deposit balance growth. In GB&M,
adjusted revenue also declined, mainly in
Equities and Foreign Exchange, partly offset
by increases in Rates. By contrast, revenue
in Corporate Centre increased, notably as
income from Balance Sheet Management,
within Central Treasury, rose.
– Reported costs decreased by $104m,
as an increase in costs to achieve of
$354m was partly offset by the favourable
effects of currency translation differences
of $177m. Adjusted costs decreased by
$227m (2%), notably as a result of cost
management initiatives, which more than
offset the effects of inflation and our
investment growing our business in China’s
Pearl River Delta and the ASEAN region.
Europe
We serve clients in Europe with a broad range
of services, and facilitate international trade
and investment. London is the strategic hub
for GB&M.
Reported loss before tax included
significant items of $8.4bn
– Reported loss before tax was $6.8bn.
This compared with a reported profit
before tax of $688m in 2015, with the fall
driven by a net adverse movement in
significant items, including and the write-off
of goodwill relating to our GPB business,
adverse fair value movements arising from
changes in credit spreads on our own debt
designated at fair value compared with
favourable movements in 2015, and higher
costs to achieve.
– On an adjusted basis, profit before tax of
$1.6bn fell by $0.5bn or 26%, as revenue
decreased by $0.9bn (5%), partly offset by
lower costs (down by $369m or 2%), which
included a reduction of $0.5bn related to the
UK bank levy, and a reduction in LICs of
$37m (8%).
– Reported revenue fell by $5.0bn, primarily
as a result of adverse movements of $1.8bn
arising from changes in credit spread on
our own debt, compared with favourable
movements of $0.8bn in 2015, and the
adverse effects of currency translation
differences ($1.6bn). Adjusted revenue fell
by $945m or 5%, reflecting a reduction
in RBWM of $465m (7%), notably in life
insurance manufacturing in France as
a result of adverse market updates, and
in GPB reflecting the repositioning of the
business. In Corporate Centre, lower
adjusted revenue (down $0.8bn), partly
reflected higher adverse fair value
movements of $0.2bn relating to the
economic hedging of our long-term debt,
and higher interest expense of $0.2bn.
These reductions were partly offset by
growth in revenue in GB&M ($0.2bn),
notably in Rates, GLCM and Global Banking,
and in CMB ($0.2bn), in Credit and Lending.
– Reported costs rose by $2.6bn, primarily
reflecting a write-off of goodwill relating
to our GPB business of $3.2bn and an
increase of $1.5bn in costs to achieve, partly
offset by the favourable effects of currency
translation of $1.3bn. Adjusted costs fell by
$0.4bn (2%). Excluding the reduction in the
UK bank levy ($0.5bn), costs rose by 1%
driven by higher charges from our global
service and technology centres due to
increased transformation activities relating to
IT transformation and process improvement.
Profit before tax ($bn)
2016
2015
Profit before tax ($bn)
2016
2015
Reported
Adjusted
(6.8)
0.7
1.6
2.1
Reported
Adjusted
13.8
15.8
14.2
14.2
Strategic ReportHSBC Holdings plc Annual Report and Accounts 2016 Regions
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HSBC is the longest-serving international
bank in the region, with one of the largest
networks there, offering a universal banking
model and playing a vital role in facilitating
international trade. Our priority markets in
the region are Saudi Arabia, Egypt and the
United Arab Emirates (‘UAE’).
Strong performance reflecting robust
cost management and lower LICs
– Reported profit before tax was $1.5bn,
and was broadly unchanged from 2015.
– On an adjusted basis, profit before tax
increased by $178m (13%), primarily
reflecting a reduction in costs of $142m,
and a decrease in LICs of $135m, partly
offset by lower share of profit in associates
and joint ventures.
– Reported revenue fell by $210m,
primarily due to the adverse effects of
currency translation differences ($182m).
Adjusted revenue decreased marginally,
mainly reflecting reductions in RBWM in
Turkey as we restructured our business
there, and in CMB in the UAE, mainly within
GTRF, in part reflecting customer exits. This
was partly offset by GB&M with growth in
GLCM, which benefited from interest rate
rises across the region, in Global Banking
mainly driven by infrastructure and real
estate fee income in the UAE and Egypt,
and Securities Services due to higher
balances and spreads.
– Reported LICs fell by $154m with adjusted
LICs decreasing by $135m, mainly in CMB
in the UAE due to lower charges and the
release of provisions taken in 2015, notably
relating to exposures in the oil and gas sector.
– Costs were $137m lower on a reported
basis, and $142m (9%) lower on an adjusted
basis, mainly in the UAE and Turkey due
to cost-saving initiatives, which more
than offset our continued investment
in compliance.
– Share of profit in associates and joint
ventures fell by $70m (14%), mainly
due to higher impairment charges in
Saudi British Bank and lower revenue
in HSBC Saudi Arabia reflecting lower
asset management and investment banking
revenues. This was partly offset by revenue
growth in Saudi British Bank and well-
managed costs in both associates.
North America
The US is a key partner in global trade, and
the US dollar remains the primary currency
for global trade and payments. We support
our North American customers within the
NAFTA region and around the world, helping
them grow their businesses.
Continued run-off of the US CML
portfolio led to a fall in revenue,
partly offset by cost reductions
across all businesses
– Reported profit before tax was $185m,
and fell by $429m from 2015, partly
reflecting the net adverse effects of
significant items, notably higher costs to
achieve of $298m.
– Adjusted profit before tax fell by $208m
(14%) from the continued reduction in
our US CML run-off portfolio.
– Reported revenue fell $592m, and included
the adverse effects of significant items
($57m) and currency translation of $59m.
Movements in significant items were
primarily driven by minimal fair value
movements arising from changes in credit
spread on our own debt in 2016, compared
with favourable movements of $219m
in 2015, although these movements were
partly offset by a gain of $116m recorded
on our sale of Visa US shares in 2016 and
lower losses on disposal in our CML run-off
portfolio of $77m. Adjusted revenue was
$475m lower, primarily from a decrease
in income in the US CML run-off portfolio
in Corporate Centre. By contrast, adjusted
revenue in GB&M increased by 6%, notably
as a result of increased income in Rates
and Credit driven by higher client flows
and collateralised financing activity.
– LICs increased by $188m on a reported
basis and $191m on an adjusted basis,
primarily as a result of a small number of
individually assessed charges in the mining
sector in GB&M, as well as higher charges
in the US CML run-off portfolio. In CMB,
there were net collectively assessed
releases in 2016, compared with charges
in 2015, relating to exposures in the oil
and gas sector.
– Reported costs fell by $353m, although this
included a rise of $298m in costs to achieve
in significant items, partly offset by a
reduction in fines, penalties and charges
in relation to legal matters of $128m.
Adjusted costs fell by $460m, reflecting
lower staff costs across all businesses.
Latin America
We are focusing on growing our business
in Mexico, where we are among the top five
banks by assets and our branch network
has a market share of more than 10%. On
1 July 2016, we completed our sale of
operations in Brazil, but we will continue
to provide access to the region for large
multinational companies.
Continued progress in strategic
initiatives with a strong business
performance
– Reported loss before tax was $1.6bn.
This compared with a profit of $310m
in 2015, with the loss driven by a number
of significant items, primarily the accounting
loss on our sale of Brazil operations which
totalled $1.7bn.
– On an adjusted basis, profit before tax rose
by $0.4bn due to higher revenue, partly
offset by higher LICs and costs.
– Reported revenue fell by $3.9bn, partly
driven by the accounting loss on our sale
of Brazil operations ($1.7bn). The reported
results also include the revenue earned
in our Brazil business of $1.5bn in 2016,
compared with $3.3bn in 2015, and the
adverse effects of currency translation
differences of $0.9m. However, adjusted
revenue was $0.7bn (29%) higher than
for 2015. We increased revenue in RBWM
in Mexico with lending growth and an
increase in market share across core retail
portfolios, and in Argentina, reflecting wider
spreads and growth in deposits, together
with higher income from insurance.
Revenue also increased in GB&M, partly
due to increased client activity, and in CMB
from lending and deposit balance growth.
– Reported LICs fell by $266m, primarily
driven by a reduction in Brazil ($184m)
and favourable effects of currency
translation ($120m). By contrast, adjusted
LICs rose by $38m due to higher LICs
in RBWM in Mexico of $124m reflecting
growth in unsecured lending and a rise in
delinquency rates, partly offset by lower
LICs in CMB and GB&M.
– Reported costs fell by $1.7bn, and included
$1.1bn of costs relating to Brazil in 2016,
compared with $2.5bn in 2015. These also
included the favourable effects of currency
translation differences ($0.6bn). Excluding
these factors, adjusted costs increased by
$0.3bn (or 16%), although this was below
the average rate of inflation in the region
as we continued to control our costs.
Profit before tax ($bn)
2016
2015
Profit before tax ($bn)
2016
2015
Profit before tax ($bn)
2016
2015
Reported
Adjusted
1.5
1.5
1.6
1.4
Reported
Adjusted
Reported
Adjusted
0.2
0.6
1.3
1.5
(1.6)
0.3
0.6
0.2
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How we do business
We conduct our business intent on supporting
the sustained success of our customers, people
and communities.
Building lasting business relationships
We serve more than 37 million
customers around the world, ranging
from individuals to the largest
companies. We are committed to
conducting our business in a way
that delivers fair value to customers
and supports them in realising
their ambitions.
Conduct and ensuring
fair outcomes
Operating with high standards of
conduct is central to our long-term
success and ability to serve
customers. In 2016, we continued to
embed good conduct practice across
all our businesses, with a range of
initiatives to further improve the
service and experience we offer
to customers.
For example, in the UK we have
introduced a simplified overdraft
charging structure with real time
notifications to prompt customers
whenever they are at risk of incurring
unarranged overdraft charges. In the
UAE, we automated pricing for foreign
exchange to provide clients with
consistent and competitive rates for
cross-currency payments. We also
enhanced our investment advice
processes and introduced tools
and guidelines to make all our
customer communication clear
and easy to understand.
These and related initiatives are guided
by our Conduct Framework, which
focuses on delivering fair customer
outcomes and improved market
integrity through our behaviours. The
Conduct Framework guides activities to
strengthen our business, and increases
our understanding and awareness of
how the decisions we make affect
customers and other stakeholders.
Additional detail on the Conduct Framework is
available online at www.hsbc.com/conduct. For
further details on regulatory compliance risk and
on conduct-related costs included in significant
items, see pages 81 and 62, respectively.
Complaint types
(RBWM)
34%
24%
11%
Key
31%
Product – features and policy
Product – fees and charges
Other product-related complaints
Service complaints
22
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Our values define who we are
as an organisation and make
us distinctive.
Open
We are open to different ideas
and cultures, and value
diverse perspectives.
Connected
We are connected to our
customers, communities, regulators
and each other, caring about
individuals and their progress.
Dependable
We are dependable, standing firm
for what is right and delivering
on commitments.
Increasing quality of service
Innovation and technology
We rely on customer feedback to
help determine where we can make
improvements. In RBWM, we conducted
more than 1.6 million customer surveys in
2016 across multiple points of customer
interaction, including live online chat.
We also improved the speed and quality
of complaint resolution with more than
two-thirds of retail customer complaints
resolved on first contact, an improvement
of 9% compared with 2015.
Our customers increasingly use digital
channels to interact, including mobile
banking. We are investing in innovation
and technology to serve customers
better and enhance security around
financial transactions and customer
data. In 2016, we introduced voice
biometric identification technology
for retail customers globally. HSBC
is one of the first large-scale global
users of this technology.
Customer feedback helps us to identify
and address root causes of complaints.
For example, we increased capacity in
our call centres in response to concerns
about long waiting times in the UK.
We also addressed the most common
complaints related to fees and charges
through increased staff training and
customer communication. As a result,
complaints of this type reduced
significantly in a number of our markets,
including a 35% reduction in Hong Kong
and a 27% reduction in France.
In the UK, we also launched a mobile
application for commercial banking
customers that allows them to digitally
verify their identity. Since its launch,
nearly 80% of the customers able to
use this digital channel have chosen
to do so. We have also adjusted our
branch network to reflect changing
customer needs and concluded our retail
branch review in the UK, with a further
reduction of 117 branches in 2016.
In Hong Kong, we launched a research
and development lab in partnership with
the government to promote technology
development for the financial sector.
Areas of focus include biometrics,
data analytics, cybersecurity and
internet finance. Separately, we are
developing a mobile application to help
retail customers manage all of their
finances more effectively through
a single interface.
Sustainable finance
We recognise that reducing global
carbon dioxide emissions is a critical
challenge for society. We seek to be
a leader in managing climate change
risk while developing opportunities
with our customers. We continue to
facilitate investment in areas such as
infrastructure and renewable energy that
help lower carbon dioxide emissions.
In 2016, for example, we helped issue
the largest-ever renewable energy bond
in Canada to support a solar power
farm. In the UK, we provided financing
and asset management expertise to
support deployment of energy smart
meters throughout the country. In
December, we established a team
dedicated to sustainable finance within
the business in order to engage clients
more effectively in assessing and
responding to potential impacts from
climate change.
23
Our valuesFinancial Review Corporate Governance Financial Statements Shareholder Information HSBC Holdings plc Annual Report and Accounts 2016
Strategic Report | How we do business
255,000
workday hours
volunteered
$137m
charitable giving
in 2016
Empowering people
Valuing diversity
Building a more diverse and inclusive
workforce is critical to developing a
sustainable and successful business.
Our approach aims to increase and
leverage diversity of thought to improve
workforce agility, enhance our risk
management capability, drive innovation
and grow markets.
Our diversity and inclusion ambitions
focus on attracting, developing and
retaining talent that reflects our
customers and the communities where
we do business, and deploying that
talent effectively to anticipate and
address expectations. Our seven global
employee networks support this
strategy and focus on gender, age,
ethnicity, LGBT+, faith, working parents
and carers, and ability. We have
continued our focus on improving
gender balance within senior leadership.
Supporting our employees
We believe that if someone is worth
talking to, they are worth listening to.
Exchange meetings are our way of
doing that: meetings with no agendas
and where managers are participants
rather than leaders. These meetings
bring people together to listen to each
other, and allow people to express
themselves without interruption or
rebuttal. Our employee surveys indicate
that Exchange participants respond
positively by 11% more than others
when asked if there is honest,
two-way communication.
Similarly, our At Our Best programme
reinforces the habits required for a
strong culture, including asking for
feedback, being mindful of one’s own
emotions and deploying tools for
making better decisions. In 2016, nearly
100,000 employees attended an At Our
Best training course, and a further
18,000 managers attended similar
training centred on managing teams.
24
The programme is supported through
a behaviour recognition scheme and
the launch of Our Charter, a framework
for good decision-making.
To further strengthen our culture and
promote positive behaviours, we have
developed culture change plans that are
regularly discussed in global and local
management forums. The plans
emphasise enabling a speak-up culture,
principles-based judgement and other
behaviours that are key to supporting
the Group’s strategic objectives such as
managing financial crime risk. In 2016,
our employees completed more than
eight million courses in person or through
online learning in order to build skills and
reinforce behaviours more broadly.
We have a wellbeing programme that
provides benefits and services to support
employees’ wellness. For example, we
offer free, confidential counselling to
address personal issues at home or
work. We also allow employees who
have been at HSBC for five years or more
to apply to take a sabbatical. Above
all, we aim to provide a working
environment where colleagues can talk
openly about wellbeing issues, including
anxiety and stress. Such measures are
particularly valuable amid the demands
of multiple change programmes and
financial crime remediation initiatives.
Whistleblowing
We operate a global whistleblowing
platform, HSBC Confidential, which
allows staff to report matters of concern
confidentially. During 2016, employees
have raised more than 1,100 cases.
Common themes among the cases
raised included concerns regarding staff
behaviour and recruitment practices,
allegations of fraud perpetrated by staff,
and weaknesses in incentive
arrangements and information security.
Employees (FTEs) by region
7%
9%
5%
26%
53%
Key
Asia
Europe
Middle East and North Africa
North America
Latin America
Exchange meeting insights
(% of employees who believe Exchange
allows them to talk freely about issues
important to them)
84%
Employee retention
81.7%
Gender diversity statistics
Female
Male
Holdings Board
Group Management
Board
Senior
employees
All employees
(30%)
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6
11
1 (8%)
6,551
2,230 (25%)
116,077
125,230
(48%)
(52%)
(70%)
(92%)
(75%)
HSBC Holdings plc Annual Report and Accounts 2016 How we do business
Ensuring sustainable outcomes
Our Global Sustainability function works
with our global businesses, global
functions and our regions to manage
environmental and social issues that
affect the Group and on which we can
have an impact. Key issues are reviewed
below and further details are available
online at www.hsbc.com/sustainability.
Sustainability performance data for 2016
will be available in spring 2017.
Climate change
We have committed to supporting the
global shift to a low-carbon economy.
Our award-winning Global Research
team published 60 reports on
sustainability topics in 2016. These
included the implications of the Paris
Agreement on climate change.
In light of the Paris Agreement, we
reviewed our mining and metals policy,
and included restrictions on lending to
new thermal coal mines, in addition to
our existing policies on coal-fired power
plants and deforestation. We also added
more specific guidance on human
rights impacts that could arise in the
mining sector.
For more information about our sustainability
risk policies see page 84.
We completed a number of GB&M and
CMB client transactions that help lower
carbon dioxide emissions in areas
including infrastructure and renewable
energy. In 2016, HSBC was the third-
ranked bookrunner for green, social
and sustainability bonds that exceeded
$250m excluding self-led transactions
by Dealogic. We also published a report
on our own green bond, issued in 2015.
We scored the highest grade in a global
index run by CDP, a not-for-profit
organisation that rates companies and
governments on how they are tackling
the climate change challenge. We also
published an HSBC Statement on
Climate Change, providing a summary
of our approach and initiatives.
We are reducing the amount of energy
we consume, and increasing the
proportion from renewable sources.
By the end of 2016, more than 17% of
our electricity was from wind or solar
farms, compared with 9% in 2015. We
signed additional agreements in 2016
to increase the percentage of the
electricity we use from new wind
and solar sources. In total, we have
agreements in place to meet 23% of
our global electricity needs from these
sources by 2018.
We report our carbon dioxide emissions
on page 62.
Sustainable investment
Our Global Research team has expanded
its environmental, social and governance
research offering, hiring analysts to
specifically cover social and governance
drivers, and to cover the fast-growing
green bond market.
Our Global Asset Management
business published a new climate
change policy to encourage the
transition to a low-carbon economy
and increase the climate resilience
of clients’ investments.
Human rights
We have issued our first statement
as required by the UK’s Modern
Slavery Act, which can be found
at www.hsbc.com.
We updated our supplier code of
conduct to take account of revised
legislation on modern slavery and
human rights. More than 240 of our
largest suppliers have already accepted
this code.
Community investment
In 2016, we contributed $137m to
charitable programmes, and our
employees volunteered 255,000
hours in community activities during
the working day.
Our flagship environmental partnership,
the HSBC Water Programme, exceeded
its five-year targets at the end of 2016.
Building on this success, we are
extending the programme for a further
three years.
In 2016, we renewed our commitments
to our two flagship global education
programmes, the HSBC Youth
Opportunities Programme and Junior
Achievement More than Money, for
another three years. These programmes
help young people access education
and realise their potential.
Tax
Taxes paid by region
$0.9bn
$0.3bn
$0.2bn
$7.4bn
$2.8bn
Key
UK
Rest of Europe
Asia
Middle East and North Africa
North America
Latin America
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$0.8bn
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.
Our approach to tax
We apply the spirit and the letter of the
law in all territories where we operate.
We have adopted the UK Code of
Practice for the Taxation of Banks. As a
consequence, we pay our fair share of
tax in the countries in which we operate.
We continue to strengthen our
processes to help ensure our banking
services are not associated with any
arrangements known or suspected to
facilitate tax evasion. HSBC continues
to apply global initiatives to improve
tax transparency such as:
– the US Foreign Account Tax
Compliance Act (‘FATCA’);
– the OECD Standard for Automatic
Exchange of Financial Account
Information (also known as the
Common Reporting Standard);
– the Capital Requirements Directive IV
(‘CRD IV’) Country by Country
Reporting; and
– the OECD Base Erosion and Profit
Shifting (‘BEPS’) initiative.
We do not expect BEPS or similar
initiatives adopted by national
governments to adversely impact
HSBC’s results. Further financial
and tax information for the countries
in which we operate will be published
in 2017 in a CRD IV Country by Country
report at www.hsbc.com/tax.
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Financial Review Corporate Governance Financial Statements Shareholder Information HSBC Holdings plc Annual Report and Accounts 2016
Risk overview
We actively manage risk to protect
and enable the business.
Managing risk
HSBC has maintained a conservative
and consistent approach to risk
throughout its history, helping
to ensure we protect customers’
funds, lend responsibly and support
economies. By carefully aligning our
risk appetite to our strategy, we aim to
deliver long-term shareholder returns.
All employees are responsible for the
management of risk, with the ultimate
accountability residing with the Board.
We have a strong risk culture, which
is embedded through clear and
consistent communication and
appropriate training for all employees.
A comprehensive risk management
framework is applied throughout the
Group, with effective governance
and corresponding risk management
tools. This framework is underpinned
by our risk culture and reinforced
by the HSBC Values and our Global
Standards programme.
Our Global Risk function oversees
the framework, and is led by the
Group Chief Risk Officer, an executive
Director. It is independent from the
global businesses, including our sales
and trading functions, to provide
challenge, appropriate oversight,
and balance in risk/reward decisions.
HSBC’s risk appetite defines its
desired forward-looking risk profile,
and informs the strategic and financial
planning process.
Top and emerging risks
It is articulated in our Risk Appetite
Statement, which is approved by
the Board. Key elements include:
– risks that we accept as part of doing
business, such as credit risk and
market risk;
– risks that we incur as part of doing
business, such as operational risk,
which are actively managed to remain
below an acceptable tolerance; and
– risks for which we have zero tolerance,
such as knowingly engaging in
activities where foreseeable
reputational risk has not
been considered.
We operate a comprehensive stress
testing programme to help ensure the
strength and resilience of HSBC, taking
part in regulators’ as well as our own
internal stress tests. In 2016, we
participated in the annual stress test
by the Bank of England, our lead
regulator, and again exceeded its
requirements comfortably. This reflected
our conservative risk appetite, and
our diversified geographical and
business mix. It also reflected our
ongoing strategic actions, including
the sale of our operations in Brazil, RWA
reductions in GB&M and continued
sales from our US CML run-off portfolio.
Our internal stress test scenarios include
potential macroeconomic, geopolitical
and operational risk events, and events
that are applicable to HSBC. The results
help management understand material
risks and consider potential mitigants.
Our risk management framework and risks
associated with our banking and insurance
manufacturing operations are described on pages
68 and 82 respectively.
Key risk appetite metrics
Component Measure
Risk appetite
2016
Returns
Return on average ordinary shareholders’ equity
≥10.0% 0.8%
Capital
Common equity tier 1 ratio – CRD IV end point basis
≥11.0% 13.6%
Liquidity
HSBC consolidated balance sheet
advances-to-deposits ratio
≤90% 67.7%
Loan
impairment
charges
Loan impairment charges as % of advances: RBWM
≤0.50% 0.37%
Loan impairment charges as % of advances:
wholesale (CMB, GB&M and GPB)
≤0.45% 0.27%
Our top and emerging risks framework
helps enable us to identify current and
forward-looking risks so that we may
take action to either prevent them
materialising or limit their effect.
Top risks are those that may have a
material impact on the financial results,
reputation or business model of the
Group in the year ahead. Emerging
risks are those that have large
unknown components and may form
beyond a one-year horizon. If these
risks were to occur, they could have
a material effect on HSBC.
During 2016, we made two changes
to our top and emerging risks to reflect
our assessment of their effect on HSBC.
Firstly, ‘IT systems infrastructure and
resilience’ was added as a new risk
due to the need to ensure core banking
systems remain robust as digital and
mobile banking services continue to
evolve. Secondly, ‘Dispute risk’ was
removed as the key drivers of this
thematic issue have already materialised
and are therefore reported through other
reporting channels. In addition, three
thematic risks were renamed to better
reflect the challenges facing HSBC.
We use the new names in the table
that follows.
Our current top and emerging risks are
summarised on the next page and discussed
in more detail on page 64.
Our approach to identifying and monitoring
top and emerging risks is described on page 70.
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Trend Mitigants
Externally driven
Economic outlook
and capital flows
Geopolitical risk
Turning of the credit cycle
Cyber threat and
unauthorised access
to systems
Regulatory and technological
developments with adverse
impact on business model
and profitability
Regulatory focus on
conduct of business
and financial crime
US deferred prosecution
agreement and related
agreements and
consent orders
Internally driven
IT systems infrastructure
and resilience
Impact of organisational
change and regulatory
demands on employees
Execution risk
Third-party risk management
Enhanced model risk
management expectations
Data management
Risk heightened during 2016
Risk remained at the same level as 2015
Thematic risk renamed during 2016
We are actively monitoring our wholesale credit and trading portfolios to identify areas of
stress following the UK electorate’s vote to leave the European Union. We have also undertaken
stress tests on our businesses and portfolios to assess potential impacts under a range of
possible exit scenarios.
We have increased physical security at our premises where the risk of terrorism is heightened
and have enhanced our major incident response capabilities.
A number of sectors remain under enhanced monitoring with risk appetite and new lending
significantly curtailed, including our oil and gas and commodities lending portfolios.
We have brought all cybersecurity initiatives together under one programme in order to
strengthen our resilience and defence capabilities. We have revised our cybersecurity risk
appetite to reflect our evolving defence approach.
We are actively engaged with regulators and policy makers to help ensure that new regulatory
requirements are considered fully and can be implemented in an effective manner. We have
established a specialist digital solutions team to lead our response to new technologies.
We created a new function, Financial Crime Risk, which brings together all areas of financial
crime risk management at HSBC and continued to enhance our management of conduct in areas
including the treatment of potentially vulnerable customers, market surveillance, employee
training and performance management.
We are continuing to take concerted action to remediate anti-money laundering and sanctions
compliance deficiencies and to implement Global Standards.
We have invested in specialist teams and are upgrading our systems capability to enhance data
and digital capabilities and help ensure strong delivery quality and resilience to customers.
We have increased our focus on resource planning and employee retention and well-being, and
are developing initiatives to equip line managers with skills to both manage change and support
their employees.
The Group Change Committee monitored the progress of the high priority programmes across
the Group that support the strategic actions, reviewing progress on deliverables and addressing
resource prioritisation issues as they arose.
To help enable a consistent risk assessment of the third-party services that the Group utilises, we
are implementing a framework to provide a holistic view of third-party risks, which assesses third
parties against key criteria, combined with associated control monitoring, testing and assurance
throughout the third-party lifecycle.
We have implemented a new global policy on model risk management and updated the model
governance framework to address key internal and regulatory requirements. Additional resources
have also been recruited to support the independent model review function.
We continued to enhance our data governance, quality and architecture to help enable consistent
data aggregation, reporting and management.
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Strategic Report
Remuneration
Our remuneration policy supports the achievement
of our strategic objectives by balancing reward for
short- and long-term sustainable performance.
Remuneration principles
The remuneration strategy for our
employees is based on a series of
key principles.
What we do
What we don’t do
– Focus on total compensation
with a strong link between pay
and performance
– Judge not only what is achieved,
but also how it is achieved, in line
with the HSBC Values
– Operate a thorough performance
management and HSBC Values
assessment process
– Reward inappropriate or excessive
risk taking or short-term performance
at the expense of long-term
company sustainability
– Use only a formulaic approach to
determine bonuses for our executives
– Award discretionary bonuses to
employees rated unacceptable against
the HSBC Values and behaviours
– Recognise and reward our employees
– Allow our employees to hedge against
for outstanding positive behaviour
– Design our policy to align
compensation with long-term
stakeholder interests
– Apply consequence management
to strengthen the alignment between
risk and reward
their unvested or retained awards
– Offer employment contracts with a
notice period of more than 12 months
– Have pre-arranged individual
severance agreements
Embedding our values in our remuneration framework
Instilling the right behaviours, and
driving and encouraging actions that
are aligned to organisational values
and expectations, are essential. We
therefore have a number of programmes
to reinforce our values.
Pay
Outcomes
Positive
adjustments
– Individuals who exhibit exceptional conduct and behaviours
are awarded positive variable pay adjustments during the year.
Global
consequence
management
policy
– Ensures clear messaging to employees on the impact of any
inappropriate conduct as part of reward communications, with
consistency in approach and actions taken depending on the
severity of the misconduct.
Global
recognition
programme
– Our global recognition programme is now available in more than
50 countries.
– In 2016, approximately 600,000 recognitions were made with a total
value of $8.1m.
Performance
management
– Employees set objectives, which connect business, team and individual
goals and are guided by expected behaviours aligned to our core values.
– All employees receive a behaviour rating based on their adherence
to HSBC Values to ensure performance is judged not only on what is
achieved, but also on how it is achieved.
– Employees and managers are encouraged to hold frequent conversations
throughout the year, exploring alternative ways to stay connected outside
the regular performance management cycle using a mix of informal and
formal check-ins on a range of topics, including performance,
development and wellbeing.
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How we set our variable pay pool
When deciding on the variable pay pool, the Remuneration Committee
considers a number of factors, which are set out in the following table:
Performance and
risk appetite
statement
Countercyclical
funding
methodology
Distribution of
profits
Commerciality
and affordability
– Our variable pay pool takes into account our performance
in the context of our risk appetite.
– To dampen effects of economic cycles, the variable pay
pool’s size has a floor and a ceiling, and we also limit the
payout ratio as performance increases to prevent the risk
of inappropriate behaviour.
– Our funding methodology ensures that the distribution of
post-tax profit between capital, shareholders and variable
pay is appropriate, and that the majority of post-tax profit
is allocated to capital and shareholders.
– We face challenges arising from being headquartered in
the UK, which has more stringent reward practices. We
take into account these challenges in determining the size
of the variable pay pool to ensure we can continue to
attract and retain talent in key markets.
Our variable pay pool for 2016
Our variable pay pool is $3,035m, a decrease
of 12.3% compared with 2015.
Variable pay pool ($m)
2015
2016
Group
Of which Global
Banking and Markets
3,035
3,462
954
1,086
Remuneration for our executive Directors
Our remuneration policy for executive Directors was approved at our
2016 Annual General Meeting and implemented for the first time in 2016.
Full details of our remuneration policy can be found online in our
Directors’ Remuneration Policy Supplement 2016.
The table below shows the amount our
executive Directors earned in 2016.
For details of Directors’ pay and performance for 2016,
see the Directors’ Remuneration Report on page 153.
(Audited)
(in £000)
Base
salary
Fixed pay
allowance
Pension
Annual
incentive
GPSP/LTI 1 Sub-total
Taxable
benefits
Non-
taxable
benefits
Notional
returns
Total
Douglas
Flint
2016
1,500
2015
1,500
—
—
450
750
—
—
Stuart
Gulliver
Iain
Mackay
Marc
Moses
2016
1,250
1,700
375
1,695
2015
1,250
1,700
2016
2015
2016
2015
700
700
700
700
950
950
950
950
625
210
350
210
350
1,072
987
1,068
—
—
—
1,950
2,250
5,020
1,969
6,616
—
2,847
1,101
4,169
100
151
557
662
52
54
15
6
86
95
71
53
37
28
38
29
—
—
27
9
17
5
18
5
2,136
2,496
5,675
7,340
2,953
4,256
2,936
3,968
1,005
—
2,865
827
1,101
3,928
1 Executive Directors received Group Performance Share Plan (‘GPSP’) awards for 2015. For 2016, executive Directors will receive a long-term incentive (‘LTI’)
award, with a performance period ending in 2019, which will be included in the single figure table for the financial year ending on 31 December 2019. If target
performance is achieved for this award, LTI payout would be 50% of grant value. In this case, the 2016 total single figure for year-on-year comparison would
be (in £000) £7,670 for Stuart Gulliver, £4,069 for Iain Mackay and £4,052 for Marc Moses.
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Report of the Directors | Financial summary
Financial summary
Use of non-GAAP financial measures
Critical accounting estimates and judgements
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 2016
Page
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32
32
34
34
35
36
36
36
37
38
38
40
40
41
42
The management commentary included in the Strategic Report,
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 starting on page 183.
In measuring our performance, the financial measures that we
use include those derived from our reported results in order to
eliminate factors that distort period-on-period comparisons.
These are considered non-GAAP financial measures.
Non-GAAP financial measures that we use throughout the
Annual Report and Accounts 2016 are described below. Non-
GAAP financial measures are described and reconciled to the
closest reported financial measure when used.
The global business segmental results on pages 45 to 60
are presented on an adjusted basis in accordance with IFRS 8
‘Operating Segments’ as detailed in ‘Basis of preparation’ on
page 44.
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.
We use ‘significant items’ to describe collectively the group
of individual adjustments excluded from reported results
when arriving at adjusted performance. These items, which
are detailed below, are ones that management and investors
would ordinarily identify and consider separately when
assessing performance to understand better the underlying
trends in the business.
These items include the operating results for our Brazil
operations sold to Banco Bradesco S.A. on 1 July 2016, as
well as the loss recognised on disposal.
We consider adjusted performance provides useful information
for investors by aligning internal and external reporting,
identifying and quantifying items management believes to
be significant and providing insight into how management
assesses year-on-year performance.
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HSBC Holdings plc Annual Report and Accounts 2016
Foreign currency translation differences
Foreign currency translation differences reflect the movements
of the US dollar against most major currencies during 2016.
We exclude our reporting currency translation differences when
deriving constant currency data because using these data
allows us to assess balance sheet and income statement
performance on a like-for-like basis to understand better
the underlying trends in the business.
Foreign currency translation differences
Foreign currency translation differences for 2016 are computed by
retranslating into US dollars for non-US dollar branches, subsidiaries,
joint ventures and associates:
• the income statements for 2015 and 2014 at the average rates of
exchange for 2016; and
• the balance sheets at 31 December 2015 and 31 December 2014 at
the prevailing rates of exchange on 31 December 2016.
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 period on the basis
described above.
Significant items
The tables on pages 54 to 60 detail the effects of significant
items on each of our global business segments and
geographical regions in 2016, 2015 and 2014.
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 1.2 on the Financial Statements. The accounting policies
listed below are highlighted as they involve a high degree of
uncertainty and have a material impact on the financial
statements:
•
Impairment of loans and advances: For collective
impairment allowances, estimation methods include the
use of historical information supplemented by significant
management judgement about whether current economic
and credit conditions are such that actual incurred losses
are likely to be greater or less than experienced in the past.
For individually assessed loans, judgements are made about
the financial condition of individual borrowers, which can
involve a wide range of factors relating to their business and
the value of any security. The exercise of judgement requires
the use of assumptions that are highly subjective and
sensitive, in particular to changes in economic and credit
conditions across a large number of geographical areas.
See Note 1.2(d) on page 198.
• Deferred tax assets: The most significant judgements relate
to those made in respect of expected future profitability.
See Note 1.2(h) on page 202.
• Valuation of financial instruments: In determining the fair
value of financial instruments a variety of valuation
techniques are used, some of which feature significant
unobservable inputs and are subject to substantial
uncertainty. See Note 1.2(c) on page 197.
•
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, based on a number of management
assumptions. See Note 1.2(a) on page 196.
• Goodwill impairment: A high degree of uncertainty is
involved in estimating the future cash flows of the cash
generating units (‘CGUs’) and the rates used to discount
these cash flows. See Note 1.2(a) on page 196.
• Provisions: A high degree of judgement may be required
due to 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. See Note 1.2(i) on page 202.
Consolidated income statement
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/(expense)
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
Attributable to:
– ordinary shareholders of the parent company
– preference shareholders of the parent company
– other equity holders
– non-controlling interests
Profit for the year
Five-year financial information
Basic earnings per share
Diluted earnings per share
Dividends per ordinary share
Dividend payout ratio
Post-tax return on average total assets
Return on risk-weighted assets
Return on average ordinary shareholders’ equity
Average foreign exchange translation rates to $:
$1: £
$1: €
Footnotes
1
2
3
Given 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 the expectations on which
management’s estimates are based, resulting in the recognition
and measurement of materially different amounts from those
estimated by management in these Financial Statements.
2016
$m
29,813
12,777
9,452
(2,666)
1,385
95
9,951
—
(971)
59,836
(11,870)
47,966
(3,400)
44,566
(39,808)
4,758
2,354
7,112
(3,666)
3,446
1,299
90
1,090
967
3,446
2016
$
0.07
0.07
0.51
%
728.6
0.1
0.7
0.8
0.741
0.904
2015
$m
32,531
14,705
8,723
1,532
2,068
123
2014
$m
34,705
15,957
6,760
2,473
1,335
311
2013
$m
35,539
16,434
8,690
768
2,012
322
10,355
11,921
11,940
—
1,055
71,092
—
1,131
74,593
—
2,632
78,337
(11,292)
(13,345)
(13,692)
59,800
(3,721)
56,079
(39,768)
16,311
2,556
18,867
(3,771)
15,096
61,248
(3,851)
57,397
(41,249)
16,148
2,532
18,680
(3,975)
14,705
64,645
(5,849)
58,796
(38,556)
20,240
2,325
22,565
(4,765)
17,800
2012
$m
37,672
16,430
7,091
(2,226)
1,189
221
13,044
7,024
2,100
82,545
(14,215)
68,330
(8,311)
60,019
(42,927)
17,092
3,557
20,649
(5,315)
15,334
12,572
13,115
15,631
13,454
90
860
1,574
15,096
90
483
1,017
14,705
90
483
1,596
17,800
90
483
1,307
15,334
2015
2014
2013
2012
$
0.65
0.64
0.50
%
76.5
0.6
1.6
7.2
$
0.69
0.69
0.49
%
71.0
0.5
1.5
7.3
$
0.84
0.84
0.48
%
57.1
0.7
2.0
9.2
$
0.74
0.74
0.41
%
55.4
0.6
1.8
8.4
0.654
0.902
0.607
0.754
0.639
0.753
0.631
0.778
For footnotes, see page 63.
Unless stated otherwise, all tables in the Annual Report and Accounts 2016 are presented on a reported basis.
For a summary of our financial performance in 2016, see page 14.
For further financial performance data for each global business and geographical region, see pages 45 to 51 and 54 to 60, respectively.
HSBC Holdings plc Annual Report and Accounts 2016
31
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Financial summary
Group performance by income and expense item
Net interest income
Interest income
Interest expense
Net interest income
Average interest-earning assets
Gross interest yield
Less: cost of funds
Net interest spread
Net interest margin
For footnotes, see page 63.
Footnotes
4
5
6
7
2016
$m
42,414
(12,601)
29,813
2015
$m
47,189
(14,658)
32,531
2014
$m
50,955
(16,250)
34,705
1,723,702
1,726,949
1,786,536
%
2.46
(0.87)
1.59
1.73
%
2.73
(1.00)
1.73
1.88
%
2.85
(1.05)
1.80
1.94
In 2016, we earned net interest income of $0.9bn in Brazil
(2015: $2.1bn) from average interest earning assets in Brazil of
$25.8bn (2015: $40.0bn). Our net interest margin excluding
Brazil was 1.70% (2015: 1.79%).
Summary of interest income by type of asset
2016
2015
2014
Average
balance
Interest
income
Footnotes
$m
$m
203,799
1,510
865,356
29,272
168,207
430,775
55,565
1,227
7,248
3,157
1,723,702
42,414
Yield
%
0.74
3.38
0.73
1.68
5.68
2.46
Average
balance
Interest
income
$m
$m
221,924
2,277
909,707
33,104
162,308
396,113
36,897
1,301
7,508
2,999
1,726,949
47,189
Yield
%
1.03
3.64
0.80
1.90
8.13
2.73
Average
balance
Interest
income
$m
$m
237,148
3,068
931,311
37,429
198,273
399,816
19,988
1,800
8,323
335
1,786,536
50,955
Yield
%
1.29
4.02
0.91
2.08
1.68
2.85
8, 9
179,780
3,897
2.17
195,285
4,626
2.37
238,958
5,596
2.34
(9,127)
653,115
(10,606)
682,143
(14,015)
668,564
2,547,470
46,311
1.82
2,593,771
51,815
2.00
2,680,043
56,551
2.11
Short-term funds and loans and advances
to banks
Loans and advances to customers
Reverse repurchase agreements –
non-trading
Financial investments
Other interest-earning assets
Total interest-earning assets
Trading assets and financial assets
designated at fair value
Impairment allowances
Non-interest-earning assets
Year ended 31 Dec
For footnotes, see page 63.
Summary of interest expense by type of liability and equity
Deposits by banks
Financial liabilities designated at fair value
– own debt issued
Customer accounts
Repurchase agreements – non-trading
Debt securities in issue
Other interest-bearing liabilities
Footnotes
10
11
12
2016
Average
balance
Interest
expense
$m
49,782
62,042
1,074,661
118,789
114,343
22,387
$m
342
942
5,492
626
2,807
2,392
Cost
%
Average
balance
$m
0.69
55,863
1.52
58,489
0.51 1,075,901
0.53
2.45
117,947
129,039
10.68
28,396
2015
Interest
expense
$m
378
717
7,401
355
3,521
2,286
Cost
%
0.68
Average
balance
$m
61,217
1.23
66,374
0.69 1,088,493
0.30
2.73
8.05
190,705
129,724
10,120
2014
Interest
expense
$m
481
837
9,131
652
4,554
595
Total interest-bearing liabilities
1,442,004
12,601
0.87 1,465,635
14,658
1.00 1,546,633
16,250
Cost
%
0.79
1.26
0.84
0.34
3.51
5.88
1.05
Trading liabilities and financial liabilities
designated at fair value (excluding own
debt issued)
Non-interest bearing current accounts
Total equity and other non-interest
bearing liabilities
Year ended 31 Dec
For footnotes, see page 63.
138,486
1,986
1.43
151,294
2,071
1.37
178,518
2,856
1.60
184,016
782,964
190,914
785,928
185,990
768,902
2,547,470
14,587
0.57 2,593,771
16,729
0.64 2,680,043
19,106
0.71
32
HSBC Holdings plc Annual Report and Accounts 2016
Significant items and currency translation
Significant items
– releases/(provisions) arising from the ongoing review of compliance with the UK Consumer Credit Act
– acquisitions, disposals and dilutions
Currency translation
Year ended 31 Dec
2016
$m
951
2
949
951
2015
$m
2,104
(10)
2,114
1,808
3,912
Net interest income of $29.8bn decreased by $2.7bn or 8%
compared with 2015. This was partly the impact of the disposal
of our operations in Brazil on 1 July 2016, which reduced net
interest income by ($1.2bn), and adverse effects of currency
translation differences. These decreases were partly offset by
growth in net interest income in Asia, notably in Hong Kong,
and in Mexico, partly offset by a decrease in the UK and the US.
Net interest margin in 2016 of 1.73% was 15 basis points (‘bps’)
lower than 2015. This reflected the effects of the disposal and
currency translation noted above, which had an adverse effect
of 8bps. The remainder of the decrease was primarily as a result
of lower yields on customer lending, which had an adverse
effect of 9bps on our net interest margin, partly reflecting the
continuing run-off of our US CML portfolio. In addition, we
recorded an increase in the cost of debt, partly offset by a lower
cost of funds on customer accounts, notably in Hong Kong.
Interest income
Interest income decreased by $4.8bn compared with 2015,
notably driven by our sale of Brazil operations ($3.1bn) and
currency translation. Excluding these factors, total interest
income increased marginally.
Interest income on loans and advances to customers decreased
by $3.8bn, driven by a reduction of $1.9bn relating to our
operations in Brazil, and the adverse effects of currency
translation. Excluding these factors, interest income on
customer lending was broadly unchanged. The effects of
growth in balances in Europe and Mexico, together with central
bank rate rises in Mexico and Argentina, were broadly offset by
the run-off of our US CML portfolio and the effect of lower
average balances in Asia.
Income growth in Mexico was driven by growth in average
balances, reflecting gains in market share and higher yields,
notably on term lending due to central bank rate increases.
Income increased in Europe as the effect of growth in average
balances, primarily an increase in term lending volumes, more
than offset the effect of lower yields on both term lending and
mortgages, reflecting competitive pricing in the market
and lower interest rates in the eurozone. By contrast, interest
income decreased in Asia, as a result of lower average balances
in term lending, despite increased mortgage balances, notably
in Hong Kong. Yields in Asia also decreased marginally as a
result of central bank rate cuts in China during 2015, although
these were partly offset by rate rises in Hong Kong.
Interest income on short-term funds and financial investments
decreased by $1.0bn in 2016, including a decrease of $0.7bn
relating to Brazil. Excluding the effect of currency translation
and Brazil, interest income on short-term funds and financial
investments increased by $0.2bn. The movement predominantly
reflected increases in available-for-sale debt securities in Asia,
reflecting growth in our surplus liquidity. In North America
income increased, driven by higher balances primarily due to
net purchase of US Treasury securities, and a higher yield,
following the US rate rise at the end of 2015.
Interest income on reverse repurchase agreements – non-
trading was $0.1bn lower, including a decrease relating to Brazil
($0.4bn). Excluding currency translation and Brazil, income
increased primarily in North America, reflecting higher balances
and improved market rates.
Interest expense
Reported interest expense decreased by $2.1bn, driven by the
reductions relating to Brazil ($1.8bn) and currency translation.
Excluding these factors, interest expense rose by $0.4bn, as
increases in the cost of debt and repurchase agreements were
partly offset by decreases in interest expense on customer
accounts.
Interest expense on customer accounts decreased by $1.9bn,
including amounts relating to Brazil ($0.8bn) and currency
translation. Excluding these factors, interest expense on
customer accounts decreased by $0.5bn, driven by Asia and
Europe, partly offset by Mexico, Argentina and North America.
In Asia, the effect of an increase in balances was more than
offset by a lower cost of funds, partly a change in portfolio mix
towards lower-cost accounts in Hong Kong, which more than
offset the effect of central bank rate rises. In addition to these
factors, the central bank rate cuts in a number of markets,
including mainland China, Australia and India, further lowered
our cost of funds. In Europe, interest expense decreased as a
result of a reduction in the cost of funds, partly due to a
negative rate environment, although the average balances
increased, notably in the UK. These decreases were partly offset
by higher interest expense on customer accounts in the US,
Mexico and Argentina, reflecting promotional deposit offerings
and the central bank rate rises.
Interest expense on debt securities in issue and own debt
designated at fair value decreased by $0.5bn, including the
impact of Brazil ($0.8bn). Excluding currency translation and the
effect of Brazil, interest expense increased by $0.4bn. This was
driven by an increase in the cost of funds and an increase in
average balances, as redemptions across the Group were more
than offset by issuances of senior debt from HSBC Holdings plc
(‘HSBC Holdings’). The increase in the cost of debt designated
at fair value was as a result of longer maturities and the
structural subordination of our new issuances from HSBC
Holdings.
Interest expense increased on repurchase agreements by
$0.3bn, notably in North America, reflecting higher balances
and market rates.
HSBC Holdings plc Annual Report and Accounts 2016
33
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Financial summary
Net fee income
Account services
Funds under management
Cards
Credit facilities
Broking income
Unit trusts
Imports/exports
Remittances
Underwriting
Global custody
Insurance agency commission
Other
Fee income
Less: fee expense
Year ended 31 Dec
Significant items and currency translation
Significant items
– acquisitions, disposals and dilutions
Currency translation
Year ended 31 Dec
Net fee income fell by $1.9bn compared with 2015, partly as a
result of the adverse effects of currency translation of $0.6bn,
primarily in the UK, Argentina and Mexico, which notably
affected account services, cards and fee expense. The sale of
our operations in Brazil to Banco Bradesco S.A. reduced net
fee income by a further $0.3bn. In addition, the decrease was
driven by RBWM in Hong Kong, reflecting risk-averse retail
investor sentiment in Asia.
Fee income from broking and unit trusts decreased by $525m,
largely due to a strong performance in Hong Kong in the first
half of 2015. The decrease was mainly in RBWM in Hong Kong,
from lower securities broking income resulting from a reduction
in stock market turnover.
In addition, fee income from cards decreased by $311m,
primarily reflecting lower interchange fees in the UK, following
regulatory change in late 2015.
Net trading income
Trading activities
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
2016
$m
2,417
2,076
1,970
1,795
1,060
863
820
766
705
662
419
2,116
15,669
(2,892)
12,777
2015
$m
2,745
2,570
2,281
1,919
1,441
1,007
971
772
762
721
519
2,308
18,016
(3,311)
14,705
2016
$m
233
233
2014
$m
3,407
2,658
2,460
1,890
1,371
1,005
1,115
833
872
726
516
2,692
19,545
(3,588)
15,957
2015
$m
533
574
1,107
Fee income from funds under management decreased by
$0.5bn, partly driven by a reclassification between fee income
from funds under management and fee expense in Germany
($0.2bn). In addition, fee income from funds under management
decreased in RBWM’s Global Asset Management business,
driven by a change in the product mix towards lower margin
fixed income products, as well as in GPB in Switzerland.
The reduction in fee income from funds under management
was partly offset by a fall in fee expense of $419m, primarily
reflecting lower brokerage fees, and the reclassification noted
above.
Footnote
2016
$m
8,702
1,386
1
(5)
23
(655)
9,452
2015
$m
7,285
1,775
(11)
15
(11)
(330)
8,723
2014
$m
5,419
1,907
1
34
19
(620)
6,760
Fair value movement on non-qualifying hedges
13
Year ended 31 Dec
For footnote, see page 63.
34
HSBC Holdings plc Annual Report and Accounts 2016
Significant items and currency translation
Significant items
Included within trading activities
– favourable debit valuation adjustment on derivative contracts
Included in other net trading income
– fair value movement on non-qualifying hedges
– acquisitions, disposals and dilutions
Total significant items
Currency translation
Year ended 31 Dec
For footnote, see page 63.
Footnote
13
2016
$m
26
26
(508)
(687)
179
(482)
(482)
2015
$m
230
230
(42)
(327)
285
188
596
784
Net trading income of $9.5bn was $0.7bn higher than in 2015,
despite the net adverse effects of $1.3bn of significant items
and currency translation summarised in the table above. The
increase (excluding the movements tabulated above) was driven
by:
•
favourable movements on assets held as economic hedges
of foreign currency debt designated at fair value of $1.7bn in
2016 compared to minimal movements in 2015. These
movements were offset by adverse movements in foreign
currency debt designated at fair value in ‘Net income/
(expense) from financial instruments designated at fair
value’; and
•
increases in GB&M ($0.2bn), notably in Rates and in Credit,
as we gained market share in Europe, partly offset by a
decrease in Equities, reflecting lower trading volumes
in Europe and Asia. In addition, we recorded adverse
movements of $70m in credit and funding valuation
adjustments compared with favourable movements of
$227m in the prior year, primarily relating to movements in
our own credit spread on structured liabilities.
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 value
Other instruments designated at fair value and related derivatives
Year ended 31 Dec
The majority of our financial liabilities designated at fair value
are fixed-rate, long-term debt issuances, and are managed in
conjunction with interest rate swaps as part of our interest rate
management strategy.
Significant items and currency translation
Significant items
– own credit spread
– acquisitions, disposals and dilutions
Currency translation
Year ended 31 Dec
We recorded a net expense from financial instruments
designated at fair value of $2.7bn in 2016, compared with net
income of $1.5bn in 2015. In 2016, there were unfavourable
movements of $1.8bn in the fair value of our own long-term
debt reflecting changes in credit spread, compared with
favourable movements of $1.0bn in 2015.
The decrease was also as a result of ‘Other changes in fair
value’ on our long-term debt and related derivatives, which
reflected:
• higher adverse movements of $1.7bn in 2016 compared
with minimal movements in 2015 on foreign currency debt
designated at fair value and issued as part of our overall
funding strategy (offset by assets held as economic hedges
in ‘Net trading income’); and
2016
$m
1,480
(218)
(3,975)
(1,792)
(2,183)
47
(2,666)
2015
$m
531
34
863
1,002
(139)
104
1,532
These liabilities are discussed further on page 242.
2016
$m
(1,488)
(1,792)
304
(1,488)
2014
$m
2,300
(435)
508
417
91
100
2,473
2015
$m
1,426
1,002
424
24
1,450
• higher adverse movements of $0.2bn relating to the
economic hedging of interest and exchange rate risk on
our long-term debt.
By contrast, net income from financial assets held to meet
liabilities under insurance and investment contracts of $1.5bn
was $0.9bn higher than in 2015. This was primarily driven by
improved equity market performance in Asia and Europe in
2016, partly offset by the disposal of our operations in Brazil
in July 2016.
Net income arising from financial assets held to meet liabilities
under insurance and investment contracts results in a
corresponding movement in liabilities to customers, reflecting
the extent to which they participate in the investment
performance of the associated asset portfolio. These offsetting
movements are recorded in ‘Net income/(expense) arising from
liabilities to customers under investment contracts’ and ‘Net
HSBC Holdings plc Annual Report and Accounts 2016
35
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Financial summary
insurance claims and benefits paid and movement in liabilities
to policyholders’.
In 2016, the majority of the variance arose in unit-linked
contracts where the policyholder bears the investment risk, and
was therefore offset by movements in liabilities to customers.
Gains less losses from financial investments
Net gains from disposal
– debt securities
– equity securities
– other financial investments
Impairment of available-for-sale equity securities
Year ended 31 Dec
Significant items and currency translation
Significant items
– gain on disposal of our membership interest in Visa – Europe
– gain on disposal of our membership interest in Visa – US
– gain on the partial sale of shareholding in Industrial Bank
– acquisitions, disposals and dilutions
Currency translation
Year ended 31 Dec
2016
$m
1,421
357
1,058
6
(36)
1,385
2015
$m
2,179
345
1,829
5
(111)
2,068
2016
$m
701
584
116
—
1
701
2014
$m
1,708
665
1,037
6
(373)
1,335
2015
$m
1,385
—
—
1,372
13
34
1,419
In 2016, gains less losses from financial investments decreased
by $0.7bn compared with 2015. This was largely due to the
significant items and currency translation tabulated above,
notably the non-recurrence of the gain on the partial sale of
our shareholding in Industrial Bank of $1.4bn in 2015, partly
offset by gains on disposal of our membership interests in Visa
Europe of $0.6bn and in Visa US of $0.1bn in 2016.
Net insurance premium income
Gross insurance premium income
Reinsurance premiums
Year ended 31 Dec
Significant items and currency translation
Significant items
– acquisitions, disposals and dilutions
Currency translation
Year ended 31 Dec
2016
$m
10,588
(637)
9,951
2015
$m
11,012
(657)
10,355
2016
$m
362
362
2014
$m
12,370
(449)
11,921
2015
$m
764
169
933
Net insurance premium income was $0.4bn lower than in 2015,
and included reductions due to the disposal of our operations in
Brazil ($0.4bn) and currency translation movements of $0.2bn.
Net insurance premium income increased in Hong Kong, partly
offset by reductions in France in response to low interest rates
Other operating income
and market volatility, and in the UK, following the disposal of
our pension business in 2015.
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
Losses arising from dilution of interest in Industrial Bank and other associates and joint ventures
Change in present value of in-force long-term insurance business
Other
Year ended 31 Dec
2016
$m
157
(1,949)
4
35
—
902
(120)
(971)
2015
$m
171
(244)
61
53
—
799
215
2014
$m
162
220
120
32
(32)
261
368
1,055
1,131
36
HSBC Holdings plc Annual Report and Accounts 2016
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 Dec
Significant items and currency translation
Significant items
Included within gains/(losses) recognised on assets held for sale:
– portfolio disposals
Included within the remaining line items:
– acquisitions, disposals and dilutions
Total significant items
Currency translation
Year ended 31 Dec
2016
$m
900
(532)
513
21
902
2015
$m
809
(552)
504
38
799
2016
$m
(163)
(163)
(1,763)
(1,763)
(1,926)
(1,926)
2014
$m
870
(545)
(116)
52
261
2015
$m
(214)
(214)
157
157
(57)
71
14
Other operating income decreased by $2.0bn from 2015. This
was as a result of the loss on the sale of our operations in Brazil
of $1.7bn and the effects of the other significant items recorded
in the table above. In addition, we recorded lower revaluation
gains on investment properties.
These decreases were partly offset by higher favourable
movements of $0.1bn in present value of in-force (‘PVIF’) long-
term insurance business, which was primarily driven by an
increase in the value of new business written in Hong Kong,
partly offset by a reduction in France and the impact of the
disposal of our operations in Brazil.
In 2016, we recognised $513m of income in ‘Assumption
changes and experience variances’, which was broadly
unchanged from the $504m recognised in 2015. For further
details, please see Note 20.
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 Dec
For footnote, see page 63.
Significant items and currency translation
Significant items
– acquisitions, disposals and dilutions
Currency translation
Year ended 31 Dec
Footnote
14
2016
$m
12,508
(638)
11,870
2015
$m
11,872
(580)
11,292
2016
$m
538
538
2014
$m
13,723
(378)
13,345
2015
$m
962
246
1,208
Net insurance claims and benefits paid and movement in
liabilities to policyholders were $0.6bn higher compared with
2015, and included reductions due to the disposal of our
operations in Brazil ($0.4bn) and currency translation
movements of $0.2bn.
This increase was primarily due to improved returns on financial
assets supporting unit-linked contracts, where the policyholder
bears the investment risk, reflecting improved equity market
performance in Hong Kong compared to 2015. In addition,
movements in liabilities to policyholders were higher due to
increased premium income, and interest rate-driven changes
to liability valuations in Hong Kong.
These increases were partly offset by decreased premiums
and reducing investment returns in France.
The gains or losses recognised on the financial assets
designated at fair value that are held to support these insurance
contract liabilities are reported in ‘Net income/(expense) from
financial instruments designated at fair value’ on page 203.
HSBC Holdings plc Annual Report and Accounts 2016
37
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Financial summary
Loan impairment charges and other credit risk provisions
New allowances net of allowance releases
Recoveries of amounts previously written off
Loan impairment charges:
– individually assessed allowances
– collectively assessed allowances
Releases of impairment on available-for-sale debt securities
Other credit risk provisions
Year ended 31 Dec
Impairment charges on loans and advances to customers as a percentage of
average gross loans and advances to customers
Significant items and currency translation
Significant items
– acquisitions, disposals and dilutions
Currency translation
Year ended 31 Dec
Loan impairment charges and other credit risk provisions
(‘LICs’) of $3.4bn were $0.3bn lower than in 2015. This was
partly as a result of favourable currency translation differences
of $0.2bn, notably in Mexico and the UK. In addition, our sale
of operations in Brazil resulted in a $0.2bn reduction.
Collectively assessed LICs of $1.5bn were down $568m
compared with 2015. This reduction included the net favourable
effect of $230m as a result of our sale of operations in Brazil
and favourable currency translation of $95m. The remaining
variance reflected the following:
•
In CMB (down $226m), a net release of collectively assessed
LICs compared with a net charge in 2015. The net release of
allowances in 2016 was primarily on exposures related to
the oil and gas sector, notably in the US and Canada, the
UAE and Asia. This reflected a more positive outlook for this
sector. By contrast, in 2015 we increased our collective
allowances on exposures related to the oil and gas sector.
The reduction in collectively assessed LICs was partly offset
by an increase in the UK, primarily reflecting new
allowances against exposures in the oil and gas sector.
•
In GB&M, a net release of collectively assessed LICs, notably
in the UK and US, compared with a net charge in 2015.
This was partly offset:
•
In RBWM, where collectively assessed LICs rose by $75m.
The increase was mainly in Mexico reflecting our strategic
focus on growing unsecured lending, as well as an increase
in delinquency rates. By contrast, collectively assessed LICs
decreased in a small number of markets in the Middle East
and North Africa and Asia.
•
In Corporate Centre, LICs increased in our US CML run-off
portfolio by $67m.
Operating expenses
2016
$m
3,977
(627)
3,350
1,831
1,519
(63)
113
3,400
2015
$m
4,400
(808)
3,592
1,505
2,087
(17)
146
3,721
2014
$m
5,010
(955)
4,055
1,780
2,275
(319)
115
3,851
0.39%
0.39%
0.43%
2016
$m
748
748
748
2015
$m
933
933
184
1,117
Individually assessed LICs of $1.8bn increased by $326m
compared with 2015. Higher charges in GB&M were partly
offset by a reduction in CMB and favourable currency
translation of $79m. This primarily reflected the following:
•
In GB&M (up $0.6bn), the increase was primarily in the
US related to a significant specific charge against a mining-
related corporate exposure, as well as charges relating to
exposures in the oil and gas sector. Additionally, in Hong
Kong, individually assessed LICs in 2016 largely related to a
single corporate exposure. This compared with a net release
of LICs in 2015.
This was partly offset:
•
In CMB, lower individually assessed LICs (down $261m),
included favourable currency translation of $70m and a
net favourable effect of $45m attributable to our sale of
operations in Brazil. The decrease also reflected lower
individually assessed LICs in Indonesia, where charges in
2015 related to a small number of exposures across multiple
sectors. Lower charges in both the UK and the UAE also
contributed to the reduction. These decreases were partly
offset by higher LICs in Hong Kong, related to various
sectors, including manufacturing, and in Canada due to a
rise in the number of exposures in the oil and gas sector
migrating to default. Notably, the increase in individually
assessed LICs in Canada was more than offset by the
movement in collective allowances related to the oil and
gas sector, discussed above.
In 2016, we recorded higher net releases of impairment
allowances against available for sale debt securities. These
were primarily related to asset-backed securities (‘ABSs’) in
our Legacy Credit business in Corporate Centre.
In addition to detailing operating expense items by category, as set out in the table below, we also categorise adjusted expenses as follows:
•
•
‘Run-the-bank’ costs comprise business-as-usual running costs that
keep operations functioning at the required quality and standard year
on year, maintain IT infrastructure and support revenue growth. Run-
the-bank costs are split between front office and back office, reflecting
the way the Group is organised into four global businesses (‘front
office’) supported by global functions (‘back office’).
‘Change-the-bank’ costs comprise expenses relating to the
implementation of mandatory regulatory changes and other
investment costs incurred relating to projects to change business-
activity to enhance future operating capabilities.
•
‘Costs to achieve’ comprise those specific costs relating to the
achievement of the strategic actions set out in the Investor Update in
June 2015. They comprise costs incurred between 1 July 2015 and
31 December 2017, and do not include ongoing initiatives such as
Global Standards. Any costs arising within this category have been
incurred as part of a significant transformation programme. Costs
to achieve are included within significant items and incorporate
restructuring costs that were identified as a separate significant
item prior to 1 July 2015.
• The UK bank levy is reported as a separate category.
38
HSBC Holdings plc Annual Report and Accounts 2016
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
Goodwill impairment
Year ended 31 Dec
By expense group
Run-the-bank – front office
Run-the-bank – back office
Change-the-bank
Bank levy
Significant items
Currency translation
Year ended 31 Dec
Staff numbers (full-time equivalents)
Global businesses
Retail Banking and Wealth Management
Commercial Banking
Global Banking and Markets
Global Private Banking
Corporate Centre
At 31 Dec
2016
$m
18,089
3,758
12,715
34,562
1,229
777
3,240
39,808
2015
$m
19,900
3,830
13,832
37,562
1,269
937
—
39,768
2016
$m
13,612
13,275
2,746
922
9,253
39,808
2014
$m
20,366
4,204
14,361
38,931
1,382
936
—
41,249
2015
$m
13,711
13,437
3,161
1,421
5,947
2,091
39,768
2016
2015
2014
124,810
44,712
46,659
8,054
10,940
235,175
145,868
48,651
47,894
8,513
4,277
255,203
151,802
48,650
46,605
8,775
1,771
257,603
Reported operating expenses of $39.8bn were $40m higher
than in 2015. This reflected an increase in significant items of
$3.3bn which included:
•
the operating expenses incurred in our Brazil business of
$1.1bn in 2016, compared with $2.5bn in 2015; and
• a reduction of $1.0bn in settlements and provisions in
• a $3.2bn write-off of the goodwill in our GPB business in
connection with legal matters.
Europe (please see Note 20 for further details);
• costs to achieve of $3.1bn, compared with $0.9bn in 2015;
partly offset by
The increase in significant items was partly offset by the
favourable effects of currency translation of $2.1bn.
Significant items and currency translation
Significant items
– costs associated with portfolio disposals
– costs to achieve
– cost to establish UK ring-fenced bank
– impairment of GPB – Europe goodwill
– regulatory provisions in GPB
– restructuring and other related costs
– settlements and provisions in connection with legal matters
– UK customer redress programmes
– acquisitions, disposals and dilutions
Currency translation
Year ended 31 Dec
Excluding the significant items and currency translation
tabulated above, operating expenses of $30.6bn were $1.2bn
lower than in 2015. This primarily reflected cost savings of
$2.2bn achieved in 2016 and a reduction in the UK bank levy
of $0.5bn. This was partly offset by the impact of inflation
and continued investment in regulatory programmes and
compliance.
2016
$m
9,252
28
3,118
223
3,240
344
—
681
559
1,059
—
9,252
2015
$m
5,947
—
908
89
—
172
117
1,649
541
2,471
2,091
8,038
Run-the-bank costs of $26.9bn were $0.3bn lower than in 2015
and change-the-bank costs of $2.7bn were $0.4bn lower than in
2015.
Our total investment in regulatory programmes and compliance,
comprising both
was $3.0bn, up $0.4bn or 14% from 2015. This reflected the
ongoing implementation of our Global Standards programme to
enhance our financial crime risk controls and capabilities, and to
meet our external commitments.
and change-the-bank elements,
HSBC Holdings plc Annual Report and Accounts 2016
39
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Financial summary
We have maintained our transformational efforts and continue
to realise the benefit of our cost-saving programme.
Taking the 2016 savings into account, our run rate savings are
now $3.7bn since the start of our initiatives.
• Within RBWM, savings of $0.4bn reflected the impact of
our branch optimisation programme enabled by our digital
initiatives.
• Within Operations and Technology, savings of $1.2bn
reflected migrations to lower cost locations, the
simplification of our IT structure and the implementation
of target operating models.
• Within our back office functions, savings of $0.4bn were
realised as a result of the re-engineering and simplification
of processes and the implementation of global operating
models.
Share of profit in associates and joint ventures
Share of profit in associates
– Bank of Communications Co., Limited
– The Saudi British Bank
– other
Share of profit in joint ventures
Year ended 31 Dec
The number of employees expressed in FTEs at 31 December
2016 was 235,175, a decrease of 20,028 since 31 December
2015. This included a 19,145 reduction following our disposal
of operations in Brazil. Excluding Brazil, the decrease in FTE
was 883 as a reduction of 17,855 FTEs realised across global
businesses and global functions was partly offset by investment
in our Global Standards Programme of 5,694 FTEs, costs to
achieve FTEs of 8,073 and investment for growth.
2016
$m
2,326
1,892
415
19
28
2,354
2015
$m
2,518
2,011
462
45
38
2,556
2014
$m
2,493
1,974
455
64
39
2,532
Our share of profit in associates and joint ventures was $2.4bn,
a decrease of $0.2bn or 8%, which included the adverse effects
of currency translation of $0.1bn, notably affecting our share of
profit in BoCom.
Excluding the impact of currency translation, our share of profit
in associates and joint ventures fell by $0.1bn or 4%, relating
to higher impairment charges in the Saudi British Bank and
lower revenue in HSBC Saudi Arabia, reflecting lower asset
management and investment banking revenue. This was partly
offset by revenue growth in Saudi British Bank and well-
managed costs in both associates.
Our share of profit in BoCom for the year was $1.9bn. At
31 December 2016, 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 2017 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.
Tax expense
Profit before tax
Tax expense
Profit after tax for the year ended 31 Dec
Effective tax rate
2016
$m
7,112
(3,666)
3,446
51.55%
2015
$m
18,867
(3,771)
15,096
19.99%
2014
$m
18,680
(3,975)
14,705
21.28%
The effective tax rate for 2016 of 51.6% was higher than the
20.0% in 2015, reflecting events that occurred in 2016 that
reduced the reported profit before tax but not taxable profits.
These included the non-deductible goodwill impairment and the
non-deductible loss on our disposal of operations in Brazil. The
2016 tax charge includes tax losses not recognised, prior year
adjustments and the impact of the 8% bank corporation tax
surcharge applicable in the UK from 1 January 2016. Further
detail is provided in Note 7 of the Financial Statements.
40
HSBC Holdings plc Annual Report and Accounts 2016
Consolidated balance sheet
Five-year summary consolidated balance sheet
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
Assets held for sale
Other assets
Total assets at 31 Dec
Liabilities and equity
Liabilities
Deposits by banks
Customer accounts
Repurchase agreements – non-trading
Trading liabilities
Financial liabilities designated at fair value
Derivatives
Debt securities in issue
Liabilities of disposal groups held for sale
Liabilities under insurance contracts
Other liabilities
Total liabilities at 31 Dec
Equity
Total shareholders’ equity
Non-controlling interests
Total equity at 31 Dec
Total liabilities and equity at 31 Dec
For footnote, see page 63.
Five-year selected financial information
Footnote
2016
$m
2015
$m
2014
$m
2013
$m
2012
$m
15
128,009
235,125
24,756
290,872
88,126
861,504
160,974
436,797
4,389
144,434
98,934
224,837
23,852
288,476
90,401
924,454
146,255
428,955
43,900
139,592
129,957
304,193
29,037
345,008
112,149
974,660
161,713
415,467
7,647
166,599
303,192
38,430
282,265
120,046
992,089
179,690
425,925
4,050
154,308
159,032
141,532
408,811
33,582
357,450
117,085
962,972
70,112
421,101
19,269
160,624
2,374,986
2,409,656
2,634,139
2,671,318
2,692,538
59,939
54,371
77,426
86,507
95,480
1,272,386
1,289,586
1,350,642
1,361,297
1,311,396
88,958
153,691
86,832
279,819
65,915
2,790
75,273
80,400
141,614
66,408
281,071
88,949
36,840
69,938
107,432
190,572
76,153
340,669
95,947
6,934
73,861
164,220
207,025
89,084
274,284
104,080
2,804
74,181
40,567
304,563
87,720
358,886
119,461
5,018
68,195
106,805
102,961
114,525
117,377
118,123
2,192,408
2,212,138
2,434,161
2,480,859
2,509,409
175,386
188,460
190,447
181,871
175,242
7,192
9,058
9,531
8,588
7,887
182,578
197,518
199,978
190,459
183,129
2,374,986
2,409,656
2,634,139
2,671,318
2,692,538
Called up share capital
Capital resources
Undated subordinated loan capital
Preferred securities and dated subordinated loan capital
Risk-weighted assets
Financial statistics
Loans and advances to customers as a percentage of customer accounts
Average total shareholders’ equity to average total assets
Net asset value per ordinary share at year-end ($)
Number of $0.50 ordinary shares in issue (millions)
Closing foreign exchange translation rates to $:
$1: £
$1: €
For footnotes, see page 63.
Footnotes
16, 17
18
16
19
2016
$m
10,096
172,358
1,967
42,600
2015
$m
9,842
2014
$m
9,609
2013
$m
9,415
2012
$m
9,238
189,833
190,730
194,009
180,806
2,368
42,844
2,773
47,208
2,777
48,114
2,778
48,260
857,181
1,102,995
1,219,765
1,092,653
1,123,943
67.7
7.37
7.91
71.7
7.31
8.73
72.2
7.01
9.28
72.9
6.55
9.27
73.4
6.16
9.09
20,192
19,685
19,218
18,830
18,476
0.811
0.949
0.675
0.919
0.642
0.823
0.605
0.726
0.619
0.758
A more detailed consolidated balance sheet is contained in the Financial Statements on page 186.
HSBC Holdings plc Annual Report and Accounts 2016
41
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Financial summary
Combined view of customer lending and customer deposits
Footnote
2016
$m
2015
$m
Combined customer lending
Loans and advances to customers
861,504
924,454
Loans and advances to customers
reported in ‘Assets held for sale’
– Brazil
– other
At 31 Dec
Combined customer deposits
Customer accounts
Customer accounts reported in
‘Liabilities of disposal groups held
for sale’
– Brazil
– other
At 31 Dec
For footnote, see page 63.
Movement in 2016
20
20
3,623
—
3,623
19,021
17,001
2,020
865,127
943,475
1,272,386
1,289,586
2,713
—
2,713
16,682
15,094
1,588
1,275,099
1,306,268
Total reported assets of $2.4tn were 1% lower than at
31 December 2015 on a reported basis, and 5% higher on
a constant currency basis.
We have maintained the strength of our balance sheet, as
targeted asset growth was partly offset by reductions in our
legacy portfolios and the completion of our sale of operations in
Brazil to Banco Bradesco S.A. We also issued more than $30bn
of senior debt during the year from HSBC Holdings to build up
the Group’s total loss-absorbing capacity in line with anticipated
regulatory requirements.
Our ratio of customer advances to customer accounts was 68%.
Loans and advances to customers fell on a reported basis by
$63bn and customer accounts fell on a reported basis by $17bn.
These changes included:
• adverse currency translation movements of $62bn on loans
and advances to customers and $81bn on customer
accounts;
• a $9bn reduction in corporate overdraft and current account
balances relating to a small number of clients in our Global
Liquidity and Cash Management business in the UK that
settled their overdraft and deposit balances on a net basis;
and
• an $11bn transfer to ‘Assets held for sale’ of US first lien
mortgage balances in Corporate Centre.
Excluding these movements, customer lending increased by
$19bn, as a result of strong fourth-quarter growth in Asia and
increases in Europe throughout the year.
Assets
Cash and balances at central banks increased by $29bn or
29%, primarily from higher euro denominated balances in
continental Europe, and in the US.
Trading assets increased by $10bn, mainly in Hong Kong and
the US. This included higher balances in settlement accounts
and an increase in debt and equity securities.
Reverse repurchase agreements – non-trading increased by
$15bn, primarily in the US, as we managed our surplus
liquidity to maximise returns.
Assets held for sale reduced by $40bn, of which $42bn related
to our disposal of operations in Brazil.
Loans and advances to customers decreased by $63bn on a
reported basis, primarily in Europe (down $48bn) and North
America (down $17bn), partly offset by Asia (up $9bn). This
included:
• adverse currency translation movements of $62bn;
42
HSBC Holdings plc Annual Report and Accounts 2016
• a $9bn reduction in corporate overdraft balances in Europe,
with a corresponding fall in corporate customer accounts;
and
• an $11bn transfer to ‘Assets held for sale’ of US first lien
mortgage balances in Corporate Centre, reflecting our
strategic focus on reducing our legacy portfolios. (We sold
most of these loans during 2016).
Excluding these factors, customer lending balances increased
by $19bn or 2%. We grew balances in Asia by $13bn, notably
in Hong Kong in both GB&M ($8bn) and CMB ($4bn) in term
lending, although trade lending remained broadly unchanged.
We also grew RBWM balances ($4bn), particularly in
mortgages in Hong Kong. We recorded particularly strong
growth in the fourth quarter ($20bn) in the region. In addition,
we increased balances in Europe by $15bn as a result of
higher term lending in CMB and mortgages in RBWM, both
mainly in the UK. By contrast, US GB&M balances fell,
reflecting our active management of overall client returns.
Liabilities
Customer accounts at 31 December 2016 were $17bn lower
than at 31 December 2015 and included:
• adverse currency translation movements of $81bn; and
• a $9bn reduction in corporate current account balances,
in line with a fall in corporate overdraft positions.
Excluding these factors, customer accounts grew by $73bn,
primarily in RBWM and in GLCM in Hong Kong and the UK,
with the latter driven by targeted customer mandate acquisition.
Trading liabilities increased by $12bn, mainly in the US,
reflecting an increase in settlement accounts and net short
positions from increased trading activity at the end of 2016,
compared with the same period in 2015.
Financial liabilities designated at fair value increased by $20bn,
reflecting new issuances of senior debt by HSBC Holdings.
Debt securities in issue fell by $23bn, mainly in HSBC Bank plc.,
following reductions in commercial paper issuances. These have
been replaced by intra-group funding from HSBC Holdings from
total loss-absorbing capacity resources. In the US, balances also
fell, reflecting a lower funding requirement as we continued to
run off legacy portfolios.
Liabilities of disposal groups held for sale decreased by $34bn,
reflecting the completion of our sale of operations in Brazil.
Equity
Total shareholders’ equity fell by $13.1bn or 7%. The effects of
profits generated in the year were more than offset by dividends
paid and an increase in accumulated foreign exchange losses,
reflecting the significant appreciation of the US dollar against
the British pound and the euro. The net increase in treasury
shares, principally reflecting our share buy-back initiative, also
reduced shareholders’ equity by $2.5bn.
Risk-weighted assets
Risk-weighted assets (‘RWAs’) were $857.2bn at 31 December
2016, a decrease of $245.8bn compared with 31 December
2015. After foreign currency translation differences, RWAs
reduced by $207.7bn in 2016. This reflected targeted RWA-
reduction initiatives of $143.2bn and the change of regulatory
treatment of our investment in BoCom reducing RWAs by
$120.9bn. This was partly offset by book size increases of
$38.7bn.
The RWA initiatives included:
• exposure reductions, process improvements and refined
calculations, which reduced RWAs by $69.8bn, 55% of
which were in GB&M;
•
the disposal of our activities in Brazil, which reduced RWAs
by $41.8bn; and
• an accelerated sell-down of our consumer mortgage
portfolio in the US and our Legacy Credit book, together
contributing $31.6bn to the reduction
The book size increase of $38.7bn primarily came from higher
term lending to corporate customers in CMB and higher general
lending to customers in GB&M, both mainly in Europe and Asia.
Customer accounts by country
Europe
– UK
– France
– Germany
– Switzerland
– other
Asia
– Hong Kong
– Mainland China
– Singapore
– Australia
– Malaysia
– Taiwan
– India
– Indonesia
– other
Middle East and North Africa (excluding Saudi Arabia)
– United Arab Emirates
– Turkey
– Egypt
– other
North America
– US
– Canada
– other
Latin America
– Mexico
– other
At 31 Dec
2016
$m
446,615
361,278
35,996
13,925
9,474
25,942
631,723
461,626
46,576
39,062
18,030
12,904
11,731
11,289
5,092
25,413
34,766
16,532
4,122
3,790
10,322
138,790
88,751
42,096
7,943
20,492
14,423
6,069
2015
$m
491,520
404,084
35,635
13,873
10,448
27,480
598,620
421,538
46,177
41,307
17,703
14,114
11,812
11,795
5,366
28,808
42,824
18,281
6,356
6,602
11,585
135,152
86,322
39,727
9,103
21,470
15,798
5,672
1,272,386
1,289,586
HSBC Holdings plc Annual Report and Accounts 2016
43
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Financial summary / Global businesses
Global businesses and
geographical regions
Change in reportable segments
Analysis of adjusted results by global business
Reconciliation of reported and adjusted items
Reconciliation of reported and adjusted items - global businesses
Retail Banking and Wealth Management
Commercial Banking
Global Banking and Markets
Global Private Banking
Corporate Centre
Analysis of reported results by geographical regions
Reconciliation of reported and adjusted items - geographical regions
Analysis of reported results by country
Page
44
45
47
48
51
52
52
53
53
54
56
59
Change in reportable segments
(Audited)
The Group Chief Executive as supported by the GMB is
considered to be the CODM for the purposes of identifying the
Group’s reportable segments.
They review operating activity on a number of bases, including
by global business and geographical region. While in 2015 we
considered the reportable segments to be the geographical
regions, over time the focus of internal management reporting
provided to the GMB and CODM has moved towards global
business. The shift in internal reporting was further augmented
in 2016 to include financial information and metrics on the
consumption of, and returns on, capital by global business to
support the GMB assessment of business performance and the
allocation of capital resources. As a result global business is
now the most prominent view used by management to allocate
resources and assess performance, and is considered to be the
Group’s reportable segment.
In addition, we made the following realignments within our
internal reporting to the GMB and CODM:
• Creation of a Corporate Centre: Certain functions were
combined to create a Corporate Centre. These include
Balance Sheet Management, legacy businesses and
interests in associates and joint ventures. The Corporate
Centre also includes the results of our financing operations,
central support costs with associated recoveries and the UK
bank levy, previously reported within Other.
• Reallocation of Head Office costs: We have reviewed central
costs previously reported in Other and reallocated them to
the global businesses where appropriate. Residual costs are
reported within the Corporate Centre.
• Customer realignment: We conducted a number of internal
reviews aligning customer requirements to those global
businesses best suited to service their respective needs,
resulting in the transfer of a portfolio of customers from
CMB to GB&M and the transfer of certain policyholders in
Asia from CMB to RBWM during the year.
Comparative data have been represented accordingly.
In addition, geographical comparative data for Europe and
Middle East and North Africa have been re-presented to reflect
the management oversight provided by our Middle East and
North Africa region following the management services
agreement entered between HSBC Bank plc and HSBC Bank
Middle East Limited in 2016 in respect of HSBC Bank A.S.
(Turkey).
Basis of preparation
Following the changes in internal reporting to the CODM, analysis by
global business is considered more prominent than the geographical
region view in the way the CODM assesses performance and allocates
resources. The global businesses are therefore considered our
reportable segments under IFRS 8.
Global business results are assessed by the CODM on the basis of
adjusted performance that removes the effects of significant items and
currency translation from reported results. We therefore present these
results on an adjusted basis as required by IFRSs. The 2015 and 2014
adjusted performance comparative information is presented on a
constant currency basis as described on page 45.
As required by IFRS 8, reconciliations of the total adjusted global
business results of the Group reported results are presented on page
46. Supplementary reconciliations from reported to adjusted results by
global business are presented on pages 47 to 51 for information
purposes.
Our operations are closely integrated and, accordingly, the presentation
of data includes internal allocations of certain items of income and
expense. These allocations include the costs of certain support services
and global functions to the extent that they can be meaningfully
attributed to operational business lines and geographical regions. While
such allocations have been made on a systematic and consistent basis,
they necessarily involve a degree of subjectivity. Costs which are not
allocated to global businesses are included in the Corporate Centre.
Where relevant, income and expense amounts presented include the
results of inter-segment funding along with inter-company and inter-
business line transactions. All such transactions are undertaken on
arm’s length terms. The intra-Group elimination items for the global
businesses are presented in the Corporate Centre.
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 the Corporate Centre.
The results of geographical regions are presented on a reported basis.
A description of the global businesses is provided in the Strategic Report,
pages 3, 18 and 19.
44
HSBC Holdings plc Annual Report and Accounts 2016
Analysis of adjusted results by global business
(Audited)
HSBC adjusted profit before tax and balance sheet data
Retail Banking
and Wealth
Management
Commercial
Banking
2016
Global
Banking
and
Markets
Global
Private
Banking
Footnotes
$m
$m
$m
21
34
22
37
21
34
22
Profit before tax
Net interest income
Net fee income/(expense)
Net trading income
Other income/(expenses)
Net operating income before loan impairment
charges and other credit risk provisions
– external
– inter-segment
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
Adjusted profit before tax
Share of HSBC’s adjusted profit before tax
Adjusted cost efficiency ratio
Adjusted balance sheet data
Loans and advances to customers (net)
Interests in associates and joint ventures
Total external assets
Customer accounts
Adjusted risk-weighted assets (unaudited)
Profit before tax
Net interest income
Net fee income/(expense)
Net trading income
Other income
Net operating income before loan impairment charges
and other credit risk provisions
– external
– inter-segment
Loan impairment charges and other credit risk
provisions
Net operating income
Total operating expenses
Operating profit
Share of profit in associates and joint ventures
Adjusted profit before tax
Share of HSBC’s adjusted profit before tax
Adjusted cost efficiency ratio
Adjusted balance sheet data
Loans and advances to customers (net)
Interests in associates and joint ventures
Total external assets
Customer accounts
Adjusted risk-weighted assets (unaudited)
37
13,198
4,839
435
453
18,925
16,319
2,606
(1,171)
17,754
(12,441)
5,313
20
5,333
%
27.6
65.7
$m
8,689
3,627
447
124
4,923
3,392
6,327
277
12,887
12,953
14,919
17,798
(66)
(2,879)
(1,000)
(457)
11,887
14,462
(5,835)
6,052
—
6,052
%
31.4
45.3
$m
(8,865)
5,597
—
5,597
%
29.0
59.4
$m
$m
809
749
183
16
1,757
1,498
259
1
1,758
(1,469)
289
—
289
%
1.5
83.6
$m
306,056
281,930
225,855
35,456
395
413,287
590,502
111,899
—
306,256
341,729
274,893
—
925,187
256,095
299,629
—
41,459
69,850
15,213
12,579
5,545
443
675
19,242
16,763
2,479
(1,060)
18,182
(12,514)
5,668
22
5,690
%
29.1
65.0
$m
8,461
3,739
462
91
12,753
12,863
(110)
(1,434)
11,319
(5,896)
5,423
—
5,423
%
27.8
46.2
$m
201535
4,514
3,500
6,175
377
14,566
17,055
(2,489)
(74)
14,492
(8,958)
5,534
—
5,534
%
28.3
61.5
$m
296,607
269,758
231,215
393
399,866
548,835
113,268
—
296,380
327,285
270,915
—
842,437
240,971
308,189
824
933
204
4
1,965
1,690
275
(11)
1,954
(1,567)
387
—
387
%
2.0
79.7
$m
41,161
—
49,241
78,318
17,121
Corporate
Centre
$m
1,243
(63)
2,542
(2,057)
1,665
1,585
80
Total
$m
28,862
12,544
9,934
(1,187)
50,153
50,153
—
(25)
(2,652)
1,640
(1,946)
(306)
2,335
2,029
%
10.5
116.9
$m
12,207
19,634
47,501
(30,556)
16,945
2,355
19,300
%
100.0
60.9
$m
861,504
20,029
688,797
2,374,986
14,210
1,272,386
150,327
851,961
2,241
(119)
655
116
2,893
3,048
(155)
(25)
2,868
(2,795)
73
2,421
2,494
%
12.8
96.6
$m
28,619
13,598
7,939
1,263
51,419
51,419
—
(2,604)
48,815
(31,730)
17,085
2,443
19,528
%
100.0
61.7
$m
23,451
18,080
625,813
13,337
305,691
862,192
18,473
2,213,737
1,208,746
1,015,184
HSBC Holdings plc Annual Report and Accounts 2016
45
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Global businesses
HSBC adjusted profit before tax and balance sheet data (continued)
201435
Retail
Banking
and Wealth
Management
Commercial
Banking
Global
Banking and
Markets
Global
Private
Banking
Footnotes
$m
$m
$m
Profit before tax
Net interest income
Net fee income/(expense)
Net trading income/(expense)
Other income
Net operating income before loan impairment charges
and other credit risk provisions
– external
– inter-segment
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
Adjusted profit before tax
21
34
22
Share of HSBC’s adjusted profit before tax
Adjusted cost efficiency ratio
Adjusted balance sheet data
Loans and advances to customers (net)
Interests in associates and joint ventures
Total external assets
Customer accounts
Adjusted risk-weighted assets (unaudited)
37
For footnotes, see page 63.
12,400
5,572
380
623
18,975
17,050
1,925
(901)
18,074
(11,964)
6,110
40
6,150
%
28.6
63.1
$m
8,094
3,809
479
216
12,598
13,103
(505)
(894)
11,704
(5,576)
6,128
—
6,128
%
28.4
44.3
$m
4,148
3,412
5,261
757
13,578
15,406
(1,828)
(408)
13,170
(8,246)
4,924
—
4,924
%
22.8
60.7
$m
Corporate
Centre
$m
3,103
(115)
(18)
929
3,899
3,771
128
291
4,190
(2,723)
1,467
2,342
3,809
%
17.7
69.8
$m
Total
$m
28,606
13,649
6,345
2,529
51,129
51,129
—
(1,901)
49,228
(30,060)
19,168
2,382
21,550
%
100.0
58.8
$m
$m
861
971
243
4
2,079
1,799
280
11
2,090
(1,551)
539
—
539
%
2.5
74.6
$m
287,496
259,053
228,323
40,928
383
385,926
514,074
109,526
—
288,755
309,152
262,634
—
928,215
261,110
349,661
—
51,283
78,592
17,660
28,844
16,801
844,644
17,184
640,404
2,294,583
23,681
1,186,609
343,882
1,083,363
46
HSBC Holdings plc Annual Report and Accounts 2016
Reconciliation of reported and adjusted items
(Audited)
Adjusted results reconciliation
2016
Significant
items
Adjusted
Reported
Adjusted
Currency
translation
Significant
items
Reported
Adjusted
Currency
translation
Significant
items
Reported
2015
2014
Footnote
$m
$m
$m
$m
22
50,153
(2,187)
47,966
51,419
$m
3,001
$m
$m
$m
5,380
59,800
51,129
$m
7,612
$m
$m
2,507
61,248
(2,652)
(748)
(3,400)
(2,604)
(184)
(933)
(3,721)
(1,901)
(918)
(1,032)
(3,851)
(30,556)
(9,252)
(39,808)
(31,730)
(2,091)
(5,947)
(39,768)
(30,060)
(5,433)
(5,756)
(41,249)
2,355
(1)
2,354
2,443
114
(1)
2,556
2,382
150
—
2,532
19,300
(12,188)
7,112
19,528
840
(1,501)
18,867
21,550
1,411
(4,281)
18,680
Revenue
LICs
Operating
expenses
Share of profit
in associates
and joint
ventures
Profit/(loss)
before tax
Adjusted balance sheet reconciliation
2016
Brazil
operations
Adjusted
Reported
Adjusted
Currency
translation
Brazil
operations
Reported
Adjusted
Currency
translation
Brazil
operations
Reported
2015
2014
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
Loans and advances to
customers (net)
Interests in associates
and joint ventures
Total external assets
Customer accounts
861,504
20,029
2,374,986
1,272,386
Adjusted profit reconciliation
—
—
861,504
862,192
62,262
— 924,454
844,644
110,001
20,015
974,660
20,029
18,473
666
—
19,139
17,184
990
7
18,181
— 2,374,986 2,213,737
145,747
50,172 2,409,656 2,294,583
289,936
49,620 2,634,139
— 1,272,386 1,208,746
80,840
— 1,289,586 1,186,609
145,084
18,949 1,350,642
For the year ended 31 Dec
Adjusted profit before tax
DVA on derivative contracts
Fair value movements on non-qualifying hedges
Gain on disposal of our membership interest in Visa – Europe
Gain on disposal of our membership interest in Visa – US
Gain on sale of shareholding in Bank of Shanghai
Gain on the partial sale of shareholding in Industrial Bank
(Loss)/gain and trading results from disposals and changes in ownership levels
Impairment of our investment in Industrial Bank
Own credit spread
Portfolio disposals
Releases/(provisions) arising from the ongoing review of compliance with the
UK Consumer Credit Act
Charge in relation to the settlement agreement with the Federal Housing
Finance Authority
Footnotes
23
24
Costs associated with portfolio disposals
Costs to achieve
Costs to establish UK ring-fenced bank
Impairment of GPB – Europe goodwill
Regulatory provisions in GPB
Restructuring and other related costs
Settlements and provisions in connection with legal matters
UK customer redress programmes
Currency translation
Reported profit before tax
For footnotes, see page 63.
2016
$m
19,300
26
(687)
584
116
—
—
(2,081)
—
(1,792)
(163)
2
—
(28)
(3,118)
(223)
(3,240)
(344)
—
(681)
(559)
7,112
2015
$m
19,528
230
(327)
—
—
—
1,372
—
(78)
—
1,002
(214)
(10)
—
—
(908)
(89)
—
(172)
(117)
(1,649)
(541)
840
18,867
2014
$m
21,550
(332)
(541)
—
—
428
(163)
(271)
417
168
(632)
(550)
—
—
—
—
(65)
(278)
(1,187)
(1,275)
1,411
18,680
HSBC Holdings plc Annual Report and Accounts 2016
47
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Global businesses
Reconciliation of reported and adjusted items – global businesses
Supplementary unaudited analysis of significant items by global business is presented below.
2016 compared with 2015 and 2014
Revenue
Reported
Significant items
– DVA on derivative contracts
– fair value movements on non-qualifying hedges
23
– gain on disposal of our membership interest in Visa –
Europe
– gain on disposal of our membership interest in Visa –
24
US
– own credit spread
– portfolio disposals
– releases arising from the ongoing review of
compliance with the UK Consumer Credit Act
– loss and trading results from disposed-of operations
in Brazil
Adjusted
Loan impairment charge and other credit risk
provisions (‘LICs’)
Reported
Significant items
– trading results from disposed-of operations in Brazil
Adjusted
Operating expenses
Reported
Significant items
– costs associated with portfolio disposals
– costs to achieve
– costs to establish UK ring-fenced bank
– impairment of GPB – Europe goodwill
– regulatory provisions in GPB
– settlements and provisions in connection with legal
matters
– UK customer redress programmes
– trading results from disposed-of operations in Brazil
Adjusted
Share of profit in associates and joint ventures
Reported
Significant items
– trading results from disposed-of operations in Brazil
Adjusted
Profit/(loss) before tax
Reported
Significant items
– revenue
– LICs
– operating expenses
– share of profit in associates and joint ventures
Adjusted
Retail Banking
and Wealth
Management
Commercial
Banking
2016
Global
Banking and
Markets
Global
Private
Banking
Corporate
Centre
$m
$m
$m
$m
$m
Total
$m
Footnotes
22
15,213
1,745
(2,735)
47,966
20,338
(1,413)
—
—
13,405
(518)
—
—
(354)
(230)
(72)
—
—
—
—
—
—
—
(294)
(26)
—
—
—
—
—
—
(987)
(288)
(268)
18,925
12,887
14,919
1,757
12
—
—
—
—
—
26
(2)
(12)
4,400
2,187
—
687
(26)
687
—
(584)
(44)
(116)
1,792
137
1,792
163
—
(2)
1,828
1,665
273
50,153
(1,633)
(1,272)
462
462
272
272
(1,171)
(1,000)
(14,138)
1,697
(6,087)
252
—
393
2
—
—
—
497
805
(12,441)
20
—
—
20
4,587
746
(1,413)
462
1,697
—
5,333
—
62
1
—
—
—
34
155
(5,835)
—
—
—
—
6,046
6
(518)
272
252
—
(471)
14
14
(457)
(9,302)
437
—
233
—
—
—
94
28
82
1
—
—
1
(25)
(3,400)
—
—
748
748
(25)
(2,652)
(5,074)
3,605
(5,207)
(39,808)
3,261
9,252
10
6
—
3,240
341
—
—
8
18
2,424
220
—
3
587
—
9
28
3,118
223
3,240
344
681
559
1,059
(8,865)
(1,469)
(1,946)
(30,556)
—
—
—
—
5,440
157
(294)
14
437
—
—
—
—
—
(3,328)
3,617
12
—
3,605
—
289
2,334
2,354
1
1
1
1
2,335
2,355
(5,633)
7,662
4,400
—
3,261
1
7,112
12,188
2,187
748
9,252
1
2,029
19,300
6,052
5,597
48
HSBC Holdings plc Annual Report and Accounts 2016
Reconciliation of reported and adjusted items (continued)
Revenue
Reported
Currency translation
Significant items
– DVA on derivative contracts
– fair value movements on non-qualifying hedges
– gain on the partial sale of shareholding in Industrial
– own credit spread
– portfolio disposals
– provisions/(releases) arising from the ongoing review
of compliance with the UK Consumer Credit Act
– trading results from disposed-of operations in Brazil
Footnotes
22
23
24
Adjusted
LICs
Reported
Currency translation
Significant items
– trading results from disposed-of operations in Brazil
Adjusted
Operating expenses
Reported
Currency translation
Significant items
– costs to achieve
– costs to establish UK ring-fenced bank
– regulatory provisions in GPB
– restructuring and other related costs
– settlements and provisions in connection with legal
matters
– UK customer redress programmes
– trading results from disposed-of operations in Brazil
Adjusted
Share of profit in associates and joint ventures
Reported
Currency translation
Significant items
– trading results from disposed-of operations in Brazil
Adjusted
Profit/(loss) before tax
Reported
Currency translation
Significant items
– revenue
– LICs
– operating expenses
– share of profit in associates and joint ventures
Adjusted
Retail Banking
and Wealth
Management
Commercial
Banking
201535
Global
Banking and
Markets
Global
Private
Banking
Corporate
Centre
$m
$m
$m
$m
$m
14,198
15,972
2,076
22,624
(1,288)
(2,094)
—
—
—
—
—
22
(2,116)
19,242
(790)
(655)
—
—
—
—
—
18
(673)
12,753
(1,878)
(1,761)
105
713
713
76
251
251
(1,060)
(1,434)
(724)
(682)
(230)
—
—
—
—
—
(452)
14,566
(47)
4
(31)
(31)
(74)
(54)
(57)
—
—
—
—
—
(30)
(27)
4,930
(145)
(1,892)
—
327
(1,372)
(1,002)
214
—
(59)
1,965
2,893
(13)
2
—
—
(11)
(22)
(3)
—
—
(25)
Total
$m
59,800
(3,001)
(5,380)
(230)
327
(1,372)
(1,002)
214
10
(3,327)
51,419
(3,721)
184
933
933
(2,604)
(15,970)
(6,852)
(10,767)
(1,840)
(4,339)
(39,768)
1,015
2,441
153
—
—
9
—
541
1,738
(12,514)
23
(1)
—
—
22
4,799
(169)
1,060
(2,094)
713
2,441
—
5,690
352
604
163
—
—
5
—
18
418
(5,896)
—
—
—
—
—
5,585
(362)
200
(655)
251
604
—
5,423
573
1,236
69
—
—
22
949
(19)
215
46
227
16
—
171
18
—
—
22
105
1,439
507
89
1
63
700
1
78
2,091
5,947
908
89
172
117
1,649
541
2,471
(8,958)
(1,567)
(2,795)
(31,730)
—
—
—
—
—
5,158
(147)
523
(682)
(31)
1,236
—
5,534
—
—
—
—
—
223
(6)
170
(57)
—
227
—
387
2,533
(113)
1
1
2,556
(114)
1
1
2,421
2,443
3,102
18,867
(156)
(452)
(1,892)
—
1,439
1
(840)
1,501
(5,380)
933
5,947
1
2,494
19,528
HSBC Holdings plc Annual Report and Accounts 2016
49
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Global businesses
Reconciliation of reported and adjusted items (continued)
Footnotes
22
23
24
Revenue
Reported
Currency translation
Significant items
– DVA on derivative contracts
– fair value movements on non-qualifying hedges
– gain on sale of shareholding in Bank of Shanghai
– impairment of our investment in Industrial Bank
– own credit spread
– portfolio disposals
– provisions arising from the ongoing review of
compliance with the UK Consumer Credit Act
– (gain)/loss and trading results from disposals and
changes in ownership levels
Adjusted
LICs
Reported
Currency translation
Significant items
– trading results from disposals and changes in
ownership levels
Adjusted
Operating expenses
Reported
Currency translation
Significant items
– charge in relation to the settlement agreement with
the Federal Housing Finance Authority
– regulatory provisions in GPB
– restructuring and other related costs
– settlements and provisions in connection with legal
matters
– UK customer redress programmes
– trading results from disposals and changes in
ownership levels
Adjusted
Share of profit in associates and joint ventures
Reported
Currency translation
Significant items
– trading results from disposals and changes in
ownership levels
Adjusted
Profit/(loss) before tax
Reported
Currency translation
Significant items
– revenue
– LICs
– operating expenses
– share of profit in associates and joint ventures
Adjusted
For footnotes, see page 63.
Retail Banking
and Wealth
Management
Commercial
Banking
201435
Global
Banking and
Markets
Global
Private
Banking
Corporate
Centre
$m
$m
$m
$m
$m
Total
$m
61,248
(7,612)
(2,507)
332
541
(428)
271
(417)
(168)
632
24,056
(3,490)
(1,591)
15,197
(1,967)
(632)
15,392
(1,725)
(89)
332
—
—
—
—
—
—
2,248
(185)
16
—
—
—
—
—
—
40
4,355
(245)
(211)
—
541
(428)
271
(417)
(168)
—
—
—
—
—
—
—
24
—
—
—
—
—
—
568
(2,159)
18,975
(656)
12,598
(421)
13,578
(24)
2,079
(10)
(3,270)
3,899
51,129
(1,905)
(1,551)
488
516
516
(901)
318
339
339
(894)
(721)
139
174
174
(408)
8
—
3
3
11
318
(27)
—
—
291
(3,851)
918
1,032
1,032
(1,901)
(17,670)
(7,115)
(11,257)
(1,780)
(3,427)
(41,249)
2,869
2,837
—
—
86
—
992
1,759
(11,964)
41
(1)
—
—
40
4,522
(134)
1,762
(1,591)
516
2,837
—
6,150
976
563
—
—
37
—
138
388
1,455
1,556
—
—
27
1,187
145
197
136
93
—
65
6
—
—
22
(3)
707
550
—
122
—
—
35
5,433
5,756
550
65
278
1,187
1,275
2,401
(5,576)
(8,246)
(1,551)
(2,723)
(30,060)
—
—
—
—
—
6,531
(673)
270
(632)
339
563
—
6,128
—
—
—
—
—
3,414
(131)
1,641
(89)
174
1,556
—
4,924
—
—
—
—
—
476
(49)
112
16
3
93
—
2,491
(149)
2,532
(150)
—
—
—
—
2,342
2,382
3,737
18,680
(424)
496
(211)
—
707
—
(1,411)
4,281
(2,507)
1,032
5,756
—
539
3,809
21,550
50
HSBC Holdings plc Annual Report and Accounts 2016
Reconciliation of reported and adjusted risk-weighted assets
2016
Retail
Banking
and Wealth
Management
Commercial
Banking
Global
Banking and
Markets
$bn
$bn
$bn
115.1
(3.2)
111.9
275.9
(1.0)
274.9
300.4
(0.8)
299.6
Global
Private
Banking
$bn
15.3
—
15.3
Corporate
Centre
$bn
150.5
(0.2)
150.3
130.7
(3.8)
(13.6)
113.3
133.7
(12.0)
(12.2)
109.5
302.2
(14.9)
(16.4)
270.9
312.1
(32.6)
(16.9)
262.6
201535
330.3
(9.0)
(13.1)
308.2
201435
385.8
(23.2)
(12.9)
349.7
18.0
(0.7)
(0.2)
17.1
18.9
(1.1)
(0.1)
17.7
321.8
(13.0)
(3.1)
305.7
369.3
(24.2)
(1.2)
343.9
Total
$bn
857.2
(5.2)
852.0
1,103.0
(41.4)
(46.4)
1,015.2
1,219.8
(93.1)
(43.3)
1,083.4
Risk-weighted assets
Reported
Brazil operations
Adjusted
Risk-weighted assets
Reported
Currency translation
Brazil operations
Adjusted
Risk-weighted assets
Reported
Currency translation
Brazil operations
Adjusted
For footnote, see page 63.
Management view of adjusted revenue
The tables below provide a breakdown of revenue by major
products for RBWM, CMB, GB&M and Corporate Centre.
These reflect the basis on which revenue performance of the
businesses is assessed and managed.
For GPB, the key measure of business performance is client
assets, which is presented below.
Adjusted return on risk-weighted assets (‘RoRWA’) is used to
measure performance of RBWM, CMB, GB&M and GPB and
is presented below.
Further information on the global businesses can be found in
the Strategic Report on pages 18 to 19.
A reconciliation of changes in the global businesses is available
in the re-segmentation data pack which can be found online at
www.hsbc.com/investor-relations.
Retail Banking and Wealth Management
Management view of adjusted revenue
Footnotes
22
2016
$m
2015
$m
2014
$m
12,979
12,806
13,041
5,359
7,620
2,590
3,111
1,919
5,288
2,926
4,941
7,865
2,694
3,312
1,859
5,799
3,262
4,881
8,160
2,758
3,438
1,964
5,331
3,030
1,404
1,553
1,384
958
658
984
637
917
603
18,925
19,242
18,975
%
4.6
%
4.9
%
5.4
26
25
27
38
Net operating income
Retail Banking
Current accounts, savings
and deposits
Personal lending
– mortgages
– credit cards
– other personal lending
Wealth Management
– investment distribution
– life insurance
manufacturing
– asset management
Other
Year ended 31 Dec
RoRWA
For footnotes, see page 63.
HSBC Holdings plc Annual Report and Accounts 2016
51
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Global businesses
RBWM – summary
Year ended 31 Dec 2016
Net operating income before loan impairment charges and other credit
risk provisions
22
Footnote
– net interest income
– net fee income/(expense)
– other income/(loss)
LICs
Net operating income
Total operating expenses
Operating profit/(loss)
Income from associates
Profit/(loss) before tax
Year ended 31 Dec 2015
Net operating income before loan impairment charges and other credit
risk provisions
22
– net interest income
– net fee income/(expense)
– other income
LICs
Net operating income
Total operating expenses
Operating profit/(loss)
Income from associates
Profit/(loss) before tax
For footnote, see page 63.
Total
RBWM
$m
18,925
13,198
4,839
888
(1,171)
17,754
(12,441)
5,313
20
5,333
19,242
12,579
5,545
1,118
(1,060)
18,182
(12,514)
5,668
22
5,690
Consists of
Banking
operations
Insurance
manufacturing
Asset
management
$m
$m
$m
16,437
11,292
4,474
671
(1,171)
15,266
(11,415)
3,851
—
3,851
16,548
10,807
5,081
660
(1,060)
15,488
(11,484)
4,004
—
4,004
1,531
1,898
(539)
172
—
1,531
(380)
1,151
20
1,171
1,709
1,763
(493)
439
—
1,709
(364)
1,345
22
1,367
957
8
904
45
—
957
(646)
311
—
311
985
9
957
19
—
985
(666)
319
—
319
Insurance manufacturing for RBWM excluded other global businesses which contributed net operating income of $167m (2015: $171m) and profit before tax of $117m (2015:
$108m) to overall insurance manufacturing. In 2016 insurance manufacturing net operating income for RBWM included $1,404m within Wealth Management (2015: $1,553m) and
$127m within other products (2015: $156m).
In total insurance manufacturing generated $2,634m of annualised new business premiums (2015: $2,349m) of which $2,519m (2015: $2,230m) related to RBWM.
Distribution of insurance products by HSBC channels contributed $1,048m of net fee income (2015: $994m) of which RBWM channels earned $922m (2015: $896m). Of this total
income, $615m was in respect of HSBC manufactured products (2015: $568m) and a corresponding fee expense is therefore recognised within the Insurance manufacturing.
Commercial Banking
Global Banking and Markets
Management view of adjusted revenue
Management view of adjusted revenue
Net operating income
Global Trade and
Receivables Finance
Credit and Lending
Global Liquidity and
Cash Management
Markets products, Insurance
and Investments and Other
Year ended 31 Dec
RoRWA
Footnotes
22
2016
$m
1,879
5,102
2015
$m
2,077
5,019
2014
$m
2,125
4,688
4,345
4,164
4,014
30
38
1,561
12,887
%
2.1
1,493
1,771
12,753
12,598
%
1.9
%
2.4
Net operating income
Global Markets
– Credit
– Rates
– Foreign Exchange
– Equities
Global Banking
Global Liquidity and
Cash Management
Securities Services
Global Trade and
Receivables Finance
Principal Investments
Credit and funding
valuation adjustments
Other
Year ended 31 Dec
RoRWA
Footnotes
22
28
29
38
2016
$m
6,775
803
2,149
2,813
1,010
3,820
1,951
1,585
702
218
(70)
(62)
2015
$m
6,140
631
1,391
2,714
1,404
3,801
1,798
1,620
691
226
227
63
2014
$m
5,488
669
1,172
2,519
1,128
3,521
1,699
1,508
693
467
127
75
14,919
14,566
13,578
%
1.8
%
1.6
%
1.5
The table above has been re-presented. In 2016, ‘Credit and
funding valuation adjustments’ of $(70)m is a separate line
previously included within ‘Markets’ (2015: $227m).
52
HSBC Holdings plc Annual Report and Accounts 2016
Global Private Banking
Corporate Centre
Management view of adjusted revenue
Management view of adjusted revenue
Net operating income
Investment Revenue
Lending
Deposit
Other
2016
$m
725
414
343
275
2015
$m
2014
$m
899
416
355
295
954
425
381
319
Net operating income
Central Treasury
Legacy portfolios
– US run-off portfolio
– Legacy credit
Year ended 31 Dec
1,757
1,965
2,079
Other
Year ended 31 Dec
Footnotes
22
42
43
2016
$m
1,504
715
692
23
(554)
1,665
2015
$m
1,905
1,234
1,164
70
(246)
2,893
2014
$m
1,938
1,571
1,548
23
390
3,899
Reported client assets31
Footnote
At 1 Jan
Net new money
– of which: areas targeted
Value change
Disposals
Exchange and other
At 31 Dec
RoRWA
38
Reported client assets by geography
2016
$bn
349
(17)
2
1
(24)
(11)
298
%
1.7
2015
$bn
365
1
14
1
—
(18)
349
%
2.1
2014
$bn
382
(3)
14
8
(11)
(11)
365
%
2.9
Footnote
40
2016
2015
2014
$bn
147
108
40
3
—
298
$bn
167
112
61
8
1
349
$bn
177
112
63
11
2
365
Europe
Asia
North America
Latin America
Middle East
At 31 Dec
For footnotes, see page 63.
HSBC Holdings plc Annual Report and Accounts 2016
53
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Geographical regions
Analysis of reported results by geographical regions
HSBC reported profit/(loss) before tax and balance sheet data
Europe35
Footnotes
$m
Asia
$m
Loans and advances to customers (net)
336,670
365,430
30,740
111,710
16,954
– reported in held for sale
Total external assets
Customer accounts
– reported in held for sale
1,057
1,068,446
446,615
2,012
—
965,730
631,723
—
474
60,472
34,766
701
2,092
409,021
138,790
—
—
43,137
20,492
—
Risk-weighted assets (unaudited)
33
298,384
333,987
59,065
150,714
34,341
Profit/(loss) before tax
Net interest income
Net fee income/(expense)
Net trading income/(expense)
Other income/(expense)
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/(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 data
21
34
22
20
Profit/(loss) before tax
Net interest income
Net fee income/(expense)
Net trading income/(expense)
Other income/(expense)
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/(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 data
21
34
22
20
2016
North
America
MENA35
Latin
America
Intra-HSBC
items
$m
$m
$m
8,346
4,247
4,949
(2,026)
12,490
1,831
5,200
3,127
2,503
709
385
44
4,220
1,898
462
485
3,006
723
449
(1,492)
(3,590)
15,516
23,320
2,969
7,065
2,686
(3,590)
47,966
(446)
(677)
15,070
22,643
(21,845)
(10,785)
(6,775)
11,858
1
1,921
(6,774)
13,779
%
(95.2)
140.8
$m
%
193.7
46.2
$m
(316)
2,653
(1,584)
1,069
434
1,503
%
21.1
53.4
$m
(732)
6,333
(6,147)
186
(1)
185
%
2.6
87.0
$m
(1,229)
1,457
(3,037)
(1,580)
(1)
(1,581)
%
(22.2)
113.1
$m
$m
(80)
—
80
Total
$m
29,813
12,777
9,452
(4,076)
—
(3,590)
3,590
—
—
—
$m
—
—
(3,400)
44,566
(39,808)
4,758
2,354
7,112
%
100.0
83.0
$m
861,504
3,623
(171,820)
2,374,986
—
—
—
1,272,386
2,713
857,181
9,686
4,702
3,968
2,116
12,184
6,032
3,090
3,997
1,849
822
418
90
2015
4,532
2,018
545
562
4,318
1,131
664
479
(38)
—
38
(3,403)
32,531
14,705
8,723
3,841
20,472
25,303
3,179
7,657
6,592
(3,403)
59,800
(519)
19,953
(19,274)
679
9
688
%
3.6
94.1
$m
(693)
24,610
(10,889)
13,721
2,042
15,763
%
83.5
43.0
$m
(470)
2,709
(1,721)
988
504
1,492
%
7.9
54.1
$m
(544)
7,113
(6,501)
612
2
614
%
3.3
84.9
$m
(1,495)
5,097
(4,786)
311
(1)
310
%
1.7
72.6
$m
17,293
17,001
86,262
21,470
15,094
73,425
—
(3,403)
3,403
—
—
—
$m
—
—
(151,871)
—
—
—
(3,721)
56,079
(39,768)
16,311
2,556
18,867
%
100.0
66.5
$m
924,454
19,021
2,409,656
1,289,586
16,682
1,102,995
Loans and advances to customers (net)
385,037
356,375
36,898
128,851
– reported in held for sale
Total external assets
Customer accounts
– reported in held for sale
—
1,121,401
491,520
—
—
889,747
598,620
—
—
70,157
42,824
—
2,020
393,960
135,152
1,588
Risk-weighted assets (unaudited)
33
327,219
459,680
70,585
191,611
54
HSBC Holdings plc Annual Report and Accounts 2016
Footnotes
Net interest income
Net fee income
Net trading income/(expense)
Other income/(expense)
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/(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 data
21
34
22
20
Europe
$m
10,115
5,738
2,557
2,394
Asia
$m
12,273
5,910
2,622
2,872
MENA
$m
2,014
954
292
79
2014
North
America
$m
5,015
1,940
411
786
Latin
America
Intra-HSBC
items
$m
5,310
1,415
856
691
$m
(22)
—
22
(2,996)
Total
$m
34,705
15,957
6,760
3,826
20,804
23,677
3,339
8,152
8,272
(2,996)
61,248
(518)
20,286
(19,633)
653
6
659
%
3.6
94.4
$m
(647)
23,030
(10,427)
12,603
2,022
14,625
%
78.3
44.0
$m
(240)
3,099
(1,824)
1,275
488
1,763
%
9.4
54.6
$m
(322)
7,830
(6,429)
1,401
16
1,417
%
7.6
78.9
$m
(2,124)
6,148
(5,932)
216
—
216
%
1.1
71.7
$m
—
(2,996)
2,996
—
—
—
$m
—
—
(3,851)
57,397
(41,249)
16,148
2,532
18,680
%
100.0
67.3
$m
974,660
577
(153,223)
2,634,139
—
—
—
1,350,642
145
1,219,765
Loans and advances to customers (net)
401,642
362,955
37,154
129,787
43,122
– reported in held for sale
Total external assets
Customer accounts
– reported in held for sale
91
1,279,817
538,104
145
—
878,723
577,491
—
—
76,609
47,575
—
486
436,859
138,884
—
—
115,354
48,588
—
Risk-weighted assets (unaudited)
33
363,473
499,846
74,785
221,378
88,781
For footnotes, see page 63.
HSBC Holdings plc Annual Report and Accounts 2016
55
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Geographical regions
Reconciliation of reported and adjusted items – geographical regions
2016 compared with 2015 and 2014
Revenue
Reported
Significant items
– DVA on derivative contracts
– fair value movements on non-qualifying
hedges
– gain on disposal of our membership
interest in Visa – Europe
– gain on disposal of our membership
interest in Visa – US
– own credit spread
– portfolio disposals
– releases arising from the ongoing review
of compliance with the UK Consumer
Credit Act
– loss and trading results from disposed-of
operations in Brazil
Adjusted
LICs
Reported
Significant items
– trading results from disposed-of operations
in Brazil
Adjusted
Operating expenses
Reported
Significant items
– costs associated with portfolio disposals
– costs to achieve
– costs to establish UK ring-fenced bank
– impairment of GPB – Europe goodwill
– regulatory provisions in GPB
– settlements and provisions in connection
with legal matters
– UK customer redress programmes
– trading results from disposed-of operations
in Brazil
Adjusted
Share of profit in associates and joint
ventures
Reported
Significant items
– trading results from disposed-of operations
in Brazil
Adjusted
Profit/(loss) before tax
Reported
Significant items
– revenue
– LICs
– operating expenses
– share of profit in associates and joint
ventures
Adjusted
Footnotes
Europe
$m
Asia
$m
MENA
$m
2016
North
America
Latin
America
$m
$m
Total
$m
UK
$m
Hong
Kong
$m
22
32
23
24
15,516
23,320
2,969
7,065
2,686
47,966
10,893
14,014
1,740
(56)
563
(573)
—
1,782
26
(2)
—
(6)
(15)
17
—
—
(8)
—
—
—
(11)
—
—
(11)
—
—
—
—
—
155
9
107
—
(116)
18
137
—
—
309
36
2,187
1,795
(26)
(63)
—
—
—
—
—
—
687
532
(584)
(441)
(116)
1,792
163
(2)
—
1,769
—
(2)
—
273
273
(1)
(22)
26
—
—
(5)
—
—
—
32
17,256
23,314
2,958
7,220
2,995
50,153
12,688
14,013
(446)
(677)
(316)
(732)
(1,229)
(3,400)
(245)
(321)
—
—
—
—
—
—
—
—
748
748
748
748
—
—
—
—
(446)
(677)
(316)
(732)
(481)
(2,652)
(245)
(321)
32
(21,845)
(10,785)
(1,584)
(6,147)
(3,037)
(39,808)
(14,562)
(5,646)
6,632
28
2,098
223
3,240
390
94
559
—
430
—
476
—
—
(46)
—
—
—
103
—
103
—
—
—
—
—
—
989
—
402
—
—
—
587
—
—
1,098
9,252
2,670
—
39
—
—
—
—
—
28
3,118
223
3,240
344
681
559
1,059
1,059
—
1,838
223
—
—
50
559
—
183
—
229
—
—
(46)
—
—
—
32
(15,213)
(10,355)
(1,481)
(5,158)
(1,939)
(30,556)
(11,892)
(5,463)
1
—
—
1
1,921
434
—
—
—
—
1,921
434
(6,774)
13,779
1,503
8,372
1,740
—
6,632
424
(6)
—
430
92
(11)
—
103
—
—
—
(1)
—
—
(1)
185
1,144
155
—
989
—
(1)
1
1
—
2,354
1
1
2,355
1
—
—
1
(1,581)
7,112
(3,913)
2,156
12,188
309
748
1,098
2,187
748
9,252
1
1
4,465
1,795
—
2,670
—
552
22
—
—
22
8,069
182
(1)
—
183
—
8,251
1,598
14,203
1,595
1,329
575
19,300
56
HSBC Holdings plc Annual Report and Accounts 2016
Reconciliation of reported and adjusted items (continued)
Footnotes
22
32
32
23
24
Revenue
Reported
Currency translation
Significant items
– DVA on derivative contracts
– fair value movements on non-qualifying
hedges
– gain on the partial sale of shareholding in
Industrial Bank
– own credit spread
– portfolio disposals
– provisions arising from the ongoing review
of compliance with the UK Consumer Credit
Act
– trading results from disposed-of operations
in Brazil
Adjusted
LICs
Reported
Currency translation
Significant items
– trading results from disposed-of operations
in Brazil
Adjusted
Operating expenses
Reported
Currency translation
Significant items
– costs to achieve
– costs to establish UK ring-fenced bank
– regulatory provisions in GPB
– restructuring and other related costs
– settlements and provisions in connection
with legal matters
– UK customer redress programmes
– trading results from disposed-of operations
in Brazil
Adjusted
Share of profit in associates and joint ventures
Reported
Currency translation
Significant items
– trading results from disposed-of operations
in Brazil
Adjusted
Profit/(loss) before tax
Reported
Currency translation
Significant items
– revenue
– LICs
– operating expenses
– share of profit in associates and joint
ventures
Adjusted
Asia
$m
MENA
$m
2015
North
America
Latin
America
$m
$m
25,303
(305)
(1,431)
(58)
2
(1,372)
(3)
—
—
—
3,179
(182)
(10)
(1)
—
—
(9)
—
—
—
7,657
(60)
98
(21)
124
—
(219)
214
—
—
6,592
(896)
(3,381)
(55)
1
—
—
—
—
Europe
$m
20,472
(1,613)
(656)
(95)
200
—
(771)
—
10
—
Total
$m
59,800
(3,001)
(5,380)
(230)
UK
$m
15,493
(1,577)
(595)
(78)
Hong
Kong
$m
15,616
(20)
(1,383)
(13)
327
204
6
(1,372)
(1,002)
214
10
—
(731)
—
10
—
(1,372)
(4)
—
—
—
(3,327)
(3,327)
32
18,203
23,567
2,987
7,695
2,315
51,419
13,321
14,213
(519)
(693)
(470)
(544)
(1,495)
(3,721)
(248)
(155)
36
—
—
6
—
—
19
—
—
3
—
—
(483)
(687)
(451)
(541)
120
933
933
(442)
184
933
933
39
—
—
—
—
—
(2,604)
(209)
(155)
32
32
(19,274)
(10,889)
(1,721)
(6,501)
(4,786)
(39,768)
(15,555)
(5,686)
1,287
2,405
600
89
172
68
935
541
—
177
130
122
—
—
8
—
—
—
83
15
14
—
—
1
—
—
—
32
851
103
—
—
34
714
—
—
567
2,546
69
—
—
6
—
—
2,091
5,947
908
89
172
117
1,649
541
2,471
2,471
1,253
2,151
536
89
—
50
935
541
—
7
49
43
—
—
6
—
—
—
32
(15,582)
(10,582)
(1,623)
(5,618)
(1,673)
(31,730)
(12,151)
(5,630)
9
—
—
—
9
688
(290)
1,749
(656)
—
2,405
—
2,042
(113)
—
—
504
—
—
—
1,929
504
15,763
(235)
(1,301)
(1,431)
—
130
—
1,492
(80)
5
(10)
—
15
—
2
(1)
—
—
1
614
(26)
949
98
—
851
—
2,147
14,227
1,417
1,537
(1)
—
1
1
—
310
(209)
99
(3,381)
933
2,546
1
200
2,556
(114)
1
1
2,443
18,867
(840)
1,501
(5,380)
933
5,947
1
19,528
10
(1)
—
—
9
(300)
(286)
1,556
(595)
—
2,151
—
970
31
—
—
—
31
9,806
(13)
(1,334)
(1,383)
—
49
—
8,459
HSBC Holdings plc Annual Report and Accounts 2016
57
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Geographical regions
Reconciliation of reported and adjusted items (continued)
Footnotes
22
32
32
23
24
Asia
$m
MENA
$m
2014
North
America
Latin
America
$m
$m
Total
$m
UK
$m
23,677
(964)
(48)
69
4
(428)
271
4
—
—
32
3,339
(367)
(3)
5
—
—
—
6
—
—
(14)
8,152
(311)
116
16
302
—
—
(34)
(168)
—
—
8,272
(2,703)
(3,280)
61,248
(7,612)
(2,507)
8
—
—
—
—
—
—
332
541
(428)
271
(417)
(168)
632
(3,288)
(3,270)
15,727
(2,574)
353
203
(8)
—
—
(474)
—
632
—
Hong
Kong
$m
13,844
(17)
(119)
26
11
(428)
271
1
—
—
—
Europe
$m
20,804
(3,404)
708
234
235
—
—
(393)
—
632
—
32
18,108
22,665
2,969
7,957
2,289
51,129
13,506
13,708
(518)
137
—
—
(381)
(647)
(240)
(322)
(2,124)
(3,851)
(214)
(320)
38
—
—
71
(2)
(2)
16
—
—
656
1,034
918
1,032
1,034
1,032
81
—
—
1
—
—
(609)
(171)
(306)
(434)
(1,901)
(133)
(319)
32
32
(19,633)
(10,427)
(1,824)
(6,429)
(5,932)
(41,249)
(15,576)
(5,424)
2,797
2,600
—
16
122
1,187
1,275
—
509
58
212
34
—
49
9
—
—
—
—
—
3
—
—
31
158
578
550
—
28
—
—
—
1,894
2,486
—
—
116
—
—
5,433
5,756
550
65
278
1,187
1,275
2,165
2,553
—
—
91
1,187
1,275
2,370
2,401
—
6
56
—
49
7
—
—
—
32
(14,236)
(9,860)
(1,578)
(5,693)
(1,552)
(30,060)
(10,858)
(5,362)
6
(1)
—
—
5
659
(471)
3,308
708
—
2,600
—
2,022
(147)
—
—
488
—
—
—
1,875
488
14,625
1,763
(564)
10
(48)
—
58
—
(84)
29
(3)
(2)
34
—
16
(2)
—
—
14
1,417
(139)
694
116
—
578
—
3,496
14,071
1,708
1,972
—
—
—
—
—
216
(153)
240
(3,280)
1,034
2,486
—
303
2,532
(150)
—
—
2,382
18,680
(1,411)
4,281
(2,507)
1,032
5,756
7
(1)
—
—
6
(56)
(329)
2,906
353
—
2,553
—
—
42
1
—
—
43
8,142
(9)
(63)
(119)
—
56
—
21,550
2,521
8,070
Revenue
Reported
Currency translation
Significant items
– DVA on derivative contracts
– fair value movements on non-qualifying
hedges
– gain on sale of shareholding in Bank of
Shanghai
– impairment of our investment in Industrial
Bank
– own credit spread
– portfolio disposals
– provisions arising from the ongoing review
of compliance with the UK Consumer Credit
Act
– (gain)/loss and trading results from
disposals and changes in ownership levels
Adjusted
LICs
Reported
Currency translation
Significant items
– trading results from disposals and
changes in ownership levels
Adjusted
Operating expenses
Reported
Currency translation
Significant items
– charge in relation to the settlement
agreement with the Federal Housing
Finance Authority
– regulatory provisions in GPB
– restructuring and other related costs
– settlements and provisions in connection
with legal matters
– UK customer redress programmes
– trading results from disposals and changes
in ownership levels
Adjusted
Share of profit in associates and joint ventures
Reported
Currency translation
Significant items
– trading results from disposals and changes
in ownership levels
Adjusted
Profit/(loss) before tax
Reported
Currency translation
Significant items
– revenue
– LICs
– operating expenses
– share of profit in associates and joint
ventures
Adjusted
For footnotes, see page 63.
58
HSBC Holdings plc Annual Report and Accounts 2016
Analysis of reported results by country
Profit/(loss) before tax by priority markets within global businesses
Retail Banking
and Wealth
Management
Commercial
Banking
Global
Banking
and Markets
Europe
– UK
– of which: HSBC Holdings
36, 41
Footnotes
– France
– Germany
– Switzerland
– other
Asia
– Hong Kong
– Australia
– India
– Indonesia
– Mainland China
– Malaysia
– Singapore
– Taiwan
– other
Middle East and North Africa
– Egypt
– UAE
– Saudi Arabia
– other
North America
– US
– Canada
– other
Latin America
– Mexico
– other
– of which: Brazil
Year ended 31 Dec 2016
$m
524
338
(676)
147
23
—
16
4,115
3,796
108
15
(9)
(72)
65
107
24
81
20
58
83
1
(122)
64
(28)
46
46
(136)
94
(230)
(281)
4,587
$m
2,129
1,834
(379)
198
68
9
20
2,920
2,191
74
123
66
68
65
43
10
280
290
104
94
—
92
648
336
292
20
59
84
(25)
(139)
6,046
$m
1,009
385
(425)
289
142
—
193
3,211
1,298
156
355
110
456
172
170
102
392
652
213
298
—
141
259
86
155
18
309
79
230
176
Global
Private
Banking
$m
(3,695)
86
(63)
9
7
(493)
(3,304)
268
221
—
10
—
(3)
—
42
(1)
(1)
—
—
—
—
—
90
67
—
23
9
5
4
4
Corporate
Centre
$m
(6,741)
(6,556)
(3,748)
(53)
13
(7)
(138)
3,265
563
31
240
11
2,158
53
77
13
119
541
79
5
434
23
(876)
(932)
47
9
(1,822)
(15)
(1,807)
(1,836)
(5,633)
Total
$m
(6,774)
(3,913)
(5,291)
590
253
(491)
(3,213)
13,779
8,069
369
743
178
2,607
355
439
148
871
1,503
454
480
435
134
185
(471)
540
116
(1,581)
247
(1,828)
(2,076)
7,112
5,440
(3,328)
HSBC Holdings plc Annual Report and Accounts 2016
59
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Geographical regions / Other information
Profit/(loss) before tax by priority markets within global businesses (continued)
Retail Banking
and Wealth
Management
Commercial
Banking
Global
Banking
and Markets
Global Private
Banking
Corporate
Centre
Europe
– UK
– of which: HSBC Holdings
36, 41
– France
– Germany
– Switzerland
– other
Asia
– Hong Kong
– Australia
– India
– Indonesia
– Mainland China
– Malaysia
– Singapore
– Taiwan
– other
Middle East and North Africa
– Egypt
– UAE
– Saudi Arabia
– other
North America
– US
– Canada
– other
Latin America
– Mexico
– other
– of which: Brazil
Year ended 31 Dec 2015
Europe
– UK
– of which: HSBC Holdings
36, 41
– France
– Germany
– Switzerland
– other
Asia
– Hong Kong
– Australia
– India
– Indonesia
– Mainland China
– Malaysia
– Singapore
– Taiwan
– other
Middle East and North Africa
– Egypt
– UAE
– Saudi Arabia
– other
North America
– US
– Canada
– other
Latin America
– Mexico
– other
– of which: Brazil
Year ended 31 Dec 2014
For footnotes, see page 63.
$m
914
560
(530)
357
23
—
(26)
4,154
3,811
60
(25)
(6)
32
118
105
10
49
50
85
2
(138)
(23)
(112)
57
32
(245)
70
(315)
(344)
$m
1,953
1,722
(399)
130
66
8
27
2,843
2,317
51
79
(128)
97
78
81
17
251
92
(24)
—
120
445
194
240
11
156
(8)
164
13
4,799
5,585
352
283
(335)
6
28
—
35
4,239
3,727
78
4
10
31
155
162
18
54
84
64
162
1
(143)
19
(99)
95
23
(172)
4
(176)
(230)
2,238
1,917
(321)
215
70
5
31
3,123
2,217
99
101
42
86
108
120
29
321
379
84
158
—
137
799
323
479
(3)
(8)
(27)
19
(97)
$m
122
(361)
(274)
84
137
—
262
3,653
1,629
232
321
76
574
196
193
113
319
179
270
—
161
444
319
101
24
329
(70)
399
341
5,158
(1,010)
(1,655)
(206)
319
139
2
185
3,102
1,163
222
378
101
449
165
181
130
313
695
136
363
—
196
388
215
140
33
239
11
228
79
$m
(93)
126
(91)
14
20
(267)
14
252
177
—
14
—
(3)
—
65
—
(1)
—
—
—
2
59
64
—
(5)
3
(2)
5
6
223
181
154
(22)
—
26
(46)
47
212
145
—
11
—
(3)
—
57
—
2
—
—
—
—
—
87
84
—
3
(4)
(2)
(2)
(2)
$m
(2,208)
(2,347)
(2,892)
54
(7)
43
49
4,861
1,872
30
217
51
2,360
50
63
15
203
89
36
498
70
(311)
(424)
87
26
67
42
25
(11)
3,102
(1,102)
(755)
(1,965)
(326)
15
81
(117)
3,949
890
33
206
45
2,388
68
69
44
206
605
51
(21)
485
90
124
9
115
—
161
65
96
3
4,522
6,531
3,414
476
3,737
60
HSBC Holdings plc Annual Report and Accounts 2016
Total
$m
688
(300)
(4,186)
639
239
(216)
326
15,763
9,806
373
606
(7)
3,060
442
507
155
821
410
367
500
215
614
41
485
88
310
32
278
5
18,867
659
(56)
(2,849)
214
278
42
181
14,625
8,142
432
700
198
2,951
496
589
221
896
1,763
335
662
486
280
1,417
532
829
56
216
51
165
(247)
18,680
Other information
Funds under management and assets held in custody
Taxes paid by region and country
Conduct-related matters
Carbon dioxide emissions
Page
61
61
62
62
Funds under management and assets held
in custody
Funds under management
Funds under management
Footnote
44
2016
$bn
2015
$bn
At 1 Jan
Net new money
Value change
Exchange and other
Disposals
At 31 Dec
Funds under management by
business
Global Asset Management
Global Private Banking
Affiliates
Other
At 31 Dec
For footnote, see page 63.
896
(8)
25
(40)
(42)
831
410
222
2
197
831
954
(3)
2
(57)
–
896
419
261
4
212
896
Funds under management (‘FuM’) represents assets managed,
either actively or passively, on behalf of our customers. At
31 December 2016, FuM amounted to $831bn, a decrease of
7% as a result of adverse foreign exchange movements and
disposals, which included our sale of operations in Brazil, partly
offset by favourable market performance.
Global Asset Management FuM decreased by 2% to $410bn
compared with 31 December 2015. Excluding currency
translation, FuM increased by 3% primarily as a result of
positive market performance, with net new money from our
retail and institutional customers in Asia into fixed income
products being offset by outflows from our customers in Europe
and the Americas.
GPB FuM decreased by 15% to $222bn compared with
31 December 2015. Excluding currency translation, FuM
decreased by 13%, reflecting the ongoing repositioning of
our client base. This was partly offset by positive net new
money in areas targeted for growth, notably in the UK, the
Channel Islands and Hong Kong.
Other FuM, of which the main element is a corporate trust
business in Asia, decreased by 7% to $197bn.
Assets held in custody44 and under administration
Custody is the safekeeping and servicing of securities and other
financial assets on behalf of clients. At 31 December 2016, we
held assets as custodian of $6.3tn, 1% higher than the $6.2tn
held at 31 December 2015. The increase was driven by
favourable foreign exchange movements in Asia, together with
the onboarding of new clients in Europe and Asia. This was
partly offset by adverse foreign exchange movements in the UK.
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 2016, the value of assets held under
administration by the Group amounted to $2.9tn. This was 7%
lower than the $3.1tn held at 31 December 2015. The decrease
primarily reflected net asset outflows in the Corporate Trust and
Loan Agency business in North America, together with adverse
foreign exchange movements in the UK.
Taxes paid by region and country
The following tables reflect a geographical view of HSBC’s
operations.
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.
Taxes paid by country
Europe
Home and priority markets
Footnote
45
– UK
– France
– Germany
– Switzerland
Other markets
Asia
Home and priority markets
– Hong Kong
– Mainland China
– India
– Australia
– Malaysia
– Indonesia
– Singapore
– Taiwan
– Japan
Other markets
Middle East and North
Priority markets
– Saudi Arabia
– UAE
– Egypt
– Turkey
Other markets
North America
Priority markets
– US
– Canada
Other markets
Latin America
Priority markets
– Argentina
– Mexico
Brazil
Other markets
Total
For footnote, see page 63.
2016
$m
3,151
3,096
2,385
553
124
34
55
2,755
2,470
1,488
241
315
147
99
46
85
35
14
285
293
267
60
89
97
21
26
276
276
135
141
—
965
303
224
79
658
4
2015
$m
3,644
3,346
2,526
620
108
92
298
2,780
2,458
1,415
277
285
173
92
70
80
53
13
322
449
407
151
120
136
16
26
353
353
127
226
—
2014
$m
3,550
3,391
2,363
790
131
107
159
2,687
2,418
1,273
278
290
204
133
76
101
44
19
269
369
246
84
102
60
75
48
(108)
(108)
(377)
269
—
1,184
1,384
431
340
91
735
18
534
333
201
804
46
7,440
8,410
7,882
HSBC Holdings plc Annual Report and Accounts 2016
61
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Other information
Conduct-related matters
Carbon dioxide emissions
Conduct-related costs included in significant items
Income statement
Net interest income/(expense)
provisions arising from the ongoing
review of compliance with the UK
Consumer Credit Act
Operating expenses
Comprising:
Legal proceedings and regulatory
matters
– charge in relation to the settlement
agreement with the Federal
Housing Finance Authority
– regulatory provisions in GPB
– settlements and provisions in
connection with legal matters
Customer remediation
– of which:
total provisions charge
for the year
total provisions utilised during the
year
Balance sheet at 31 Dec
Total provisions
– legal proceedings and regulatory
matters
– customer remediation
Accruals, deferred income and other
liabilities
2016
$m
2015
$m
2014
$m
2
2
(10)
(632)
(10)
(632)
1,025
1,821
1,802
—
344
681
559
—
172
1,649
541
2,362
550
65
1,187
1,275
3,077
To report carbon emissions, we use the revised edition of the
Greenhouse Gas Protocol’s A Corporate Accounting and
Reporting Standard guideline for disclosure that incorporates
the Scope 2 market-based methodology.
We report carbon dioxide emissions resulting from energy use
in our buildings and employees’ business travel.
For 29 countries where we operated in 2016, which accounted
for approximately 92% of our full-time employees (‘FTEs’), we
collect data on energy use and business travel. For the other
countries where we have financial control and a small presence,
we estimate emissions by scaling up from 92% to 100% of
FTEs.
We then apply emission uplift rates to reflect uncertainty
concerning the quality and coverage of emission measurement
and estimation. The rates are 4% for electricity, 10% for other
energy and 6% for business travel. This is consistent both with
the Intergovernmental Panel on Climate Change’s Good Practice
Guidance and Uncertainty Management in National Greenhouse
Gas Inventories and our internal analysis of data coverage and
quality.
Figures for 2016 and the previous year are in the following
tables.
1,584
2,362
2,500
Carbon dioxide emissions in tonnes
2,265
1,021
2,503
3,056
3,926
2,545
2,060
996
2,729
1,197
1,154
1,391
106
168
379
Total
From energy
From travel
Footnote
46
2016
2015
617,000
529,000
88,000
771,000
662,000
109,000
Carbon dioxide emissions in tonnes per FTE
Total operating expenses
1,584
Total charge for the year relating
to significant items
1,582
2,372
3,709
The table above provides a summary of conduct-related costs
incurred and included within significant items (see pages 33
and 39).
Total
From energy
From travel
Footnote
46
2016
2.63
2.25
0.38
2015
2.97
2.54
0.42
For footnote, see page 63.
Our greenhouse gas reporting year runs from October to
September. For the year from 1 October 2015 to 30 September
2016, carbon dioxide emissions from our global operations were
617,000 tonnes. Independent assurance of our carbon dioxide
emissions will be available in the first half of 2017 on our
website.
The HSBC approach to conduct is designed to ensure that
through our actions and behaviours we deliver fair outcomes for
our customers and do not disrupt the orderly and transparent
operation of financial markets. The Board places a strong
emphasis on conduct, requiring adherence to high behavioural
standards and adhering to the HSBC Values. Board oversight
of conduct matters is provided by the Conduct & Values
Committee, which oversees the embedding of HSBC Values and
our required global conduct outcomes, and the Remuneration
Committee, which considers conduct and compliance-related
matters relevant to remuneration. These committees’ reports
may be found on pages 143 to 145.
The management of business conduct and the steps taken to
raise standards are described on page 81. ‘Regulatory focus on
conduct of business and financial crime’ is one of the Group’s
top and emerging risks and is discussed on page 66.
Provisions relating to significant items raised for conduct costs
in 2016 resulted from the ongoing consequences of a small
number of historical events.
Operating expenses included significant items related to
conduct matters in respect of legal proceedings and regulatory
matters of $1.0bn and customer remediation costs in respect
of the mis-selling of payment protection insurance of $0.5bn.
These are discussed in Note 27 and Note 35 of the Financial
Statements.
62
HSBC Holdings plc Annual Report and Accounts 2016
Footnotes to financial summary and other
information
Consolidated income statement/
Group performance by income and expense item
1 Dividends recorded in the financial statements are dividends per ordinary share
declared in a year and are not dividends in respect of, or for, that year.
2 Dividends per ordinary share expressed as a percentage of basic earnings per
share.
3 Return on risk-weighted assets (‘RoRWA’) is calculated using pre-tax return
and reported average RWAs.
4 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.
5 Gross interest yield is the average annualised interest rate earned on average
interest-earning assets (‘AIEA’).
6 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.
7 Net interest margin is net interest income expressed as an annualised
percentage of AIEA.
8 Interest income on trading assets is reported as ‘Net trading income’ in the
consolidated income statement.
9 Interest income on financial assets designated at fair value is reported as ‘Net
income/(expense) from financial instruments designated at fair value’ in the
consolidated income statement.
10 Including interest-bearing bank deposits only.
11 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’.
12 Including interest-bearing customer accounts only.
13 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.
14 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.
Consolidated balance sheet
15 Net of impairment allowances.
24 ‘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.
25 ‘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.
26 ‘Other personal lending’ includes personal non-residential closed-end loans
and personal overdrafts.
27 ‘Other’ mainly includes the distribution and manufacturing (where applicable)
of retail and credit protection insurance.
28 In 2016, credit and funding valuation adjustments included an adverse fair
value movement of $110m on the widening of own credit spreads on
structured liabilities (2015: favourable fair value movement of $179m; 2014:
favourable fair value movement of $12m).
29 ‘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’.
30 ‘Markets products, Insurance and Investments and Other’ includes revenue
from Foreign Exchange, insurance manufacturing and distribution, interest rate
management and GCF products.
31 ‘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 were funds under
management ($222bn at 31 December 2016) which were not reported on the
Group’s balance sheet, and customer deposits ($76bn at 31 December 2016),
of which $70bn was reported on the Group’s balance sheet and $6bn were off-
balance sheet deposits.
32 Amounts are non-additive across geographical regions due to inter-company
transactions within the Group.
33 Risk-weighted assets are non-additive across geographical regions due to
market risk diversification effects within the Group.
34 Other income in this context comprises where applicable 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.
35 2015 and 2014 figures are restated for the changes explained on page 44.
36 For the purposes of the analysis of reported results by country table, HSBC
Holdings profit/(loss) is presented excluding the effect of the early adoption of
the requirements of IFRS 9 ‘Financial Instruments’ relating to the presentation
of gains and losses on financial liabilities designated at fair value’, which was
early adopted in the separate financial statements of HSBC Holdings but not in
the consolidated financial statements of HSBC.
37 Adjusted RWAs are calculated using reported RWAs adjusted for the effects of
currency translation differences and significant items.
38 Adjusted RoRWA is calculated using adjusted profit before tax and adjusted
average risk-weighted assets.
39 Includes Head Office costs attributable to Global Business operations.
40 Client assets related to our Middle East clients are booked across to various
other regions, primarily in Europe.
16 On 1 January 2014, CRD IV came into force and the calculation of capital
41 Excludes intra-Group dividend income.
resources and RWAs for 2014 to 2016 are calculated and presented on this
basis. 2012 and 2013 comparatives are on a Basel 2.5 basis.
17 Capital resources are regulatory capital, the calculation of which is set out on
page 127.
18 Including perpetual preferred securities, details of which can be found in Note
28 on the Financial Statements.
19 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.
20 In the first half of 2015 our operations in Brazil were classified as held for sale.
As a result, balance sheet accounts were classified as ‘Assets held for sale’ and
‘Liabilities of disposal groups held for sale’. There was no separate income
statement classification. The sale completed on 1 July 2016.
Global businesses and geographical regions
21 Net interest income includes the cost of internally funding trading assets, while
the related revenues are reported in net trading income. In our global business
results, the total cost of funding trading assets is included within Corporate
Centre net trading income as an interest expense. In the statutory presentation,
internal interest income and expense are eliminated.
22 Net operating income before loan impairment charges and other credit risk
provisions, also referred to as revenue.
23 Excludes items where there are substantial offsets in the income statement for
the same year.
42 Central Treasury includes revenue relating to BSM of $3,060m (2015:
$2,885m; 2014:$2,794m ), interest expense of $948m (2015: $710m; 2014:
$484m) and adverse valuation differences on issued long-term debt and
associated swaps of $278m (2015: loss of $64m; 2014: gain of $33m).
Revenue relating to BSM includes other internal allocations, including notional
tax credits 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 in other
Central Treasury.
43 Other miscellaneous items in Corporate Centre includes internal allocations
relating to Legacy Credit.
Other information
44 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 19 on the Financial
Statements).
45 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.
46 In the Annual Report and Accounts 2015, we applied our own internal
methodology which did not contain the Greenhouse Gas Protocol’s Scope 2
quality criteria verification and the residual mix factors which are
recommended in the Scope 2 market-based methodology.
HSBC Holdings plc Annual Report and Accounts 2016
63
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
Risk
Our conservative risk appetite
Top and emerging risks
Externally driven
Internally driven
Areas of special interest
Process of UK withdrawal from the European Union
Oil and gas prices
Risk management
Our risk management framework
Our material banking and insurance risks
Credit risk management
Liquidity and funding risk management
Market risk management
Operational risk management
Regulatory compliance risk management
Financial crime risk management
Insurance manufacturing operations risk management
Other material risks
– Reputational risk management
– Sustainability risk management
– Pension risk management
Key developments and risk profile in 2016
Key developments in 2016
Credit risk profile
Liquidity and funding risk profile
Market risk profile
Operational risk profile
Insurance manufacturing operations risk profile
Page
64
64
64
66
67
67
68
68
68
71
73
75
77
80
81
81
82
83
84
84
85
85
85
106
114
121
121
Our conservative risk appetite
Throughout its history, HSBC has maintained a conservative risk
profile. This is central to our business and strategy.
The following principles guide the Group’s overarching risk
appetite and determine how its businesses and risks are
managed.
Financial position
• Strong capital position, defined by regulatory and internal
capital ratios.
• Liquidity and funding management for each operating entity,
on a stand-alone basis.
Operating model
• Returns generated in line with risk taken.
• Sustainable and diversified earnings mix, delivering
consistent returns for shareholders.
Business practice
• Zero tolerance for knowingly engaging in any business,
activity or association where foreseeable reputational risk
or damage has not been considered and/or mitigated.
• No appetite for deliberately or knowingly causing detriment
to consumers arising from our products and services or
incurring a breach of the letter or spirit of regulatory
requirements.
• No appetite for inappropriate market conduct by a member
of staff or by any Group business.
64
HSBC Holdings plc Annual Report and Accounts 2016
Top and emerging risks
Our approach to identifying and monitoring top and emerging
risks is described on page 70. During 2016, we made a number
of changes to our top and emerging risks to reflect our
assessment of the issues facing HSBC and their effect on the
Group, which are described on page 27.
Our current top and emerging risks are as follows.
Externally driven
Economic outlook and capital flows
Global economic growth remained muted in 2016, with
headwinds adversely affecting both developed and emerging
markets.
The UK electorate’s vote to leave the European Union (‘EU’)
caused significant market volatility in its immediate aftermath,
and since then sterling has depreciated against major
currencies. Uncertainty regarding the terms of the UK’s exit
agreement, its future relationship with the EU and its trading
relationship with the rest of the world may lead to economic
uncertainty and market volatility, which could affect both the
Group and its customers.
Following robust policy action during the course of 2016,
market concerns have eased over the extent of the slowdown
of the mainland Chinese economy, and the potential for further
renminbi depreciation. However, a prolonged or severe
slowdown cannot be ruled out, which would have wider
ramifications for regional and global economic growth, and
global trade and capital flows, as a consequence.
While oil and gas prices have partly recovered from the lows of
2015, global supply and demand imbalances continue to place
considerable financial strain on some producers and exporters.
A continuation of low oil prices, particularly in conjunction with
a low inflation environment and/or low or negative interest
rates, would adversely affect global growth prospects and, as
a consequence, our results.
Mitigating actions
• We actively assess the impact of economic developments
in key markets on specific customers, customer segments
or portfolios and take appropriate mitigating action – that
may include revising risk appetite or limits – as
circumstances evolve.
• We use internal stress testing and scenario analysis, as
well as regulatory stress test programmes, to evaluate
the potential impact of macroeconomic shocks on our
businesses and portfolios. Analysis undertaken on our oil
and gas lending portfolios are described on page 68, and
our wider approach to stress testing is described on
page 70.
• We have carried out detailed reviews of our wholesale credit
portfolios, particularly across those sectors most affected by
the UK referendum result. We have also run a number of
stress tests on our wholesale and trading portfolios to
examine potential impacts under a range of possible exit
scenarios and develop a suite of possible mitigating actions.
Geopolitical risk
Our operations and portfolios are exposed to risks arising from
political instability, civil unrest and military conflict in many
parts of the world. These may include physical risk to our staff
and/or physical damage to our assets, disruption to our
operations and a curtailment in global trade flows.
The outcome of the US election has added to concerns about a
rise in protectionism. This has been accentuated in many parts
of the world by rapid technological change and income
inequality. Any amplification of this trend could cause a
curtailment in global trade, and thus impact HSBC’s traditional
lines of business.
European states are experiencing heightened political tension,
reflecting concerns over migration, fears of terrorism, increased
tension with Russia, and uncertainty about the future
relationship between the UK and the EU. Elections in France,
Germany, the Netherlands and possibly Italy in 2017 are adding
to the uncertainty.
In the Middle East, the terrorist group Daesh has come under
increasing pressure as an international coalition recaptured
territory across Syria and Iraq. Despite this, Daesh has proved
capable of carrying out terrorist attacks both in neighbouring
countries and further afield.
In Asia, ongoing territorial disputes in the South China Sea
and a region-wide build-up in military capability have strained
diplomatic relations, and are testing the resolve of the US to
defend freedom of navigation.
Mitigating actions
• We continually monitor the geopolitical outlook, in particular
in countries where we have material exposures and/or a
physical presence. We established a new dedicated forum
to monitor and advise senior management on global
developments, including analysis on how the Group’s
strategy could be affected by geopolitical events.
• We have taken steps to increase the physical security of our
premises and have enhanced our major incident response
capabilities, particularly in those geographical areas deemed
to be at a higher risk from terrorism and military conflicts.
• Our internal credit risk ratings of sovereign counterparties
take geopolitical factors into account and drive 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.
• We incorporate geopolitical scenarios, such as conflicts in
countries where we have a significant presence or political
developments that could disrupt our operations, into our
internal stress tests to assess their potential effect on our
portfolios and businesses.
Turning of the credit cycle
Although the credit environment has stabilised in the latter part
of the year, due in part to further monetary loosening, there is a
risk that the credit cycle could turn sharply in 2017 if economic
and/or geopolitical shocks unfold.
Stress could appear across a wide array of credit segments,
particularly given the substantial amounts of external
refinancing due in emerging markets in 2017 and 2018.
Sentiment towards mainland China could also deteriorate amid
concerns over its increasing debt burden, or political events in
the US, UK and EU could deliver negative economic outcomes.
Impairment allowances could increase if the credit quality of
our customers is affected by less favourable global economic
conditions in some markets. Should oil prices remain low or fall,
our oil and gas portfolios would come under further pressure.
Mitigating actions
• We closely monitor economic developments in key markets
and sectors, taking portfolio actions where necessary,
including enhanced monitoring, amending our risk appetite
and/or reducing limits and exposures.
• We stress test portfolios of particular concern to identify
sensitivity to loss under a range of scenarios, with
management actions being taken to manage risk appetite
where necessary.
• Reviews of key portfolios are undertaken regularly to ensure
that individual customer or portfolio risks are understood
and that the level of facilities offered and our ability to
manage these through any downturn are appropriate.
Cyber threat and unauthorised access to systems
HSBC and other public and private organisations continue to be
the targets of increasing and more sophisticated cyber attacks
that may disrupt customer services.
Mitigating actions
• We continue to strengthen and significantly invest in our
ability to prevent, detect and respond to the ever-increasing
and sophisticated threat of cyber attacks. Specifically, we
continue to enhance our capabilities to protect against
increasingly sophisticated malware, denial of service attacks
and data leakage prevention, as well as enhancing our
security event detection and incident response processes.
• Cyber risk is a priority area for the Board and is regularly
reported at Board level to ensure appropriate visibility,
governance and executive support for our ongoing
cybersecurity programme.
• We participate in intelligence sharing with both law
enforcement and industry schemes to help improve our
understanding of, and ability to respond to, the evolving
threats faced by us and our peers within our industry.
Regulatory and technological developments with adverse
impact on business model and profitability
Financial service providers continue to face stringent regulatory
and supervisory requirements, particularly in the areas of capital
and liquidity management, conduct of business, financial crime,
operational structures, the use of models and the integrity of
financial services delivery. The competitive landscape in which
the Group operates may be significantly altered by future
regulatory changes and government intervention, which
could be introduced with different, potentially conflicting
requirements and to differing timetables by different regulatory
regimes. Regulatory changes may affect the activities of the
Group as a whole, or of some or all of its principal subsidiaries.
While the rise of financial technology (‘fintech’) presents a
number of opportunities that we are actively engaging in, there
is also a risk that it could disrupt financial institutions’
traditional business model.
Mitigating actions
• We are engaged closely with governments and regulators
in the countries in which we operate to help ensure that
new requirements are considered properly by regulatory
authorities and the financial sector and can be implemented
effectively.
• We have strengthened governance and resourcing around
regulatory change management. Significant regulatory
programmes, such as the implementation of International
Financial Reporting Standard 9, are overseen by the Group
Change Committee (see ‘Execution risk’ on page 67).
• We are actively pursuing opportunities in the fintech space,
and have established HSBC Digital Solutions, a specialist
team to design, build and run digital services. We have also
established a technology advisory board to help ensure we
are fully aware of, and respond to, industry developments as
they arise.
Regulatory focus on conduct of business and
financial crime
Financial institutions remain under considerable scrutiny
regarding conduct of business, particularly in relation to fair
outcomes for customers and orderly and transparent operations
in financial markets, as well as financial crime. Regulators,
prosecutors, the media and the public all have heightened
expectations as to the behaviour and conduct of financial
institutions, and any shortcomings or failure to demonstrate
adequate controls are in place to mitigate such risks could
result in regulatory sanctions or fines. This could also lead to
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an increase in civil litigation arising from or relating to issues
which are subject to regulatory investigation, sanction or fine.
Mitigating actions
• We have created a new function, Financial Crime Risk,
which brings together all areas of financial crime risk
management at HSBC. For further details, see ‘Financial
crime risk management’ on page 81.
• We have also continued to enhance our management of
conduct in areas including the treatment of potentially
vulnerable customers, market surveillance, employee
training and performance management (see ‘Regulatory
compliance risk management’ on page 81).
US deferred prosecution agreement and related
agreements and consent orders
HSBC is subject to a five-year deferred prosecution agreement
(‘US DPA’) with the US DoJ and related agreements and
consent orders with the FRB, the OCC and the FCA. Under the
agreements entered into with the DoJ and the FCA in 2012, an
independent compliance monitor (the ‘Monitor’) was appointed
in July 2013 for an expected five-year period to produce annual
assessments of the effectiveness of the Group’s anti-money
laundering (‘AML’) and sanctions compliance programme.
The design and execution of the AML and sanctions
remediation plans to address the findings of the US DPA and
the Monitor are complex and require major investments in
people, systems and other infrastructure. This complexity
creates significant execution risk that could affect our ability to
effectively identify and manage financial crime risk and remedy
AML and sanctions compliance deficiencies in a timely manner.
This, in turn, could impact our ability to satisfy the Monitor or
comply with the terms of the US DPA and related agreements
and consent orders, and may require us to take additional
remedial measures in the future. These risks could be further
heightened if the Monitor’s reports were to become public.
In February 2017, the Monitor delivered his third annual follow-
up review report as required by the US DPA. In his report, which
is discussed on page 82, the Monitor concluded that, in 2016,
HSBC continued to make progress in enhancing its financial
crime compliance controls, including improvements to our
global AML policies and procedures. However, the Monitor also
expressed significant concerns about the pace of that progress,
instances of potential financial crime that the DoJ and HSBC
are reviewing further and on-going systems and control
deficiencies that in his view raised questions as to whether
HSBC is adhering to all its obligations under the US DPA. The
Monitor also found that there remain substantial challenges
for HSBC to meet its goal of developing a reasonably effective
and sustainable AML and sanctions compliance programme.
In addition, the Monitor did not certify as to HSBC’s
implementation of and adherence to remedial measures
specified in the US DPA.
Potential consequences of breaching the US DPA could include
the imposition of additional terms and conditions on HSBC, an
extension of the agreement, including its monitorship, or the
criminal prosecution of HSBC that could, in turn, entail further
financial penalties and collateral consequences.
Moreover, HSBC Bank USA, as the primary US dollar
correspondent bank for the Group, is subject to heightened
financial crime risk arising from business conducted on behalf
of clients as well as its non-US HSBC affiliates. If HSBC Bank
USA fails to conduct adequate due diligence on clients,
including its affiliates, or otherwise inappropriately processes
US dollar payments on behalf of non-US HSBC affiliates, it
could be in breach of applicable US AML and sanctions laws
and regulations, become subject to legal or regulatory
enforcement actions by OFAC or other US agencies and be
required to pay substantial fines or penalties. In addition, any
such breaches of US legislation could constitute a breach of the
US DPA.
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Under the terms of the US DPA, upon notice and an opportunity
to be heard, the DoJ has sole discretion to determine whether
HSBC has breached the US DPA.
Mitigating actions
• We continued to make progress during 2016 toward putting
in place an effective and sustainable AML and sanctions
compliance programme, including through the creation of
a new Financial Crime Risk function and improvements in
technology and systems to manage financial crime risk.
• We are working to implement the agreed recommendations
flowing from the Monitor’s previous reviews, and to
implement the agreed recommendations from the 2016
review.
Internally driven
IT systems infrastructure and resilience
HSBC continues to invest in the reliability and resilience of our
IT Systems, to help ensure that disruption to customer services
resulting in reputational and regulatory damage does not occur.
Mitigating actions
• We are part-way through a multi-year investment
programme that is transforming how technology is
developed, delivered and maintained, with a particular focus
on providing high-quality, stable and secure services. As
part of this, we are simplifying our service provision and
replacing older IT infrastructure and applications. These
investments are designed to improve IT systems resilience.
• During 2016, we continued to upgrade our IT Systems,
improve disruption free change, and materially reduce the
number of incidents relating to our critical business services.
These enhancements led to a material improvement in
service availability during the year and helped reduce impact
to our customers and colleagues by 45% (when compared
with the same period in 2015).
Impact of organisational change and regulatory
demands on employees
The cumulative workload arising from our regulatory reform and
remediation programmes, together with those related to the
delivery of our strategy, continues to place increasingly complex
and conflicting demands on a workforce that operates in an
employment market where expertise in key markets is often in
short supply and mobile. The scale of organisational change,
including the establishment of the ring-fenced bank in the UK,
has increased pressure on employees and requires us to ensure
that key skills and experience are retained. Furthermore, the
outcome of the UK referendum on EU membership has led to
some uncertainties regarding movement of labour.
Mitigating actions
• We have enhanced our wellbeing programme to support
our employees, particularly those affected by the Group’s
considerable change agenda.
• Risks related to organisational change are subject to close
management oversight. A range of actions are being
developed to address the risks associated with the Group’s
major change initiatives, including recruitment and extensive
relocation support to existing employees in the UK ring-
fenced bank.
• We continue to increase the level of specialist resource in
key areas, and to engage with our regulators as they finalise
new regulations. We use a broad array of talent-sourcing
channels, succession planning for key management roles,
and heightened promotion of opportunities internally, with
particular attention in our more challenging markets.
Execution risk
Execution risk remained heightened during 2016 as we
continued to work towards delivering the strategic actions
announced at the Investor Update in June 2015 (see page 12).
These, along with the regulatory reform agenda and our
commitments under the US DPA, require the management
of significant projects that are resource intensive and time
sensitive. Risks arising from the volume, magnitude and
complexity of the projects underway to meet these demands
may include regulatory censure, reputational damage or
financial losses.
Mitigating actions
• We have strengthened our prioritisation and governance
processes for significant projects. The Group Change
Committee (‘GCC’), chaired by the Group Chief Operating
Officer, oversees the most significant programmes and
provides regular updates to the Risk Management Meeting
of the GMB.
• The GCC monitors the concentration of deliverables to
ensure that potential resource constraints over the medium
term are understood and addressed.
the creation of centralised global analytical functions with
necessary subject matter expertise.
• We have hired additional subject matter experts within our
Independent Model Review sub-function and empowered
the team to ensure appropriate challenge and feedback are
given to models prior to and as part of their ongoing use.
• We have strengthened the model risk policy and introduced
a Group-wide single model inventory system detailing key
metrics on all models, and an assessment of their relative
importance to the organisation.
Data management
The Group currently uses a large number of systems and
applications to support business processes and operations.
Multiple data sources, including customer data sources,
introduce the need for reconciliation to reduce the risk of error.
Strong data governance and enhanced data quality are required
to meet our regulatory obligations relating to risk data
aggregation and risk reporting as set out by the Basel
Committee and our obligations under the US DPA, as well as to
service our customers more effectively and improve our product
offering.
Third-party risk management
Mitigating actions
We utilise third parties for the provision of a range of goods and
services, in common with other financial services providers.
Global regulators have increased their scrutiny of these
arrangements and expect firms to be able to demonstrate
adequate control over the selection, governance and oversight
of their third parties, including affiliates. Any deficiency in our
management of third-party risk could affect our ability to meet
strategic, regulatory or client expectations. This may, in turn,
lead to a range of consequences, including regulatory censure
or reputational damage.
Mitigating actions
• We are part-way through a multi-year strategic programme
to enhance our third-party risk management capability. This
is designed to enable the consistent risk assessment of any
third-party service against key criteria, along with associated
control monitoring, testing and assurance throughout the
third-party life cycle.
• A new Group policy and supporting framework was
published in December 2016. The supporting delivery model
and technology will be developed and will start to deploy in
the second half of 2017.
Enhanced model risk management expectations
We use models for a range of purposes in managing our
business, including regulatory capital calculations, stress
testing, credit approvals, financial crime and fraud risk
management, and financial reporting. Regulatory requirements
for models are rapidly increasing and often fast-moving. The
scale and scope of model development expected by regulators
pose significant execution challenges, especially where the
breadth and scope are beyond what has previously been
expected of the Group.
Regulatory scrutiny and supervisory concerns over banks’ use
of models is considerable, particularly the internal models and
assumptions used by banks in the calculation of regulatory
capital. If regulatory approval for key capital models is not
achieved in a timely manner, we could be required to hold
additional capital.
Mitigating actions
• We have strengthened our model risk governance
framework by establishing additional global model oversight
committees and implementing policies and standards in
accordance with key regulatory requirements.
• We have strengthened our governance over the
development, usage and validation of models including
• The Chief Information Officer continues to drive the
Group’s efforts to enhance data governance, quality and
architecture. These services underpin key programmes and
initiatives, such as our Global Standards programme.
• We are significantly reducing the number of systems and
applications that support key business processes, which will
streamline the number of data sources across the Group,
particularly data used in our customer and transaction
screening processes.
• We continue to make progress on key initiatives and
projects to implement our data strategy and work towards
meeting our Basel Committee data obligations.
Areas of special interest
During 2016, we considered a number of particular areas
because of the effect they may have on the Group. While these
areas have been identified as part of our top and emerging
risks, further details of the actions taken during the year are
provided below.
Process of UK withdrawal from the European
Union
The period of uncertainty and market volatility that followed the
UK’s decision to leave the EU is likely to continue until the UK’s
future relationship with the EU and the rest of the world is
clearer. Given the time-frame and the complex negotiations
involved, and assuming Article 50 is invoked by the end of
March 2017, a clearer picture is not expected to emerge for
some time. HSBC is working with clients as they adapt to this
new environment and plan for what might follow.
Meeting our customers’ needs following the UK’s departure
from the EU will likely require adjustments to our cross-border
banking model. However, with Article 50 not yet invoked and
formal negotiations not yet initiated, it is too early to determine
precisely what will be required or what the likely effects on
HSBC might be. Despite this uncertainty, use of HSBC’s existing
subsidiaries in France, Germany, Malta and Poland should help
us more quickly and seamlessly adapt our banking model to this
new landscape. Such changes could, among other things,
increase our operating costs and require us to relocate staff
and businesses outside the UK to other jurisdictions.
Through this period of uncertainty, our priorities are to continue
to support our clients, take appropriate actions to mitigate risks
and maintain stability, and deliver on our strategy. We are
actively monitoring our portfolio to identify areas of stress, with
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vulnerable sectors subject to management review to determine
if any adjustment to our risk policy or appetite is required. As
the UK's negotiating priorities and likelihood of achieving them
become clearer, we will continue to monitor developments and
take actions required to meet these priorities.
Oil and gas prices
Oil prices improved throughout 2016 and in early 2017,
particularly after Opec agreed to cut supply levels. The improved
oil prices resulted in a decline in new loan impairments in the
second half of the year. The medium- to long-term outlook
remains uncertain as technological change impacts the supply
side through cheaper methods of extraction and the demand
side through the development of renewable energy sources. At
31 December 2016, HSBC’s overall portfolio directly exposed
to oil and gas sector had drawn risk exposure of $28bn (2015:
$29bn). The portfolio has the following credit quality
distribution: ‘strong’ and ‘good’ 53% (2015: 56%), ‘satisfactory’
28% (2015: 35%), ‘sub-standard’ 15% (2015: 7%) and ‘impaired’
4% (2015: 2%), with the majority of the exposures located in
North America, Asia and Europe. Loan impairment charges in
2016 were approximately $0.3bn. The sector remains under
enhanced monitoring with risk appetite and new lending
significantly curtailed.
Key components of our risk management framework
Risk management
This section describes the enterprise-wide risk management
framework, and the significant policies and practices employed
by HSBC in managing its material risks.
Our risk management framework
We use an enterprise-wide risk management framework across
the organisation and across all risk types. It is underpinned by
our risk culture and is reinforced by the HSBC Values and our
Global Standards programme.
The framework fosters continuous monitoring of the risk
environment, and an integrated evaluation of risks and their
interactions. It also ensures a consistent approach to
monitoring, managing and mitigating the risks we accept
and incur in our activities.
The following diagram and descriptions summarise key aspects
of the framework, including governance and structure, our risk
management tools and our risk culture, which together help
align employee behaviour with our risk appetite.
HSBC Values and risk culture
The Board and its sub-committees
The Board approves the Group’s risk appetite, plans and performance targets.
It sets the ‘tone from the top’ and is advised by the Group Risk Committee,
the Financial System Vulnerabilities Committee, and the Conduct & Values
Committee (see page 132).
Governance
and structure
The Risk Management Meeting of the Group
Management Board and its sub-committees
Responsible for the enterprise-wide management of all risks, including key
policies and frameworks for the management of risk within the Group (see
page 69). The Global Standards Steering Meeting is responsible for the
management of financial crime risk (see page 81).
Risk governance framework
Ensures appropriate oversight of and accountability for the management
of risk (see page 68).
Responsibilities
Three lines of defence model
Our three lines of defence model defines roles and responsibilities for
risk management (see page 69).
Global Risk function
An independent function to help ensure the necessary balance in risk/return
decisions (see page 69).
Enterprise-wide risk management tools
Processes
Risk appetite
Top and emerging risks
Processes to identify, monitor, mitigate and report risks to ensure
we remain within our risk appetite (see pages 70 to 71).
Risk map
Stress testing
Banking and insurance risks
Material risks arising from our business activities that are measured,
monitored and managed (see pages 71 to 72).
Controls
Risk Policies and Practices
Set by risk stewards for each of our material banking and insurance risks
(see pages 68 to 73.
Internal Controls
The operational risk management framework defines minimum standards and
processes for managing operational risks and internal controls (see page 80).
Systems and tools
Our risk culture
Risk culture refers to HSBC’s norms, attitudes and behaviours
related to risk awareness, risk taking and risk management.
HSBC has long recognised the importance of a strong risk
culture, the fostering of which is a key responsibility of senior
executives. Our risk culture is reinforced by HSBC Values and
our Global Standards programme. It is instrumental in aligning
the behaviours of individuals with our attitude to assuming and
managing risk, which helps to ensure that our risk profile
remains in line with our risk appetite.
We use clear and consistent employee communication on risk
to convey strategic messages and set the tone from senior
management. We also deploy mandatory training on risk and
compliance topics to embed skills and understanding in order to
strengthen our risk culture and reinforce the attitude to risk in
the behaviour expected of employees, as described in our risk
policies. Mandatory training materials are updated regularly,
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describing technical, cultural and ethical aspects of the various
risks assumed by the Group and how they should be managed
effectively. We operate a global whistleblowing platform, HSBC
Confidential, allowing staff to report matters of concern
confidentially. We also maintain an external email address for
concerns about accounting and internal financial controls or
auditing matters (accountingdisclosures@hsbc.com). The Group
has a strict policy prohibiting retaliation against those who raise
concerns by this route. All allegations of retaliation reported are
escalated to senior management. For details on the governance
of our whistleblowing policy, see pages 140 and 144.
Our risk culture is also reinforced by our approach to
remuneration. Individual awards, including those for senior
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 remuneration, see the Directors’ Remuneration
Report on page 153.
Governance and structure
The Board has ultimate responsibility for the effective
management of risk and approves HSBC’s risk appetite. It is
advised on risk-related matters by the Group Risk Committee
(‘GRC’), the Financial System Vulnerabilities Committee
(‘FSVC’), and the Conduct & Values Committee (‘CVC’)
(see page 82).
Executive accountability for the monitoring, assessment
and management of risk resides with the Group Chief Risk
Officer. He is supported by the Risk Management Meeting
of the Group Management Board (‘RMM’).
In the second half of 2016, we established a Financial Crime
Risk (‘FCR’) function and appointed a Group Head of FCR, who
reports to the Group Chief Executive and chairs the Global
Standards Steering Meeting. The FCR function is dedicated to
implementing the most effective global standards to combat
financial crime, as described under ‘Financial crime risk
management’ on page 81.
Day-to-day responsibility for risk management is delegated
to senior managers with individual accountability for decision
making. These managers are supported by global functions
as described under ‘Three lines of defence’ below.
We use a defined executive risk governance structure to help
ensure appropriate oversight and accountability of risk, which
facilitates the reporting and escalation to the RMM. This
structure is summarised below.
Governance structure for the management of risk
Authority
Membership
Responsibilities include:
Risk Management Meeting
of the Group Management
Board
Group Chief Risk Officer
Chief Legal Officer
Group Chief Executive
Group Finance Director
All other Group Managing Directors
• Supporting the Group Chief Risk Officer in exercising Board-
delegated risk management authority
• Overseeing the implementation of risk appetite and the enterprise-
wide risk management framework
• Forward-looking assessment of the risk environment, analysing the
possible risk impact and taking appropriate action
• Monitoring all categories of risk and determining appropriate
mitigating action
• Promoting a supportive Group culture in relation to risk
management and conduct
Global Risk Management Board Group Chief Risk Officer
• Supporting the Group Chief Risk Officer in providing strategic
Global business/regional risk
management meetings
Chief Risk Officers of HSBC’s
global businesses and regions
Heads of Global Risk sub-functions
Global Business/Regional Chief
Risk Officer
Global Business/Regional Chief
Executive
Global Business/Regional Chief
Financial Officer
Global Business/Regional Heads
of global functions
direction for the Global Risk function, setting priorities and providing
oversight
• Overseeing a consistent approach to accountability for, and
mitigation of, risk across the Global Risk function
• Supporting the Chief Risk Officer in exercising Board-delegated risk
management authority
• Forward-looking assessment of the risk environment, analysing the
•
possible risk impact and taking appropriate action
Implementation of risk appetite and the enterprise-wide risk
management framework
• Monitoring all categories of risk and determining appropriate
mitigating actions
• Embedding a supportive culture in relation to risk management and
controls
The Board committees with responsibility for oversight of risk-related matters are set out on page 140.
Our responsibilities
All employees are responsible for identifying and managing
risk within the scope of their role as part of the three lines of
defence model.
Three lines of defence
We use an activity-based three lines of defence model to
delineate management accountabilities and responsibilities
for risk management and the control environment. This
creates a robust control environment to manage risks.
The model underpins our approach to risk management by
clarifying responsibility, encouraging collaboration, and
enabling efficient coordination of risk and control activities.
The three lines of defence are summarised below:
• The first line of defence owns the risks and is responsible
for identifying, recording, reporting and managing them,
and ensuring that the right controls and assessments are
in place to mitigate them.
• The second line of defence sets the policy and guidelines
for managing specific risk areas, provides advice and
guidance in relation to the risk, and challenges the first
line of defence on effective risk management.
• The third line of defence is our Internal Audit function,
which provides independent and objective assurance of
the adequacy of the design and operational effectiveness
of the Group’s risk management framework and control
governance process.
Global Risk function
We have a Global Risk function, headed by the Group Chief Risk
Officer, which is responsible for the Group’s risk management
framework. This responsibility includes establishing global
policy, monitoring risk profiles, and forward-looking risk
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identification and management. Global Risk is made up of sub-
functions covering all risks to our operations. Global Risk forms
part of the second line of defence. It is independent from the
global businesses, including sales and trading functions, to
provide challenge, appropriate oversight, and balance in risk/
return decisions.
Enterprise-wide risk management tools
The Group uses a range of tools to identify, monitor and
manage risk. The key enterprise-wide risk tools are summarised
below.
An ‘emerging risk’ is a thematic issue with large unknown
components that may form and crystallise beyond a one-year
time horizon. If it were to materialise, it could have a material
effect on the Group’s long-term strategy, profitability and/or
reputation. Existing mitigation plans are likely to be minimal,
reflecting the uncertain nature of these risks at this stage.
Some high-level analysis and/or stress testing may have
been carried out to assess the potential impact.
Our current top and emerging risks are discussed on page 64.
Stress testing
Risk appetite
The Group’s risk appetite defines its desired forward-looking
risk profile, and informs the strategic and financial planning
process. Furthermore, it is integrated with other key risk
management tools, such as stress testing and our top and
emerging risk reports, to help ensure consistency in risk
management practices.
The Group sets out the aggregated level and risk types it
accepts in order to achieve its business objectives in a risk
appetite statement (‘RAS’). This is reviewed on an ongoing
basis, and formally approved by the Board every six months
on the recommendation of the GRC.
The Group’s actual performance is reported monthly against
the approved RAS to the RMM, enabling senior management
to monitor the risk profile and guide business activity to balance
risk and return. This reporting allows risks to be promptly
identified and mitigated, and informs risk-adjusted
remuneration to drive a strong risk culture.
Global businesses, regions and strategically important countries
are required to have their own RASs, which are monitored to
ensure they remain aligned with the Group’s. All RASs and
business activities are guided and underpinned by qualitative
principles (see page 143). Additionally, quantitative metrics are
defined along with appetite and tolerance thresholds for key risk
areas.
Risk map
The Group risk map provides a point-in-time view of the risk
profiles of countries, regions and global businesses across all
risk categories. It assesses the potential for these risks to have a
material impact on the Group’s financial results, reputation and
the sustainability of its business. Risk stewards assign ‘current’
and ‘projected’ risk ratings, supported by commentary. Risks
that have an ‘amber’ or ‘red’ risk rating require monitoring and
mitigating action plans to be either in place or initiated to
manage the risk down to acceptable levels.
Descriptions of our material banking and insurance risks are set out
on page 71.
Top and emerging risks
We use a top and emerging risks process to provide a forward-
looking view of issues with the potential to threaten the
execution of our strategy or operations over the medium to
long term.
We proactively assess the internal and external risk
environment, as well as review the themes identified across our
regions and global businesses, for any risks that may require
global escalation, updating our top and emerging risks as
necessary.
We define a ‘top risk’ as a thematic issue that may form and
crystallise in between six months and one year, and that has
the potential to materially affect the Group’s financial results,
reputation or business model. It may arise across any
combination of risk types, regions or global businesses. The
impact may be well understood by senior management and
some mitigating actions may already be in place. Stress tests
of varying granularity may also have been carried out to assess
the impact.
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HSBC Holdings plc Annual Report and Accounts 2016
HSBC operates a comprehensive stress testing programme that
supports our risk management and capital planning. It includes
execution of stress tests mandated by our regulators. Our stress
testing is supported by dedicated teams and infrastructure, and
is overseen at the most senior levels of the Group.
Our stress testing programme demonstrates our capital strength
and enhances our resilience against external shocks. It also
helps us understand and mitigate risks, and informs our
decisions about capital levels. As well as taking part in
regulators’ stress tests, we conduct our own internal stress
tests.
Many of our regulators – especially the Bank of England (‘BoE’),
the Federal Reserve and the HKMA – utilise stress testing as an
essential prudential regulatory tool and the Group has focused
significant governance attention and resourcing to meet their
requirements. We place particular emphasis on the global
enterprise-wide stress test run on the Group by the BoE, our
lead regulator.
In 2016, the results for HSBC as published by the BoE showed
that our capital ratios after taking account of CRD IV restrictions
and strategic management actions exceeded the BoE’s
requirements. The results for HSBC included an assumed
dividend payment in the first year of the severe stress projection
period.
This outcome reflected our conservative risk appetite, and
diversified geographical and business mix. It also reflected our
ongoing strategic actions, including the sale of operations in
Brazil, RWA reductions in GB&M and continued sales from our
US CML run-off portfolio. These actions have materially reduced
our RWAs, strengthened our capital position and made us even
more robust under stress.
Bank of England stress test results for 2016
The BoE’s stress test in 2016 specified a global downturn with
severe effects in the UK, US, Hong Kong and China, which
accounted for approximately two-thirds of HSBC’s RWAs at the
end of 2015. The assumed GDP growth rates are detailed in the
following table. We estimated that the impact on global GDP in
this scenario was about as severe as the global financial crisis
of 2007 to 2009, but with a much greater focus on emerging
markets. This made it particularly severe for HSBC, given its
priority markets in these areas.
Assumed GDP growth rates in the 2016 Bank of England
stress test scenario
UK
USA
China
Hong Kong
Source: Bank of England.
2015
2016
2017
2018
%
2.2
1.8
6.7
1.9
%
(4.3)
(3.0)
(0.5)
(7.4)
%
1.1
0.8
4.2
1.5
%
1.7
1.6
5.6
2.7
PRA assumed GDP growth rates are shown in terms of fourth quarter on fourth quarter
annual changes.
The following table shows the results of the stress test for the
past three years, and reflects HSBC’s resilience. From a starting
CET1 ratio of 11.9% at the end of 2015, the BoE showed
projected minimum stressed CET1 ratios of 7.6% and 9.1%
before and after the impact of strategic management actions.
Results of Bank of England stress tests for the past three years
CET1 ratio at scenario start point
Minimum stressed CET1 ratio after
strategic management actions
Fall in CET1 ratio
Source: Bank of England.
2016
%
11.9
9.1
2.8
2015
%
10.9
7.7
3.2
2014
%
10.8
8.7
2.1
Data is presented in terms of the minimum CET1 ratio reached net of strategic
management actions as per the results published by the PRA.
Internal stress tests are used intensively in our enterprise-wide
risk management and capital management frameworks. Risks
to our capital plan are assessed through a range of scenarios
which explore risks that management needs to consider under
stress. They include potential adverse macroeconomic,
geopolitical and operational risk events, and potential events
that are specific to HSBC. The selection of scenarios reflects
our risk appetite relating to metrics such as profitability,
capital or liquidity. Stress testing analysis helps management
understand the nature and extent of any vulnerability. Using this
information, management decides whether risks can or should
be mitigated through management actions or, if they were to
crystallise, should be absorbed through capital. This in turn
informs decisions about preferred capital levels.
We conduct reverse stress tests each year at Group and, where
required, subsidiary entity level in order to understand which
potential extreme conditions would make our business model
non-viable. Reverse stress testing identifies potential stresses
and vulnerabilities we might face, and helps inform early
warning triggers, management actions and contingency
plans designed to mitigate risks.
In addition to the Group-wide stress testing scenarios, each
major HSBC subsidiary conducts regular macroeconomic
and event-driven scenario analyses specific to its region. They
also participate as required in the regulatory stress testing
programmes of the jurisdictions in which they operate, such
as the Comprehensive Capital Analysis and Review and Dodd-
Frank Act Stress Test programmes in the US, and the stress
tests of the Hong Kong Monetary Authority. Global functions
and businesses also perform bespoke stress testing to inform
their assessment of risks in potential scenarios.
The Group stress testing programme is overseen by the GRC
and results are reported, where appropriate, to the RMM
and GRC.
Our material banking and insurance risks
The material risk types associated with our banking and
insurance manufacturing operations are described in the
following tables:
Description of risks – banking operations
Risks
Arising from
Measurement, monitoring and management of risk
Credit risk (see page 73)
Credit risk is the risk of
financial loss if a customer or
counterparty fails to meet an
obligation under a contract.
Credit risk arises
principally from direct
lending, trade finance and
leasing business, but also
from certain other
products such as
guarantees and
derivatives.
Credit risk is:
• measured as the amount which could be lost if a customer or counterparty fails to
make repayments;
• monitored using various internal risk management measures and 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.
Liquidity and funding risk (see page 75)
Liquidity risk is 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 an excessive cost.
Funding risk is the risk that
funding considered to be
sustainable, and therefore
used to fund assets, is not
sustainable over time.
Liquidity risk arises from
mismatches in the timing
of cash flows.
Funding risk arises when
illiquid asset positions
cannot be funded at the
expected terms and when
required.
Liquidity and funding risk is:
• measured using a range of metrics including liquidity coverage ratio and net stable
funding ratio;
• monitored against the Group’s liquidity and funding risk framework; 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 (see page 77)
Market risk is the risk that
movements in market factors,
such as foreign exchange
rates, interest rates, credit
spreads, equity prices and
commodity prices, will reduce
our income or the value of our
portfolios.
Exposure to market risk is
separated into two
portfolios:
• trading portfolios; and
• non-trading portfolios.
Market risk exposures
arising from our insurance
operations are discussed
on page 123.
Market risk is:
• measured in terms of value at risk (‘VaR’), which measures the potential losses on
risk positions over a specified time horizon for a given level of confidence, and
assessed using stress testing;
• monitored using VaR, stress testing and other measures including the sensitivity of
net interest income and the sensitivity of structural foreign exchange; and
• managed using risk limits approved by the RMM and the risk management meeting
in various global businesses.
Operational risk (see page 80)
Operational risk is the risk to
achieving our strategy or
objectives as a result of
inadequate or failed internal
processes, people and
systems or from external
events.
Operational risk arises
from day-to-day operations
or external events, and is
relevant to every aspect of
our business.
Regulatory compliance risk
and financial crime
compliance risk are
discussed below.
Operational risk is:
• measured using the risk and control assessment process, which assesses 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 that identify and
assess risks, implement controls to manage them and monitor the effectiveness of
these controls using the operational risk management framework.
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Description of risks – banking operations
Risks
Arising from
Measurement, monitoring and management of risk
Regulatory compliance risk (see page 81)
Regulatory 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.
Regulatory compliance risk
is part of operational risk,
and arises from the risks
associated with breaching
our duty to clients and
other counter-parties,
inappropriate market
conduct and breaching
other regulatory
requirements.
Financial crime risk (see page 81)
Financial crime risk is the
risk that we knowingly or
unknowingly help parties
to commit or to further
potentially illegal activity
through HSBC.
Financial crime risk is part
of operational risk and
arises from day-to-day
banking operations.
Other material risks
Reputational risk (see page 83)
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,
our employees or those with
whom we are associated, that
might cause stakeholders to
form a negative view of the
Group.
Primary reputational risks
arise directly from an
action or inaction by
HSBC, its employees or
associated parties that are
not the consequence of
another type of risk.
Secondary reputational
risks are those arising
indirectly and are a result
of a failure to control any
other risks.
Pension risk (see page 84)
Pension risk is the risk of
increased costs to HSBC from
the post-employment benefit
plans that HSBC has
established for its employees.
Pension risk arises from
investments delivering an
inadequate return, adverse
changes in interest rates
or inflation, or members
living longer than
expected. Pension risk
also includes operational
and reputational risk of
sponsoring pension plans.
Regulatory compliance risk is:
• measured by reference to identified metrics, incident assessments, regulatory
feedback and the judgement and assessment of our Regulatory Compliance teams;
• monitored against our regulatory compliance risk assessments and metrics, the
results of the monitoring and control activities of the second line of defence
functions, and the results of internal and external audits and regulatory inspections;
and
• managed by establishing and communicating appropriate policies and procedures,
training employees in them, and monitoring activity to help ensure their observance.
Proactive risk control and/or remediation work is undertaken where required.
Financial crime risk is:
• measured by reference to identified metrics, incident assessments, regulatory
feedback and the judgement and assessment of our Financial Crime Risk teams;
• monitored against our financial crime compliance risk appetite statement and
metrics, the results of the monitoring and control activities of the second line of
defence functions, and the results of internal and external audits and regulatory
inspections; and
• managed by establishing and communicating appropriate policies and procedures,
training employees in them, and monitoring activity to help ensure their observance.
Proactive risk control and/or remediation work is undertaken where required.
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 that is integrated
into the Group’s broader risk management framework; and
• managed by every member of staff, and covered by a number of policies and
guidelines. There is a clear structure of committees and individuals charged with
mitigating reputational risk.
Pension risk is:
• measured in terms of the scheme’s 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 Global Pensions Oversight Committee and ultimately the RMM.
Sustainability risk (see page 84)
Sustainability risk is the
risk that financial services
provided to customers by
the Group indirectly result
in unacceptable impacts on
people or the environment.
Sustainability risk arises
from the provision of
financial services to
companies or projects
which indirectly result
in unacceptable impacts
on people or on the
environment.
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 RMM and monthly by the Group’s Sustainability Risk
function; and
• managed using sustainability risk policies covering project finance lending and
sector-based sustainability policies for sectors and themes with potentially large
environmental or social impacts.
Our insurance manufacturing subsidiaries are regulated
separately from our banking operations. Risks in our insurance
entities are managed using methodologies and processes that
are subject to Group oversight. Our insurance operations are
also subject to some of the same risks as our banking
operations, which are covered by the Group’s risk
management processes.
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Description of risks – insurance manufacturing operations
Risks
Arising from
Measurement, monitoring and management of risk
Financial risk (see page 123)
Our ability to effectively match
liabilities arising under
insurance contracts with the
asset portfolios that back
them is contingent on the
management of financial risks
and the extent to which these
are borne by policyholders.
Exposure to financial risk
arises from:
• market risk affecting the fair
values of financial assets or
their future cash flows;
• credit risk; and
• liquidity risk of entities
not being able to
make payments to
policyholders as they
fall due.
Financial risk is:
• measured (i) for credit risk, in terms of economic capital and the amount that
could be lost if a counterparty fails to make repayments; (ii) for market risk, in
terms of economic capital, internal metrics and fluctuations in key financial
variables; and (iii) for liquidity risk, in terms of internal metrics including stressed
operational cash flow projections;
• monitored through a framework of approved limits and delegated authorities;
and
• managed through a robust risk control framework which outlines clear and
consistent policies, principles and guidance. This includes using product design,
asset liability matching and bonus rates.
Insurance risk (see page 125)
Insurance risk is the risk that,
over time, the cost of the
contract, including claims and
benefits, may exceed the total
amount of premiums and
investment income received.
The cost of claims and benefits
can be influenced by many
factors, including mortality and
morbidity experience, as well
as lapse and surrender rates.
Insurance risk is:
• measured in terms of life insurance liabilities and economic capital allocated to
insurance underwriting risk;
• monitored through a framework of approved limits and delegated authorities;
and
• managed through a robust risk control framework which outlines clear and
consistent policies, principles and guidance. This includes using product design,
underwriting, reinsurance and claims-handling procedures.
Credit risk management
Credit quality of financial instruments
Details of changes in our credit risk profile in 2016 can be found on
page 85, in ‘Key developments and risk profile in 2016’.
There were no material changes to the policies and practices
for the management of credit risk in 2016.
Credit risk sub-function
(Audited)
Credit approval authorities are delegated by the Board to the
Group Chief Executive together with the authority to sub-
delegate them. The Credit Risk sub-function in Global Risk is
responsible for the key policies and processes for managing
credit risk, which include formulating Group credit policies and
risk rating frameworks, guiding the Group’s appetite for credit
risk exposures, undertaking independent reviews and objective
assessment of credit risk, and monitoring performance and
management of portfolios.
The principal objectives of our credit risk management are:
•
•
•
to maintain across HSBC a strong culture of responsible
lending, and robust risk policies and control frameworks;
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 industries, countries and global
businesses. These include portfolio and counterparty limits,
approval and review controls, and stress testing.
(Audited)
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.
The customer risk rating (‘CRR’) 10-grade scale summarises a
more granular underlying 23-grade scale of obligor probability
of default (‘PD’). All corporate 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 the five credit quality classifications defined, each
encompasses a range of granular internal credit rating grades
assigned to wholesale and retail lending businesses, and the
external ratings attributed by external agencies to debt
securities.
For debt securities and certain other financial instruments,
external ratings have been aligned to the five quality
classifications based upon the mapping of related CRR to
external credit rating. The mapping is reviewed on a regular
basis and the most recent review resulted in sovereign BBB+
and BBB exposures previously mapped to Credit Quality band
‘Good’ being mapped to Credit Quality Band ‘Strong’. Sovereign
BB+ and BB exposures previously mapped to Credit Quality
band ‘Satisfactory’ being mapped to Credit Quality Band ‘Good’.
This represents a change in disclosure mapping unrelated to
changes in counterparty creditworthiness. Had this mapping
been applied in 2015, sovereign exposures would be changed
as follows: ‘Satisfactory’ $1.4bn decrease, ‘Good’ $4.3bn
decrease and $5.7bn ‘Strong’ increase.
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Credit quality classification
Sovereign debt
securities
and bills
Other debt
securities
and bills
Wholesale lending
and derivatives
Retail lending
Footnotes
External credit
rating
External credit
rating
Internal credit
rating
12-month
probability of
default %
Internal credit
rating
Expected loss %
Quality classification
Strong
Good
Satisfactory
Sub-standard
Impaired
1, 2
BBB and above
A– and above
CRR1 to CRR2
0 – 0.169
EL1 to EL2
0 – 0.999
BB to BBB–
BBB+ to BBB–
CRR3
0.170 – 0.740
EL3
1.000 – 4.999
BB- to B and
unrated
BB+ to B and
unrated
CRR4 to CRR5
0.741 – 4.914
EL4 to EL5
5.000 – 19.999
3
B– to C
Default
B– to C
CRR6 to CRR8
4.915 – 99.999
EL6 to EL8
20.000 – 99.999
Default
CRR9 to CRR10
100
EL9 to EL10
100+ or defaulted
1
2
3
Customer risk rating.
Expected loss (‘EL’).
The EL percentage is derived through a combination of probability of default (‘PD’) and loss given default (‘LGD’), and may exceed 100% in circumstances where the LGD is
above 100% reflecting the cost of recoveries.
Quality classification definitions
•
•
•
•
•
‘Strong’ exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default and/or low levels of
expected loss.
‘Good’ exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk.
‘Satisfactory’ exposures require closer monitoring and demonstrate an average to fair capacity to meet financial commitments, with moderate
default risk.
‘Sub-standard’ exposures require varying degrees of special attention and default risk is of greater concern.
‘Impaired’ exposures have been assessed as impaired, as described on page 90. These also include retail accounts classified as EL1 to EL8 that are
delinquent by more than 90 days, 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).
Renegotiated loans and forbearance
(Audited)
Where a loan is modified due to significant concerns about the
borrower’s ability to meet contractual payments when due, 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.
Identifying renegotiated loans
Loans are identified as renegotiated loans when we modify the
contractual payment terms due to significant credit distress of
the borrower. ‘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.
When considering modification terms, the borrower’s continued
ability to repay is assessed and where they are unrelated to
payment arrangements, whilst potential indicators of
impairment, these loans are not considered as renegotiated
loans. In HSBC Finance, loan modification and re-age policies,
renegotiated real estate loans are not eligible for a subsequent
renegotiation for six or 12 months depending upon the action,
with a maximum of five renegotiations permitted within a five-
year period. Loans that have been identified as renegotiated
retain this designation until maturity or derecognition. A loan
that is renegotiated is derecognised if the existing agreement
is cancelled and a new agreement is made on substantially
different terms or if the terms of an existing agreement are
modified such that the renegotiated loan is substantially a
different financial instrument. Any new loans that arise
following derecognition events will continue to be disclosed
as renegotiated loans.
Credit quality of renegotiated loans
On execution of the renegotiation, the loan will also be
classified as impaired if it is not already so classified. In
wholesale lending, all of the facilities with a customer, including
loans which have not been modified, are considered impaired
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HSBC Holdings plc Annual Report and Accounts 2016
following the provision of a renegotiated loan. In our US CML
run-off portfolio in HSBC Finance, 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 not considered impaired, as the contractual
payment deferrals are deemed to be insignificant compared
with payments due on the loan as a whole.
Those loans that are considered impaired retain the impaired
classification for a minimum of one year. Renegotiated loans
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 (the evidence typically
comprises a history of payment performance against the
original or revised terms), and there are no other indicators of
impairment. In our US CML run-off portfolio in HSBC Finance,
all modified loans with terms of more than two years are
considered to be permanently impaired.
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.
For wholesale lending, renegotiated loans are typically assessed
individually. Credit risk ratings are intrinsic to the impairment
assessment. The individual impairment assessment takes into
account the higher risk of the non-payment of future cash flows
inherent in renegotiated loans.
Impairment assessment
(Audited)
For details of our impairment policies on loans and advances
and financial investments, see Note 1 to the Financial
Statements.
Write-off of loans and advances
(Audited)
For details of our policy on the write-off of loans and advances,
see Note 1 to the Financial Statements.
In HSBC Finance, the carrying amounts of residential mortgages
and second lien loans in excess of net realisable value are
written off at or before the time foreclosure is completed or
settlement is reached with the borrower. If there is no
reasonable expectation of recovery, and foreclosure is pursued,
the loan is normally written off no later than the end of the
month in which the loan becomes 180 days contractually past
due.
Unsecured personal facilities, including credit cards, are
generally written off at between 150 and 210 days past due.
The standard period runs until the end of the month in which
the account becomes 180 days contractually delinquent. Write-
off periods may be extended, generally to no more than 360
days past due but, in very exceptional circumstances, to longer
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.
For secured personal facilities, final write-off should generally
occur within 60 months of the default at the latest.
In the event of bankruptcy or analogous proceedings, write-off
may occur earlier than the periods stated above. Collection
procedures may continue after write-off.
Impairment methodologies for available-for-sale asset-
backed securities (‘ABSs’)
(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 collateralised debt obligations (‘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.
Liquidity and funding risk management
Details of changes in our liquidity and funding risk profile in 2016 can
be found on page 85, in ‘Key developments and risk profile in 2016’.
Liquidity and funding risk management framework
HSBC has an internal liquidity and funding risk management
framework (‘LFRF’) which aims to allow it to withstand very
severe liquidity stresses. It is designed to be adaptable to
changing business models, markets and regulations.
The management of liquidity and funding is primarily
undertaken locally (by country) in our operating entities in
compliance with the Group’s LFRF, and with practices and
limits set by the GMB through the RMM and approved by the
Board. 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 asset and liability committees
(‘ALCO’) 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, Holdings ALCO and the RMM.
The remaining smaller operating entities are overseen by
regional ALCOs, with appropriate escalation of significant
issues to Holdings ALCO and the RMM.
Operating entities are predominantly 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 RMM reviews and agrees annually the list of entities it
directly oversees and the composition of these entities.
Key developments in 2016
On 1 January 2016, the Group implemented a new LFRF. It uses
the liquidity coverage ratio (‘LCR’) and net stable funding ratio
(‘NSFR’) regulatory framework as a foundation, but adds extra
metrics, limits and overlays to address firm-specific risks:
The LFRF is delivered using the following key aspects:
• stand-alone management of liquidity and funding by
operating entity;
• operating entity classification by inherent liquidity risk (‘ILR’)
categorisation;
• minimum LCR requirement depending on ILR categorisation;
• minimum NSFR requirement depending on ILR
categorisation;
•
•
legal entity depositor concentration limit;
three-month and 12-month cumulative rolling term
contractual maturity limits covering deposits from banks,
deposits from non-bank financial institutions and securities
issued;
• annual individual liquidity adequacy assessment by principal
operating entity;
• minimum LCR requirement by currency;
•
•
intra-day liquidity; and
forward-looking funding assessments.
The new internal LFRF and the risk tolerance limits were
approved by the Board on the basis of recommendations made
by the Group Risk Committee.
Our annual individual liquidity adequacy assessment process
aims to:
HSBC Holdings plc Annual Report and Accounts 2016
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•
identify risks that are not reflected in the LFRF, and, where
required, to assess additional limits required locally; and
borrowing receivables and derivative assets’ and ‘Cannot be
pledged as collateral’.
• validate the risk tolerance at the operating entity level by
demonstrating that reverse stress testing scenarios are
acceptably remote and ensuring vulnerabilities have been
assessed through the use of severe stress scenarios.
Management of liquidity and funding risk
Liquidity coverage ratio
The HSBC application of the LCR metric involves the following
two key assumptions about the definition of operational
deposits and the ability to transfer liquidity from non-EU
legal entities:
• we define operational deposits as transactional (current)
accounts arising from the provision of custody services
by HSBC Security Services or Global Liquidity and Cash
Management, where the operational component is assessed
to be the lower of the current balance and the separate
notional values of debits and credits across the account
in the previous calculation period; and
• we assume no transferability of liquidity from non-EU
entities other than to the extent currently permitted.
Net stable funding ratio
HSBC uses the NSFR as a basis for establishing stable funding
around the Group.
Liquid assets of HSBC’s principal operating entities
Liquid assets are held and managed on a stand-alone operating
entity basis. Most are held directly by each operating entity’s
Balance Sheet Management (‘BSM’) department, primarily for
the purpose of managing liquidity risk in line with the LFRF.
The liquid asset buffer may also include securities in held-to-
maturity portfolios. To qualify as part of the liquid asset buffer,
held-to-maturity portfolios must have a deep and liquid repo
market in the underlying security.
Liquid assets also include any unencumbered liquid assets held
outside BSM departments for any other purpose. The LFRF
gives ultimate control of all unencumbered assets and sources
of liquidity to BSM.
Sources of funding
Customer deposits in the form of current accounts and savings
deposits payable on demand or at short notice form the
significant part of our stable 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 (publicly 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.
Ordinary share capital and retained reserves, non-core capital
instruments and total loss-absorbing capacity (‘TLAC’) eligible
debt securities are also a source of stable funding.
Analysis of on-balance sheet encumbered and
unencumbered assets and off-balance sheet collateral
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 segmented into four separate sub-categories: ‘Readily
realisable assets’, ‘Other realisable assets’, ‘Reverse repo/stock
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Liquidity behaviouralisation
All stable deposits are assumed under the Group’s frameworks
to have a liquidity behaviouralised life beyond one year and to
represent a homogeneous source of stable funding. The
behaviouralisation of assets is far more granular and seeks to
differentiate the period for which we must assume that we will
need stable funding for the asset.
Funds transfer pricing
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).
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 IFRS 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.
HSBC Holdings
HSBC Holdings’ primary sources of cash are dividends received
from subsidiaries, interest on and repayment of intra-group
loans and securities, and interest earned on its own liquid
funds. HSBC Holdings also raises ancillary funds in the debt
capital markets through subordinated and senior debt
issuances. Cash is primarily used for the provision of capital and
subordinated funding to subsidiaries, interest payments to debt
holders and dividend payments to shareholders.
HSBC Holdings is also subject to contingent liquidity risk by
virtue of 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. During 2016, consistent with the Group’s capital
plan, the Group’s subsidiaries did not experience any significant
restrictions on paying dividends or repaying loans and
advances. Also, there are no foreseen restrictions envisaged
with regard to planned dividends or payments. However, 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,
exchange controls, statutory reserves, and financial and
operating performance.
None of the subsidiaries that are excluded from our regulatory
consolidation has capital resources below its minimum
regulatory requirement.
Market risk management
Details of changes in our market risk profile in 2016 can be found on page
85, in ‘Key developments and risk profile in 2016’.
There were no material changes to our policies and practices for
the management of market risk in 2016.
Market risk in global businesses
The diagram below summarises the main business areas where
trading and non-trading market risks reside, and the market risk
measures used to monitor and limit exposures.
Risk types
Trading risk
Non-trading risk
• Foreign exchange and
commodities
• Interest rates
• Credit spreads
• Equities
• Structural foreign
exchange
• Interest rates1
• Credit spreads
Global business
GB&M and BSM2
GB&M, BSM2,
GPB, CMB and RBWM
Risk measure
VaR | Sensitivity | Stress
Testing
VaR | Sensitivity | Stress
Testing
1
2
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 106.
BSM, for external reporting purposes, forms part of Corporate Centre while daily
operations and risk are managed within GB&M.
Where appropriate, we apply similar risk management policies
and measurement techniques to both trading and non-trading
portfolios. Our objective is to manage and control market risk
exposures to optimise return on risk while maintaining a market
profile consistent with our established risk appetite.
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 the portfolio level.
Market risk governance
(Audited)
Market risk is managed and controlled through limits approved
by the RMM for HSBC Holdings. These limits are allocated
across business lines and to the Group’s legal entities.
General
measures
HSBC Holdings Board
Group Chairman/
Group Chief Executive
Risk Management
Meeting of the GMB
Group traded risk
Entity risk management
committee
Specific
measures
Principal office manager
Business/desk/trader
GB&M manages market risk, where the majority of HSBC’s total value at risk (excluding insurance) and
almost all trading VaR resides, using risk limits approved by the RMM. VaR limits are set for portfolios,
products and risk types, with market liquidity being a primary factor in determining the level of limits set.
Global Risk is responsible for setting market risk management policies and measurement techniques.
Each major operating entity has an independent market risk management and control sub-function which
is responsible for measuring market risk exposures, 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 GB&M unit for management, or to separate books managed under the
supervision of the local ALCO.
Model risk is governed through Model Oversight Committees (‘MOCs’) at the regional and global Wholesale
Credit and Market Risk levels. They have direct oversight and approval responsibility for all traded risk
models used for risk measurement and management and stress testing. We are committed to the ongoing
development of our in-house risk models.
The Markets MOC reports into the Group MOC, which oversees all model risk types at Group level. The
Group MOC informs the RMM about material issues at least two times a year. The RMM 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.
Global Risk enforces trading in permissible instruments approved for each site, new product approval
procedures, restricting trading in the more complex derivative products only to offices with appropriate
levels of product expertise and robust control systems.
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Market risk measures
Monitoring and limiting market risk exposures
Our objective is to manage and control market risk exposures
while maintaining a market profile consistent with 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
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 a principal factor in determining the level.
Value at risk
(Audited)
Value at risk (‘VaR’) is a technique for estimating 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 calculated for all trading positions regardless
of how we capitalise them. 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 to have a complete picture of risk. Where we do not
calculate VaR explicitly, we use alternative tools as summarised
in the ‘Stress testing’ section below.
Our models are predominantly based on historical simulation
which incorporate the following features:
• historical market rates and prices are calculated with
reference to foreign exchange rates, 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 models also incorporate the effect of option features on the
underlying exposures. 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.
VaR model limitations
Although a valuable guide to risk, VaR should always be viewed
in the context of its limitations. For example:
• use of historical data as a proxy for estimating future events
may not encompass all potential events, particularly extreme
ones;
•
•
the use of a holding period assumes that all positions can
be liquidated or the risks offset during that period, which
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 does not take into
account losses that might occur beyond this level of
confidence; and
• VaR is calculated on the basis of exposures outstanding at
the close of business and therefore does not necessarily
reflect intra-day exposures.
Risk not in VaR framework
The risks not in VaR (‘RNIV’) framework aims to capture and
capitalise material market risks that are not adequately covered
in the VaR model, such as the LIBOR tenor basis.
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Risk factors are reviewed on a regular basis and either
incorporated directly in the VaR models, where possible, or
quantified through the VaR-based RNIV approach or a stress
test approach within the RNIV framework. The outcome of the
VaR-based RNIV is included in the VaR calculation and back-
testing; a stressed VaR RNIV is also computed for the risk
factors considered in the VaR-based RNIV approach.
Stress-type RNIVs include a gap risk exposure measure to
capture risk on non-recourse margin loans and a de-peg risk
measure to capture risk to pegged and heavily-managed
currencies.
Stress testing
Stress testing is an important procedure that is integrated
into our market risk management framework to evaluate the
potential impact on portfolio values of more extreme, although
plausible, events or movements in a set of financial variables.
In such scenarios, losses can be much greater than those
predicted by VaR modelling.
Stress testing is implemented at legal entity, regional and
overall Group levels. A set of scenarios is used consistently
across all regions within the Group. Scenarios are tailored to
capture the relevant potential events or market movements
at each level. The risk appetite around potential stress losses
for the Group is set and monitored against referral limits.
Market risk reverse stress tests are undertaken on the premise
that there is a fixed loss. The stress testing process identifies
which scenarios lead to this loss. The rationale behind the
reverse stress test is to understand scenarios that are beyond
normal business settings and 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
Back-testing
We routinely validate the accuracy of our VaR models by back-
testing them against both actual and hypothetical profit and
loss against the corresponding VaR numbers. Hypothetical
profit and loss excludes non-modelled items such as fees,
commissions and revenues of intra-day transactions.
We would expect, on average, to see two or three profits and
two or three losses in excess of VaR at the 99% confidence level
over a one-year period. The actual number of profits or losses in
excess of VaR over this period can therefore be used to gauge
how well the models are performing.
We back-test our Group VaR at various levels that reflect a full
legal entity scope of HSBC, including entities that do not have
local permission to use VaR for regulatory purposes.
Structural foreign exchange exposures
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.
Interest rate risk in the banking book
The Asset, Liability and Capital Management (‘ALCM’) function
is responsible for measuring and controlling interest rate risk
in the banking book under the supervision of the RMM.
The component of the interest rate risk in the banking book
outside Balance Sheet Management (‘BSM’) or Global Markets
that can be economically neutralised by fixed-rate government
bonds or interest rate derivatives is transfer priced to and
managed by BSM. The banking book interest rate risk
transferred to BSM is reflected in the Group’s non-traded
VaR measure.
BSM is overseen by the Market Risk and Product Control
functions in exactly the same way as Global Markets.
The price at which interest rate risk is transferred to BSM is
determined by the entity’s prevailing interest rate risk transfer
pricing curve defined by operating entities Asset and Liability
Management Committee (‘ALCO’), in accordance with the
Group’s funds transfer pricing policies. The transfer price seeks
to reflect the price at which BSM could neutralise the risk in the
market at the point of transfer.
The banking book interest rate risk within HSBC Holdings is
not transferred to BSM and is managed as an ALCO book.
Interest rate risk behaviouralisation
In assessing the banking book interest rate risk outside BSM
and Global Markets, interest rate repricing behaviouralisation
techniques are used where the interest repricing profile is
uncertain due to customer/bank optionality or where non-
interest bearing balances are withdrawable.
The maximum tenor to which any individual tranche of a non-
interest bearing withdrawable/repayable customer balance or
equity can be behaviouralised is 10 years. The maximum
weighted average behaviouralised tenor for any portfolio is five
years. Interest-bearing managed/administered rate balances
are behaviouralised to tenors less than one year, typically one
month or three months.
The maximum percentage of any portfolio that can be
behaviouralised is 90% with the residual treated as contractual,
meaning overnight.
Unlike liquidity risk, which is assessed on the basis of a very
severe stress scenario, banking book interest rate risk is
assessed and managed according to business-as-usual
conditions. In many cases, the contractual profile of banking
book assets/liabilities arising from assets/liabilities created
outside Markets or BSM does not reflect the behaviour
observed.
Where there is no certainty with regard to interest rate repricing
profile, behaviouralisation is used to assess the market interest
rate risk of banking book 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 repricing 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.
Interest rate behaviouralisation policies have to be formulated in
line with the Group’s behaviouralisation policies and approved
at least annually by local ALCOs.
The extent to which balances can be behaviouralised is driven
by:
•
•
•
the amount of the current balance that can be assessed as
constant under business-as-usual conditions; and
for managed rate balances, the historical market interest
rate repricing 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.
Measurement of interest rate risk in the banking book
Interest rate risk in the banking book is measured and
controlled using three metrics:
• non-traded VaR;
• net interest income sensitivity; and
• economic value of equity.
Non-traded VaR excludes the non-traded interest rate risk not
transferred to BSM and the non-traded interest rate risk of
HSBC Holdings.
Net interest income (‘NII’) sensitivity captures the expected
impact of changes in interest rates on base case projected net
interest income.
Economic value of equity (‘EVE’) captures the expected impact
of changes in interest rates on base case economic value. It
captures all non-traded items irrespective of the profit and loss
accounting treatment.
Balance Sheet Management
Effective governance across BSM is supported by the dual
reporting lines it has to the Chief Executive Officer 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 banking book interest rate
positions transferred to it within a Markets limit structure.
In executing the management of the liquidity risk on behalf of
ALCO, and managing the banking book 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 sheet.
BSM is permitted to enter into single name and index credit
derivatives activity, but it does so to manage credit risk on the
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exposure specific to its securities portfolio in limited
circumstances only. The risk limits are extremely limited and
closely monitored. At 31 December 2016, BSM had no open
credit derivative index risk.
VaR is calculated on positions held in BSM and is calculated
by applying the same methodology used for the Markets
business and utilised as a tool for market risk control purposes.
The vast majority of BSM’s VaR arises from banking book
portfolios and is classified as non-traded VaR.
BSM is predominantly involved in managing liquidity in
accordance with the LFRF, managing the daily cash position
and managing the non-traded interest rate risk transferred to
it, within non-traded market risk limits.
Net interest income sensitivity
A principal part of our management of non-traded interest rate
risk is to monitor the sensitivity of expected net interest income
under varying interest rate scenarios (simulation modelling),
where all other economic variables are held constant. 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 projected yield curves
based on a static balance sheet size and structure assumption,
other than instances where the size of the balances or repricing
is deemed interest rate sensitive (non-interest bearing current
account migration and fixed rate loan early prepayment) and
where non-traded VaR is assumed to contractually run off. 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 proactively seeks
to change the interest rate risk profile to 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 unless the central bank rate is
already negative and then not assumed to go further negative,
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.
Economic value of equity
An economic value of equity (‘EVE value’) represents the
present value of future banking book cash flows that could
be distributed to equity providers under a managed run-off
scenario, which represents the current book value of equity
plus the present value of future net interest income under a
managed run-off scenario. The present value of net interest
income under a managed run-off and under any interest rate
scenario can therefore be assessed by deducting the book
value of equity from the EVE value calculated.
An EVE sensitivity is the extent to which the EVE value will
change due to a pre-specified movement in interest rates,
where all other economic variables are held constant. The EVE
sensitivity represents the sensitivity of discounted net interest
income plus the sensitivity of the net present value of any
transactions used to hedge the interest income earned on
equity. If the EVE sensitivity is adjusted to remove the sensitivity
in net present value of any transactions used to hedge the
interest income earned on equity, the resulting adjusted EVE
sensitivity represents the extent to which, under a managed
run-off scenario, discounted net interest income is sensitive to
a pre-specified movement in interest rates.
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When assessing the sensitivity of economic value of equity to
interest rate movements, the timing of principal cash flows can
vary but the amount remains constant.
Operating entities are required to monitor EVE sensitivity
as a percentage of total capital resources and adjusted EVE
sensitivity as a percentage of the present value of future net
interest income (base case EVE minus book value of equity)
under a managed run-off assumption.
EVE can also be used for assessing the economic capital
required to support interest rate risk in the banking book
(‘IRRBB’):
• Where EVE under any scenario is higher than the current
balance sheet carrying value of equity, the banking book
income stream is positive (i.e. profit) and therefore capital
accretive under that scenario and no economic capital for
IRRBB is required.
• Where EVE of any scenario is lower than the current balance
sheet carrying value of equity, the banking book income
stream is negative (i.e. loss) and therefore capital deductive
under that scenario and economic capital for IRRBB should
be held against this loss.
Where banking book assets/liabilities are fair valued through
profit and loss or where the fair value changes impact capital
resources (i.e. available for sale), economic capital for this
interest rate sensitivity is additionally assessed using a stressed
VaR approach.
HSBC Holdings
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 its 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 banking book 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 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 management
Details of our operational risk profile in 2016 can be found on page 121, in
‘Operational risk exposures in 2016’.
Responsibility for minimising operational risk lies with all
HSBC’s employees. Specifically, all staff are required to manage
the operational risks of the business and operational activities
for which they are responsible.
Overview
The objective of our operational risk management is to manage
and control operational risk in a cost-effective manner within
targeted levels of operational risk consistent with our risk
appetite, as defined by the GMB.
Key developments in 2016
Regulatory compliance risk management
HSBC’s operational risk management framework (‘ORMF’) is
our overarching approach for managing operational risk, the
purpose of which is to:
•
•
identify and manage our non-financial operational risks in an
effective manner;
remain within the Group’s operational risk appetite, which
helps the organisation understand the level of risk it is
willing to accept; and
• drive forward-looking risk awareness and assist
management focus during 2016.
Activity to strengthen our risk culture and better embed the use
of the ORMF was further implemented in 2016, in particular the
use of the activity-based three lines of defence model, which
sets out roles and responsibilities for managing operational risks
on a daily basis.
Further information on the three lines of defence model can be found in
the ‘Our risk management framework’ section on page 68.
Governance and structure
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.
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
sub-function supports the Group Chief Risk Officer and the
Global Operational Risk Committee. It is responsible for leading
the embedding of the ORMF and assurance of adherence to
associated policies and processes across the first and second
lines. It is also responsible for preparation of operational risk
reporting at Group level, including reports for consideration
by the RMM and the 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.
Key risk management processes
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 inputted 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 help
ensure that operational risk losses are consistently reported and
monitored at Group level, all Group companies are required to
report individual losses when the net loss is expected to exceed
$10,000, and to aggregate all other operational risk losses under
$10,000. Losses are entered into the Group operational risk
database and reported to the RMM on a monthly basis.
Overview
The Regulatory Compliance sub-function (‘RC’) provides
independent, objective oversight and challenge and promotes
a compliance-orientated culture, supporting the business in
delivering fair outcomes for customers, maintaining the integrity
of financial markets and achieving HSBC’s strategic objectives.
Key developments in 2016
In the second half of 2016, we restructured part of our Global
Risk function. The Financial Crime Compliance sub-function
became part of our new Financial Crime Risk function, which
reports directly to the Group Chief Executive (see ‘Financial
crime risk management’ below). The RC sub-function remains
part of Global Risk, and continues to oversee management of
regulatory compliance risk.
Governance and structure
The Global Head of RC reports to the Group Chief Risk Officer.
To align with our global business structure and help ensure
coverage of local regulatory requirements, RC is structured as
a global function with regional and country RC teams, which
support and advise each global business and global function.
Key risk management processes
We regularly review our policies and procedures. Global policies
and procedures require the prompt identification and escalation
of any actual or potential regulatory breach to RC. Reportable
events are escalated to the RMM and the Group Risk
Committee, as appropriate. Matters relating to the Group’s
regulatory conduct of business are reported to the Conduct
& Values Committee.
Conduct of business
In 2016, we continued to take steps to raise our standards
relating to conduct, which included:
• designing further global mandatory conduct training for
delivery to all employees in 2017;
•
•
•
incorporating the assessment of expected values and
behaviours as key determinants in recruitment, performance
appraisal and remuneration processes;
improving our Group-wide market surveillance capability;
introducing policies and procedures to strengthen support
for potentially vulnerable customers;
• enhancing the quality and depth of conduct management
information and how it is used across the Group;
•
implementing an assessment process to check the
effectiveness of our conduct initiatives across the Group;
and
• assessing conduct standards and practices within our key
third-party suppliers and distributors.
The Board maintained oversight of conduct matters through the
Conduct & Values Committee.
Further information on our conduct is provided in the Strategic Report on
page 22 and www.hsbc.com. For conduct-related costs relating to
significant items, see page 62.
Financial crime risk management
Overview
In the second half of 2016, we established a Financial Crime
Risk (‘FCR’) function and appointed a Group Head of FCR, who
reports to the Group Chief Executive and chairs the Global
Standards Steering Meeting. FCR is a global function that
brings together all areas of financial crime risk management at
HSBC and is dedicated to implementing the most effective
global standards to combat financial crime. The function has
been set up to enable us to build on our achievements in
managing financial crime risk effectively across the bank and
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Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
to continue to strengthen financial crime detection, and anti-
money laundering (‘AML’), sanctions and anti-bribery and
corruption compliance.
Key developments in 2016
The FCR function encompasses FCR Assurance, Financial
Crime Compliance, Financial Crime Threat Mitigation, the
Global Standards programme, the Monitor Liaison Office, FCR
Strategy Implementation, FCR Chief of Staff and FCR COO.
The structure has been designed around the following key
principles:
• FCR sets policy and standards, provides subject matter
expertise and guidance, drives execution at country level
via regions, and maintains line of business subject matter
expertise in support of the global businesses.
• Country-level execution accountability is driven by a
common set of global principles with material variations
managed by exception.
• Sub-functions within FCR are leveraged across the global
function, ensuring consistency and utilising expertise and
resourcing.
Key risk management processes
We continue to embed policies and procedures, introduce new
technology solutions and support the cultural change needed
to effectively manage financial crime risk. A key enhancement
during 2016 was the deployment of our global customer due
diligence system to 35 markets for RBWM, 52 for CMB, 36 for
GB&M and two for GPB. This, along with the enhanced financial
crime risk training that we have taken more than 3,500 senior
leaders through globally, will help ensure our people have the
guidance and tools that they need.
The Group Head of FCR attends the Financial System
Vulnerabilities Committee (‘FSVC’), 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, as well as cyber and information security. In 2016,
the FSVC assumed responsibility from the CVC for oversight
of controls relating to anti-bribery and corruption.
Throughout the year the Committee received regular reports
from country chief executives on the actions being taken by
management to address local financial crime risk issues and
vulnerabilities, and also received reports on specific issues.
The Monitor
Under the agreements entered into with the DoJ and the FCA
in 2012, including the five-year US DPA, the Monitor was
appointed in July 2013 for an expected five-year period to
produce annual assessments of the effectiveness of the Group’s
AML and sanctions compliance programme.
In February 2017, the Monitor delivered his third annual follow-
up review report based on various thematic and country reviews
he had conducted over the course of 2016. In his report, the
Monitor concluded that, in 2016, HSBC continued to make
progress in enhancing its financial crime compliance controls,
including improvements to its Global AML policies and
procedures. However, the Monitor also expressed significant
concerns about the pace of that progress, instances of potential
financial crime that the DoJ and HSBC are reviewing further
and on-going systems and control deficiencies that in his
view raised questions as to whether HSBC is adhering to
its obligations under the US DPA - a matter that would be
determined by the DoJ in its sole discretion. The Monitor
also found that there remain substantial challenges for HSBC
to meet its goal of developing a reasonably effective and
sustainable AML and sanctions compliance programme.
In addition, the Monitor did not certify as to HSBC’s
implementation of and adherence to remedial measures
specified in the US DPA. The ‘US deferred prosecution
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HSBC Holdings plc Annual Report and Accounts 2016
agreement and related agreements and consent orders’
are discussed in ‘Top and emerging risks’ on page 64.
Throughout 2016, the FSVC received regular reports on HSBC’s
relationship with the Monitor and its compliance with the US
DPA. The FSVC received regular updates on the preliminary
findings arising from the Monitor’s third annual review, and
has received the Monitor’s third annual review report.
Insurance manufacturing operations risk
management
Details of changes in our insurance manufacturing operations
risk profile in 2016 can be found on page 121, in ‘Insurance
manufacturing operations risk profile’.
There were no material changes to our policies and practices for
the management of risks arising in our insurance manufacturing
operations in 2016.
Governance
(Audited)
Insurance risks are managed to a defined risk appetite, which
is aligned to the Group risk appetite and risk management
framework, including the Group three lines of defence model.
For details of the Group’s governance framework, see page 68.
The Group Insurance Risk Management Meeting oversees the
control framework globally and is accountable to the RBWM
Risk Management Meeting on risk matters relating to the
insurance business.
The monitoring of the risks within the insurance operations is
carried out by insurance risk teams. Specific risk functions,
including Wholesale Credit & Market Risk, Operational Risk,
Information Security Risk and Financial Crime Risk, support
Insurance Risk teams in their respective areas of expertise.
Stress and scenario testing
(Audited)
Stress testing forms a key part of the risk management
framework for the insurance business. We participate in local
and Group-wide regulatory stress tests, including the Bank of
England stress test of the banking system, the Hong Kong
Monetary Authority stress test, the European Insurance and
Occupational Pensions Authority stress test, and individual
country insurance regulatory stress tests.
These have highlighted that a key risk scenario for the insurance
business is a prolonged low interest rate environment. In order
to mitigate the impact of this scenario, the insurance operations
have a range of strategies that could be employed including the
hedging of investment risk, repricing current products to reflect
lower interest rates, improving risk diversification, moving
towards less capital intensive products, and developing
investment strategies to optimise the expected returns against
the cost of economic capital.
Management and mitigation of key risk types
Market risk
(Audited)
All our insurance manufacturing subsidiaries have market risk
mandates which specify the investment instruments in which
they are permitted to invest and the maximum quantum of
market risk which they may retain. They manage market risk by
using, among others, some or all of the techniques listed below,
depending on the nature of the contracts written:
• For products with discretionary participating features
(‘DPF’), adjusting bonus rates to manage the liabilities to
policyholders. The effect is that a significant portion of the
market risk is borne by the policyholder.
• Asset and liability matching where asset portfolios are
structured to support projected liability cash flows. The
group manages its assets using an approach that considers
asset quality, diversification, cash flow matching, liquidity,
volatility and target investment return. It is not always
possible to match asset and liability durations due to
uncertainty over the receipt of all future premiums and the
timing of claims; and also because the forecast payment
dates of liabilities may exceed the duration of the longest
dated investments available. We use models to assess the
effect of a range of future scenarios on the values of
financial assets and associated liabilities, and ALCOs employ
the outcomes in determining how to best structure asset
holdings to support liabilities.
• Using derivatives to protect against adverse market
movements or better match liability cash flows.
• For new products with investment guarantees, considering
the cost when determining the level of premiums or the
price structure.
• Periodically reviewing products identified as higher risk,
which contain investment guarantees and embedded
optionality features linked to savings and investment
products.
• Designing new products to mitigate market risk, such as
changing the investment return sharing portion between
policyholders and the shareholder.
• Exiting, to the extent possible, investment portfolios whose
risk is considered unacceptable.
• Repricing premiums charged to policyholders.
Credit risk
(Audited)
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 the Group Insurance Credit Risk and Group
Credit Risk functions. Stress testing is performed by Group
Insurance on the investment credit exposures using credit
spread sensitivities and default probabilities.
We use a number of tools to manage and monitor credit risk.
These include a credit report which contains a watch-list of
investments with current credit concerns. The report is
circulated monthly to senior management in Group Insurance
and the individual country chief risk officers to identify
investments which may be at risk of future impairment.
Liquidity risk
(Audited)
Risk is managed by cash flow matching and maintaining
sufficient cash resources, investing in high credit-quality
investments with deep and liquid markets, monitoring
investment concentrations and restricting them where
appropriate, and establishing committed contingency
borrowing facilities.
Insurance manufacturing subsidiaries are required to complete
quarterly liquidity risk reports for the Group Insurance Risk
function and an annual review of the liquidity risks to which
they are exposed.
Insurance risk
HSBC Insurance primarily uses the following techniques to
manage and mitigate insurance risk:
• product design, pricing and overall proposition management
(for example, management of lapses by introducing
surrender charges);
• underwriting policy;
• claims management processes; and
•
reinsurance which cedes risks above our acceptable
thresholds to an external reinsurer thereby limiting
our exposure.
Reputational risk management
There were no material changes to our policies and practices for
the management of reputational risk in 2016.
Overview
Reputational risk relates to stakeholders’ perceptions, whether
fact-based or otherwise. Stakeholders’ expectations change
constantly, and so reputational risk is dynamic and varies
between geographical regions, groups and individuals. We have
an unwavering commitment to operating at the high standards
we set for ourselves in every jurisdiction. Any lapse in standards
of integrity, compliance, customer service or operating
efficiency represents a potential reputational risk.
Governance and structure
The development of policies, management and mitigation
of reputational risk are coordinated through the Group
Reputational Risk Policy Committee, which is chaired by
the Group Chairman. In parallel, the Global Risk Resolution
Committee, chaired by the Chief Risk Officer, is the highest
decision-making forum in the Group for matters arising from
clients or transactions that either present a serious potential
reputational risk to the Group, or merit a Group-led decision
to ensure a consistent risk management approach across our
regions and global businesses. Both committees keep the
RMM apprised of areas and activities presenting significant
reputational risk and, where appropriate, make
recommendations to the RMM to mitigate such risks.
Significant issues posing reputational risk are also reported
to the Board and the Conduct & Values Committee, where
appropriate.
Key risk management processes
The External Affairs function maintains policies and gives policy
advice for the issues that might affect HSBC’s reputation and
standing with customers, employees, opinion formers and the
public. It oversees the identification, management and control
of reputational risk for all HSBC Group entities in the areas of
media relations and engagement with non-governmental
organisations and other external stakeholders.
Our Reputational Risk and Client Selection (‘RRCS’) team, which
is jointly managed by the Global Head of Financial Crime
Compliance and the Global Head of Regulatory Compliance,
oversees the identification, management and control of all
other significant reputational risks across HSBC Group. It is
responsible for setting policies to guide the Group’s reputational
risk management, devising strategies to protect against
reputational risk, and advising the global businesses and global
functions to help them identify, assess and mitigate such risks,
where possible. It is led by a headquarters-based team. This is
supported by teams in each business line and region, which
help ensure that issues are directed to the appropriate forums,
that decisions are made and implemented effectively, and
that management information is generated to aid senior
management in the businesses and regions in understanding
where reputational risk exists. Each global business has
established a governance process that empowers the RRCS’s
committees to address reputational risk issues at the right level,
escalating decisions where appropriate. The global functions
manage and escalate reputational risks within established
operational risk frameworks.
Our policies set out our risk appetite and operational procedures
for all areas of reputational risk, including financial crime
prevention, regulatory compliance, conduct-related concerns,
environmental impacts, human rights matters and employee
relations.
We have taken, and are taking, measures to address the
requirements of the US DPA and enhance our AML, sanctions
HSBC Holdings plc Annual Report and Accounts 2016
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and other regulatory compliance frameworks. These measures
should also enhance our reputational risk management in the
future. For further details on our financial crime risk, see
‘Financial crime risk management’ on page 81.
Pension risk management
There were no material changes to our policies and practices
for the management of pension risk in 2016.
Further details can be found at www.hsbc.com.
Sustainability risk management
Overview
Assessing the environmental and social impacts of providing
finance to our customers is integral to our overall risk
management processes.
Key developments in 2016
In 2016, we issued a revised mining and metals policy. It
replaced the one introduced in 2007, and responds to
increasing concerns regarding climate change by addressing
thermal coal mining, and provides more details on how we deal
with human rights issues in the sector.
We also created a new training module for relevant relationship
managers globally on our sustainability risk policies and their
responsibilities, to ensure consistent implementation.
Furthermore, we continued to improve the way sustainability
risk is recorded in our information management system.
Governance and structure
The Global Risk function, with input from the Global Corporate
Sustainability function, is mandated to manage sustainability
risk globally, working through local offices as appropriate.
Sustainability risk managers have regional or national
responsibilities for advising on and managing environmental
and social risks.
Key risk management processes
The Global Risk function’s responsibilities in relation to
sustainability risk include:
• Formulating sustainability risk policies. This includes work
in several key areas: overseeing our sustainability risk
standards; overseeing our application of the Equator
Principles, which provide a framework for banks to assess
and manage the social and environmental impact of large
projects they provide finance to; overseeing our application
of our sustainability policies, covering agricultural
commodities, chemicals, defence, energy, forestry,
freshwater infrastructure, mining and metals, UNESCO
World Heritage Sites and the Ramsar Convention on
Wetlands; undertaking independent reviews of transactions
where sustainability risks are assessed to be high; and
supporting our operating companies to assess similar risks
of a lesser 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.
• Providing training and capacity building within our operating
companies to ensure sustainability risks are identified and
mitigated consistently to appropriate standards.
Governance and structure
A global pension risk framework and accompanying global
policies on the management of risks related to defined benefit
and defined contribution plans is in place. Pension risk is
managed by a network of local and regional pension risk
forums. The Global Pensions Oversight Committee is
responsible for the governance and oversight of all pension
plans sponsored by HSBC around the world.
Key risk management processes
Our global pensions strategy is to move from defined benefit
to defined contribution plans, where local law allows and it is
considered competitive to do so.
In defined contribution pension plans, the contributions that
HSBC is required to make are known, while the ultimate
pension benefit will vary, typically with investment returns
achieved by investment choices made by the employee. While
the market risk to HSBC of defined contribution plans is low,
the Group is still exposed to operational and reputational risk.
In defined benefit pension plans, the level of pension benefit is
known. Therefore, the level of contributions required by HSBC
will vary due to a number of risks, including:
•
•
investments delivering a return below that required to
provide the projected plan benefits;
the prevailing economic environment leading to corporate
failures, thus triggering write-downs in asset values (both
equity and debt);
• a change in either interest rates or inflation expectations,
causing an increase in the value of plan liabilities; and
• plan members living longer than expected (known as
longevity risk).
Pension risk is assessed using an economic capital model
that takes into account potential variations in these factors.
The impact of these variations on both pension assets and
pension liabilities is assessed using a one-in-200-year stress
test. Scenario analysis and other stress tests are also used to
support pension risk management.
To fund the benefits associated with defined benefit plans,
sponsoring Group companies, and in some instances
employees, make regular contributions in accordance with
advice from actuaries and in consultation with the plan’s
trustees where relevant. These contributions are normally set
to ensure that there are sufficient funds to meet the cost of
the accruing benefits for the future service of active members.
However, higher contributions are required when plan assets
are considered insufficient to cover the existing pension
liabilities. Contribution rates are typically revised annually
or once every three years, depending on the plan.
The defined benefit plans invest contributions in a range of
investments designed to limit the risk of assets failing to meet
a plan’s liabilities. Any changes in expected returns from the
investments may also change future contribution requirements.
In pursuit of these long-term objectives, an overall target
allocation of the defined benefit plan assets between asset
classes is established. In addition, each permitted asset class
has its own benchmarks, such as stock-market or property
valuation indices. The benchmarks are reviewed at least once
every three years and more frequently if required by local
legislation or circumstances. The process generally involves
an extensive asset and liability review.
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HSBC Holdings plc Annual Report and Accounts 2016
Key developments and risk profile in 2016
Key developments in 2016
In 2016, HSBC undertook a number of initiatives to enhance
its approach to the management of risk. These included:
•
Implementing a new internal liquidity and funding risk
management framework which uses the liquidity coverage
ratio and net stable funding ratio regulatory framework as a
foundation, as described on page 75 of the ‘Liquidity and
funding risk management’ section.
• Undertaking activities to strengthen our risk culture and
further embed the use of the operational risk management
framework, as described on page 81 of the ‘Operational risk
management’ section.
•
Implementing a number of initiatives to raise our standards
in relation to the conduct of our business, as described on
page 81 of the ‘Regulatory compliance risk management’
section.
• Restructuring part of our Global Risk function. The Financial
Crime Compliance sub-function became part of our new
Financial Crime Risk (‘FCR’) function. The Regulatory
Compliance sub-function remains part of Global Risk, and
continues to oversee management of regulatory compliance
risk.
• Establishing an FCR function and appointing a Group Head
of FCR, who chairs the Global Standards Steering Meeting
and reports to the Group Chief Executive, to oversee all
areas of financial crime risk management at HSBC. The FCR
function is dedicated to implementing the most effective
global standards to combat financial crime, as described on
page 81 of the ‘Financial crime risk management’ section.
•
Issuing a revised mining and metals policy and creating a
new training module for relevant relationship managers
globally on our sustainability risk policies and their
responsibilities, to ensure consistent implementation,
as described on page 84 in the ‘Sustainability risk
management’ section.
There were no material changes to our policies and practices
for the management of credit risk, market risk, insurance
manufacturing operations risk, reputational risk and
sustainability risk in 2016.
Credit risk profile
Credit risk in 2016
Credit exposure
Wholesale lending
Personal lending
HSBC Finance
Supplementary information
HSBC Holdings
Securitisation exposures and other structured products
Credit risk in 2016
Page
85
86
94
100
102
104
105
105
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.
A summary of our current policies and practices regarding the
management of credit risk is set out on pages 73 to 75.
The effect of commodity price movements in the oil and gas
sectors is provided in ‘Areas of special interest’ on page 67.
Gross loans and advances declined by $67bn, mainly due to
foreign exchange effects reducing balances by $68bn.
Loan impairment charges and other credit provisions for the
year were $3.4bn.
In wholesale lending, balances declined by $33bn mainly due
to foreign exchange movements of $41bn. Excluding foreign
exchange movements, lending balances decreased in North
America, and in Middle East and North Africa but were more
than offset by increases in Asia and Latin America. Europe
lending balances were broadly unchanged.
In personal lending, balances decreased by $34bn, mainly due
to foreign exchange movements of $26bn and $13bn in North
America largely due to continued repayments and loan sales
in the US CML run-off portfolio. Excluding foreign exchange
movements and the US CML run-off portfolio, lending balances
increased in Europe, Asia and Latin America and were offset by
a decrease in Middle East and North Africa.
Information on constant currency movements is provided on page 30.
Summary of credit risk
At 31 Dec
Maximum exposure to credit risk
– total assets subject to credit risk
– off-balance sheet commitments
subject to credit risk
Gross loans and advances
– personal lending
– wholesale lending
Impaired loans
– personal lending
– wholesale lending
Impaired loans as a % of gross loans
and advances
– personal lending
– wholesale lending
– personal and wholesale lending
Impairment allowances
– personal lending
– wholesale lending
Loans and advances net of
impairment allowances
For year ended 31 Dec
Loan impairment charge
– personal lending
– wholesale lending
Other credit risk provisions
Page
86
101
95
90
94
101
96
92
2016
$bn
2,898
2,205
693
958
340
618
18
6
12
%
1.8
1.9
1.9
$bn
7.9
2.0
5.9
2015
$bn
2,947
2,234
713
1,024
374
650
24
12
12
%
3.1
1.9
2.3
$bn
9.6
2.9
6.7
950
1,015
3.3
1.7
1.6
0.1
3.4
3.6
1.8
1.8
0.1
3.7
HSBC Holdings plc Annual Report and Accounts 2016
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Gross loans to customers and banks over five years ($bn)
Loan impairment charges by industry ($bn)
Personal
Wholesale
Unimpaired
Impaired
Loan impairment charge over five years ($bn)
2016
2015
Loan impairment allowances over five years ($bn)
Personal
Wholesale
Personal
Wholesale
Loan impairment charges by geographical region ($bn)
2016
2015
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HSBC Holdings plc Annual Report and Accounts 2016
Loan impairment allowances as
a percentage of impaired loans
Loan impairment
allowances ($bn)
Credit exposure
Maximum exposure to credit risk
(Audited)
The table that follows provides information on balance sheet
items, offsets, and loan and other credit-related commitments.
Commentary on balance sheet movements is provided on
page 42.
The offset on derivatives remains in line with the movements
in maximum exposure amounts.
The offset on corporate and commercial loans to customers
decreased by $17bn. This reduction was mainly related to
corporate overdraft balances where a small number of clients
benefited from the use of net interest arrangements across
overdrafts and deposits. As a result, net risk exposures are
usually stable, while gross balances can be volatile.
‘Maximum exposure to credit risk’ table
The following table presents our maximum exposure before taking
account of any collateral held or other credit enhancements (unless
such enhancements meet accounting offsetting requirements). The
table excludes financial instruments whose carrying amount best
represents the net exposure to credit risk; and it excludes equity
securities as they are not subject to credit risk. For the financial assets
recognised on the balance sheet, the maximum exposure to credit risk
equals their carrying amount; for financial guarantees and 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. No offset has been applied to off-balance
sheet collateral. In the case of derivatives the offset column also
includes collateral received in cash and other financial assets.
Other credit risk mitigants
While not disclosed as an offset in the following ‘Maximum
exposure to credit risk’ table, other arrangements are in place
which reduce our maximum exposure to credit risk. These
include a charge over collateral on borrowers’ specific assets
such as residential properties, collateral held in the form of
financial instruments that are not held on balance sheet and
short positions in securities. In addition, for financial assets
held as part of linked insurance/investment contracts the risk
is predominantly borne by the policyholder. See Note 30 and
pages 198 and 201 of the Financial Statements for further
details of collateral in respect of certain loans and advances
and derivatives.
Maximum exposure to credit risk
(Audited)
Derivatives
Loans and advances to customers held at amortised cost
– personal
– corporate and commercial
– non-bank financial institutions
Loans and advances to banks held at amortised cost
Reverse repurchase agreements – non-trading
Total balance sheet exposure to credit risk
Total off-balance sheet
– financial guarantees and similar contracts
– loan and other credit-related commitments
At 31 Dec
Maximum
exposure
$m
290,872
861,504
337,826
460,209
63,469
88,126
2016
Offset
$m
(262,233)
(33,657)
(3,629)
(27,686)
(2,342)
(248)
Net
$m
28,639
827,847
334,197
432,523
61,127
87,878
Maximum
exposure
$m
288,476
924,454
371,203
493,078
60,173
90,401
160,974
(4,764)
156,210
146,255
2015
Offset
$m
(258,755)
(52,190)
(5,373)
(44,260)
(2,557)
(53)
(900)
Net
$m
29,721
872,264
365,830
448,818
57,616
90,348
145,355
2,204,751
(300,902)
1,903,849
2,234,409
(311,898)
1,922,511
692,915
37,072
655,843
—
—
—
692,915
37,072
655,843
712,546
46,116
666,430
—
—
—
712,546
46,116
666,430
2,897,666
(300,902)
2,596,764
2,946,955
(311,898)
2,635,057
Concentration of exposure
• derivatives, see page 99 and Note 14 to the Financial
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 2016.
For an analysis of:
•
financial investments, see Note 15 to the Financial
Statements;
•
trading assets, see Note 10 to the Financial Statements;
Statements; and
•
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 plc, HSBC Bank Middle
East Limited and HSBC Bank USA, by the location of the
lending branch) see page 94 for wholesale lending and page
100 for personal lending.
HSBC Holdings plc Annual Report and Accounts 2016
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Credit quality of financial instruments
(Audited)
We assess the credit quality of all financial instruments that are
subject to credit risk. Additional credit quality information in
respect of our consolidated holdings of ABSs is provided on
page 105.
For the purpose of the following disclosure, loans past due
up to 90 days and not otherwise classified as impaired are
separately classified as past due but not impaired, irrespective
Distribution of financial instruments by credit quality
(Audited)
of their credit quality grade. Trading assets, financial assets
designated at fair value and financial investments exclude
equity securities as they are not subject to credit risk. The
changes to the mapping of sovereign external ratings to credit
quality bands, described on page 73, mainly impacts the credit
quality of financial investments in 2016 with an increase in the
‘Strong’ rating band and a decrease in the ‘Good’ and
‘Satisfactory’ rating bands.
Neither past due nor impaired
Strong
Good
Satisfactory
Sub-
standard
Past due
but not
impaired
Impaired
Cash and balances
at central banks
Items in the course
of collection from
other banks
Hong Kong Government
certificates of
indebtedness
$m
126,838
4,656
31,228
$m
711
14
—
$m
444
329
—
$m
16
4
—
Trading assets
127,997
20,345
21,947
1,232
$m
$m
Total
gross
amount
$m
128,009
Impairment
allowances
$m
Total
$m
128,009
5,003
5,003
31,228
171,521
14,451
94,054
24,769
38,247
4,472
290,872
31,228
171,521
14,451
94,054
24,769
38,247
4,472
290,872
13,595
73,171
672
7,746
138
12,741
15,356
6,119
3,250
25,875
5,808
5,818
3,249
367
236,693
45,961
542
7,368
46
396
44
746
314
850
437,531
200,385
185,717
18,831
290,313
24,544
12,505
884
8,662
5,062
18,228
869,354
6,490
339,798
(7,850)
(1,972)
861,504
337,826
111,848
158,878
163,107
17,504
3,128
11,362
465,827
(5,618)
460,209
35,370
16,963
10,105
443
472
376
63,729
(260)
63,469
73,516
8,238
6,293
73
123,822
401,010
1,774
11,203
18,223
13,579
536
5,348
18,166
13,570
392
9,227
1,160
3,688
3,125
10,043
1,660
6,102
763
2,940
266
805
474
331
6
—
—
236
124
35
89
—
88,126
—
160,974
1,031
1,030
221
432,130
4,234
26,928
92
8,574
129
18,354
—
—
(250)
88,126
160,974
432,130
3,984
26,928
8,574
18,354
At 31 Dec 2016
1,579,517
313,707
263,995
26,094
9,028
20,510
2,212,851
(8,100)
2,204,751
Percentage of total
gross amount
%
%
71.4
14.2
%
11.9
%
1.2
%
0.4
%
0.9
%
100.0
88
HSBC Holdings plc Annual Report and Accounts 2016
– treasury and other
eligible bills
– debt securities
– loans and advances to
banks
– loans and advances to
customers
Financial assets
designated at fair value
Derivatives
Loans and advances to
customers held at
amortised cost
– personal
– corporate and
commercial
– non-bank financial
institutions
Loans and advances
to banks held at amortised
cost
Reverse repurchase
agreements
– non-trading
Financial investments
Assets held for sale
Other assets
– endorsements and
acceptances
– accrued income
and other
Distribution of financial instruments by credit quality (continued)
Neither past due nor impaired
Good
Satisfactory
Sub-
standard
Past due
but not
impaired
Impaired
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
Derivatives
Loans and advances to
customers
held at amortised cost
– personal
– corporate and
commercial
– non-bank financial
institutions
Loans and advances
to banks held
at amortised cost
Reverse repurchase
agreements
– non-trading
Financial investments
Assets held for sale
Other assets
– endorsements and
acceptances
– accrued income and
other
Strong
$m
97,365
5,318
28,410
$m
583
32
—
$m
939
416
—
116,633
21,243
19,894
6,749
77,088
790
10,995
14,546
4,391
18,250
5,067
3,037
701
248,101
32,056
190
10,656
3,239
5,809
736
7,209
$m
$m
$m
47
2
—
576
100
299
127
50
383
1,110
Impairment
allowances
$m
Total
gross
amount
$m
98,934
5,768
28,410
158,346
7,829
99,038
22,303
29,176
4,857
288,476
Total
$m
98,934
5,768
28,410
158,346
7,829
99,038
22,303
29,176
4,857
288,476
472,691
214,152
309,720
29,322
194,393
15,021
16,836
12,179
944
7,568
23,758
11,507
934,009
374,082
(9,555)
(2,879)
924,454
371,203
127,673
168,772
171,466
15,379
4,274
11,949
499,513
(6,435)
493,078
35,298
16,058
7,906
513
337
302
60,414
(241)
60,173
73,226
11,929
4,836
407
1
20
90,419
(18)
90,401
108,238
382,328
10,177
8,306
16,552
18,600
9,605
5,688
1,084
3,850
7,222
1,838
20,931
16,341
17,279
10,204
3,798
6,406
46
4,525
1,635
632
343
289
—
—
703
147
22
125
488
1,326
2,133
333
52
281
146,255
423,120
41,532
25,310
9,149
16,161
—
(1,454)
146,255
423,120
40,078
25,310
9,149
16,161
At 31 Dec 2015
1,553,830
331,141
293,178
26,199
13,030
28,058
2,245,436
(11,027)
2,234,409
Percentage of total
gross amount
%
69.2
%
14.7
%
13.1
%
1.2
%
0.6
%
1.2
%
100.0
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 90.
In North America, past due but not impaired balances
decreased, mainly due to the continued repayments and loan
sales in the US CML run-off portfolio.
Past due but not impaired gross financial instruments by geographical region
(Audited)
At 31 Dec 2016
At 31 Dec 2015
Europe
$m
1,206
1,599
Asia
$m
3,484
3,444
MENA
$m
1,260
1,263
North
America
Latin
America
$m
2,549
5,474
$m
529
1,250
Total
$m
9,028
13,030
HSBC Holdings plc Annual Report and Accounts 2016
89
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
Ageing analysis of days for past due but not impaired gross financial instruments
(Audited)
Loans and advances to customers and banks held at amortised cost
– personal
– corporate and commercial
– financial
Assets held for sale
– disposal group
– non-current assets held for sale
Other financial instruments
At 31 Dec 2016
Loans and advances to customers and banks held at amortised cost
– personal
– corporate and commercial
– financial
Assets held for sale
– disposal group
– non-current assets held for sale
Other financial instruments
At 31 Dec 2015
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
HSBC considers that the customer is either unlikely to pay
their credit obligations in full without recourse to security,
or 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
Movement in impaired loans by industry sector
60-89
days
90-179
days
180 days
and over
$m
$m
Up to 29
days
$m
6,743
3,696
2,593
454
194
11
183
70
30-59
days
$m
1,320
986
316
18
29
3
26
18
$m
587
380
201
6
13
3
10
10
7,007
1,367
610
9,403
5,665
3,432
306
476
476
—
80
1,917
1,401
505
11
137
136
1
35
727
502
225
—
90
89
1
14
11
—
11
—
—
—
—
12
23
111
—
93
18
—
—
—
10
Total
$m
8,668
5,062
3,128
478
236
17
219
124
9,028
12,179
7,568
4,274
337
703
701
2
148
13,030
7
—
7
—
—
—
—
14
21
21
—
19
2
—
—
—
9
30
9,959
2,089
831
121
and advances more than 90 days past due unless they have
been individually assessed as not impaired.
• Renegotiated loans and advances: loans where we
have changed the contractual cash flows due to credit
distress of the obligor. 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.
In personal lending, the continued repayments and loan sales in
the US CML run-off portfolio reduced impaired loan balances by
a further $4.2bn.
At 1 Jan
Classified as impaired during the year
Transferred from impaired to unimpaired
during the year
Amounts written off
Net repayments and other
At 31 Dec
2016
Corporate and
commercial
$m
11,949
6,032
(922)
(1,720)
(3,977)
11,362
Personal
$m
11,507
3,521
(1,210)
(1,252)
(6,076)
6,490
Financial
Total
Personal
$m
322
133
(7)
(11)
(61)
$m
23,778
9,686
(2,139)
(2,983)
(10,114)
$m
15,160
5,995
(2,346)
(2,263)
(5,039)
376
18,228
11,507
2015
Corporate and
commercial
Financial
$m
13,795
5,469
(922)
(1,424)
(4,969)
11,949
$m
375
96
(38)
(14)
(97)
322
Total
$m
29,330
11,560
(3,306)
(3,701)
(10,105)
23,778
90
HSBC Holdings plc Annual Report and Accounts 2016
Impaired loans by industry sector and geographical region
Non-renegotiated impaired loans
– personal
– corporate and commercial
– financial
Renegotiated impaired loans
– personal
– corporate and commercial
– financial
At 31 Dec 2016
Impaired loans % of total gross loans and advances
Non-renegotiated impaired loans
– personal
– corporate and commercial
– financial
Renegotiated impaired loans
– personal
– corporate and commercial
– financial
At 31 Dec 2015
Impaired loans % of total gross loans and advances
Currency translation adjustment
31 Dec 2015 at 31 Dec 2016 exchange rates
Movement – constant currency basis
31 Dec 2016 as reported
Renegotiated loans and forbearance
The most significant portfolio of renegotiated loans was in
North America, substantially all of which were retail loans held
by HSBC Finance Corporation (‘HSBC Finance’). The ongoing
repayments and loan sales in the US CML run-off portfolio
reduced renegotiated loans by $8.7bn during 2016.
Renegotiated loans and advances to customers by industry sector
Neither past due nor impaired
Past due but not impaired
Impaired
At 31 Dec 2016
Impairment allowances on renegotiated loans
Neither past due nor impaired
Past due but not impaired
Impaired
At 31 Dec 2015
Impairment allowances on renegotiated loans
Europe
$m
4,354
1,239
3,029
86
3,708
648
2,868
192
8,062
2.3%
4,583
1,361
3,135
87
4,682
878
3,607
197
9,265
2.3%
(1,170)
8,095
(33)
8,062
Asia
$m
1,771
453
1,291
27
728
113
614
1
2,499
0.6%
1,760
385
1,368
7
615
131
480
4
2,375
0.6%
(22)
2,353
146
2,499
MENA
$m
1,042
459
582
1
1,188
72
1,052
64
2,230
5.5%
1,051
475
552
24
1,127
41
1,086
—
2,178
4.6%
(194)
1,984
246
2,230
North
America
Latin
America
$m
1,913
1,043
865
5
2,929
2,213
716
—
4,842
4.1%
2,177
1,786
389
2
6,753
6,208
545
—
8,930
6.5%
12
8,942
(4,100)
4,842
$m
399
220
179
—
196
30
166
—
595
2.9%
623
211
411
1
407
31
376
—
1,030
4.8%
(162)
868
(273)
595
Total
$m
9,479
3,414
5,946
119
8,749
3,076
5,416
257
18,228
1.9%
10,194
4,218
5,855
121
13,584
7,289
6,094
201
23,778
2.3%
(1,536)
22,242
(4,014)
18,228
The following tables show the gross carrying amounts of
the Group’s holdings of renegotiated loans and advances
to customers by industry sector, geography, credit quality
classification and arrangement type.
First lien
residential
mortgages
Other
personal
lending
Corporate
and
commercial
Non-bank
financial
institutions
$m
976
346
2,751
4,073
267
3,973
1,753
6,556
12,282
870
$m
282
78
325
685
150
716
243
733
1,692
252
$m
1,848
301
5,416
7,565
1,667
2,152
123
6,094
8,369
2,098
$m
260
—
257
517
130
391
24
201
616
119
Total
$m
3,366
725
8,749
12,840
2,214
7,232
2,143
13,584
22,959
3,339
Total
$m
12,840
22,959
Renegotiated loans and advances to customers by geographical region
At 31 Dec 2016
At 31 Dec 2015
Europe
$m
5,855
7,121
Asia
$m
1,046
943
MENA
$m
1,871
1,945
North
America
Latin
America
$m
3,736
12,372
$m
332
578
A range of forbearance strategies are employed in order to
improve the management of customer relationships, maximise
collection opportunities and, if possible, avoid default,
foreclosure or repossession.
The tables below show renegotiated loans by arrangement type
as a percentage of the total value of arrangements offered.
In personal lending, renegotiated loans have been allocated
to the single most dominant arrangement type.
HSBC Holdings plc Annual Report and Accounts 2016
91
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Impairment of loans and advances
(Audited)
For an analysis of loan impairment charges and other credit risk provisions
by global business, see page 38.
The tables below analyse the loan impairment charges for the
year by industry sector for impaired loans and advances that are
either individually or collectively assessed, and for collective
impairment allowances on loans and advances that are
classified as not impaired.
Report of the Directors | Risk
Renegotiated loans by arrangement type: personal lending
Interest rate and terms modifications
Payment concessions
Collection re-age
Modification re-age
Other
At 31 Dec 2016
%
21.9
14.3
19.2
34.6
10.0
100.0
Corporate renegotiated loans often require the granting of more
than one arrangement type as part of an effective strategy. The
percentages reported in the table below include the effect
of loans being reported in more than one arrangement type.
Renegotiated loans by arrangement type: corporate and
commercial, and financial
Maturity term extensions
Reductions in margin, principal forgiveness, debt equity
swaps and interest, fees or penalty payment forgiveness
Other changes to repayment profile
Interest only conversion
Other
At 31 Dec 2016
%
37.3
21.4
19.4
9.3
12.6
100.0
Loan impairment charge to the income statement by industry sector
Personal
– first lien residential mortgages
– other personal
Corporate and commercial
– manufacturing and international trade and services
– commercial real estate and other property-related
– other commercial
Financial
At 31 Dec 2016
Personal
– first lien residential mortgages
– other personal
Corporate and commercial
– manufacturing and international trade and services
– commercial real estate and other property-related
– other commercial
Financial
At 31 Dec 2015
Europe
$m
162
1
161
337
38
(15)
314
34
533
109
(8)
117
415
138
33
244
14
538
Asia
$m
264
(1)
265
388
306
(28)
110
2
654
309
(1)
310
372
250
18
104
—
681
MENA
North
America
Latin
America
$m
226
10
216
53
105
(16)
(36)
13
292
276
50
226
212
127
49
36
(18)
470
$m
219
149
70
500
81
3
416
(10)
709
157
70
87
319
26
24
269
(7)
469
$m
832
7
825
330
195
25
110
—
Total
$m
1,703
166
1,537
1,608
725
(31)
914
39
1,162
3,350
983
41
942
451
305
47
99
—
1,834
152
1,682
1,769
846
171
752
(11)
1,434
3,592
Charge for impairment losses as a percentage of average gross loans and advances to customers by geographical region
New allowances net of allowance releases
Recoveries
At 31 Dec 2016
Amount written off net of recoveries
New allowances net of allowance releases
Recoveries
At 31 Dec 2015
Amount written off net of recoveries
Europe
%
0.23
(0.08)
0.15
0.26
0.26
(0.11)
0.15
0.22
Asia
%
0.23
(0.04)
0.19
0.14
0.23
(0.05)
0.18
0.12
MENA
%
0.93
(0.13)
0.80
0.84
1.35
(0.14)
1.21
1.17
North
America
Latin
America
%
0.62
(0.06)
0.56
0.48
0.41
(0.06)
0.35
0.45
%
7.02
(0.56)
6.46
2.99
5.37
(0.50)
4.87
3.94
Total
%
0.46
(0.07)
0.39
0.32
0.48
(0.09)
0.39
0.37
92
HSBC Holdings plc Annual Report and Accounts 2016
Movement in impairment allowances by industry sector and by geographical region
At 1 Jan 2016
Amounts written off
Personal
– first lien residential mortgages
– other personal
Corporate and commercial
– manufacturing and international trade and services
– commercial real estate and other property-related
– other commercial
Financial
Total amounts written off
Recoveries of amounts written off in previous years
Personal
– first lien residential mortgages
– other personal
Corporate and commercial
– manufacturing and international trade and services
– commercial real estate and other property-related
– other commercial
Financial
Total recoveries of amounts written off in previous years
Charge to income statement
Exchange and other movements
At 31 Dec 2016
Impairment allowances against banks:
– individually assessed
Impairment allowances against customers:
– individually assessed
– collectively assessed
Impairment allowances at 31 Dec 2016
At 1 Jan 2015
Amounts written off
Personal
– first lien residential mortgages
– other personal
Corporate and commercial
– manufacturing and international trade and services
– commercial real estate and other property-related
– other commercial
Financial
Total amounts written off
Recoveries of amounts written off in previous years
Personal
– first lien residential mortgages
– other personal
Corporate and commercial
– manufacturing and international trade and services
– commercial real estate and other property-related
– other commercial
Financial
Total recoveries of amounts written off in previous years
Charge to income statement
Exchange and other movements
At 31 Dec 2015
Impairment allowances against banks:
– individually assessed
Impairment allowances against customers:
– individually assessed
– collectively assessed
Impairment allowances at 31 Dec 2015
North
America
Latin
America
Asia
$m
1,525
MENA
$m
1,810
Europe
$m
3,477
(412)
(10)
(402)
(730)
(380)
(109)
(241)
(1)
(1,143)
225
3
222
35
15
9
11
1
261
533
(339)
2,789
(208)
(3)
(205)
(137)
(78)
(54)
(5)
(18)
(363)
34
—
34
10
5
—
5
—
(358)
(6)
(352)
(285)
(172)
(31)
(82)
(5)
(648)
124
4
120
24
23
—
1
1
149
654
(45)
1,635
44
292
(102)
1,681
73
709
(886)
1,272
—
—
—
—
2,060
729
2,789
1,038
597
1,635
1,137
544
1,681
540
732
1,272
$m
720
(340)
(12)
(328)
(297)
(10)
(223)
(64)
—
(637)
78
8
70
22
16
—
6
—
100
1,162
(872)
473
—
157
316
473
Total
$m
9,573
(1,602)
(173)
(1,429)
(1,830)
(765)
(452)
(613)
(24)
(3,456)
515
41
474
109
68
11
30
3
627
3,350
(2,244)
7,850
—
4,932
2,918
7,850
3,971
1,356
1,890
2,640
2,529
12,386
(468)
(12)
(456)
(644)
(233)
(244)
(167)
(12)
(1,124)
320
6
314
46
16
24
6
2
368
538
(276)
3,477
(416)
(6)
(410)
(179)
(149)
(5)
(25)
—
(595)
135
4
131
30
20
5
5
—
165
681
(82)
1,525
(273)
(1)
(272)
(235)
(215)
(8)
(12)
—
(508)
50
—
50
3
2
—
1
—
53
470
(95)
1,810
—
—
18
—
2,572
905
3,477
908
617
1,525
1,157
635
1,810
327
1,714
2,041
(554)
(344)
(210)
(106)
(28)
(57)
(21)
(2)
(996)
(24)
(972)
(309)
(213)
(30)
(66)
—
(2,707)
(387)
(2,320)
(1,473)
(838)
(344)
(291)
(14)
(662)
(1,305)
(4,194)
119
(17)
136
27
15
2
10
—
146
1,434
(2,084)
720
—
438
282
720
681
19
662
124
61
36
27
3
808
3,592
(3,019)
9,573
18
5,402
4,153
9,573
$m
2,041
(284)
(142)
(142)
(381)
(125)
(35)
(221)
—
(665)
54
26
28
18
9
2
7
1
57
26
31
18
8
5
5
1
76
469
(482)
2,041
HSBC Holdings plc Annual Report and Accounts 2016
93
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
Movement in impairment allowances on loans and advances to customers and banks
(Audited)
Banks
individually
assessed
2016
Customers
Individually
assessed
Collectively
assessed
Banks
individually
assessed
2015
Customers
Individually
assessed
Collectively
assessed
$m
5,402
(1,831)
107
1,831
(577)
4,932
$m
4,153
(1,607)
520
1,519
(1,667)
2,918
Total
$m
9,573
(3,456)
627
3,350
(2,244)
7,850
$m
6,195
(1,368)
86
1,516
(1,027)
5,402
$m
6,142
(2,826)
722
2,087
(1,972)
4,153
Total
$m
12,386
(4,194)
808
3,592
(3,019)
9,573
$m
49
—
—
(11)
(20)
18
—
0.6%
0.3%
0.8%
0.6%
0.4%
0.9%
causes of the decline were mainly in Turkey, where some
portfolios are being reduced, and in the UAE, where we sold
loans and exited certain customer relationships. These
decreases were partly offset by loan growth mainly in Egypt
and Oman.
In Asia, lending balances increased by $13bn. This reflected
strong credit growth in the fourth quarter of 2016 across a
range of industries, and principally in Hong Kong, partly offset
by foreign exchange decreases of $3.8bn.
At 1 Jan
Amounts written off
Recoveries of loans and advances
previously written off
Charge to income statement
Exchange and other movements
At 31 Dec
Impairment allowances % of loans and
advances
Wholesale lending
$m
18
(18)
—
—
—
—
—
Total wholesale lending balances declined by $33bn including
foreign exchange movements of $41bn, of which $31bn related
to the UK. In North America, lending decreased by $6.1bn,
mainly in the US as paydowns and maturities exceeded new
loan originations. This reflected our efforts to improve returns
with more disciplined lending.
In Middle East and North Africa, overall lending fell by $5.8bn,
including $3.4bn of foreign exchange movements. Other
94
HSBC Holdings plc Annual Report and Accounts 2016
Total wholesale lending gross loans
Corporate and commercial
– manufacturing
– international trade and services
– commercial real estate
– other property-related
– government
– other commercial
Financial
– non-bank financial institutions
– banks
Gross loans at 31 Dec 2016
Loan and other credit-related commitments
– corporate and commercial
– financial
Corporate and commercial
– manufacturing
– international trade and services
– commercial real estate
– other property-related
– government
– other commercial
Financial
– non-bank financial institutions
– banks
Gross loans at 31 Dec 2015
Currency translation adjustment
31 Dec 2015 at 31 Dec 2016 exchange rates
Movement – constant currency basis
31 Dec 2016 as reported
Loan and other credit-related commitments
– corporate and commercial
– financial
Europe
$m
Asia
$m
MENA
$m
161,653
212,848
22,078
27,005
55,875
21,460
7,025
3,009
47,279
43,666
31,307
12,359
205,319
135,394
112,229
23,165
32,564
72,166
32,798
37,628
2,919
34,773
79,254
19,517
59,737
292,102
183,508
167,298
16,210
187,508
211,224
36,623
61,598
26,148
7,129
3,653
52,357
50,447
33,345
17,102
34,272
72,199
32,371
35,206
1,132
36,044
68,321
13,969
54,352
237,955
279,545
(32,287)
(3,846)
205,668
275,699
(349)
205,319
125,029
104,832
20,197
16,403
292,102
171,566
159,947
11,619
2,941
8,448
724
1,856
1,619
6,490
10,370
2,599
7,771
32,448
18,562
18,474
88
26,525
4,884
10,621
798
2,102
1,695
6,425
11,761
2,597
9,164
38,286
(3,446)
34,840
(2,392)
32,448
20,829
20,610
219
North
America
$m
58,276
15,348
11,035
7,849
8,823
354
14,867
14,823
9,750
5,073
73,099
124,720
96,301
28,419
62,882
17,507
11,505
7,032
8,982
203
17,653
16,308
9,822
6,486
79,190
Latin
America
$m
Total
$m
10,972
465,827
2,785
2,518
1,340
306
541
3,482
3,742
556
3,186
14,714
9,849
9,174
675
11,374
2,572
3,096
1,577
45
772
3,312
3,996
681
3,315
80,643
150,042
64,171
55,638
8,442
106,891
151,855
63,729
88,126
617,682
472,033
403,476
68,557
499,513
95,858
159,019
67,926
53,464
7,455
115,791
150,833
60,414
90,419
15,370
650,346
557
(2,316)
(41,338)
79,747
(6,648)
73,099
126,912
102,369
24,543
13,054
1,660
14,714
19,151
18,155
996
609,008
8,674
617,682
463,487
405,913
57,574
As a % of
total gross
loans
%
48.6
8.4
15.6
6.7
5.8
0.9
11.2
15.9
6.7
9.2
64.5
48.8
9.4
15.5
6.7
5.2
0.7
11.3
14.7
5.9
8.8
63.5
HSBC Holdings plc Annual Report and Accounts 2016
95
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
Total wholesale lending impairment allowances
Corporate and commercial
– manufacturing
– international trade and services
– commercial real estate
– other property-related
– government
– other commercial
Financial
– non-bank financial institutions
– banks
Impairment allowances at 31 Dec 2016
Impairment allowances % of impaired loans
Corporate and commercial
– manufacturing
– international trade and services
– commercial real estate
– other property-related
– government
– other commercial
Financial
– non-bank financial institutions
– banks
Impairment allowances at 31 Dec 2015
Impairment allowances % of impaired loans
Currency translation adjustment
31 Dec 2015 at 31 Dec 2016 exchange rates
Movement – on constant currency basis
31 Dec 2016 as reported
Europe
$m
2,048
411
473
402
167
2
593
216
216
—
Asia
$m
1,343
342
647
11
34
—
309
9
9
—
MENA
$m
1,137
174
476
144
202
1
140
15
15
—
North
America
Latin
America
$m
880
139
81
67
37
—
556
20
20
—
$m
210
38
35
36
55
1
45
—
—
—
2,264
36.7%
1,352
69.9%
1,152
67.8%
900
56.7%
210
60.9%
2,638
1,256
1,254
459
796
613
234
6
530
194
194
—
2,832
40.3%
(502)
2,330
(66)
2,264
254
599
35
72
—
296
13
13
—
1,269
68.3%
(21)
1,248
104
1,352
204
456
145
270
—
179
22
4
18
1,276
77.7%
(101)
1,175
(23)
1,152
777
140
123
76
55
—
383
30
30
—
510
49
48
343
1
2
67
—
—
—
807
86.2%
510
64.7%
(21)
786
114
900
(78)
432
(222)
210
Total
$m
5,618
1,104
1,712
660
495
4
1,643
260
260
—
5,878
50.0%
6,435
1,106
2,022
1,212
632
8
1,455
259
241
18
6,694
54.6%
(723)
5,971
(93)
5,878
Commercial real estate
Our commercial real estate lending disclosures focus on the
regions containing the majority of our balances for loans and
advances. Europe, Asia and North America accounted for 97%
of our total commercial real estate lending at 31 December
2016 (31 December 2015: 97%).
Commercial real estate lending
Gross loans and advances
Neither past due nor impaired
Past due but not impaired
Impaired loans
Total gross loans and advances
– of which: renegotiated loans
Impairment allowances
31 Dec
2016
Total
$m
of which:
Europe
$m
Asia
$m
North
America
$m
62,342
20,208
32,688
7,650
221
1,608
64,171
1,525
660
41
1,212
21,461
1,117
403
88
22
89
110
32,798
7,849
—
11
118
67
31 Dec
2015
Total
$m
64,926
454
2,546
67,926
2,134
1,212
of which:
Europe
$m
Asia
$m
24,426
32,182
89
1,633
26,148
1,586
613
119
70
32,371
6
35
North
America
$m
6,659
212
161
7,032
150
76
Commercial real estate lending includes the financing of
corporate, institutional and high net worth customers who are
investing primarily in income-producing assets and, to a lesser
extent, in their construction and development. The portfolio is
globally diversified with larger concentrations in Hong Kong,
the UK, the US and Canada.
Our global exposure is centred largely on cities with economic,
political or cultural significance. In many less-developed
markets, industry is moving from the development and
rapid construction of recent years to an increasing focus on
investment stock consistent with more developed markets.
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 less-
developed commercial real estate markets, our exposures
comprise lending for development assets on relatively short
tenors with a particular focus on supporting larger, better
capitalised developers involved in residential construction or
assets supporting economic expansion.
Commercial real estate lending was $3.8bn lower, largely
because of a fall in the value of sterling contributing to a foreign
exchange movement of $4.0bn. Total lending balances in
Europe declined by $4.7bn, including foreign exchange
movements of $3.5bn, partly offset by increases in lending
in Asia and North America.
96
HSBC Holdings plc Annual Report and Accounts 2016
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
Commercial real estate loans and advances maturity analysis
that a customer, being unable to repay the debt on maturity,
fails to refinance it at commercial rates. We monitor our
commercial real estate portfolio closely, assessing indicators
for signs of potential issues with refinancing.
31 Dec
2016
Total
$m
17,636
9,531
26,829
10,175
64,171
of which:
Asia
$m
7,773
5,075
13,691
6,259
32,798
Europe
$m
5,687
2,904
10,846
2,024
21,461
North
America
$m
3,568
1,453
1,733
1,095
7,849
31 Dec
2015
Total
$m
19,579
11,408
25,268
11,671
67,926
of which:
Asia
$m
8,811
5,934
11,399
6,227
32,371
Europe
$m
6,757
4,354
11,442
3,595
26,148
North
America
$m
2,992
939
2,037
1,064
7,032
On demand, overdrafts or revolving
< 1 year
1-2 years
2-5 years
> 5 years
Gross loans and advances
Collateral on loans and advances
Collateral held is analysed separately for commercial real estate
and for other corporate, commercial and financial (non-bank)
lending. The following tables include
commitments, primarily undrawn credit lines.
sheet loan
The collateral measured in the following tables 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. Marketable securities are measured at their
fair value.
Other types of collateral 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 loan-
to-value (‘LTV’) figures 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 179.
Commercial real estate loans and advances
The value of commercial real estate collateral is determined
by using a combination of external and internal valuations
and physical inspections. For CRR 1-7, local valuation policies
determine the frequency of review on the basis of local market
conditions because of the complexity of valuing collateral
for commercial real estate. 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 Annual Report and Accounts 2016
97
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
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
Total
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
Total
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
Total
At 31 Dec
31 Dec
2016
Total
$m
18,313
60,330
3,917
2,571
of which:
Asia
$m
12,714
27,296
1,106
552
Europe
$m
3,887
21,815
1,360
1,021
North
America
$m
561
10,618
1,388
991
82,560
27,062
41,116
12,567
13
196
58
77
44
17
102
71
311
75
1,118
141
624
88
265
412
202
12
190
54
76
44
16
91
70
293
62
764
79
571
64
50
384
148
1,605
84,476
1,210
28,565
—
—
—
—
—
—
—
—
—
3
14
7
5
1
1
5
5
1
6
4
1
—
1
11
1
18
4
85
5
34
7
39
21
13
22
110
31 Dec
2015
Total
$m
17,834
62,618
6,265
4,270
86,717
28
682
92
385
174
31
122
87
832
422
1,124
221
513
156
234
1,032
555
2,578
of which:
Asia
$m
12,329
26,270
1,924
1,175
40,523
Europe
$m
4,493
25,735
2,961
2,045
33,189
North
America
$m
8
9,997
1,264
981
11,269
28
668
86
377
174
31
120
87
816
65
899
174
425
139
161
716
397
—
4
—
4
—
—
1
—
5
51
18
10
2
2
4
5
3
—
9
5
4
—
—
1
—
10
2
76
15
27
10
24
66
35
1,680
35,685
74
40,602
144
11,423
41,138
12,695
90,127
98
HSBC Holdings plc Annual Report and Accounts 2016
Other corporate, commercial and financial (non-bank) loans are
analysed separately in the table below, which focuses on the
regions containing the majority of our loans and advances
balances. For financing activities in other corporate and
commercial lending, collateral value is not strongly correlated
to principal repayment performance.
Collateral values are generally refreshed when an obligor’s
general credit performance deteriorates and we have to assess
the likely performance of secondary sources of repayment
should it prove necessary to rely on them.
Accordingly, the table below reports values only for customers
with CRR 8 to 10, recognising that these loans and advances
generally have valuations that are comparatively recent.
Other corporate, commercial and non-bank financial institutions loans and advances including loan commitments by level of
collateral rated CRR/EL 8 to 10 only
(Audited)
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
Total
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
Total
At 31 Dec
31 Dec
2016
Total
Europe
$m
$m
of which:
Asia
$m
North
America
$m
31 Dec
2015
Total
$m
of which:
Europe
$m
Asia
$m
5,283
600
249
168
96
87
465
57
1,766
141
86
34
10
11
191
23
405
2,976
2,529
1,611
164
3
2
1
—
—
12
3
362
151
118
79
14
242
26
930
174
430
214
112
336
148
349
58
267
20
4
99
65
41
13
8
18
2
47
17
North
America
$m
609
454
95
85
168
106
179
58
6,348
2,098
420
3,580
3,795
2,059
252
1,242
3,508
2,545
838
615
414
678
2,368
1,034
8,421
14,769
1,439
1,394
570
412
180
232
478
322
848
447
126
104
86
131
642
268
154
488
59
85
53
291
771
353
3,311
5,409
1,937
2,357
1,413
4,993
4,877
1,853
514
553
231
555
3,079
1,374
9,809
13,604
2,805
789
270
336
87
96
1,667
770
5,261
7,320
889
440
94
149
74
123
506
236
1,835
2,087
80
323
47
47
27
202
423
283
826
2,068
During the year, a number of counterparties were downgraded
to CRR 8, mainly in the US’ energy, commodities and Latin
American portfolios. In the UK, a single large counterparty
balance was settled which partly reduced the CRR 9 balance.
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 summarised below:
• Some securities issued by governments, banks and other
financial institutions benefit from additional credit
enhancement provided by government guarantees
that cover the assets.
• Debt securities issued by 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 105.
• Trading loans and advances mainly consist of cash collateral
posted to satisfy margin requirements. 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 on page 231 of 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 use additional
credit mitigation if a guarantee is called upon or a loan
commitment is drawn and subsequently defaults.
For further information on these arrangements, see Note 33 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 over-the-counter (‘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 an 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 CVAs, see Note 11 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 Annual Report and Accounts 2016
99
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
Notional contract amounts and fair values of derivatives by product type
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
Total OTC derivatives
– total OTC derivatives cleared by central counterparties
– total OTC derivatives not cleared by central counterparties
Total exchange traded derivatives
Gross
Offset
At 31 Dec
Notional
amount
$m
2016
Fair value
Assets
Liabilities
$m
$m
Notional
amount
$m
5,846,095
127,413
119,781
5,690,354
12,657
66,209
5,767,229
13,944,763
1,075,299
8,207,550
4,661,914
472,169
250,810
221,359
448,220
122,832
325,388
62,009
5,596
56,413
209
698
126,506
255,385
277
120,017
135,091
7,410
919
6,491
5,199
1,954
3,245
2,020
117
1,903
65
748
195,612
29,263
118,968
5,465,479
250,022
14,675,036
214
1,259,888
122,022
127,786
8,774,674
4,640,474
9,240
2,173
7,067
5,767
1,941
3,826
1,564
—
1,564
501,834
265,129
236,705
463,344
90,863
372,481
51,683
8,136
43,547
19,428,894
8,396,591
11,032,303
1,344,362
395,905
122,669
273,236
1,522
383,922
19,653,486
124,711
8,894,800
259,211
10,758,686
2,452
1,728,765
2015
Fair value
Assets
Liabilities
$m
96,341
167
406
95,768
279,154
49
117,877
161,228
8,732
1,888
6,844
6,961
1,779
5,182
3,148
38
3,110
392,194
120,062
272,132
2,142
$m
95,598
76
443
95,079
271,367
8
117,695
153,664
10,383
2,601
7,782
6,884
2,069
4,815
2,699
—
2,699
384,246
120,207
264,039
2,685
20,773,256
397,427
386,374
21,382,251
394,336
386,931
(106,555)
(106,555)
290,872
279,819
(105,860)
(105,860)
288,476
281,071
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 is common, and our preferred practice,
for the parties to execute a Credit Support Annex (‘CSA’) in
conjunction with the ISDA Master Agreement. Under a CSA,
collateral is passed between the parties to mitigate the
counterparty risk inherent in outstanding positions. The
majority of our CSAs are with financial institutional clients.
We manage the counterparty exposure 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 place 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, approval is required from a committee of senior
representatives from Markets, Legal and Risk.
See page 251 and Note 30 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.
Personal lending
On a reported basis, total personal lending reduced by $34bn,
mainly due to foreign exchange movements of $26bn and the
ongoing repayments and loan sales of our US CML run-off
portfolio in North America of $13bn.
Loan impairment allowances reduced by $0.9bn, largely due
to the reduction in our US CML run-off portfolio.
Loan impairment charges for personal lending, remained flat
at $1.7bn for 2016. For further analysis of loan impairment
charges and other credit risk provisions by global business,
see page 38.
100
HSBC Holdings plc Annual Report and Accounts 2016
While the tables are presented on a reported basis, the
commentary that follows is on a constant currency basis and
excludes the effect of the ongoing run-off and loan sales in the
US CML run-off portfolio.
Overall, personal lending increased by $5.6bn compared with
31 December 2015. The growth was in mortgage balances
which increased by $7.5bn across the Group. UK mortgage
balances increased by $4.2bn as we grew our UK mortgage
market share through increased sales across various channels
including the expanded use of broker relationships. Mortgages
in Hong Kong and China grew by $4.5bn as a result of
successful marketing campaigns and business growth
initiatives. This growth was offset by a $1.4bn reduction in
Singapore, following a decision to continue to constrain the
size of our mortgage portfolio.
The quality of both our Hong Kong and UK mortgage books
remained high, with negligible defaults and impairment
allowances. The average LTV ratio on new mortgage lending in
Hong Kong was 47% compared with an estimated 29% for the
overall mortgage portfolio. The LTV ratio on new lending in the
UK was 59% compared with the average of 40% for the total
mortgage portfolio.
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. They must comply with the Group’s policies,
strategy and risk appetite, but vary to reflect the local factors:
economic and housing market conditions, regulations, portfolio
performance, pricing and product features.
Other personal lending balances declined by $1.9bn, mainly due
to reductions resulting from the continued repositioning of the
Global Private Bank. This was offset by growth in RBWM, in
other personal lending products including $0.7bn in the UK and
$0.5bn in Mexico.
Total personal lending gross loans
First lien residential mortgages
– of which:
interest only (including offset)
affordability including ARMs
Other personal lending
– other
– credit cards
– second lien residential mortgages
– motor vehicle finance
At 31 Dec 2016
Loan and other credit-related commitments
First lien residential mortgages
– of which:
interest only (including offset)
affordability including ARMs
Other personal lending
– other
– credit cards
– second lien residential mortgages
– motor vehicle finance
At 31 Dec 2015
Europe
$m
Asia
$m
MENA
$m
North
America
Latin
America
$m
$m
Total
$m
As a %
of total
gross loans
108,008
98,072
2,535
39,239
1,924
249,778
26.1
33,045
297
38,491
29,297
9,096
97
1
876
3,427
36,628
26,059
10,438
24
107
146,499
49,029
134,700
111,123
92
—
5,209
3,072
1,816
2
319
7,744
4,291
113
14,182
5,717
3,061
993
1,631
32
44,956
13,944
—
—
3,975
2,018
1,595
—
362
5,899
5,423
34,126
17,906
90,020
63,507
23,938
1,754
821
339,798
183,810
3.6
1.9
9.4
6.6
2.5
0.2
0.1
35.5
125,098
94,606
2,704
50,117
1,986
274,511
26.8
40,906
356
42,568
31,763
10,803
—
2
936
3,966
38,101
27,682
10,189
33
197
—
—
6,861
4,246
2,241
2
372
180
17,041
8,069
3,284
996
3,762
27
—
—
3,972
1,816
1,780
—
376
42,022
21,363
99,571
68,791
26,009
3,797
974
167,666
132,707
9,565
58,186
5,958
374,082
4.1
2.1
9.7
6.7
2.5
0.4
0.1
Currency translation adjustment
31 Dec 2015 at 31 Dec 2016 exchange rates
Movement - constant currency basis
31 Dec 2016 as reported
Loan and other credit-related commitments
(24,032)
(1,145)
143,634
131,562
(810)
8,755
519
58,705
(950)
(26,418)
5,008
347,664
2,865
146,499
67,787
3,138
(1,011)
(13,749)
134,700
103,153
7,744
5,318
44,956
14,510
891
5,899
12,175
(7,866)
339,798
202,943
Total personal lending impairment allowances
First lien residential mortgages
Other personal lending
– other
– credit cards
– second lien residential mortgages
– motor vehicle finance
At 31 Dec 2016
Impairment allowances % of impaired loans
First lien residential mortgages
Other personal lending
– other
– credit cards
– second lien residential mortgages
– motor vehicle finance
At 31 Dec 2015
Impairment allowances % of impaired loans
Currency translation adjustment
31 Dec 2015 at 31 Dec 2016 exchange rates
Movement – constant currency basis
31 Dec 2016 as reported
MENA
North
America
Latin
America
Europe
$m
225
300
224
76
—
—
Asia
$m
34
249
122
127
—
—
$m
81
448
226
217
—
5
525
27.8%
283
50.0%
529
99.6%
276
374
296
78
—
—
650
29.0%
(82)
568
(43)
525
29
227
104
122
—
1
256
26
507
285
216
—
6
533
49.6%
103.3%
(4)
252
31
283
(53)
480
49
529
$m
289
83
23
34
26
—
372
$m
14
249
128
117
—
4
263
11.4%
105.2%
991
241
31
30
180
—
1,232
15.4%
2
1,234
(862)
372
22
186
80
102
—
4
208
86.0%
(35)
173
90
263
Total
$m
643
1,329
723
571
26
9
1,972
30.4%
1,344
1,535
796
548
180
11
2,879
25.0%
(172)
2,707
(735)
1,972
HSBC Holdings plc Annual Report and Accounts 2016
101
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
Exposure to UK interest-only mortgage loans
The profile of expiring UK interest-only loans was as follows.
Of total UK mortgage lending, interest-only mortgage products
contributed $32bn, including $12bn of offset mortgages in First
Direct and $1.2bn of endowment mortgages.
The following information is presented for HSBC Bank plc
interest-only mortgage loans with balances of $15bn at the end
of 2016. During the year, $0.17bn of interest-only mortgages
matured. Of these, 1,416 loans with total balances of $0.07bn
were repaid in full, 106 loans with balances of $0.01bn have
agreed future repayment plans and 529 loans with balances
of $0.09bn are subject to ongoing individual assessment.
UK interest-only mortgage loans
Expired interest-only mortgage loans
Interest-only mortgage loans by maturity
– 2017
– 2018
– 2019
– 2020
– 2021-2025
– Post 2025
At 31 Dec 2016
HSBC Finance
Gross loan portfolio of HSBC Finance real estate secured balances
$m
209
248
517
567
570
3,071
9,347
14,529
At 31 Dec 2016
At 31 Dec 2015
Re-aged
Modified
and re-aged
Modified
Total
renegotiated
loans
Total non-
renegotiated
loans
$m
876
4,858
$m
1,015
5,257
$m
75
519
$m
1,966
10,634
$m
3,688
8,612
Total
gross
loans
$m
5,654
19,246
Total
impairment
allowances
Impairment
allowances/
gross loans
$m
190
986
%
3.4
5.1
Collateral and other credit enhancements held
(Audited)
The following table shows the values of the fixed charges we
hold over specific assets where we have previously enforced,
and are able to enforce, collateral in satisfying a debt because
the borrower has failed to meet 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 mortgages, including second lien mortgages,
decreased by $14bn to $6bn at 31 December 2016. In addition
to the continued loan sales in the US CML run-off portfolio, we
transferred a further $12bn to ‘Assets held for sale’ during 2016,
of which $1.6bn remained at the year end due to be sold in
February 2017. The average gain on sale of foreclosed
properties that arose after we took title to the property was 2%.
There was a decrease in impairment allowances from $1.0 bn
at 31 December 2015 to $0.2bn at the end of 2016, reflecting
reduced levels of delinquency, and lower levels of both new
impaired loans and loan balances outstanding as a result of
continued liquidation of the portfolio.
Across the first and second lien residential mortgages in our
US CML run-off portfolio, two months and over delinquent
balances halved to $1.0bn during 2016.
Renegotiated real estate secured accounts in HSBC Finance
reduced by $8.7bn or 82% and represented 67% at
31 December 2016 (2015: 91%) of our total renegotiated
loans in North America, of which $1.3bn were classified as
impaired (2015: $5.1bn). During 2016, the aggregate number
of renegotiated loans in HSBC Finance reduced due to the
portfolio repayments and further loan sales in the US CML
portfolio.
102
HSBC Holdings plc Annual Report and Accounts 2016
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 60%
– 61% to 70%
– 71% to 80%
– 81% to 90%
– 91% to 100%
Partially collateralised:
Greater than 100% (A)
– 101% to 110%
– 111% to 120%
– greater than120%
Collateral on A
Europe
$m
Asia
$m
MENA
$m
111,799
104,122
2,333
63,404
19,129
14,437
9,029
4,963
837
430
150
64
216
342
63,009
18,198
10,908
7,370
3,463
1,174
41
20
2
19
27
617
369
505
659
148
35
69
15
11
43
40
North
America
$m
35,773
12,454
8,124
9,471
4,374
888
462
373
179
85
109
328
Latin
America
$m
1,813
676
316
366
253
144
58
26
17
5
4
25
Total
$m
UK
$m
255,840
140,160
46,136
35,687
21,685
9,606
2,566
939
381
167
391
762
106,006
61,128
18,094
13,222
8,433
4,509
620
284
106
33
145
197
Hong
Kong
$m
65,480
44,732
10,656
3,851
2,958
2,324
959
1
1
—
—
1
Non-impaired loans and advances
112,229
104,163
2,402
36,146
1,839
256,779
106,290
65,481
Impaired loans and advances
Fully collateralised
– LTV ratio: less than 50%
– 51% to 60%
– 61% to 70%
– 71% to 80%
– 81% to 90%
– 91% to 100%
Partially collateralised:
Greater than 100% (B)
– 101% to 110%
– 111% to120%
– greater than 120%
Collateral on B
1,213
580
222
180
122
66
43
80
37
12
31
66
247
109
49
24
29
19
17
7
3
2
2
5
Impaired loans and advances
1,293
254
At 31 Dec 2016
113,522
104,417
Non impaired loans and advances
Fully collateralised
– LTV ratio: less than 50%
– 51% to 60%
– 61% to 70%
– 71% to 80%
– 81% to 90%
– 91% to 100%
Partially collateralised:
Greater than 100% (A)
– 101% to110%
– 111% to 120%
– greater than 120%
Collateral on A
127,697
70,732
24,069
17,449
10,184
4,258
1,005
535
212
76
247
430
100,102
59,212
16,625
12,548
7,813
2,773
1,131
168
154
5
9
155
59
21
3
13
4
9
9
73
10
12
51
64
132
2,534
2,560
714
442
532
576
265
31
51
16
5
30
41
Non-impaired loans and advances
128,232
100,270
2,611
Impaired loans and advances
Fully collateralised
– LTV ratio: less than 50%
– 51% to 60%
– 61% to 70%
– 71% to 80%
– 81% to 90%
– 91% to 100%
Partially collateralised:
Greater than 100% (B)
– 101% to110%
– 111% to 120%
– greater than 120%
Collateral value on B
Impaired loans
At 31 Dec 2015
1,392
513
270
249
171
102
87
178
130
11
37
160
1,570
222
105
38
29
18
25
7
8
3
2
3
6
230
59
23
8
10
6
7
5
18
1
3
14
13
77
129,802
100,500
2,688
2,905
825
527
540
449
336
228
182
94
38
50
152
3,087
39,233
41,567
12,369
8,266
10,472
6,279
2,556
1,625
1,208
709
288
211
1,147
42,775
6,713
1,247
990
1,199
1,257
1,184
836
628
375
147
106
547
7,341
50,116
85
8
3
4
3
67
—
—
—
—
—
—
85
4,509
1,543
804
761
607
497
297
342
144
64
134
287
1,059
521
200
158
101
52
27
42
17
7
18
33
4,851
1,101
42
34
4
1
1
1
1
—
—
—
—
—
42
1,924
261,630
107,391
65,523
1,869
710
387
378
256
104
34
13
7
2
4
11
1,882
109
90
6
5
5
2
1
1
1
—
110
273,795
143,737
49,789
41,379
25,108
9,956
3,826
1,975
1,098
376
501
1,784
122,221
68,362
23,068
16,755
9,593
3,930
513
321
126
29
166
221
61,784
42,589
9,193
5,252
2,391
1,379
980
97
97
—
—
95
275,770
122,542
61,881
8,495
1,978
1,312
1,492
1,457
1,320
936
833
510
163
160
726
1,191
469
254
204
143
72
49
49
15
5
29
36
9,328
1,240
46
42
2
1
1
—
—
—
—
—
—
—
46
1,992
285,098
123,782
61,927
HSBC Holdings plc Annual Report and Accounts 2016
103
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
Supplementary information
Gross loans and advances to customers by country
Europe
– UK
– France
– Germany
– Switzerland
– other
Asia
– Hong Kong
– Australia
– India
– Indonesia
– Mainland China
– Malaysia
– Singapore
– Taiwan
– other
Middle East and North Africa (excluding Saudi Arabia)
– Egypt
– Turkey
– UAE
– other
North America
– US
– Canada
– other
Latin America
– Mexico
– other
At 31 Dec 2016
Europe
– UK
– France
– Germany
– Switzerland
– other
Asia
– Hong Kong
– Australia
– India
– Indonesia
– Mainland China
– Malaysia
– Singapore
– Taiwan
– other
Middle East and North Africa (excluding Saudi Arabia)
– Egypt
– Turkey
– UAE
– other
North America
– US
– Canada
– other
Latin America
– Mexico
– other
At 31 Dec 2015
First lien
residential
mortgages
Other personal
Property-related
Commercial,
international trade
and other
$m
108,008
101,822
2,676
1
506
3,003
98,072
63,566
10,134
1,280
63
7,192
2,719
6,194
4,036
2,888
2,535
—
301
1,981
253
39,239
22,756
15,220
1,263
1,924
1,803
121
$m
38,491
17,820
13,786
192
5,848
845
36,628
24,558
757
388
334
1,107
3,065
4,502
671
1,246
5,209
272
1,554
1,867
1,516
5,717
2,676
2,831
210
3,975
2,849
1,126
$m
28,485
21,707
5,220
413
213
932
70,426
54,219
2,164
1,040
165
4,788
1,693
2,920
55
3,382
2,580
73
247
1,883
377
16,672
11,835
4,586
251
1,646
1,528
118
$m
164,465
124,341
22,153
8,322
1,660
7,989
161,940
88,921
6,804
5,979
4,384
20,451
4,179
11,832
5,074
14,316
22,107
1,327
2,214
13,037
5,529
51,355
38,199
12,515
641
9,880
7,118
2,762
Total
$m
339,449
265,690
43,835
8,928
8,227
12,769
367,066
231,264
19,859
8,687
4,946
33,538
11,656
25,448
9,836
21,832
32,431
1,672
4,316
18,768
7,675
112,983
75,466
35,152
2,365
17,425
13,298
4,127
249,778
90,020
119,809
409,747
869,354
125,098
117,346
3,606
4
511
3,631
94,606
60,943
9,297
1,248
56
5,716
2,792
7,743
3,866
2,945
2,704
1
446
1,854
403
50,117
34,382
14,418
1,317
1,986
1,881
105
42,568
20,797
12,130
203
8,045
1,393
38,101
24,389
726
431
346
1,645
3,113
5,392
629
1,430
6,861
549
2,414
2,286
1,612
8,069
4,813
3,029
227
3,972
2,828
1,144
33,277
25,700
6,070
347
224
936
67,577
50,825
1,592
637
71
6,185
1,993
3,334
126
2,814
2,900
104
302
1,833
661
16,014
11,435
4,315
264
1,622
1,498
124
187,576
149,327
20,380
7,941
834
9,094
157,616
80,609
6,448
5,728
4,965
23,703
4,947
11,021
5,291
14,904
26,222
2,097
4,231
14,199
5,695
56,690
42,439
13,490
761
10,433
7,844
2,589
388,519
313,170
42,186
8,495
9,614
15,054
357,900
216,766
18,063
8,044
5,438
37,249
12,845
27,490
9,912
22,093
38,687
2,751
7,393
20,172
8,371
130,890
93,069
35,252
2,569
18,013
14,051
3,962
274,511
99,571
121,390
438,537
934,009
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 plc, HSBC Bank
Middle East and HSBC Bank USA, by the location of the lending
branch.
104
HSBC Holdings plc Annual Report and Accounts 2016
HSBC Holdings
(Audited)
Risk in HSBC Holdings is overseen by the HSBC Holdings Asset
and Liability Management Committee (‘Holdings ALCO’).
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 by certain Group operations in the
normal conduct of their business. It principally represents
claims on Group subsidiaries in Europe and North America.
In HSBC Holdings, all financial instruments carrying amount
represents the maximum exposure to credit risk. Derivatives
have an offset balance of $1.8bn at 31 December 2016
(2015: $2.5bn).
Carrying amount of HSBC’s consolidated holdings of ABSs
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 (2015: 100%).
Securitisation exposures and other structured products
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 $11bn
(2015: $15bn).
At 31 December 2016, the available-for-sale reserve in respect
of ABSs was a deficit of $749m (2015: deficit of $1,021m). For
2016, the impairment write-back in respect of ABSs was
$121m (2015: write-back of $85m).
Trading
Available
for sale
Held to
maturity
Designated at
fair value
through profit
or loss
Loans and
receivables
$m
$m
$m
$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 Dec 2016
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 Dec 2015
63
—
247
662
348
175
140
1,278
2,913
73
—
166
812
590
240
236
1,184
3,301
1,544
1,453
—
5
13,070
12,788
362
1,146
1,284
2,865
730
—
—
—
—
—
22,454
12,793
2,247
1,989
—
7
15,082
13,997
780
2,308
2,294
2,991
880
—
—
—
—
—
28,571
14,004
—
—
—
—
—
—
—
19
19
1
—
—
—
—
—
—
23
24
Total
$m
1,711
1,497
26,105
1,078
1,635
1,529
3,016
2,075
$m
104
39
—
54
141
70
11
48
467
38,646
132
55
—
108
201
149
25
128
798
2,453
2,051
29,245
1,700
3,099
2,683
3,252
2,215
46,698
Of which
held through
consolidated
SEs
$m
618
1,382
—
152
707
735
2,616
404
6,614
1,075
1,796
—
253
1,656
1,310
2,679
565
9,334
HSBC Holdings plc Annual Report and Accounts 2016
105
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
Liquidity and funding risk profile
Liquidity and funding risk in 2016
Management of liquidity and funding risk
Sources of funding
Analysis of on-balance sheet encumbered and unencumbered
assets and off-balance sheet collateral
Contractual maturity of financial liabilities
HSBC Holdings
Page
106
106
107
108
111
112
Liquidity and funding risk in 2016
A summary of our current policies and practices regarding the
management of liquidity and funding risk is set out on page 106.
The liquidity position of the Group remained strong in 2016.
The amount of our unencumbered liquid assets was $560bn.
We recognised $447bn of these liquid assets for the purposes
of the Group consolidated LCR, which was 136%.
Management of liquidity and funding risk
Liquidity coverage ratio
The Liquidity Coverage Ratio (‘LCR’) aims to ensure that a bank
has sufficient unencumbered high-quality liquid assets (‘HQLA’)
to meet its liquidity needs in a 30-calendar-day liquidity stress
scenario. HQLA consist of cash or assets that can be converted
into cash at little or no loss of value in markets. We reported a
Group European Commission (‘EC’) LCR at 31 December 2016
of 136% (31 December 2015: 116%) to the PRA.
We assume no transferability of liquidity from non-EU entities
other than to the extent currently permitted. This results in
$113bn of HQLA being excluded from the Group’s LCR.
The ratio of total consolidated HQLA to the EC LCR denominator
at 31 December 2016 was 171% (31 December 2015: 142%),
reflecting the additional $113bn (31 December 2015: $94bn)
of HQLAs excluded from the Group LCR.
At 31 December 2016, all the Group’s principal operating
entities were within the LCR risk tolerance level established by
the Board and applicable under the Group’s internal liquidity
and funding risk management framework (‘LFRF’).
The liquidity position of the Group can also be represented by
the stand-alone ratios of each of our principal operating entities.
The Board and RMM decide the criteria for categorising an
operating entity as a principal entity. The main criterion is a
material balance sheet size. The following table displays the
individual LCR levels for our principal operating entities on
an EC LCR basis. The ratios for operating entities in non-EU
jurisdictions can vary from local LCR measures due to
differences in the way non-EU regulators have implemented
the Basel III recommendations.
Operating entities’ LCRs
Footnotes
47
48
48
49
49
HSBC UK liquidity group
The Hongkong and Shanghai Banking
Corporation – Hong Kong Branch
The Hongkong and Shanghai Banking
Corporation – Singapore Branch
HSBC Bank USA
HSBC France
Hang Seng Bank
HSBC Canada
HSBC Bank China
HSBC Middle East – UAE Branch
HSBC Mexico
HSBC Private Bank
For footnotes, see page 126.
2015
%
107
150
189
116
127
199
142
183
At Dec
2016
%
123
185
154
130
122
218
142
253
241
177
178
106
HSBC Holdings plc Annual Report and Accounts 2016
Net stable funding ratio
The Net Stable Funding Ratio (‘NSFR’) requires institutions to
maintain sufficient stable funding relative to required stable
funding, and reflects a bank’s long-term funding profile (funding
with a term of more than a year). It is designed to complement
the LCR.
At 31 December 2016, the Group’s principal operating entities
were within the NSFR risk tolerance level established by the
Board and applicable under the LFRF.
The table below displays the NSFR levels for the principal
HSBC operating entities.
Our NSFR levels were not disclosed at the last year-end, so
there are no comparatives.
Operating entities’ NSFRs
HSBC UK liquidity group
The Hongkong and Shanghai Banking Corporation –
Hong Kong Branch
The Hongkong and Shanghai Banking Corporation –
Singapore Branch
HSBC Bank USA
HSBC France
Hang Seng Bank
HSBC Canada
HSBC Bank China
HSBC Middle East – UAE Branch
HSBC Mexico
HSBC Private Bank
Footnotes
47
48
48
49
49
At
31 Dec
2016
%
116
157
112
120
120
162
139
149
141
128
155
Depositor concentration and term funding maturity
concentration
The LCR and NSFR metrics assume a stressed outflow based
on a portfolio of depositors within each deposit segment. The
validity of these assumptions is challenged if the portfolio of
depositors is not large enough to avoid depositor concentration.
Operating entities are exposed to term re-financing
concentration risk if the current maturity profile results in future
maturities being overly concentrated in any defined period.
At 31 December 2016, all principal operating entities were
within the risk tolerance levels set for depositor concentration
and term funding maturity concentration. These risk tolerances
were established by the Board and are applicable under the
LFRF.
Liquid assets of HSBC’s principal operating entities
The table below shows the unweighted liquidity value of assets
categorised as liquid, which is used for the purposes of
calculating the LCR metric.
This reflects the stock of unencumbered liquid assets at the
reporting date, using the regulatory definition of liquid assets.
The amount recognised by entity at the Group level is different
from the amount recognised at a solo entity level, reflecting
where liquidity cannot be freely transferred up to Group.
Total of HSBC’s other principal entities
50
Liquid assets of HSBC’s principal entities
HSBC UK liquidity group
Level 1
Level 2a
Level 2b
The Hongkong and Shanghai Banking Corporation – Hong Kong Branch
Level 1
Level 2a
Level 2b
HSBC Bank USA
Level 1
Level 2a
Level 2b
Hang Seng Bank
Level 1
Level 2a
Level 2b
Level 1
Level 2a
Level 2b
For footnotes, see page 126.
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 following ‘Funding sources and uses’ table provides a
consolidated view of how our balance sheet is funded, and
should be read in light of the LFRF, which requires operating
entities to manage liquidity and funding risk on a stand-alone
basis.
The table analyses our consolidated balance sheet according to
the assets that primarily arise from operating activities and the
sources of funding primarily supporting these activities. Assets
and liabilities that do not arise from operating activities are
presented as a net balancing source or deployment of funds.
In 2016, 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 advances to banks continued to exceed deposits by
banks, meaning 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 Risk Management section on page 68.
31 Dec 2016
Recognised at Group
and entity level
Recognised at entity
level only
$m
$m
Footnotes
47
143,884
2,085
7,663
48,342
23,790
3,450
53,409
14,995
10
21,798
1,474
199
74,239
6,240
226
143,884
2,085
7,663
98,963
23,790
3,450
72,931
14,995
10
37,525
1,474
199
90,579
6,240
226
Funding sources and uses
Sources
Customer accounts
Deposits by banks
Repurchase agreements – non-trading
Debt securities in issue
Liabilities of disposal groups held for sale
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 Dec
Uses
2016
$m
2015
$m
1,272,386
1,289,586
59,939
88,958
65,915
2,790
20,984
86,832
75,273
54,371
80,400
88,949
36,840
22,702
66,408
69,938
153,691
141,614
1,428
3,643
15,271
133,349
182,578
442
8,859
10,530
121,783
197,518
2,009,346
2,048,326
Loans and advances to customers
Loans and advances to banks
861,504
924,454
88,126
90,401
Reverse repurchase agreements – non-trading
160,974
146,255
Assets held for sale
Trading assets
– reverse repos
– stock borrowing
– settlement accounts
– other trading assets
Financial investments
Cash and balances with central banks
Net deployment in other balance sheet assets
and liabilities
At 31 Dec
4,389
43,900
235,125
224,837
4,780
5,427
17,850
207,068
436,797
128,009
438
7,118
12,127
205,154
428,955
98,934
94,422
90,590
2,009,346
2,048,326
HSBC Holdings plc Annual Report and Accounts 2016
107
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
Wholesale term debt maturity profile
The maturity profile of our wholesale term debt obligations is
set out in the following table ‘Wholesale funding cash flows
payable by HSBC under financial liabilities by remaining
contractual maturities’.
The balances in the table are not directly comparable 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 include debt securities and
subordinated liabilities measured at fair value.
Wholesale funding cash flows payable by HSBC under financial liabilities by remaining contractual maturities
Due not
more than
1 month
Due over
1 month
but not
more than
3 months
Due over
3 months
but not
more than
6 months
Due over
6 months
but not
more than
9 months
Due over
9 months
but not more
than
1 year
Due over
1 year
but not
more than
2 years
Due over
2 years
but not
more than
5 years
Due over
5 years
$m
$m
$m
7,462
10,110
11,834
691
837
1,088
1,584
3,196
11
55
13
13
—
5,906
1,706
1,675
—
—
23
800
63
63
—
5,530
3,727
1,389
295
—
893
—
145
145
—
$m
6,930
3,152
2,699
882
71
—
126
—
—
—
—
$m
8,043
2,384
3,580
2,066
—
—
13
—
500
500
—
Total
$m
$m
$m
$m
21,906
43,764
44,164
154,213
242
133
12
13,626
30,519
36,240
5,940
207
—
91
1,800
1,775
1,775
—
8,344
1,357
—
908
2,503
7,292
6,881
411
3,885
2,559
—
439
1,029
32,179
30,425
1,754
18,050
92,934
25,269
6,073
3,196
2,504
6,187
41,967
39,802
2,165
7,475
10,173
11,979
6,930
8,543
23,681
51,056
76,343
196,180
19,447
5,830
4,229
883
—
8,414
20
71
—
—
—
11,803
8,426
2,240
20,565
11,250
7,130
964
1,544
—
—
173
—
816
—
816
—
—
195
446
—
—
—
6,712
2,944
2,687
875
—
—
206
—
—
—
—
5,274
1,224
1,711
2,166
—
—
173
—
34
34
—
20,150
955
10,850
4,158
2,074
—
313
1,800
648
648
—
43,463
108
27,239
9,741
1,619
—
1,554
3,202
6,826
6,338
488
19,447
12,619
20,565
6,712
5,308
20,798
50,289
27,398
154,812
10
18,407
5,262
2,577
—
114
1,028
34,423
32,494
1,929
61,821
30,747
74,493
25,593
6,270
8,414
2,748
6,547
42,747
39,514
3,233
197,559
Debt securities issued
– unsecured CDs and CP
– unsecured senior MTNs
– unsecured senior structured
notes
– secured covered bonds
– secured asset-backed
commercial paper
– secured ABS
– others
Subordinated liabilities
– subordinated debt securities
– preferred securities
At 31 Dec 2016
Debt securities issued
– unsecured CDs and CP
– unsecured senior MTNs
– unsecured senior structured
notes
– secured covered bonds
– secured asset-backed
commercial paper
– secured ABS
– others
Subordinated liabilities
– subordinated debt securities
– preferred securities
At 31 Dec 2015
Analysis of on-balance sheet encumbered and
unencumbered assets and off-balance sheet collateral
On-balance sheet encumbered and unencumbered assets
The table on page 110, ‘Analysis of on-balance sheet
encumbered and unencumbered assets’, summarises the total
on-balance sheet assets capable of supporting future funding
and collateral needs, and shows the extent to which they are
currently pledged for this purpose. This disclosure aims to
facilitate an understanding of available and unrestricted assets
that could be used to support potential future funding and
collateral needs.
During 2016 cash collateral given and reported within loans and
advances to banks and customers, reflecting initial and variable
cash margins, was reclassified from ‘unencumbered assets’ to
‘encumbered assets’ to align with our Pillar 3 disclosure.
Furthermore a portfolio of mortgages, classified as
‘unencumbered assets’ in 2015 was reclassified to ‘Assets
positioned at central banks’ (i.e. pre-positioned plus
encumbered) in 2016. Comparative data have been restated.
Under ‘Off-balance sheet collateral’ below we discuss the off-
balance sheet collateral received and re-pledged, and the level
of available unencumbered off-balance sheet collateral.
For a summary of our policy on collateral management and definition of
encumbrance, see the Risk Management section on page 68.
108
HSBC Holdings plc Annual Report and Accounts 2016
Off-balance sheet collateral
The fair value of assets accepted as collateral that we are
permitted to sell or repledge in the absence of default was
$269bn at 31 December 2016 (2015: $228bn). The fair value of
any such collateral actually sold or re-pledged was $157bn
(2015: $150bn). 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 re-pledged 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 IFRS offset
criteria. As a consequence of reverse repo, stock borrowing and
derivative transactions where the collateral received could be
sold or re-pledged but had not been, we held $112bn
(2015: $78bn) of unencumbered collateral available to
support potential future funding and collateral needs at
31 December 2016.
Under the terms of our current collateral obligations under
derivative contracts (which are ISDA compliant CSA contracts
and contracts entered into for pension obligations), and based
on an estimate of the positions at 31 December 2016, we
calculate that we could be required to post additional collateral
of up to $0.3bn (2015: $0.4bn) in the event of a one-notch
downgrade in third-party agencies’ credit rating of HSBC’s debt.
This would increase to $0.8 bn (2015: $0.7bn) in the event of a
two-notch downgrade.
Encumbered and unencumbered assets
Definitions of the categories included in the table ‘Analysis of on-balance sheet encumbered and unencumbered assets’:
•
•
•
•
•
•
•
•
‘Assets encumbered as a result of transactions with counterparties other than central banks as a result of covered bonds’ are any assets on our
balance sheet pledged against our covered bonds issuance with a counterparty which is not central bank and as a result the assets are unavailable
to the bank to secure funding, satisfy collateral needs or be sold to reduce potential future funding requirements.
‘Assets encumbered as a result of transactions with counterparties other than central banks as a result of securitisation’ are any assets on our
balance sheet pledged against securitisations with a counterparty which is not central bank including asset-backed commercial paper,
collateralised debt obligations, residential mortgage-backed securities, or structured investment vehicles paper and as a result the assets are
unavailable to the bank to secure funding, satisfy collateral needs or be sold to reduce potential future funding requirements.
‘Assets encumbered as a result of transactions with counterparties other than central banks – Other’ are assets on our balance sheet (other than
covered bonds and securitisation above) which have been pledged with a counterparty which is not central bank as a 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. Examples include assets pledged for sale and repurchase and stock lending transactions and certain property assets.
‘Assets positioned at central banks (i.e. pre-positioned plus encumbered)’ are any assets that are eligible for emergency central bank liquidity/
funding or under central bank pre-existing arrangements for funding without further due diligence work required. Any transferable customer loan
that is central bank eligible such as pre-positioned central bank UK mortgages and US mortgages accepted by the Federal Reserve Bank and assets
on our balance sheet which have been pledged with central bank 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 available assets’ are assets considered by the bank to be readily available 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 assets capable of being encumbered’ 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 encumbered’ 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 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.
HSBC Holdings plc Annual Report and Accounts 2016
109
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
Analysis of on-balance sheet encumbered and unencumbered assets
Assets encumbered as a result
of transactions with counterparties
other than central banks
Unencumbered assets not
positioned at central banks
Assets
positioned
at central
banks
(i.e. pre-
positioned
plus
encumbered)
Assets
readily
available for
encumbrance
Other assets
capable
of being
encumbered
$m
$m
82
123,363
—
—
—
—
$m
326
—
—
Reverse
repos/stock
borrowing
receivables
and derivative
assets
Assets that
cannot be
encumbered
$m
$m
Total
$m
—
—
—
4,228
128,009
5,003
5,003
31,228
31,228
As a
result of
securitisations
$m
—
—
—
Other
$m
10
—
—
— 62,962
2,504
131,420
7,419
10,207
20,613
235,125
—
981
— 34,144
—
2,645
— 10,532
— 14,660
—
—
—
—
—
—
—
—
—
—
—
—
1
2,150
354
—
—
—
—
—
—
—
—
—
11,309
59,231
59,394
11
318
1,565
—
—
—
—
7
—
14,451
94,054
63,604
1,331
1,910
5,386
5,610
24,769
155
835
150
442
243
—
—
3,615
4,821
14,996
38,247
20
—
—
20
—
—
—
—
—
—
—
290,872
23,901
24,756
54
204
3,747
20,021
4,189
20,284
79
—
79
290,872
3,903
6,719
2,051
50,824
2,045
22,583
88,126
6,258
8,365
10,425
67,208
15,941
732,242
4,027
17,038
861,504
—
—
—
—
—
160,974
—
160,974
— 16,537
17,983
331,154
10,765
—
537
3,766
93,566
— 16,000
14,217
236,003
—
—
—
—
—
—
—
2,358
—
345
—
—
—
—
—
—
—
—
1,143
7,904
1,718
1,585
8,368
27,099
—
62
—
—
—
19,329
—
—
—
—
—
—
—
—
—
—
—
60,358
436,797
214
99,226
58,780
332,904
1,364
4,667
26,084
63,909
1,145
1,145
293
20,029
21,346
21,346
6,163
6,163
As a
result of
covered
bonds
$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
– 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 Dec 2016
6,258
8,366
96,540
94,496
613,194
848,024
468,125
239,983 2,374,986
110
HSBC Holdings plc Annual Report and Accounts 2016
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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
– 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 Dec 2015
Analysis of on-balance sheet encumbered and unencumbered assets (continued)
Assets encumbered as a result
of transactions with counterparties
other than central banks
Unencumbered assets not
positioned at central banks
As a
result of
covered
bonds
$m
As a
result of
securitisations
$m
Assets
positioned
at central
banks
(i.e. pre-
positioned plus
encumbered)
Assets readily
available for
encumbrance
Other assets
capable
of being
encumbered
Other
$m
—
—
—
$m
98
—
—
$m
95,545
—
—
56,188
1,573
138,070
1,099
25,890
4,616
10,410
14,173
—
—
—
—
—
—
984
492
—
—
97
—
—
—
—
—
—
5,618
72,377
59,430
456
189
1,775
258
1,327
178
12
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Reverse
repos/stock
borrowing
receivables
and derivative
assets
Assets that
cannot be
encumbered
$m
$m
Total
$m
—
—
—
7,520
—
—
—
2,941
98,934
5,768
5,768
28,410
13,217
28,410
224,837
—
46
—
7,829
99,038
66,491
2,763
5,784
22,303
4,757
—
—
—
—
—
288,476
7,387
20,833
138
2,749
17,838
29,176
23,852
396
4,341
18,995
108
—
120
288,476
$m
350
—
—
8,269
128
233
2,445
2,890
2,573
1,244
—
265
979
—
—
1,329
2,900
1,702
2,054
61,602
815
19,999
90,401
6,947
15,288
9,769
64,984
15,730
790,929
1,531
19,276
924,454
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
25,078
509
24,561
8
1,188
—
—
—
—
—
8,150
3,675
4,475
—
—
—
—
—
—
—
—
146,255
—
146,255
325,101
14,753
98,866
224,355
1,880
1,177
11,124
2,452
4,685
65,190
—
51
—
—
—
18,794
—
—
—
—
—
—
—
—
—
—
—
55,873
428,955
324
104,551
54,054
1,495
27,235
1,221
318,569
5,835
98,298
1,221
294
19,139
24,605
6,051
24,605
6,051
6,947
16,617
95,123
76,507
583,011
961,131
444,597
225,723
2,409,656
Contractual maturity of financial liabilities
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 29 on the
Financial Statements.
In addition, loans and other credit-related commitments,
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.
HSBC Holdings plc Annual Report and Accounts 2016
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Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
Cash flows payable by HSBC under financial liabilities by remaining contractual maturities
(Audited)
On
demand
$m
40,277
1,079,866
18,134
153,691
1,307
274,283
9
1
45,569
1,613,137
410,950
12,608
2,036,695
42,182
1,076,595
13,181
141,614
327
276,141
377
—
59,298
1,609,715
425,000
12,579
2,047,294
Due within
3 months
Due between
3 and 12 months
Due between
1 and 5 years
Due after
5 years
$m
10,222
145,932
66,801
—
2,265
287
13,118
400
15,844
254,869
95,751
4,647
355,267
6,643
160,368
64,109
—
4,077
255
25,910
803
17,476
279,641
93,149
5,727
378,517
$m
3,284
38,273
2,929
—
5,003
1,129
19,492
1,378
3,050
74,538
63,729
10,301
$m
5,233
8,676
1,048
—
34,707
2,472
29,487
10,302
1,525
93,450
57,019
8,138
$m
1,033
559
—
—
61,929
1,727
8,089
21,552
843
95,732
28,395
1,378
148,568
158,607
125,505
1,452
43,289
2,144
—
6,149
970
23,886
971
7,226
86,087
73,115
15,091
4,029
10,964
535
—
24,642
1,721
35,499
10,151
10,188
97,729
60,078
9,915
174,293
167,722
107
263
543
—
41,365
1,652
6,993
28,132
1,014
80,069
15,089
2,805
97,963
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.
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 Dec 2016
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 Dec 2015
HSBC Holdings
Liquidity risk in HSBC Holdings is overseen by Holdings ALCO.
This 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 external
debt obligations with internal loan cash flows and by
maintaining an appropriate liquidity buffer that is monitored
by Holdings ALCO.
The balances in the table below are not directly comparable
with those on the balance sheet of HSBC Holdings as the table
incorporates, on an undiscounted basis, all cash flows relating
112
HSBC Holdings plc Annual Report and Accounts 2016
Cash flows payable by HSBC Holdings under financial liabilities by remaining contractual maturities
(Audited)
On
demand
Due within
3 months
Due between
3 and 12 months
Due between
1 and 5 years
Due after
5 years
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 Dec 2016
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 Dec 2015
$m
—
—
3,841
—
—
—
3,841
—
7,619
11,460
257
—
2,065
—
—
—
2,322
—
68,333
70,655
$m
2,051
314
—
157
196
1,343
4,061
—
—
4,061
1,375
1,145
—
15
229
1,426
4,190
—
—
4,190
$m
—
960
—
478
598
164
2,200
—
—
2,200
424
655
—
47
699
152
1,977
—
—
1,977
$m
105
11,964
592
8,393
4,461
—
25,515
—
—
$m
—
25,665
592
19,164
20,899
—
66,320
—
—
25,515
66,320
110
5,202
213
250
5,149
—
10,924
—
—
10,924
—
20,779
—
1,176
25,474
—
47,429
—
—
47,429
HSBC Holdings plc Annual Report and Accounts 2016
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Market risk profile
Market risk in 2016
Trading portfolios
Non-trading portfolios
Market risk balance sheet linkages
Structural foreign exchange exposures
Net interest income sensitivity
Sensitivity of capital and reserves
Third-party assets in BSM
Defined benefit pension schemes
Additional market risk measures
applicable only to the parent company
Page
114
114
115
116
116
117
118
118
118
118
Market risk in 2016
Market risk is the risk that movements in market factors, such
as foreign exchange rates, interest rates, credit spreads, equity
prices and commodity prices, will reduce our income or the
value of our portfolios. Exposure to market risk is separated
into two portfolios:
•
trading portfolios; and
• non-trading portfolios.
Market risk exposures arising from our insurance manufacturing
operations are discussed on page 82.
A summary of our current policies and practices regarding the
management of market risk is set out on page 77.
Global markets were influenced by the increase in US interest
rates in line with market expectation. Bond yields continued to
rise and global stock markets continued to be supported by
expectations of fiscal expansion in the US in the wake of the
new US presidential elections. The US monetary tightening
contrasts with the ECB extending its quantitative easing
programme, highlighting the divergence in monetary policies
during the year.
Daily VaR (trading portfolios), 99% 1 day ($m)
In China, the prospect of a slowdown in the economy in the first
half of 2016, and uncertainty around the trade relationship with
the US, following the elections, led to further depreciation of
the renminbi. Chinese policymakers will attempt to keep this
process gradual in order to avoid disruptive capital outflows.
In the UK, following the decision to leave the EU, concerns
persist about the upcoming exit negotiations and the ultimate
nature of the EU-UK relationship.
Capital flows to the emerging markets remained weak, with
some central banks increasing local interest rates to reduce
reserve outflows.
Trading value at risk (‘VaR’) spiked in quarter one, due to higher
market volatility impacting the foreign exchange and credit
spread asset classes. For the remainder of the year, exposures
in all asset classes were managed down. Non-trading VaR
increased during the year as higher interest rates, especially
in US dollars, caused the duration of non-trading assets to
increase.
Trading portfolios
Value at risk of the trading portfolios
Trading VaR predominantly resides within Global Markets. It
was relatively stable at 31 December 2016 compared with
31 December 2015. During the year, the trading VaR
composition changed in that interest rate trading VaR increased
but was offset by decreases in both credit spread and equity
trading VaR components.
The daily levels of total trading VaR over the last year are set
out in the graph below.
Trading VaR
IR trading
Equity trading
CS trading
FX trading
Diversification
114
HSBC Holdings plc Annual Report and Accounts 2016
The Group trading VaR for the year is shown in the table below.
Trading VaR, 99% 1 day51
(Audited)
Balance at 31 Dec 2016
Average
Maximum
Minimum
Balance at 31 Dec 2015
Average
Maximum
Minimum
For footnotes, see page 126.
Back-testing
Foreign
exchange (FX)
and commodity
Interest
rate (IR)
Equity (EQ)
Credit
spread (CS)
Portfolio
diversification52
Total53
$m
8.9
11.1
16.9
5.4
8.0
14.7
25.4
6.3
$m
49.7
42.8
64.2
31.8
34.9
46.0
57.0
32.6
$m
11.8
20.4
32.4
11.8
21.4
19.6
29.0
11.9
$m
5.9
13.5
28.1
5.0
13.9
15.5
23.3
9.8
$m
(23.5)
(30.3)
(24.9)
(35.7)
$m
52.8
57.5
91.5
42.1
53.3
60.1
77.9
47.5
In 2016, the Group experienced two back-testing exceptions
against hypothetical profit and loss: a loss exception in
February, driven by Libor against overnight index spread
widening on long positions; and a profit exception in June,
driven by significant devaluations in sterling and the euro
against the US dollar resulting from the UK’s referendum on
EU membership.
There was no evidence of model errors or control failures.
The back-testing result excludes exceptions due to changes in
fair value adjustments.
Daily VaR (non-trading portfolios), 99% 1 day ($m)
Non-trading portfolios
Value at risk of the non-trading portfolios
Non-trading VaR of the Group includes contributions from all
global businesses. There is no commodity risk in the non-
trading portfolios. The increase in non-trading VaR during 2016
was due primarily to the lengthening of the duration in the non-
trading book from higher interest rates, especially US rates.
The increase in non-trading interest rate was offset by a
decrease in the credit spread VaR component and an increase
in portfolio diversification effects.
Non-trading VaR includes the interest rate risk in the banking
book transferred to and managed by Balance Sheet
Management (‘BSM’) and the non-trading financial instruments
held by BSM. The management of interest rate risk in the
banking book and the role of BSM are described further in
Interest rate risk in the banking book section below.
Non-trading VaR excludes the insurance operations which are
discussed further on page 121 and the interest rate risk in the
banking book arising from HSBC Holdings.
The daily levels of total non-trading VaR over the last year are
set out in the graph below.
Non-trading VaR
IR non-trading
CS non-trading
Diversification
HSBC Holdings plc Annual Report and Accounts 2016
115
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
The Group non-trading VaR for the year is shown in the table below.
Non-trading VaR, 99% 1 day
(Audited)
Balance at 31 Dec 2016
Average
Maximum
Minimum
Balance at 31 Dec 2015
Average
Maximum
Minimum
For footnotes, see page 126.
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. This section
and the sections below describe the scope of HSBC’s
management of market risks in non-trading books.
Equity securities classified as available for sale
Fair value of equity securities
(Audited)
Private equity holdings
Investment to facilitate ongoing business
Footnotes
54
55
Other strategic investments
At 31 Dec
For footnotes, see page 126.
2016
$bn
1.2
1.5
2.0
4.7
2015
$bn
1.9
1.9
2.1
5.9
The table above sets out the maximum possible loss on
shareholders’ equity from available-for-sale equity securities.
The fair value of equity securities classified as available for sale
reduced from $5.9bn to $4.7bn. The decrease in private equity
holdings was largely due to fund distributions and the
reclassification of the investment in certain funds as an
associate investment. The decrease in business facilitation
equities was largely due to the sale of the Visa investment.
Market risk balance sheet linkages
Below are the balance sheet lines in the Group’s consolidated
position that are subject to market risk.
Trading assets and liabilities
The Group’s trading assets and liabilities are in almost all cases
originated by GB&M. 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.
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.
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 184, HSBC’s net trading income in 2016 was
$9,452m (2015: $8,723m). Adjustments to trading income such
as valuation adjustments do not feed the trading VaR model.
116
HSBC Holdings plc Annual Report and Accounts 2016
Interest
rate (IR)
Credit
spread (CS)
Portfolio
diversification52
$m
157.0
131.6
171.9
100.2
114.1
97.5
131.5
70.5
$m
46.5
52.8
82.8
36.9
72.7
65.7
89.4
52.1
$m
(32.1)
(32.1)
(54.0)
(42.0)
Total53
$m
171.4
152.3
182.1
123.3
132.8
121.2
156.8
91.5
For information on the accounting policies applied to financial instruments
at fair value, see Note 13 on the Financial Statements.
Structural foreign exchange exposures
For our policies and procedures for managing structural foreign exchange
exposures, see page 78 of the Risk management section.
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.
Net structural foreign exchange exposures
Currency of structural exposure
Hong Kong dollars
Pound sterling1
Chinese renminbi
Euros
Indian rupees
Mexican pesos
Canadian dollars
Saudi riyals
Swiss francs
Malaysian ringgit
UAE dirhams
Singapore dollars
Taiwanese dollars
Australian dollars
Indonesian rupiah
Korean won
Argentine pesos
Brazilian real
Turkish lira
Thai baht
Others, each less than $700m
At 31 Dec
2016
$m
32,472
27,527
24,504
17,397
3,901
3,826
3,734
3,690
2,226
2,079
2,073
1,995
1,753
1,667
1,439
1,260
860
755
734
736
5,728
140,356
2015
$m
28,270
32,701
24,117
19,966
3,645
4,228
3,595
3,109
2,642
1,994
1,898
1,454
1,702
1,396
1,303
1,296
875
2,865
1,006
662
6,038
144,762
1 During 2016, we entered into new forward exchange contracts amounting to
$1.5bn (2015: $2.6bn) in order to manage our sterling structural foreign exchange
exposure.
Shareholders’ equity would decrease by $2,247m (2015:
$2,633m) if euro and sterling foreign currency exchange rates
weakened by 5% relative to the US dollar.
Net interest income sensitivity
The following table sets out the assessed impact on our
base case projected net interest income (‘NII’) for 2016
(excluding insurance) of a series of four quarterly parallel shocks
of 25 basis points to the current market-implied path of interest
rates worldwide at the beginning of each quarter from
1 January 2017.
The sensitivities shown represent our assessment as to the
change in expected base case net interest income 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 repricing rates of assets and liabilities used
are derived from current yield curves, thereby reflecting current
market expectations of the future path of interest rates. The
scenarios therefore represent interest rate shocks to the current
market implied path of rates.
The NII sensitivities shown are indicative and based on
simplified scenarios, including the assumption that the balance
sheet size and structure remains static, other than instances
where the size of the balances or repricing is deemed interest
rate sensitive (non-interest bearing current account migration
and fixed rate loan early prepayment) and where non-traded
VaR is assumed to contractually run off. The limitations of this
analysis are discussed within the ‘Risk management’ section on
page 68.
Assuming no management response, a sequence of such rises
(‘up-shock’) would increase expected net interest income for
2016 by $1,709m (2015: $1,251m), while a sequence of such
falls (‘down-shock’) would decrease planned net interest
income by $2,406m (2015: $2,258m).
The 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.
Net interest income sensitivity56
(Audited)
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 NII 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 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.
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
the figures in the following table.
Change in 2016 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
605
(1,024)
Change in 2015 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 126.
410
(691)
47
(41)
72
(74)
US dollar
bloc
$m
Rest of
Americas
bloc
$m
Hong Kong
dollar
bloc
$m
Rest of
Asia
bloc
$m
Sterling
bloc
$m
504
(797)
280
(292)
61
(261)
Euro
bloc
$m
212
9
Total
$m
1,709
(2,406)
217
(645)
369
(290)
135
(528)
49
(30)
1,251
(2,258)
We expect NII to rise in the rising rate scenario and fall in the
falling rate scenario. This is due to a structural mismatch
between our assets and liabilities (on balance we would expect
our assets to reprice more quickly, and to a greater extent, than
our liabilities).
Economic value of equity
The table below sets out the assessed impact on our base case
economic value of equity (‘EVE’) of an immediate parallel
upward shock of 200 basis points (‘bps’) (up 200bps) and an
immediate parallel downward shock of 200 basis points (down
200bps) to the market-implied path of interest rates worldwide
on 1 January 2017.
The economic value of equity remains higher than the book
value of equity under base case, up 200bps and down 200bps
scenarios.
HSBC Holdings plc Annual Report and Accounts 2016
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Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
Economic value of equity
Change in economic value of equity as at 31 Dec 2016
arising from an immediate shift in yield curves of:
+200 basis points
–200 basis points
US dollar
bloc
Rest of
Americas
bloc
Hong Kong
dollar
bloc
$m
$m
$m
Rest of
Asia
bloc
$m
Sterling
bloc
$m
Euro
bloc
$m
Total
$m
1,616
(7,455)
(596)
531
1,492
(2,591)
(103)
(159)
(684)
(792)
(597)
1,128
58
(10,408)
Sensitivity of capital and reserves
Under CRD IV, available-for-sale (‘AFS’) reserves are included as
part of CET1 capital. We measure the potential downside risk to
the CET1 ratio due to interest rate and credit spread risk in the
AFS portfolio by the portfolio’s stressed VaR, using a 99%
confidence level and an assumed holding period of one quarter.
At December 2016, the stressed VaR of the portfolio was
$3.2bn.
We monitor the sensitivity of reported cash flow hedging
reserves to interest rate movements on a monthly basis by
assessing the expected reduction in valuation of 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 exposure.
The following table describes the sensitivity of our cash flow
hedge 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
simplified scenarios.
Sensitivity of cash flow hedging reported reserves to interest rate movements
At 31 Dec 2016
+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 Dec 2015
+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
$m
(1,051)
(0.6)%
1,080
0.6%
(1,235)
(0.66 )%
1,224
0.65%
Maximum
impact
$m
Minimum
impact
$m
(1,173)
(0.7)%
1,080
0.6%
(1,259)
(0.67 )%
1,232
0.65%
(1,051)
(0.6)%
1,145
0.7%
(1,137)
(0.60 )%
1,133
0.60%
Third-party assets in Balance Sheet Management
Defined benefit pension schemes
For our BSM governance framework, see page 79 of ‘Risk management’.
Third-party assets in BSM increased by 9% during 2016.
Deposits with central banks increased by $28bn, predominantly
in North America and Europe, due to deployment of increased
commercial surplus, partly offset by decrease in the UK due to
foreign exchange movements as sterling depreciated against
the US dollar.
Financial investments increased by $17bn due to increases in
Europe and Asia, as commercial surplus was deployed into
government bonds.
Third-party assets in Balance Sheet Management
Cash and balances at central banks
Trading assets
Loans and advances:
– to banks
– to customers
Reverse repurchase agreements
Financial investments
Other
At 31 Dec
2016
$m
98,996
414
37,287
2,564
35,143
2015
$m
71,116
639
42,059
2,773
29,760
352,419
335,543
4,555
4,277
531,378
486,167
At 31 Dec
Average
Minimum
Maximum
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.
For details of our defined benefit schemes, including asset allocation, see
Note 5 on the Financial Statements, and for pension risk management
see page 84.
Additional market risk measures applicable only to the
parent company
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 2016 was as follows:
HSBC Holdings – foreign exchange VaR
2016
$m
32.1
44.4
32.1
58.2
2015
$m
45.6
42.3
32.9
47.1
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
118
HSBC Holdings plc Annual Report and Accounts 2016
statement. These loans, and most of the associated foreign
exchange exposures, are eliminated on consolidation.
Sensitivity of net interest income
HSBC Holdings monitors NII 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 NII 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 2016.
Assuming no management actions, a sequence of such rises
would increase planned NII for the next five years by $746m
(2015: increase of $247m), while a sequence of such falls would
decrease planned NII by $723m (2015: decrease of $266m).
Sensitivity of HSBC Holdings’ net interest income to interest rate movements56
US dollar bloc
Sterling bloc
Euro bloc
$m
$m
$m
Total
$m
Change in projected net interest income as at 31 Dec
arising from a shift in yield curves
2016
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
2015
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 126.
84
299
304
(84)
(299)
(304)
57
118
(23)
(57)
(118)
23
6
20
20
(4)
(13)
(19)
15
43
43
(14)
(43)
(43)
0
6
8
—
—
(1)
—
7
(12)
(6)
(22)
15
90
325
332
(88)
(312)
(324)
72
168
8
(77)
(183)
(5)
The interest rate sensitivities tabulated above are indicative
and based on simplified scenarios. The figures represent
hypothetical movements in NII 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 NII
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.
HSBC Holdings plc Annual Report and Accounts 2016
119
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | 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.
From over 1
to 5 years
From over 5
to 10 years
More than
10 years
Non-interest
bearing
$m
$m
$m
—
—
279
731
—
105
1,115
$m
—
—
405
8
—
—
413
—
—
—
—
—
—
—
Up to
1 year
$m
—
—
72,288
2,675
—
—
74,963
(105)
(1,109)
—
(7,344)
(12,588)
(6,422)
—
—
—
(4,199)
(2,997)
(11,708)
(3,916)
—
—
—
(5,413)
(57,089)
12,461
12,461
242
—
42,661
2,985
—
—
45,888
(781)
(1,741)
—
—
—
—
—
(2,522)
(22,748)
20,618
20,618
—
—
—
(3,267)
(2,000)
(9,445)
—
(13,608)
13,608
1,115
13,576
—
(26,296)
26,296
413
13,989
—
(19,783)
13,441
(6,342)
7,647
—
—
279
—
—
109
388
—
(3,239)
—
—
(3,374)
—
—
(6,613)
5,351
(874)
19,744
—
—
405
731
—
—
1,136
—
(7,032)
—
(963)
(3,500)
—
—
(11,495)
10,722
363
20,107
—
—
—
—
—
—
—
(4,312)
—
—
(9,119)
—
—
(13,332)
5,763
(7,569)
12,538
—
2,184
4,708
141
96,183
1,383
104,599
(2,052)
(2,682)
(5,018)
996
(1,628)
(488)
(105,118)
(115,990)
3,743
(7,647)
—
—
2,467
1,005
569
97,770
971
102,782
(1,371)
(3,628)
(2,278)
3
98
(1,642)
(107,414)
(116,232)
912
(12,538)
—
Repricing gap analysis of HSBC Holdings
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 Dec 2016
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 Dec 2015
Cumulative interest rate gap
Total
$m
—
2,184
77,680
3,555
96,183
1,488
181,090
(2,157)
(30,145)
(5,018)
(21,824)
(1,628)
(15,200)
(105,118)
(181,090)
242
2,467
44,350
4,285
97,770
1,080
150,194
(2,152)
(19,853)
(2,278)
(960)
(15,895)
(1,642)
(107,414)
(150,194)
—
—
—
120
HSBC Holdings plc Annual Report and Accounts 2016
Operational risk profile
Operational risk is the risk to achieving our strategy or
objectives as a result of inadequate or failed internal processes,
people and systems or from external events. It arises from day-
to-day operations or external events, and is relevant to every
aspect of our business.
Responsibility for minimising operational risk lies with HSBC’s
staff. All staff are required to manage the operational risks of
the business and operational activities for which they are
responsible.
A summary of our current policies and practices regarding the
management of operational risk is set out on page 80.
Operational risk exposures in 2016
HSBC continued to strengthen those controls that manage our
most material risks in 2016. Among other measures, we:
•
•
•
further embedded Global Standards into the operational
risk management framework to ensure that we know our
customers, ask the right questions and escalate concerns
to prevent financial crime;
implemented a number of initiatives to raise our standards
in relation to the conduct of our business, as described on
page 81 of the ‘Regulatory compliance risk management’
section;
increased monitoring and enhanced detective controls
to manage those fraud risks which arise from new
technologies and new ways of banking;
• strengthened internal security controls to prevent cyber-
attacks;
•
improved controls and security to protect customers when
using digital channels; and
• enhanced third-party risk management capability to enable
the consistent risk assessment of any third-party service.
Further information on the nature of these risks is provided in
‘Top and emerging risks’ on page 64.
Operational risk losses in 2016
Operational risk losses in 2016 are lower than in 2015, reflecting
a reduction in losses incurred relating to large legacy conduct-
related events. Conduct-related costs included in significant
items are outlined on page 62. The profile of operational risk
losses below shows the distribution of losses for 2015 and 2016
against event types.
Operational risk losses
Business disruption and system failures
Clients, products and business practices
Damage to physical assets
Employee practices and workplace safety
Execution, delivery and process management
External fraud
Internal fraud
Total
2016
2015
%
—
57
—
1
34
8
—
%
—
74
—
1
13
11
1
100
100
Insurance manufacturing operations risk profile
Insurance manufacturing operations risk in 2016
HSBC’s bancassurance model
Measurement
Key risk types
Market risk
Credit risk
Liquidity risk
Insurance risk
Page
121
121
121
123
123
124
124
125
Insurance manufacturing operations risk in 2016
The majority of the risk in our insurance business derives from
manufacturing activities and can be categorised as financial risk
or insurance risk. Financial risks include market risk, credit risk
and liquidity risk. Insurance risk is the risk, other than financial
risk, of loss transferred from the holder of the insurance
contract to the issuer (HSBC).
A summary of our current policies and practices regarding the
management of insurance risk is set out on page 82.
HSBC’s bancassurance model
We operate an integrated bancassurance model that provides
insurance products principally for customers with whom we
have a banking relationship.
The insurance contracts we sell relate to the underlying needs
of our banking customers, which we can identify from our
point-of-sale contacts and customer knowledge. The majority
of sales are of savings and investment products and term and
credit life contracts.
By focusing largely on personal and SME lines of business, we
are able to optimise volumes and diversify individual insurance
risks. We choose to manufacture these insurance products in
HSBC subsidiaries based on an assessment of operational scale
and risk appetite. Manufacturing insurance allows us to retain
the risks and rewards associated with writing insurance
contracts by keeping part of the underwriting profit and
investment income within the Group.
We have life insurance manufacturing subsidiaries in nine
countries (Argentina, mainland China, France, Hong Kong,
Malaysia, Malta, Mexico, Singapore and the UK). We also have
life insurance manufacturing associates in Saudi Arabia and
India.
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.
Insurance products are sold through all global businesses, but
predominantly by RBWM and CMB through our branches and
direct channels worldwide.
The sale of our Brazilian insurance operations completed on
1 July 2016. These operations were reported as part of the
disposal group held for sale at 31 December 2015.
Measurement
(Audited)
The risk profile of our insurance manufacturing businesses is
measured using an economic capital approach. Assets and
liabilities are measured on a market value basis, and a capital
requirement is defined to ensure that there is a less than one in
HSBC Holdings plc Annual Report and Accounts 2016
121
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
200 chance of insolvency over a one-year time horizon, given
the risks that the businesses are exposed to. The methodology
for the economic capital calculation is largely aligned to the
pan-European Solvency II insurance capital regulations, which
were applicable from January 2016. The economic capital
coverage ratio (economic net asset value divided by the
economic capital requirement) is a key risk appetite measure.
The business has a current appetite to remain above 140%
with a tolerance of 110%. In addition to economic capital, the
regulatory solvency ratio is also a metric used to manage risk
appetite on an entity basis.
The tables below show the composition of assets and liabilities
by contract type and by geographical region.
Balance sheet of insurance manufacturing subsidiaries by type of contract63
(Audited)
Financial assets
– trading assets
– financial assets designated at fair value
– derivatives
– financial investments – HTM
– financial investments – AFS
– other financial assets
Reinsurance assets
PVIF
Other assets and investment properties
Total assets
Liabilities under investment contracts designated at fair value
Liabilities under insurance contracts
Deferred tax
Other liabilities
Total liabilities
Total equity
Total liabilities and equity at 31 Dec 2016
Financial assets
– trading assets
– financial assets designated at fair value
– derivatives
– financial investments – HTM
– financial investments – AFS
– other financial assets
Reinsurance assets
PVIF
Other assets and investment properties
Total assets
Liabilities under investment contracts designated at fair value
Liabilities under insurance contracts
Deferred tax
Other liabilities
Total liabilities
Total equity
Total liabilities and equity at 31 Dec 2015
For footnotes, see page 126.
Footnotes
59
59
60
61
62
59
59
60
61
62
With
DPF
$m
57,004
—
12,134
212
25,867
14,359
4,432
498
—
1,716
59,218
—
58,800
13
—
58,813
—
58,813
53,521
—
11,119
160
22,840
15,077
4,325
202
—
1,726
55,449
—
55,023
11
—
55,034
—
55,034
Unit-linked
Other
contracts57
Shareholder
assets and
liabilities58
$m
8,877
—
8,592
2
—
—
283
322
—
5
9,204
2,197
6,949
3
—
9,149
—
9,149
8,840
—
8,435
1
—
—
404
264
—
7
9,111
2,256
6,791
—
—
9,047
—
9,047
$m
13,021
2
2,889
13
5,329
4,206
582
1,048
—
171
14,240
3,805
9,524
7
—
13,336
—
13,336
11,691
2
2,718
33
4,189
4,020
729
951
—
139
12,781
3,771
8,124
14
—
11,909
—
11,909
$m
5,141
—
684
46
2,919
1,355
137
—
6,502
525
12,168
—
—
1,166
1,805
2,971
10,561
13,532
5,531
—
1,015
62
3,050
1,233
171
—
5,685
4,576
15,792
—
—
1,056
5,553
6,609
10,534
17,143
Total
$m
84,043
2
24,299
273
34,115
19,920
5,434
1,868
6,502
2,417
94,830
6,002
75,273
1,189
1,805
84,269
10,561
94,830
79,583
2
23,287
256
30,079
20,330
5,629
1,417
5,685
6,448
93,133
6,027
69,938
1,081
5,553
82,599
10,534
93,133
122
HSBC Holdings plc Annual Report and Accounts 2016
Balance sheet of insurance manufacturing subsidiaries by geographical region63, 64
(Audited)
Financial assets
– trading assets
– financial assets designated at fair value
– derivatives
– financial investments – HTM
– financial investments – AFS
– other financial assets
Reinsurance assets
PVIF
Other assets and investment properties
Total assets
Liabilities under investment contracts designated at fair value
Liabilities under insurance contracts
Deferred tax
Other liabilities
Total liabilities
Total equity
Total liabilities and equity at 31 Dec 2016
Financial assets
– trading assets
– financial assets designated at fair value
– derivatives
– financial investments – HTM
– financial investments – AFS
– other financial assets
Reinsurance assets
PVIF
Other assets and investment properties
Total assets
Liabilities under investment contracts designated at fair value
Liabilities under insurance contracts
Deferred tax
Other liabilities
Total liabilities
Total equity
Total liabilities and equity at 31 Dec 2015
For footnotes, see page 126.
Key risk types
The key risk for the insurance operation is market risk, followed
by insurance risk. Credit and liquidity risk, while significant for
the bank, are minor for our insurance operations.
Market risk
(Audited)
Description and exposure
Market risk is the risk of changes in market factors affecting
HSBC’s capital or profit. Market factors include interest rates,
equity and growth assets, spread risk and foreign exchange
rates.
Our exposure varies depending on the type of contract issued.
Our most significant life insurance products are contracts with
discretionary participating features (‘DPF’) issued in France and
Hong Kong. These products typically include some form of
capital guarantee or guaranteed return on the sums invested
by the policyholders, to which discretionary bonuses are added
if allowed by the overall performance of the funds. These funds
are primarily invested in bonds, with a proportion allocated to
other asset classes to provide customers with the potential for
enhanced returns.
DPF products expose HSBC to the risk of variation in asset
returns, which will impact our participation in the investment
Footnotes
59
59
60
61
62
59
59
60
61
62
Europe
$m
26,238
—
10,171
187
—
13,812
2,068
362
711
871
28,182
1,321
24,310
238
841
26,710
1,472
28,182
26,897
—
9,987
163
—
14,525
2,222
287
807
919
28,910
1,376
24,699
274
832
27,181
1,729
28,910
Asia
$m
56,371
—
13,618
86
33,624
5,735
3,308
1,499
5,682
1,493
65,045
4,681
49,793
919
914
56,307
8,738
65,045
51,087
—
12,668
93
29,496
5,503
3,327
1,122
4,761
1,358
58,328
4,651
43,975
767
974
50,367
7,961
58,328
Latin
America
$m
1,434
2
510
—
491
373
58
7
109
53
1,603
—
1,170
32
50
1,252
351
1,603
1,599
2
632
—
583
302
80
8
117
4,171
5,895
—
1,264
40
3,747
5,051
844
5,895
Total
$m
84,043
2
24,299
273
34,115
19,920
5,434
1,868
6,502
2,417
94,830
6,002
75,273
1,189
1,805
84,269
10,561
94,830
79,583
2
23,287
256
30,079
20,330
5,629
1,417
5,685
6,448
93,133
6,027
69,938
1,081
5,553
82,599
10,534
93,133
performance. In addition, in some scenarios the asset returns
can become insufficient to cover the policyholders’ financial
guarantees, in which case the shortfall has to be met by HSBC.
Reserves are held against the cost of such guarantees,
calculated by stochastic modelling.
Where local rules require, these reserves are held as part
of liabilities under insurance contracts. Any remainder is
accounted for as a deduction from the present value of in-force
(‘PVIF’) long-term insurance business 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 cost of guarantees decreased to $625m (2015: $748m)
primarily due to changes to the profit-sharing mechanism on
DPF contracts with guarantees in Hong Kong, which primarily
reduced the cost of guarantees on portfolios reported in the
2.1% to 4.0% category. In addition, there was a movement in
cost of guarantees from the 2.1% to 4.0% category, to the 0.1%
to 2.0% category due to reducing average guarantees on certain
portfolios. The real annual return guarantees reported in 2015
relate to insurance operations in Brazil, which were sold on
1 July 2016.
HSBC Holdings plc Annual Report and Accounts 2016
123
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk
For unit-linked contracts, market risk is substantially borne
by the policyholder, but some market risk exposure typically
remains, as fees earned are related to the market value of the
linked assets.
Financial return guarantees63
(Audited)
Capital
Nominal annual return
Nominal annual return
Nominal annual return
Real annual return
At 31 Dec
For footnotes, see page 126.
Sensitivities
2016
2015
Investment
returns
implied by
guarantee
%
0.0
0.1 – 2.0
2.1 – 4.0
4.1 – 5.0
n/a
Footnotes
65
66
Current
yields
%
0.0 – 3.0
3.7 – 3.8
3.0 – 4.4
3.0 – 4.1
n/a
Cost of
guarantees
$m
59
64
426
76
n/a
625
Investment
returns
implied by
guarantee
%
0.0
0.1 – 1.9
2.0 – 4.0
4.1 – 5.0
0.0 – 6.0
Current
yields
%
0.0 – 3.8
3.9 – 3.9
3.8 – 4.0
3.8 – 4.1
5.9 – 6.1
Cost of
guarantees
$m
85
4
603
28
28
748
Changes in financial market factors, from the economic
assumptions in place at the start of the year, had a negative
impact on reported profit before tax of $386m (2015: $13m
negative). 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, the effects of the sensitivity tests on profit
after tax and equity incorporate the impact of the stress on the
PVIF. The relationship between the profit and total equity and
the risk factors is non-linear, therefore the results disclosed
should not be extrapolated to measure sensitivities to different
levels of stress. For the same reason, the impact of the stress is
not symmetrical on the upside and downside. The sensitivities
are stated before allowance for management actions which may
mitigate the effect of changes in the market environment. The
sensitivities presented allow for adverse changes in policyholder
behaviour that may arise in response to changes in market
rates.
Interest rate movements have a greater impact on total equity
as changes in market value of available-for-sale bonds are not
recognised in profit after tax.
Changes in sensitivity compared to 2015 were primarily driven
by the impact of decreasing yields in France on the projected
cost of options and guarantees and by the adoption of a more
market-aligned PVIF methodology in Singapore.
Sensitivity of HSBC’s insurance manufacturing subsidiaries to market risk factors
(Audited)
+100 basis point parallel shift in yield curves
–100 basis point parallel shift in yield curves
10% increase in equity prices
10% decrease in equity prices
10% increase in US dollar exchange rate compared with all currencies
10% decrease in US dollar exchange rate compared with all currencies
For footnote, see page 126.
Credit risk
(Audited)
Description and exposure
Footnote
67
2016
2015
Effect on
profit after tax
Effect on
total equity
Effect on profit
after tax
Effect on
total equity
$m
63
(182)
189
(191)
19
(19)
$m
(494)
490
190
(191)
19
(19)
$m
39
(213)
176
(158)
16
(16)
$m
(474)
404
176
(158)
16
(16)
exposure is primarily related to liabilities under non-linked
insurance and investment contracts and shareholders’ funds.
The credit quality of insurance financial assets is included in
the table on page 88.
Credit risk is the risk of financial loss if a customer or
counterparty fails to meet their obligation under a contract. It
arises in two main areas for our insurance manufacturers:
Liquidity risk
(Audited)
•
•
risk of default by debt security counterparties after investing
premiums to generate a return for policyholders and
shareholders; and
risk of default by reinsurance counterparties and non-
reimbursement for claims made after ceding insurance risk.
The amounts outstanding at the balance sheet date in respect
of these items are shown in the table on page 122.
The credit quality of the reinsurers’ share of liabilities under
insurance contracts is assessed as ‘satisfactory’ or higher (as
defined on page 74), with 100% of the exposure being neither
past due nor impaired (2015: 100%).
Credit risk on assets supporting unit-linked liabilities is
predominantly borne by the policyholder; therefore, our
124
HSBC Holdings plc Annual Report and Accounts 2016
Description and exposure
Liquidity risk is the risk that an insurance operation, though
solvent, either does not have sufficient financial resources
available to meet its obligations when they fall due, or can
secure them only at excessive cost.
The following table shows the expected undiscounted cash
flows for insurance liabilities at 31 December 2016. The liquidity
risk exposure is wholly borne by the policyholder in the case of
unit-linked business and is shared with the policyholder for non-
linked insurance.
The profile of the expected maturity of insurance contracts at
31 December 2016 remained comparable with 2015.
The remaining contractual maturity of investment contract
liabilities is included in Note 29.
Expected maturity of insurance contract liabilities63
(Audited)
Unit-linked
With DPF and Other contracts
At 31 Dec 2016
Unit-linked
With DPF and Other contracts
At 31 Dec 2015
For footnotes, see page 126.
Insurance risk
Description and exposure
Insurance risk is the risk of loss through adverse experience, in
either timing or amount, of insurance underwriting parameters
(non-economic assumptions). These parameters include
mortality, morbidity, longevity, lapses and unit costs.
The principal risk we face is that, over time, the cost of the
contract, including claims and benefits, may exceed the total
amount of premiums and investment income received.
The tables on pages 122 and 123 analyse our life insurance risk
exposures by type of contract and by geographical region.
The insurance risk profile and related exposures remain largely
consistent with those observed at 31 December 2015.
Sensitivities
(Audited)
The table below shows the sensitivity of profit and total equity
to reasonably possible changes in non-economic assumptions
across all our insurance manufacturing subsidiaries.
Mortality and morbidity risk is typically associated with life
insurance contracts. The effect on profit of an increase in
mortality or morbidity depends on the type of business being
written. Our largest exposures to mortality and morbidity risk
exist in Hong Kong and Singapore.
Within 1 year
1-5 years
5-15 years
Over 15 years
Expected cash flows (undiscounted)
$m
630
5,582
6,212
549
5,356
5,905
$m
2,468
23,136
25,604
2,164
22,796
24,960
$m
5,101
40,621
45,722
5,945
37,585
43,530
$m
9,513
40,447
49,960
11,080
38,649
49,729
Total
$m
17,712
109,786
127,498
19,738
104,386
124,124
Sensitivity to lapse rates depends on the type of contracts
being written. For a portfolio of term assurance, an increase in
lapse rates typically has a negative effect on profit due to the
loss of future income on the lapsed policies. However, some
contract lapses have a positive effect on profit due to the
existence of policy surrender charges. We are most sensitive
to a change in lapse rates on unit-linked and universal life
contracts in Hong Kong and Singapore, and DPF contracts
in France.
Expense rate risk is the exposure to a change in the cost
of administering insurance contracts. To the extent that
increased expenses cannot be passed on to policyholders,
an increase in expense rates will have a negative effect on
our profits.
Sensitivity analysis
(Audited)
Effect on profit after tax and total equity
at 31 Dec
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
2016
$m
2015
$m
(71)
75
(80)
93
(89)
87
(70)
75
(90)
102
(85)
83
HSBC Holdings plc Annual Report and Accounts 2016
125
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk / Capital
Footnotes to Risk
Liquidity and funding
47 The HSBC UK Liquidity Group 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 plc, HSBC Private Bank (UK) Ltd and HSBC Trust Company (UK)
Limited, managed as a single operating entity, in line with the application of
UK liquidity regulation as agreed with the UK PRA.
48 The Hongkong and Shanghai Banking Corporation – Hong Kong branch and
The Hongkong and Shanghai Banking Corporation – Singapore branch
represent the material activities of the Hongkong and Shanghai Banking
Corporation. Each branch is monitored and controlled for liquidity and
funding risk purposes as a stand-alone operating entity.
49 HSBC France and HSBC Canada represent the consolidated banking
operations of the Group in France and Canada, respectively. HSBC France
and HSBC Canada are each managed as single distinct operating entities for
liquidity purposes.
50 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.
Market risk
51 Trading portfolios comprise positions arising from the market-making and
warehousing of customer-derived positions.
52 Portfolio diversification is the market risk dispersion effect of holding a
portfolio containing different risk types. It represents the reduction in
unsystematic market risk that occurs when combining a number of different
risk types; for example, interest rate, equity and foreign exchange, together
in one portfolio. It is measured as the difference between the sum of the
VaR by individual risk type and the combined total VaR. A negative number
represents the benefit of portfolio diversification. As the maximum and
minimum occurs on different days for different risk types, it is not meaningful
to calculate a portfolio diversification benefit for these measures.
53 The total VaR is non-additive across risk types due to diversification effects.
54 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.
55 Investments held to facilitate ongoing business include holdings in
government-sponsored enterprises and local stock exchanges.
56 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 page 281, ‘Cautionary statement regarding forward-
looking statements’.
Risk management of insurance operations
57 ‘Other Contracts’ includes term assurance, credit life insurance, universal life
insurance and investment contracts not included in the ‘Unit-linked’ or ‘With
DPF’ columns.
58 At 31 December 2015, ‘Shareholder assets and liabilities’ included assets and
liabilities classified as held for sale in respect of the disposal of operations in
Brazil, which was completed on 1 July 2016. The assets, comprising mainly
debt and equity securities and PVIF, were reported within ‘Other assets and
investment properties’ and totalled $4.1bn. The liabilities classified as held for
sale, comprising mainly liabilities under insurance contracts and liabilities
under investment contracts, were reported within ‘Other liabilities’ and
totalled $3.7bn. No assets and liabilities relating to insurance businesses
were held for sale at 31 December 2016.
59 Financial investments held to maturity (‘HTM’) and available for sale (‘AFS’).
60 Comprise mainly loans and advances to banks, cash and inter-company
balances with other non-insurance legal entities.
61 Present value of in-force long-term insurance business.
62 ‘Deferred tax’ includes the deferred tax liabilities arising on recognition of
PVIF.
63 Does not include associated insurance companies SABB Takaful Company
and Canara HSBC Oriental Bank of Commerce Life Insurance Company
Limited.
64 HSBC has no insurance manufacturing subsidiaries in Middle East and North
Africa or North America.
65 A block of contracts in France with guaranteed nominal annual returns in the
range 1.25%-3.72% is reported entirely in the 2.1%-4.0% category in line with
the average guaranteed return of 2.6% offered to policyholders by these
contracts.
66 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.
67 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%.
126
HSBC Holdings plc Annual Report and Accounts 2016
Capital
Capital overview
Capital management
Capital
Risk-weighted assets
Leverage ratio
Capital highlights
Page
127
127
128
129
131
• Our common equity tier 1 (‘CET1’) ratio of 13.6% was up from
11.9% at the end of 2015, mainly due to a change in the regulatory
treatment of Bank of Communications Co., Limited ('BoCom').
• Our CET1 capital base reduced during the year by $14.3bn, driven
by unfavourable foreign currency movements of $7.7bn, a $5.6bn
reduction due to the BoCom change, and the $2.5bn share buy-
back.
• A decrease in RWAs in 2016 of $245.8bn from continued
implementation of RWA-reduction initiatives, the BoCom change
and favourable foreign currency movements, supported the increase
in capital ratios.
Capital overview
Capital ratios
CRD IV end point
Common equity tier 1 ratio
CRD IV transitional
Common equity tier 1 ratio
Tier 1 ratio
Total capital ratio
Footnote
1
1
At 31 Dec
2016
%
13.6
13.6
16.1
20.1
2015
%
11.9
11.9
13.9
17.2
Total regulatory capital and risk-weighted assets
CRD IV end point
Common equity tier 1 capital
CRD IV transitional
Common equity tier 1 capital
Additional tier 1 capital
Tier 2 capital
Total regulatory capital
Transitional risk-weighted assets
At 31 Dec
2016
$m
2015
$m
Footnote
1
1
1
115,984
130,863
116,552
130,863
21,470
34,336
22,440
36,530
172,358
189,833
857,181
1,102,995
1 Due to transitional provisions in the threshold deduction our CET1 and RWAs are
different for transitional and end point. At 31 December 2016, end point RWAs
were $855.8bn.
RWAs by risk types
Credit risk
Counterparty credit risk
Market risk
Operational risk
At 31 Dec 2016
RWAs
$bn
655.7
62.0
41.5
98.0
857.2
Capital required 1
$bn
52.5
5.0
3.3
7.8
68.6
1
‘Capital required’ represents the Pillar 1 capital charge at 8% of RWAs.
Capital management
(Audited)
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.
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. It is our
objective to maintain a strong capital base to support the risks
inherent in our business and invest in accordance with our
strategy, meeting both consolidated and local regulatory capital
requirements at all times. Our policy on capital management is
underpinned by a capital management framework and our
internal capital adequacy assessment process (‘ICAAP’), which
enables us to manage our capital in a consistent manner. The
framework incorporates a number of different capital measures
calculated on an economic capital and regulatory capital basis.
The internal capital adequacy assessment process brings
together regulatory and internal capital resources and
requirements with HSBC’s business model, strategy,
performance and planning, risks to capital, and the implications
of stress testing to assess the bank’s capital position.
Our assessment of capital adequacy is aligned to our
assessment of risks. These include credit, market, operational,
pensions, insurance, structural foreign exchange risk, residual
risks and interest rate risk in the banking book.
Planning and performance
Capital plans and RWA plans form part of the Annual Operating
Plan that is approved by the Board. Revised RWA forecasts are
submitted to the GMB on a monthly basis and reported RWAs
are monitored against plan.
The responsibility for global capital allocation principles and
decisions rests with the Group Finance Director. 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 to support growth objectives where
above hurdle returns have been identified and their regulatory
and economic capital needs.
We manage business returns by use of a return on risk-
weighted assets (‘RoRWA’) measure. In 2016, we augmented
this through the introduction of financial information and
metrics on the consumption of, and returns on, capital by global
business to support management’s assessment of business
performance and the allocation of capital resources. We plan
to further embed this in 2017.
Risks to capital
Outside the stress testing framework, other risks may be
identified that have the potential to affect our RWAs and/or
capital position. The downside or upside scenarios are assessed
against our capital management objectives and mitigating
actions are assigned as necessary.
Stress testing
In addition to an annual internal stress test, the Group is subject
to supervisory stress testing in many jurisdictions. Supervisory
stress testing 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 and our internal stress test when
assessing our internal capital requirements. The outcome of
stress testing exercises carried out by the PRA will also feed
HSBC Holdings plc Annual Report and Accounts 2016
127
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Capital
into a PRA buffer under the Pillar 2 requirements, where
required.
Capital generation
HSBC Holdings is the 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
Transitional own funds disclosure
(Audited)
Ref*
Common equity tier 1 (‘CET1’) capital: instruments and reserves
1 Capital instruments and the related share premium accounts
– ordinary shares
2 Retained earnings1
3 Accumulated other comprehensive income (and other reserves)1
5 Minority interests (amount allowed in consolidated CET1)
5a Independently reviewed interim net profits net of any foreseeable charge or dividend1
6 Common equity tier 1 capital before regulatory adjustments
Common equity tier 1 capital: regulatory adjustments
7 Additional value adjustments
8 Intangible assets (net of related deferred tax liability)
10 Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax
liability)
11 Fair value reserves related to gains or losses on cash flow hedges
12 Negative amounts resulting from the calculation of expected loss amounts
14 Gains or losses on liabilities at fair value resulting from changes in own credit standing
15 Defined-benefit pension fund assets
16 Direct and indirect holdings of own CET1 instruments
19 Direct, indirect and synthetic holdings by the institution of the CET1 instruments of financial sector entities where the
institution has a significant investment in those entities (amount above 10% threshold and net of eligible short positions)
28 Total regulatory adjustments to common equity tier 1
29 Common equity tier 1 capital
Additional tier 1 (‘AT1’) capital: instruments
30 Capital instruments and the related share premium accounts
31 – classified as equity under IFRSs
33 Amount of qualifying items and the related share premium accounts subject to phase out from AT1
34 Qualifying tier 1 capital included in consolidated AT1 capital (including minority interests not included in CET1) issued by
subsidiaries and held by third parties
35 – of which: instruments issued by subsidiaries subject to phase out
36 Additional tier 1 capital before regulatory adjustments
Additional tier 1 capital: regulatory adjustments
37 Direct and indirect holdings of own AT1 instruments
41b Residual amounts deducted from AT1 capital with regard to deduction from tier 2 (‘T2’) capital during the transitional period
– direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities
where the institution has a significant investment in those entities
43 Total regulatory adjustments to additional tier 1 capital
44 Additional tier 1 capital
45 Tier 1 capital (T1 = CET1 + AT1)
Tier 2 capital: instruments and provisions
46 Capital instruments and the related share premium accounts
47 Amount of qualifying items and the related share premium accounts subject to phase out from T2
48 Qualifying own funds instruments included in consolidated T2 capital (including minority interests and AT1 instruments not
included in CET1 or AT1) issued by subsidiaries and held by third parties
49 – of which: instruments issued by subsidiaries subject to phase out
51 Tier 2 capital before regulatory adjustments
Tier 2 capital: regulatory adjustments
52 Direct and indirect holdings of own T2 instruments
55 Direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where
the institution has a significant investment in those entities (net of eligible short positions)
57 Total regulatory adjustments to tier 2 capital
58 Tier 2 capital
59 Total capital (TC = T1 + T2)
At 31 Dec
2016
$m
21,310
21,310
2015
$m
20,858
20,858
125,442
122,304
560
3,878
(1,899)
8,832
3,519
8,670
149,291
164,183
(1,358)
(15,037)
(1,151)
(20,650)
(1,696)
(52)
(4,025)
1,052
(3,680)
(1,573)
(1,204)
(52)
(4,920)
(495)
(4,009)
(839)
(6,370)
(32,739)
116,552
—
(33,320)
130,863
11,259
11,259
7,946
2,419
1,522
21,624
(60)
(94)
(94)
(154)
9,261
9,261
8,972
4,388
2,842
22,621
(60)
(121)
(121)
(181)
21,470
138,022
22,440
153,303
16,732
5,695
12,323
12,283
34,750
(40)
(374)
(414)
15,863
6,645
14,344
14,330
36,852
(40)
(282)
(322)
34,336
172,358
36,530
189,833
*
1
The references identify the lines prescribed in the EBA template, which are applicable and where there is a value.
In the comparative period, profits and other comprehensive income have been reallocated from row 2 into rows 5a and 3 respectively. In addition, retained earnings and profits
pertaining to the deconsolidation of insurance and other entities have been reallocated from row 3 to rows 2 and 5a.
128
HSBC Holdings plc Annual Report and Accounts 2016
Throughout 2016, we complied with the Prudential Regulation
Authority’s (‘PRA’) regulatory capital adequacy requirements,
including those relating to stress testing.
Following a clarification of policy by the PRA, at 30 September
2016 the regulatory treatment of our investment in BoCom
changed from proportional consolidation of RWAs to a
deduction from capital (subject to regulatory thresholds).
The revised regulatory treatment is more consistent with our
financial reporting treatment, aligning with the equity method
of accounting, and better reflects our relationship with BoCom,
including the nature of our obligations and financial
commitments.
CET1 capital decreased during the year by $14.3bn, primarily
because of:
• unfavourable foreign currency translation differences of
$7.8bn;
• a $5.6bn reduction from the change in treatment of BoCom;
and
•
the $2.5bn share buy-back.
These decreases were partly offset by:
• $2.4bn from the sale of our operations in Brazil.
Risk-weighted assets
RWAs
RWAs decreased in 2016 by $245.8bn, of which $38.1bn was
due to foreign currency translation differences. RWA initiatives
reduced RWAs by $143.2bn, partly offset by book size
movements increasing RWAs by $38.7bn. The change of
regulatory treatment of our investment in BoCom reduced
RWAs by $120.9bn.
The following comments describe RWA movements in 2016,
excluding foreign currency translation differences.
RWA initiatives
The main drivers of these reductions were:
• $69.8bn as a result of reduced exposures, refined
calculations and process improvements;
• $41.8bn from the sale of our activities in Brazil; and
• $31.6bn through the continued reduction in Legacy Credit
and US run-off portfolios.
Book size
Book size movements increased RWAs by $38.7bn, principally
from:
•
increased corporate lending in GB&M and CMB, increasing
RWAs by $32bn in Asia and Europe;
• movements in market parameters increasing counterparty
credit risk and market risk by $11.7bn; and
• offset by a decrease in operational risk RWAs of $3.4bn
reflecting the decrease of average income over three years.
RWAs by global business
Credit risk
Counterparty credit risk
Market risk
Operational risk
At 31 Dec 2016
Credit risk
Counterparty credit risk
Market risk
Operational risk
At 31 Dec 2015
RWAs by geographical region
Credit risk
Counterparty credit risk
Market risk1
Operational risk
At 31 Dec 2016
Credit risk
Counterparty credit risk
Market risk
Operational risk
At 31 Dec 2015
RBWM
$bn
84.6
—
—
30.5
115.1
99.7
—
—
31.0
130.7
Europe
$bn
205.8
30.9
30.8
30.9
298.4
231.6
31.9
30.5
33.2
327.2
CMB
$bn
250.6
—
—
25.3
275.9
278.1
—
—
24.1
302.2
Asia
$bn
260.0
16.1
21.3
36.6
334.0
373.6
17.1
21.9
47.1
459.7
GB&M
$bn
170.8
59.1
38.5
32.0
300.4
189.6
64.3
40.7
35.7
330.3
GPB
$bn
12.2
0.2
—
2.9
15.3
14.4
0.3
—
3.3
18.0
Corporate
Centre
$bn
137.5
2.7
3.0
7.3
150.5
294.1
4.6
1.8
21.3
321.8
MENA
North
America
Latin
America
$bn
49.0
1.2
1.4
7.5
59.1
59.2
2.0
1.5
7.9
70.6
$bn
118.5
12.6
6.8
12.8
150.7
156.4
14.6
6.5
14.1
191.6
$bn
22.4
1.2
0.5
10.2
34.3
55.1
3.6
1.6
13.1
73.4
Total
$bn
655.7
62.0
41.5
98.0
857.2
875.9
69.2
42.5
115.4
1,103.0
Total
$bn
655.7
62.0
41.5
98.0
857.2
875.9
69.2
42.5
115.4
1,103.0
1
RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.
HSBC Holdings plc Annual Report and Accounts 2016
129
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Capital
RWA movement by global business by key driver
RWAs at 1 Jan 2016
RWA movements
RWA initiatives
Foreign exchange movement
Acquisitions and disposals
Book size
Book quality
Model updates
– portfolios moving onto IRB1 approach
– new/updated models
Methodology and policy
– internal updates
– external updates – regulatory
Total RWA movement
RWAs at 31 Dec 2016
1
Internal ratings based.
RWA movement by geographical region by key driver
RWAs at 1 Jan 2016
RWA movements
RWA initiatives
Foreign exchange movement
Acquisitions and disposals
Book size
Book quality
Model updates
– portfolios moving onto IRB1 approach
– new/updated models
Methodology and policy
– internal updates
– external updates – regulatory
Total RWA movement
RWAs at 31 Dec 2016
1
Internal ratings based.
Credit risk, counterparty credit risk and operational risk
RBWM
$bn
130.8
(10.1)
(4.1)
—
0.7
(1.5)
(0.9)
—
(0.9)
0.2
1.0
(0.8)
(15.7)
115.1
CMB
$bn
302.1
(39.0)
(15.7)
—
16.6
7.7
—
—
—
4.2
4.2
—
(26.2)
275.9
GB&M
$bn
289.6
(48.1)
(10.1)
—
22.9
8.5
(0.1)
(0.1)
—
(0.8)
(0.8)
—
(27.7)
261.9
GPB
$bn
18.0
(0.3)
(0.7)
—
(1.5)
—
—
—
—
(0.2)
(0.2)
—
(2.7)
15.3
Corporate
Centre
$bn
320.0
Market
risk
$bn
42.5
Total
RWAs
$bn
1,103.0
(39.8)
(7.5)
—
(4.9)
0.3
—
—
—
(120.6)
(1.0)
(119.6)
(172.5)
147.5
(5.9)
—
—
4.9
—
—
—
—
—
—
—
(1.0)
41.5
(143.2)
(38.1)
—
38.7
15.0
(1.0)
(0.1)
(0.9)
(117.2)
3.2
(120.4)
(245.8)
857.2
Credit risk, counterparty credit risk and operational risk
Europe
$bn
296.7
(28.4)
(26.9)
—
20.4
4.1
0.2
(0.1)
0.3
1.5
2.6
(1.1)
(29.1)
267.6
Asia
$bn
437.8
(19.1)
(7.8)
—
12.6
7.6
—
—
—
(118.4)
0.6
(119.0)
(125.1)
312.7
MENA
$bn
69.1
North
America
$bn
185.0
Latin
America Market risk
Total RWAs
$bn
71.9
$bn
42.5
$bn
1,103.0
(3.6)
(6.5)
—
(1.4)
0.2
—
—
—
(0.1)
(0.1)
—
(11.4)
57.7
(43.6)
(42.6)
0.9
—
0.2
2.8
(1.2)
—
(1.2)
(0.2)
(0.2)
—
(41.1)
143.9
2.2
—
2.0
0.3
—
—
—
—
0.3
(0.3)
(38.1)
33.8
(5.9)
—
—
4.9
—
—
—
—
—
—
—
(1.0)
41.5
(143.2)
(38.1)
—
38.7
15.0
(1.0)
(0.1)
(0.9)
(117.2)
3.2
(120.4)
(245.8)
857.2
130
HSBC Holdings plc Annual Report and Accounts 2016
Leverage ratio
Leverage ratio
Ref*
21 Total leverage ratio exposure
20 Tier 1 capital (end point)
22 Leverage ratio
At 31 Dec
2016
$bn
2,354.4
127.3
5.4%
2015
$bn
2,794.4
140.2
5.0%
EU-23 Choice on transitional arrangements for the definition of the capital measure
Fully phased in
Fully phased in
Total leverage ratio exposure – quarterly average
Leverage ratio – quarterly average
*
The references identify the lines prescribed in the EBA template.
Our leverage ratio calculated on CRR basis was 5.4% at
31 December 2016, up from 5.0% at 31 December 2015.
This was mainly due to a reduction in the exposure measure
resulting from the change in regulatory treatment of our
investment in BoCom.
The Group’s UK leverage ratio on a modified basis, excluding
qualifying central bank balances, was 5.7%. This modification
to the leverage ratio exposure measure was made following
recommendations by the Bank of England’s Financial Policy
Committee.
The Financial Policy Committee has stated that it intends to
recalibrate the leverage ratio in 2017 to take account of this
modification. HSBC’s UK leverage ratio on a modified basis
should be considered in this context.
2,438.7
5.4%
2,869.4
5.0%
At 31 December 2016, our UK minimum leverage ratio
requirement of 3% was supplemented by an additional leverage
ratio buffer of 0.2%. This additional buffer translates to a value
of $5bn. The countercyclical leverage ratio buffer results in no
capital impact. We comfortably exceeded these leverage
requirements.
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
publication, at least annually, of wide-ranging information on
their risks, capital and management. Pillar 3 Disclosures 2016
is published on our website, www.hsbc.com, under Investor
Relations.
HSBC Holdings plc Annual Report and Accounts 2016
131
Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Corporate Governance
Corporate Governance Report
The Board
The Board aims to promote the Group’s long-term success,
deliver sustainable value to shareholders and promote a culture
of openness and debate.
Led by the Group Chairman, the Board sets the Group’s strategy
and risk appetite. It also approves capital and operating plans
for achieving strategic objectives, on the recommendation of
management.
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, regulations and HSBC Holdings’
Articles of Association (the ‘Articles of Association’).
Although the Board delegates day-to-day management of the
business and implementation of strategy to the Group Chief
Executive, certain matters, including annual operating plans,
risk appetite and performance targets, procedures for
monitoring and control of operations, approval of credit or
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 are reserved by the Board for
approval.
Executive Directors
The Group Chairman, the Group Chief Executive, the Group
Finance Director and the Group Chief Risk Officer are HSBC
employees.
Non-executive Directors
The Board comprises a majority of independent non-executive
Directors. Their role is to constructively challenge, scrutinise the
performance of management and help develop proposals on
strategy. They also review the performance of management in
meeting agreed goals and objectives and monitor the Group’s
risk profile.
The Board considers all non-executive Directors to be
independent of HSBC. The Board has concluded that there are
no relationships or circumstances likely to affect any individual
non-executive Director’s judgement. To satisfy the Rules
Governing the Listing of Securities on the HKEx, all non-
executive Directors have provided confirmation of their
independence during the year. Sam Laidlaw 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 and the Hong Kong Corporate
Governance Code. The Board has determined Sam Laidlaw to
be independent in character and judgement, notwithstanding
his length of service, taking into account his continuing level of
constructive challenge of management and strong contribution
to Board discussions. He will, however, be retiring from the
Board at the conclusion of the forthcoming AGM.
Role and support of Directors
The roles of Group Chairman and Group Chief Executive are
separate, with a clear division of responsibilities between the
running of the Board and executive responsibility for running
HSBC’s business. Their respective roles are set out in writing
and are available on the website at www.hsbc.com/about-hsbc/
corporate-governance/board-committees, along with the role
description of the Senior Independent Director (‘SID’).
Statement of compliance
The Board
Director and Group Managing Director biographies
Appointment and induction of Directors
Operation of the Board
Conflicts of interest and indemnification
Board performance evaluation
Shareholder engagement and the AGM
Board committees
Internal control
Going concern and viability
Share capital and other disclosures
Employees
Page
132
132
133
138
138
138
138
139
140
145
146
147
150
Statement of compliance
The statement of corporate governance practices set out on
pages 132 to 182 and the information referred to therein
constitutes the Corporate Governance Report of HSBC
Holdings. The websites referred to do not form part of
this Report.
Relevant corporate governance codes
UK Corporate Governance Code
www.frc.org.uk
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)
Descriptions of the roles and
responsibilities of the:
– Group Chairman
– Group Chief Executive
– Senior Independent Director
www.hkex.com.hk
www.hsbc.com/about-hsbc/corporate-
governance/board-committees
Board and senior management
www.hsbc.com/about-hsbc/leadership
Roles and responsibilities of the
Board and its committees
www.hsbc.com/about-hsbc/corporate-
governance/board-committees
Board’s policies on:
– Diversity
– Shareholder communication
Global Internal Audit Charter
www.hsbc.com/investor-relations/
governance/corporate-governance-
codes
www.hsbc.com/investor-relations/
governance/internal-control
HSBC is subject to corporate governance requirements in both
the UK and Hong Kong. During 2016, HSBC complied with the
applicable provisions of the UK Corporate Governance Code,
and also the requirements of the Hong Kong Corporate
Governance Code.
Under the Hong Kong Code the Audit Committee should be
responsible for the oversight of all risk management and
internal control systems. HSBC’s Group Risk Committee is
responsible for oversight of internal control, other than internal
control over financial reporting, and risk management systems.
This is permitted under the UK Corporate Governance Code.
The Board has codified obligations for transactions in HSBC
Group securities in accordance with the requirements of the
Market Abuse Regulation and the rules governing the listing of
securities on The Stock Exchange of Hong Kong Limited
(‘HKEx’), save that the HKEx has granted waivers from strict
compliance with the rules that take into account accepted
practices in the UK, particularly in respect of employee share
plans. HSBC is in discussion with the HKEx to update these
waivers to take account of the Market Abuse Regulation.
Following specific enquiry, each Director has confirmed that he
or she has complied with their obligations in respect of
transacting in Group securities during the year.
132
HSBC Holdings plc Annual Report and Accounts 2016
Executive Directors
Douglas Flint, CBE, 61
Group Chairman
Appointed to the Board: December 1995
Group Chairman since December 2010
Skills and experience: Douglas has extensive board-level
experience and knowledge of governance primarily having
served on the boards of HSBC and BP plc, and as a partner of
KPMG. He has expertise in finance and risk management in
banking, multinational financial reporting, treasury and
securities trading operations. He joined HSBC as Group Finance
Director in 1995 and, prior to becoming Chairman in 2010, his
responsibilities broadened to Chief Financial Officer, and
Executive Director for Risk and Regulation.
He is a member of the Institute of Chartered Accountants of
Scotland and a Fellow of the Chartered Institute of Management
Accountants.
Current appointments include: Board member of the
Institute of International Finance, member of the International
Business Leaders Advisory Councils of the mayors of both
Beijing and Shanghai, a UK Business Ambassador at the
invitation of the UK Prime Minister, non-executive Chairman of
the Just Finance Foundation, trustee of the Royal Marsden
Cancer Charity Board and a member of its Investment
Committee.
Stuart Gulliver, 57
Group Chief Executive
Appointed to the Board: May 2008
Group Chief Executive since January 2011
appointments include director of Hang Seng Bank Limited;
Chief Financial Officer, HSBC Asia-Pacific. Before joining HSBC,
Iain worked at General Electric (‘GE’), serving as Controller of its
Global Consumer Finance Unit, Chief Financial Officer of GE
Consumer Finance Americas, and Chief Financial Officer of GE
Healthcare – Global Diagnostic Imaging. Iain is a member of the
Institute of Chartered Accountants of Scotland.
Current appointments include: Member of the Board of
Trustees of the British Heart Foundation and chairman of its
audit and risk committee.
Marc Moses, 59
Group Chief Risk Officer
Appointed to the Board: January 2014
Skills and experience: Marc joined HSBC in 2005 as Chief
Financial and Risk Officer for Global Banking and Markets, and
in December 2010 became Group Chief Risk Officer. He has
extensive risk management and financial experience. Marc is a
Fellow of the Institute of Chartered Accountants in England and
Wales. He was European chief financial officer at J.P. Morgan
and an audit partner at PricewaterhouseCoopers.
Independent non-executive Directors
Phillip Ameen, 68
Independent non-executive Director
Appointed to the Board: January 2015
Skills and experience: Stuart has more than 36 years’
international banking experience, having joined HSBC in 1980.
He played a leading role in developing and expanding Global
Banking and Markets, and has held key roles in the Group’s
operations worldwide, working in London, Hong Kong, Tokyo,
Kuala Lumpur and the United Arab Emirates. Former
appointments include Chairman of HSBC Bank plc, HSBC Bank
Middle East Limited, HSBC Private Banking Holdings (Suisse)
SA and HSBC France. He was also Deputy Chairman of HSBC
Trinkaus & Burkhardt AG and a member of its supervisory
board.
Current appointments include: Chairman of the Group
Management Board, and The Hongkong and Shanghai Banking
Corporation Limited.
Iain Mackay, 55
Group Finance Director
Appointed to the Board: December 2010
Member of the Group Audit Committee.
Skills and experience: As a Certified Public Accountant with
extensive financial and accounting experience, Phillip served as
Vice President, Comptroller, and Principal Accounting Officer of
GE. Prior to joining General Electric, he was a partner of KPMG.
He also 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 and the Financial Accounting Standards Board
Emerging Issues Task Force. He was also Chairman of the
Committee on Corporate Reporting of Financial Executives
International, Chairman of Skyonic Corporation and a trustee of
the Financial Accounting Foundation.
Current appointments include: A non-executive director of
HSBC North America Holdings Inc., HSBC Bank USA N.A.,
HSBC Finance Corporation and HSBC USA Inc.
Kathleen Casey, 50
Independent non-executive Director
Appointed to the Board: March 2014
Skills and experience: Iain has extensive financial and
international experience, having worked in London, Paris, the
US, Africa and Asia. He joined HSBC in 2007 as Chief Financial
Officer of HSBC North America Holdings Inc. Other former
Member of the Group Audit Committee and the Financial System
Vulnerabilities Committee.
HSBC Holdings plc Annual Report and Accounts 2016
133
Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the Directors | Corporate Governance
Skills and experience: Kathleen has extensive financial
regulatory policy experience. She is a former Commissioner of
the US Securities and Exchange Commission, and acted as its
principal representative in multilateral and bilateral regulatory
dialogues with the G-20 Financial Stability Board and the
International Organisation of Securities Commissions. Other
former appointments include Staff Director and Counsel to the
United States Senate Committee on Banking, Housing, and
Urban Affairs; Chair of the Alternative Investment Management
Association; and Legislative Director and Chief of Staff for a
US Senator.
Current appointments include: Senior adviser to Patomak
Global Partners and to a number of public bodies in the US.
Laura Cha, GBS, 67
Independent non-executive Director
Appointed to the Board: March 2011
Chair of the Philanthropic & Community Investment Oversight
Committee, 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. Other
former appointments include serving as a non-executive director
of Bank of Communications Co., Limited; Hong Kong
Exchanges and Clearing Limited; and Tata Consultancy Services
Limited. She also served as chair of the University Grants
Committee in Hong Kong, and was Deputy Chairman of the
Securities and Futures Commission in Hong Kong.
Current appointments include: A non-executive Deputy
Chairman of The Hongkong and Shanghai Banking Corporation
Limited, Chairman of Hong Kong’s Financial Services
Development Council and a non-executive director of China
Telecom Corporation Limited, Unilever PLC and Unilever N.V.
Henri de Castries, 62
Independent non-executive Director
Appointed to the Board: March 2016
Skills and experience: Henri has more than 25 years’
international experience in the financial services industry. He
joined AXA in 1989 and his roles included responsibility for
the group’s asset management, financial and real-estate
businesses, the oversight of North American and UK operations,
and the preparation and execution of all the group’s major
mergers and acquisitions undertaken in the 1990s. Henri
retired as Chairman and Chief Executive Officer of AXA SA on
1 September 2016. Other former appointments include serving
as a director of AllianceBernstein Corporation.
Current appointments include: Chairman of Institut
Montaigne, a French think-tank; non-executive director of
Nestlé S.A. and a non-executive director of the French National
Foundation for Political Science.
134
HSBC Holdings plc Annual Report and Accounts 2016
Lord Evans of Weardale, 59
Independent non-executive Director
Appointed to the Board: August 2013
Chairman of the Financial System Vulnerabilities Committee,
and a member of the Conduct & Values Committee and the
Philanthropic & Community Investment Oversight Committee.
Skills and experience: Jonathan has extensive experience
in national security policy and operations. He was formerly
Director General of the UK’s Security Service (MI5) with
responsibility for its leadership, policy and strategy, and areas
including international and domestic counter-terrorism, counter-
espionage and counter-proliferation activities, and
cybersecurity. Jonathan held various positions during a 30-year
career in the Security Service, which included responsibility
for the oversight of the Joint Terrorist Analysis Centre and the
Centre for the Protection of National Infrastructure, and
attending the National Security Council.
Current appointments include: A non-executive director of
Ark Data Centres and an adviser to various cybersecurity and
technology companies.
Joachim Faber, 66
Independent non-executive Director
Appointed to the Board: March 2012
Chairman of the Group Risk Committee.
Skills and experience: Joachim has extensive international
experience in banking and asset management. He is a former
Chief Executive Officer of Allianz Global Investors AG and is
a member of the management board of Allianz SE. He spent
14 years with Citicorp, holding positions in Trading and Project
Finance, and as Head of Capital Markets for Europe, North
America and Japan. He was also chairman of various Allianz
subsidiaries. He was previously a member 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.
Current appointments include: Chairman of the supervisory
board of Deutsche Börse AG and the Shareholder Committee of
Joh. A. Benckiser SARL, and a director of Coty Inc. and Allianz
France S.A.
Sam Laidlaw, 61
Independent non-executive Director
Appointed to the Board: January 2008
Chairman of the Group Remuneration Committee and the
Nomination Committee.
Skills and experience: Sam has had responsibility for
businesses in four continents and has particular experience in
the energy sector. He was Chief Executive Officer of Centrica
plc and lead non-executive board member of the UK
Department for Transport. He was also an Executive Vice
President of Chevron Corporation and a member of the UK
Prime Minister’s Business Advisory Group. He is a qualified
solicitor with a Master’s in business administration.
Current appointments include: Chair of the National Centre
for Universities and Business, Chair of the Global Leadership
Council for the Saïd Business School and Executive Chairman of
Neptune Oil & Gas Limited. Sam was also appointed as a non-
executive director of Rio Tinto plc and Rio Tinto Limited on 10
February 2017.
Skills and experience: Rachel was Deputy Governor of the
Bank of England, and Permanent Secretary at the UK
Government Departments for Transport and Work and Pensions,
and the Welsh Office. She was a non-executive director of
Reinsurance Group of America Inc. and The Scottish American
Investment Company P.L.C.
Current appointments include: A
of Arcus European Infrastructure Fund GP LLP, Heathrow
Airport Holdings Limited, SETL Development Limited and Serco
Group plc, as well as Chairman of the latter’s corporate
responsibility committee.
director
Irene Lee, 63
Independent non-executive Director
Appointed to the Board: July 2015
Heidi Miller, 63
Independent non-executive Director
Appointed to the Board: September 2014
Skills and experience: Irene has more than 30 years’ finance
industry experience, having held senior investment banking and
fund management positions in the UK, the US and Australia,
including positions at Citibank and the Commonwealth Bank
of Australia. Other former appointments include serving as a
member of the Advisory Council of J.P. Morgan Australia and
the Australian Takeovers Panel.
Current appointments include: Executive Chairman of Hysan
Development Company Limited and a non-executive director of
The Hongkong and Shanghai Banking Corporation Limited,
Hang Seng Bank Limited, Cathay Pacific Airways Limited, CLP
Holdings Limited and Noble Group Limited.
John Lipsky, 70
Independent non-executive Director
Appointed to the Board: March 2012
Member of the Group Risk Committee, the Nomination
Committee and the Group Remuneration Committee.
Skills and experience: John worked for J.P. Morgan 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
Special Adviser. Other former appointments include serving as a
trustee of the Economic Club of New York, a Global Policy
Adviser for Anderson Global Macro, LLC and Chairman of the
World Economic Forum’s Global Agenda Council on the
International Monetary System.
Current appointments include: Senior appointments and
advisory positions in international economic research
organisations.
Rachel Lomax, 71
Senior Independent Director
Appointed to the Board: December 2008
Senior Independent Director since April 2015
Chair of the Conduct & Values Committee, and a member of
the Group Risk Committee and the Nomination Committee.
Member of the Group Risk Committee.
Skills and experience: Heidi is a former President of
International at JP Morgan Chase, and was responsible for
leading the global expansion and the international business
strategy across its investment bank, asset management, and
treasury and securities services divisions. She was also a non-
executive director of Merck & Co., Inc. and Progressive Corp.;
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.
Current appointments include: Chair of HSBC North
American Holdings Inc., a non-executive director of First Data
Corporation and General Mills Inc., and an advisory director of
SRS Acquiom LLC.
David Nish, 56
Independent non-executive Director
Appointed to the Board: May 2016
Member of the Group Audit Committee.
Skills and experience: David served as Chief Executive Officer
of Standard Life plc between 2010 and 2015, having joined as
Finance Director in 2006. David led its investment in technology,
complementary acquisitions and the disposal of the group’s
Canadian operations. Other former appointments include Group
Finance Director of Scottish Power plc, non-executive director of
HDFC Life (India) and partner of Price Waterhouse. He is a
qualified chartered accountant.
Current appointments include: A non-executive director of
Vodafone plc, London Stock Exchange Group plc, UK Green
Investment Bank plc and Zurich Insurance Group.
Jonathan Symonds, CBE, 57
Independent non-executive Director
Appointed to the Board: April 2014
Chairman of the Group Audit Committee and a member of the
Conduct & Values Committee.
HSBC Holdings plc Annual Report and Accounts 2016
135
Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Paul Walsh, 61
Independent non-executive Director
Appointed to the Board: January 2016
Member of the Group Remuneration Committee and the Group
Nomination Committee.
Skills and experience: Paul was Group Chief Executive of
Diageo plc for 12 years, having originally joined the Board of its
predecessor, Grand Metropolitan plc, in 1995. He was also a
non-executive director of Unilever PLC, United Spirits Limited
and Centrica plc. Paul is a Fellow of the Chartered Institute of
Management Accountants.
Current appointments include: Non-executive Chairman of
Compass Group PLC, Avanti Communications Group Plc and
Chime Communications Limited, and a non-executive director of
FedEx Corporation and RM2 International S.A.
Group Company Secretary
Ben Mathews, 49
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.
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, and for advising the Board on
corporate governance matters.
Under the direction of the Group Chairman, the Group Company
Secretary is responsible for 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.
Report of the Directors | Corporate Governance
Skills and experience: Jonathan is a former Chief Financial
Officer of Novartis AG and AstraZeneca plc. He was also a
partner and Managing Director of Goldman Sachs, a partner
of KPMG, and a non-executive director and chair of the Audit
Committee of Diageo plc. He is a fellow of the Institute of
Chartered Accountants in England and Wales.
Current appointments include: Chairman of HSBC Bank plc,
Innocoll AG and Proteus Digital Health Inc., and a non-executive
director of Genomics England Limited.
Jackson Tai, 66
Independent non-executive Director
Appointed to the Board: September 2016
Member of the Group Risk Committee and the Financial System
Vulnerabilities Committee.
Skills and experience: Jackson was formerly Vice Chairman
and Chief Executive of DBS Group and DBS Bank Ltd, having
served the group as Chief Financial Officer and then as
President and Chief Operating Officer. He previously worked at
JP Morgan & Co. Incorporated as an investment banker in New
York, Tokyo and San Francisco. Other former appointments
include non-executive director of Bank of China Limited,
Singapore Airlines, NYSE Euronext, ING Groep N.V., CapitaLand
Ltd, SingTel Ltd. and Jones Lang LaSalle Inc. Jackson also
served as Vice-Chairman of Islamic Bank of Asia.
Current appointments include: Non-executive director of
Eli Lilly and Company, Koninklijke Philips Electronics N.V.,
MasterCard Incorporated and the Canada Pension Plan
Investment Board.
Pauline van der Meer Mohr, 57
Independent non-executive Director
Appointed to the Board: September 2015
Member of the Group Remuneration Committee, the Group
Nomination Committee and the Conduct & Values Committee.
Skills and experience: Pauline has extensive legal and human
resources experience across a number of different sectors, and
contributed to the Dutch Banking Code Monitoring
Commission. Former appointments include President of
Erasmus University Rotterdam; Senior Executive Vice President
and Head of Group Human Resources at ABN AMRO Bank NV;
Group Human Resources Director at TNT NV; HR Director,
Information Technology, Royal Dutch Shell Group; and Senior
Legal Counsel, Shell International.
Current appointments include: President of the supervisory
board of EY Netherlands and member of the supervisory boards
of ASML Holding N.V. and Royal DSM N.V.
136
HSBC Holdings plc Annual Report and Accounts 2016
Group Managing Directors
Samir Assaf, 56
Chief Executive, Global Banking and Markets
Samir joined HSBC in 1994 and became a Group Managing
Director in 2011. He is Chairman and a non-executive director of
HSBC France; a director of HSBC Trinkaus & Burkhardt AG and
The Saudi British Bank. Former appointments include: a director
of HSBC Bank plc; HSBC Global Asset Management Limited
and HSBC Bank Egypt S.A.E.; and Head of Global Markets for
Europe, Middle East and Africa.
Peter Boyles, 61
Chief Executive Officer of Global Private Banking
Peter joined HSBC in 1975 and became a Group Managing
Director in 2013. He is Chairman of HSBC Private Bank
(Monaco) SA and a director of HSBC Global Asset Management
Limited and HSBC Private Bank (UK) Limited. Former
appointments include: Chief Executive of HSBC France; a
director of HSBC Bank plc, HSBC Bank Malta p.l.c. and HSBC
Trinkaus & Burkhardt AG.
Patrick Burke, 55
President and Chief Executive Officer of HSBC USA
Patrick joined HSBC in 1989 and became a Group Managing
Director in 2015. He is Chairman of HSBC Bank USA, N.A.,
HSBC Finance Corporation, HSBC USA Inc. and HSBC Global
Asset Management (USA) Inc.
John Flint, 48
Chief Executive Officer, Retail Banking and
Wealth Management
John joined HSBC in 1989 and became a Group Managing
Director in 2013. Former appointments include: a director of
HSBC Private Banking Holdings (Suisse) SA, 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.
Pierre Goad, 55
Group Head of Employee Insight and Communications
Pierre first joined HSBC in 2001. In 2010 he left and joined
Zurich Insurance Group as Head of Communications. He
rejoined HSBC in 2011 and became a Group Managing Director
in 2015. He is a director of HSBC Bank Canada. Former
appointments include: Global Head of Communications; and
Head of Corporate Development, Europe, Middle East and
Global Businesses.
Pam Kaur, 53
Group Head of Internal Audit
Pam joined HSBC and became a Group Managing Director in
2013. She is a co-opted member of The Institute of Chartered
Accountants in England and Wales. Former appointments
include: Global Head of Group Audit for Deutsche Bank AG;
Chief Financial Officer and Chief Operating Officer of the
Restructuring and Risk Division, Royal Bank of Scotland Group
plc; Group Head of Compliance and AML, Lloyds TSB; and
Global Director of Compliance, Global Consumer Group,
Citigroup.
Stuart Levey, 53
Chief Legal Officer
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 a
Partner at Miller, Cassidy, Larroca & Lewin LLP and at Baker
Botts LLP.
Andy Maguire, 50
Group Chief Operating Officer
Andy joined HSBC in 2014 as Group Chief Operating Officer and
became a Group Managing Director in 2015. He is Chairman of
HSBC Global Services (UK) Limited; a director of HSBC Global
Services Limited and HSBC Group Management Services
Limited. He was formerly a Managing Partner (UK and Ireland)
of the Boston Consulting Group.
Paulo Maia, 58
Chief Executive, Latin America
Paulo joined HSBC in 1993 and became a Group Managing
Director on 1 February 2016. He is Chairman of Grupo
Financiero HSBC Mexico S.A. de C.V., HSBC Argentina Holdings
S.A. and a Director of HSBC North America Holdings Inc.
Former appointments include: Chief Executive of HSBC Bank
Canada and HSBC Bank Australia Limited.
Noel Quinn, 55
Chief Executive, Global Commercial Banking
Noel joined HSBC in 1992 when the Group acquired Midland
Bank and became a Group Managing Director on 1 September
2016. Former appointments include: Head of Specialised and
Equity Finance, Director of Strategy & Development for
Commercial Banking, Head of Commercial Finance Europe,
Head of Commercial Banking UK and Head of Commercial
Banking Asia.
Antonio Simoes, 41
Chief Executive, HSBC Bank plc
Antonio joined HSBC in 2007 and became a Group Managing
Director on 1 February 2016. He is a director of HSBC Bank plc
and HSBC France. Former appointments include: Chief
Executive of HSBC UK; Head of Retail Banking and Wealth
Management, Europe; and Chief of Staff to the Group Chief
Executive and Group Head of Strategy and Planning. He is the
Chairman of the Practitioner Panel of the FCA. He was formerly
a Partner of McKinsey & Company.
Peter Wong, 65
Deputy Chairman and Chief Executive,
The Hongkong and Shanghai Banking Corporation Limited
Peter joined HSBC in 2005 and became a Group Managing
Director in 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. He is also non-
executive Vice Chairman of Bank of Communications Co Ltd
and an independent non-executive Director of Cathay Pacific
Airways Limited. Former appointments include: Vice Chairman
of HSBC Bank (Vietnam) Ltd; a director of HSBC Bank Australia
Limited; and a director of Ping An Insurance (Group) Company
of China, Ltd.
HSBC Holdings plc Annual Report and Accounts 2016
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Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the Directors | Corporate Governance
Board of Directors
Appointment, retirement and re-election of
Directors
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. A rigorous selection
process, overseen by the Nomination Committee and based
upon agreed requirements using an external search
consultancy, is followed in relation to the appointment of non-
executive Directors.
During the year Henri de Castries, David Nish, Jackson Tai and
Paul Walsh were appointed to the Board. Their biographies can
be found on pages 133 to 136.
The number of Directors must not be less than five nor exceed
25. The Board may at any time appoint any person as a Director,
either to fill a vacancy or as an addition to the existing Board.
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 as a Director or remove any Director before the
expiration of his or her period of office.
Newly appointed Directors retire at the Annual General Meeting
(‘AGM’) following appointment and are eligible for election. All
Directors are nominated for annual re-election by shareholders
subject to continued satisfactory performance based upon an
assessment by the Group Chairman and the Nomination
Committee.
Non-executive Directors are appointed for an initial three-year
term and, subject to re-election by shareholders at AGMs, are
typically expected to serve two three-year terms. The Board may
invite a Director to serve additional periods. Any term beyond
six years is subject to particularly rigorous review.
The terms and conditions of appointment of non-executive
Directors are set out in a letter of appointment, which includes
the expectations of them and the time estimated for them to
meet their commitment to the Group. The current anticipated
minimum time commitment, which is subject to periodic review
and adjustment by the Board, is 30 days per year. Non-executive
Directors are also advised that the time they need to devote to
the Group may be considerably more if they serve on Board
Committees or as other matters require. All non-executive
Directors have confirmed they can meet this requirement,
taking into account any other commitments they have at the
time of appointment, and most devote considerably more time.
During their term of appointment, non-executive Directors are
expected to consult the Group Chairman or the Group Company
Secretary if they are considering whether to accept or vary any
commitments outside the Group. The agreement of the Group
Chairman is required if any additional or changed commitment
might affect the time that a Director is able to devote to his or
her role with the Group.
Letters setting out the terms of appointment of each non-
executive Director are available for inspection at the registered
office of HSBC Holdings. The Board diversity policy is available
at www.hsbc.com/investor-relations/governance/corporate-
governance-codes.
Induction
Formal induction programmes are arranged for newly appointed
Directors, based on the individual’s needs, skills and experience.
Typically, these consist of a series of meetings with other
Directors and senior executives, as well as local site visits, to
provide familiarity with the business. Directors also receive
comprehensive guidance from the Group Company Secretary on
the Group’s governance framework and associated policies, as
well as their duties as Directors on the Board. During the year
Henri de Castries, David Nish, Paul Walsh and Jackson Tai
completed a formal induction programme.
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HSBC Holdings plc Annual Report and Accounts 2016
Operation of the Board
The Board regularly reviews reports on performance against
financial and other strategic objectives, key business
challenges, risk, business developments, and investor and
external relations. During 2016, it also considered presentations
on strategy and performance by each of the global businesses
and across the principal geographical areas.
All of HSBC’s activities involve the measurement, evaluation,
acceptance and management of risk or combinations of risks.
The Board, advised by the Group Risk Committee (‘GRC’),
Conduct & Values Committee (‘CVC’) and the Financial System
Vulnerabilities Committee (‘FSVC’), promotes a strong risk
governance culture which shapes the Group’s attitude to risk.
The Board and these committees oversee the development and
maintenance of a strong risk management framework.
The Group Company Secretary will ensure that agenda and
supporting papers are distributed in advance of Board and
Board committee meetings to allow reasonable time for review
and to facilitate full discussion at the meetings.
The Chairman met with the non-executive Directors without the
other executive Directors in attendance. The SID also facilitated
meetings of the non-executive Directors without the attendance
of executive Directors, including that of the Group Chairman.
The Directors are encouraged to have free and open contact
with management at all levels and full access to all relevant
information. When attending off-site Board meetings and
when travelling for other reasons, non-executive Directors are
encouraged to visit local business operations and meet local
management.
Directors may take independent professional advice, if
necessary, at HSBC Holdings’ expense.
Conflicts of interest, indemnification of Directors
and contracts of significance
The Board has established a policy and procedures relating to
Directors’ conflicts of interest. Where conflicts of interest arise,
the Board has the power to authorise them. A review of those
conflicts which have been authorised, and the terms of those
authorisations, is undertaken by the Board annually.
The Articles of Association state that Directors are entitled to be
indemnified out of the assets of HSBC Holdings against claims
from third parties in respect of certain liabilities. All Directors
have the benefit of directors’ and officers’ liability insurance.
None of the Directors had, during the year, a material interest,
directly or indirectly, in any contract of significance with any
HSBC company. Each Director is routinely reminded of their
obligations in respect of transacting in HSBC Group securities
and has confirmed that he or she has complied with regulatory
requirements.
Board performance evaluation
The Board is committed to regular, independent evaluation of its
own effectiveness and that of its committees. For 2015/16, an
independent review was undertaken by Heidrick & Struggles/
JCA Group, an independent third-party firm that has no other
connection with HSBC Holdings. The process involved an
extensive series of interviews and meetings with the non-
executive Directors, together with input from members of the
Group Management Board. Actions arising from the review
were presented and discussed in detail with the Board in
February 2016 and then tracked throughout the remainder of
the year and reported to the Board.
Given the ongoing nature of these actions, a follow-up review
is to be conducted during the first half of 2017, the outcome
of which will be published in the 2017 Annual Report. In the
interim period, the performance evaluation of the individual
Directors was conducted internally, as provided for under the
UK Corporate Governance Code, by the Group Chairman and
the SID.
Set out below are areas of particular focus from the 2015/16 review that the Board has addressed during the year:
Theme
Agenda management
Action taken
Board agendas were revised to allow for a greater focus on business strategy and financial and operational
performance.
A rolling cycle of annual deep dives across each of the four global businesses and the Group’s principal
geographical regions was established. A detailed presentation of the technology and digital opportunities
facing the Group was also arranged with an explanation of how the Group is currently responding to them
and the Group’s longer-term strategic response.
Improvements were made to the process for the preparation, submission and distribution of management
information and Board and Committee papers.
Committee efficiency
The operation of the Committees was reviewed to improve efficiency and address overlaps and any gaps in
their responsibilities.
Continued development of the cohesive
relationship between non-executive
Directors and senior management
More opportunities were created for senior management to interact with non-executive Directors both inside
and outside formal Board meetings, and to increase Board exposure to other high potential managers in the
Group.
Succession planning
There has been a continued focus by the Board, through the Nomination Committee, on executive and non-
executive succession planning. A committee has been established to oversee succession planning for the
Group Chairman.
Director performance evaluation
Non-executive Directors’ individual performance evaluation is
undertaken annually by the Group Chairman. This involves a
discussion about a Director’s individual contribution, explores
individual training and development needs, and the time
commitment that is required to continue to deliver the role
effectively. The Group Chairman has confirmed that all non-
executive Directors continue to perform effectively, contribute
positively to the governance of HSBC and are able to fully
commit the time required for their roles.
Executive Directors’ individual performance evaluation is
undertaken as part of the performance management process
for all employees. The results are considered by the Group
Remuneration Committee when determining variable pay
awards each year.
The Group Chairman’s performance is evaluated by the non-
executive Directors, led by the SID.
Training and development
Training and development is provided for each Director, and is
regularly reviewed by the Group Chairman supported by the
Group Company Secretary. All executive Directors develop
and refresh their skills and knowledge through day-to-day
interactions and briefings with senior management of the
Group’s businesses and functions.
A two-day forum for all of the Group’s non-executive Directors
was held during the year. Awareness and discussion sessions
were conducted by senior executives and subject matter experts
on emerging technologies, financial crime compliance,
regulatory initiatives and other business developments. The
following Directors attended these sessions: David Nish,
Joachim Faber, John Lipsky, Jonathan Symonds, Kathleen
Casey and Paul Walsh. Jonathan Symonds and Joachim Faber
hosted a separate forum for the Chairs of the Group’s audit and
risk committees globally.
In addition, all members of the Group Audit Committee (‘GAC’)
received refresher training in IFRS 9 and the Committee Chairs
received training in the requirements of the Senior Managers
Regime. As part of their induction programme, David Nish,
Henri de Castries and Paul Walsh received training on the
Volcker Rule.
Shareholder engagement
Communication with shareholders is given high priority by the
Board and a copy of its policy is available at www.hsbc.com.
Extensive information about HSBC and its activities is provided
to shareholders in the Annual Report and Accounts, the Strategic
Report and the Interim Report as well as at www.hsbc.com.
To compliment these, there is regular dialogue with institutional
investors. Enquiries from individuals on matters relating to their
shareholdings and HSBC’s business are welcomed.
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. An annual
governance breakfast is also held, which gives institutional
investors an opportunity to engage with the non-executive
Directors and senior management on governance matters. All
executive Directors hold regular meetings with institutional
investors and feedback from these meetings is routinely
provided to the Board.
As SID, Rachel Lomax is available to shareholders if they have
concerns that cannot be resolved or for which the normal
channels would be inappropriate. She may be contacted via
the Group Company Secretary at 8 Canada Square, London
E14 5HQ.
The AGM and other general meetings
The 2017 AGM will be held at the Queen Elizabeth II Conference
Centre, Broad Sanctuary, Westminster, London SW1P 3EE on
Friday 28 April at 11.00am and a live webcast will be available
on www.hsbc.com. A recording of the proceedings will be
available on www.hsbc.com shortly after the conclusion of the
AGM until 28 May 2017. An informal meeting of shareholders
will be held at 1 Queen’s Road Central, Hong Kong on Monday
24 April at 4.30pm. Shareholders are encouraged to attend
these meetings. Shareholders may send enquiries to the Board
in writing via 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 AGM 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
HSBC Holdings that carries the right of voting at its general
meetings (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 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 HSBC
Holdings at its UK address, referred to in the paragraph above
or by sending an email to shareholderquestions@hsbc.com. At
any general meeting convened on such request, no business
shall be transacted except that stated by the requisition or
proposed by the Board.
HSBC Holdings plc Annual Report and Accounts 2016
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Board Committees
The Board has seven standing committees and a Chairman’s
Committee. In the case of the FSVC and the Philanthropic &
Community Investment Oversight Committee, membership
includes co-opted non-Director members as well as non-
executive Directors.
The Chairs of each Committee report matters of significance to
the Board after each meeting and the minutes of the meetings
are made available to all Board members.
The detailed roles and responsibilities of each Committee are
set out in its terms of reference, which can be found on the
website at www.hsbc.com/about-hsbc/corporate-governance/
board-committees.
Principal subsidiaries
The GRC works closely with the GAC to strengthen alignment
with the major regional and global business risk and audit
committees.
The GAC and GRC make a number of recommendations to the
Board in relation to the preparation of the financial statements
which are supported by certificates from the principal
subsidiaries.
Whistleblowing
The GAC and the CVC are responsible for reviewing the Group’s
whistleblowing procedures and received regular updates on
relevant concerns raised under these procedures, together with
management actions taken in response.
Committee interaction
Committee effectiveness
The Board places significant reliance on its Committees and
delegates a broad range of responsibilities to them. It is
therefore important that, while unnecessary duplications
between each remit of the Committees should be avoided,
effective links should exist between Committees and the
Board where required.
The effectiveness of the Committees is evaluated as part of the
overall performance evaluation of the Board as referred to
above. In addition, the Committees review the papers and the
effectiveness of each meeting as a standing agenda item to
ensure that they continue to be effective, challenging and well-
managed, and review a rolling planner of proposed committee
business.
2016 Board and Committee attendance
AGM Board
Group
Audit
Committee
Group Risk
Committee
Group
Remuneration
Committee
Nomination
Committee
Financial
System
Vulnerabilities
Committee
Conduct &
Values
Committee
Philanthropic &
Community Investment
Oversight Committee
Number of meetings
Group Chairman
Douglas Flint
Executive Directors
Stuart Gulliver
Iain Mackay
Marc Moses
Non-executive Directors
Phillip Ameen
Kathleen Casey
Laura Cha
Henri de Castries1
Lord Evans of Weardale
Joachim Faber
Rona Fairhead2
Sam Laidlaw
Irene Lee
John Lipsky
Rachel Lomax3
Heidi Miller
David Nish4
Sir Simon Robertson2
Jonathan Symonds
Jackson Tai5
Pauline van der Meer Mohr6
Paul Walsh7
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
—
1
1
8
8
8
8
8
8
8
8
5/5
8
8
4/4
8
8
8
8
8
4/4
4/4
8
2/2
7
7
8
—
—
—
—
7
8
—
—
—
—
—
—
—
—
2/2
—
3/4
—
8
—
—
—
9
—
—
—
—
—
—
—
—
—
9
—
—
—
9
8
9
—
—
—
2/2
—
—
9
—
—
—
—
—
—
—
—
—
—
—
9
—
8
—
—
—
4/4
—
—
9
8
7
—
—
—
—
—
—
7
—
—
—
7
—
—
—
—
—
7
—
—
7
—
3/4
1/2
7
—
7
7
—
—
—
—
—
3/3
3/3
—
—
—
—
—
—
—
—
1/2
—
—
6
—
—
—
—
—
—
6
—
6
—
—
—
—
—
6
—
—
—
5
—
6
—
3
—
—
—
—
—
—
3
—
3
—
—
—
—
—
—
—
—
—
—
—
—
—
*
Board meetings in 2016 were held in London and Hong Kong. In addition to the Board meetings listed there were also 11 Chairman’s Committee meetings held in 2016.
1 Appointed to the Board 1 March 2016.
Resigned from the Board 22 April 2016.
2
Resigned from the Group Audit Committee 20 April 2016.
3
4 Appointed to the Board 1 May 2016. Attended AGM as part of his induction.
5 Appointed to the Board 12 September 2016.
6 Appointed to the Group Nomination Committee 22 April 2016.
7 Appointed to the Board 1 January 2016 and to the Group Nomination Committee 1 May 2016.
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HSBC Holdings plc Annual Report and Accounts 2016
Group Audit Committee
Members
Jonathan Symonds (Chairman)
Phillip Ameen
Kathleen Casey
David Nish (appointed on 1 May 2016)
Rachel Lomax (resigned on 20 April 2016)
Role and responsibilities
The GAC has non-executive responsibility for matters relating to
financial reporting, including Pillar 3 disclosures and internal
control over financial reporting.
Governance
The Group Finance Director, Group Chief Accounting Officer,
Group Head of Internal Audit and other members of senior
management routinely attend meetings of the GAC. The
external auditor, PwC, also attended all meetings. The Chairman
of the GAC had regular meetings to discuss agenda planning
and specific issues as they arose during the year.
How the Committee discharges its responsibilities
Financial reporting
The GAC reviews HSBC’s financial and reporting judgements
and their application to the Group’s financial reporting,
including Pillar 3 disclosures. It also reviews presentations to
external analysts including the key financial metrics relating
to HSBC’s strategic actions.
The GAC assesses the adequacy of resources of the accounting
and financial reporting function. It also monitors the legal and
regulatory environment.
Internal controls
The GAC assesses the effectiveness of the internal control
system for financial reporting and any developments affecting
it in support of the Board’s assessment of internal control over
financial reporting in accordance with section 404 of the
Sarbanes-Oxley Act.
The GAC has received confirmation that executive management
has taken or is taking the necessary actions to remedy any
failings or weaknesses identified through the operation of the
Groups framework of controls.
Further detail of how the Board reviews the effectiveness of
key aspects of internal control can be found on page 145.
External audit
The GAC meets privately with the external auditor at every
Committee meeting and the GAC Chairman maintains regular
contact with the audit partner throughout the year.
The GAC reviews the external auditor’s approach and strategy
for the annual audit.
All non-audit services provided by PwC are pre-approved by
the GAC in accordance with the auditor independence policy
to ensure that services do not create a conflict. The auditor
independence policy has been revised with effect from
1 January 2017 to take account of the UK implementation of
new EU audit rules. Details of the significant engagements for
non-audit services are contained in Note 6.
A policy is in place and monitored by the GAC on hiring
employees or former employees of the external auditor.
Internal Audit
The GAC approves Internal Audit’s annual plan, resource and
budget, and reviews the performance of the Group Head of
Internal Audit and the performance and effectiveness of its
head. The Group Head of Internal Audit reports to the Chairman
of the GAC and the Committee regularly meets with the Group
Head of Internal Audit without other management present.
Compliance with Regulatory Requirements
The Board is satisfied that each member of the GAC is
independent according to SEC criteria, may be regarded as
audit committee financial experts for the purposes of section
407 of the Sarbanes-Oxley Act and has recent and relevant
financial experience for the purposes of the UK and Hong Kong
Corporate Governance Codes.
The Committee has complied with the relevant parts of the
Competition and Markets Authority Final Order on the statutory
audit market for the year ended 31 December 2016.
Principal activities and significant issues considered
during 2016
External auditor
The Committee assessed the effectiveness of PwC as the
Group’s external auditor, using a questionnaire which focused
on the overall audit process, its effectiveness and the quality of
output. It concluded that PwC had performed a high-quality and
effective audit in 2016.
Fees payable to PwC for the year ended 31 December 2016
totalled $111.1m, of which $39.8m or 35.8% was payable in
respect of non-audit services. A further breakdown of the fees
paid to the auditors for each of the last three financial years can
be found in Note 6 on the Financial Statements.
The GAC considered PwC to be independent and PwC, in
accordance with professional ethical standards, provided the
GAC with written confirmation of its independence for the
duration of 2016.
The GAC has therefore recommended to the Board that PwC
be reappointed as auditor. Resolutions concerning the
reappointment of PwC and their audit fee for 2017 will be
proposed to shareholders at the 2017 AGM.
Internal Audit
The GAC concluded that the Internal Audit function remained
effective.
Finance transformation project
The Finance function has embarked on a large scale three-year
transformation project to respond to the future needs of a
changing industry facing increased regulatory demands.
The project also included embedding internal controls and
improving the consistency of critical financial processes across
the Group.
Internal control framework
The GAC continued to monitor the progress being made to
upgrade entity level controls and remediate issues identified
in 2015.
In particular, the GAC continued to monitor the remediation of
controls over access management in IT and the next phase in
terms of the enhancement of strategic controls. The GAC was
encouraged by the progress being made.
Changing regulatory landscape
Given the changing legal and regulatory landscape, the GAC
continued to receive detailed presentations and updates from
management on the Group’s readiness to implement IFRS 9
Financial Instruments and the revised Basel framework’s Pillar 3
disclosure requirements.
HSBC Holdings plc Annual Report and Accounts 2016
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Significant accounting judgements considered during 2016 included:
Key area
Action taken
Appropriateness of
provisioning for legal
proceedings and
regulatory matters
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 provisioning arising from investigations by US regulators and law
enforcement agencies relating to trading activities in the foreign exchange market and competition law investigations
relating to foreign exchange activities in a number of jurisdictions; and management’s judgement regarding provisions
and contingent liabilities in connection with investigations of HSBC’s Swiss Private Bank by a number of tax
administration, regulatory and law enforcement authorities. The GAC also considered management’s assumptions and
judgements relating to the disclosure of a contingent liability in respect of investigations into historical sales of US
mortgage securitisations by The United States Attorney for the District of Colorado for potential violations of The
Financial Industry Reform, Recovery and Enforcement Act of 1989, 12 U.S.C. § 1833a.
Quarterly and annual
reporting
The GAC considered key judgements in relation to quarterly and annual reporting. In addition, it considered external
analysts’ presentations and key financial metrics included in HSBC’s strategic actions.
Loan impairment,
allowances and charges
Valuation of financial
instruments
Viability statement
UK customer remediation
The GAC considered loan impairment allowances for personal and wholesale lending. Significant judgements and
estimates for personal lending included a review of loss emergence periods across the retail loan portfolios and the
potential impact of the UK electorate's vote to leave the EU. For wholesale lending, the GAC considered management’s
judgements and assumptions in respect of the recognition of judgemental collective impairment allowances for oil and
gas exposures, and judgements relating to impairment allowances recognised for individual identified cases, as at
31 December 2016, and noted the ongoing monitoring for signs of credit deterioration that could result from the UK
electorate's vote to leave the EU.
The GAC considered the key valuation metrics and judgements involved in the determination of the fair value of financial
instruments. The GAC considered the valuation control framework, valuation metrics, significant year-end judgements
and emerging valuation topics.
Under the obligations of the UK Corporate Governance Code the Directors have carried out a robust assessment of the
principal risks for the Group and parent company. The GAC has considered the Directors' judgement in concluding that
the Group and parent company will be able to continue in operation and meet liabilities as they fall due, and that it is
appropriate that the viability statement covers a period of three years.
The GAC considered the provisions for redress for mis-selling of payment protection insurance (‘PPI’) policies, in the UK,
including management’s judgements regarding the effect of the proposed time-bar for claims ending June 2019. The
GAC also considered provisions in relation to the implications of a 2014 UK court case (‘Plevin’) for the non-disclosure of
levels of commission regarding the historical sales of PPI products, pending finalised guidance from the Financial
Conduct Authority (‘FCA’).
Bank of Communications
Co., Limited (‘BoCom’)
impairment testing
During the year, the GAC considered the regular impairment reviews of HSBC’s investment in BoCom. 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. It
was concluded that the investment was not impaired.
Goodwill impairment
testing
The GAC noted the process and results of the 1 July 2016 annual goodwill impairment test and the review of impairment
indicators at 30 June 2016 and 31 December 2016. During the year, impairment indicators were noted for GPB Europe
and GBM Europe. No impairment was recognised for GBM Europe.
The GAC considered management’s judgements in respect of the impairment charge of $0.8bn relating to GPB Europe
goodwill in H1 2016, and the further impairment charge of $2.4bn in Q4 2016, resulting in the impairment of the entire
balance of goodwill for GPB Europe in 2016. There were two main factors which led to indicators of impairment being
identified:
• during the year, revised forecast cash flows became available; and
• management adjusted the discount rates used in the goodwill tests due to the results of the UK EU Referendum
decision.
Hedge accounting
The GAC considered management’s judgements relating to the partial discontinuation of a hedging relationship in France
in December 2016. The GAC discussed the control weaknesses, which were limited to France, and noted management’s
actions to address them.
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 US and, in the first half of 2016, in the Brazil operations which were sold in July 2016, and the associated
projections of future taxable income.
Operating segments
The GAC considered the change in reportable segments during the year under IFRS 8, from regions to global businesses,
and the introduction of a Corporate Centre segment.
Group Risk Committee
Members
Joachim Faber (Chairman)
John Lipsky
Rachel Lomax
Heidi Miller
Jackson Tai (appointed on 12 September 2016)
Role and responsibilities
The GRC has non-executive responsibility for the oversight of
risk-related matters and the principal risks impacting the Group,
risk governance and internal control systems (other than
internal financial control systems). The GRC is updated on, but
is not directly responsible for, overseeing risks relating to
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HSBC Holdings plc Annual Report and Accounts 2016
financial crime, cyber-crime and information security, anti-
bribery and corruption, and culture and conduct. These risks are
overseen by the FSVC and the CVC.
Governance
The Group Chief Risk Officer, Group Finance Director, Chief
Legal Officer, Group Head of Internal Audit, Global Head of
Regulatory Compliance, Global Head of Financial Crime
Compliance, Group Head of Financial Crime Risk and other
members of senior management attended meetings of the
GRC by invitation to contribute to discussions relating to their
areas of expertise.
The GRC works closely with the GAC to ensure that any areas
of significant overlap are appropriately addressed and to
improve inter-committee communication.
The GRC holds meetings with the Group Chief Risk Officer and,
separately, with the Group Head of Internal Audit without
management present.
Further detail of how the Board reviews the effectiveness of key aspects of
internal control can be found on page 145.
How the Committee discharges its responsibilities
Financial System Vulnerabilities Committee
As a standing item on the rolling planner the GRC reviews the
Group Risk Appetite Statement (‘RAS’), the risk map (which
describes the Group’s risk profile by risk type across the global
businesses) and a report on the top and emerging risks
(together with mitigating actions for the identified risks). This
also identifies any areas where management needed to assess
vulnerabilities via stress testing.
Page 64 provides further information on the top and emerging
risks, the risk map and the risk appetite for the Group.
The GRC receives presentations on a range of topics, including
stress testing and briefings on developments in the regulatory
environment. In addition, the GRC requests reports and updates
from management on risk-related issues for in-depth
consideration and receives regular reports on matters discussed
at the Risk Management Meeting of the Group Management
Board (‘GMB’). It has continued to invite senior management
from the global businesses and functions to present their risk
control frameworks, which has led to enhanced discussions of
the risk environment.
Any revisions to the RAS are reviewed bi-annually by GRC and
any changes are recommended to the Board. The GRC regularly
reviews the Group’s risk profile against the key performance
metrics set out in the RAS. It reviews management’s
assessment of risk and provides scrutiny of management’s
proposed mitigating actions.
Regular reports are received on legal and regulatory risks.
Management actions to mitigate these risks are reviewed
and the potential impact of future developments in this area
on the Group are considered.
Principal activities and significant issues considered
during 2016
The Group Risk Appetite Statement (‘RAS’) and
monitoring of the Group risk profile against the RAS
There were no significant changes to the RAS in 2016.
Stress testing
The PRA and EBA stress testing exercises and the results of
stress testing were closely monitored and reviewed prior to
submission. Reports were received over the course of the stress
testing exercise and the Committee met an additional four times
during the year solely to consider stress testing related matters,
including additional stress tests specific to oil and gas
exposures and the UK electorate's vote to leave the EU.
Execution risk
Regular reports were received from the Group Chief Operating
Officer, who updated each meeting on the progress and status
of the Group’s highest-priority programmes and mitigating
measures being introduced to manage the identified risks
appropriately.
Monitoring of this risk and challenging management’s
assessment of execution risk and corresponding mitigating
actions remains a priority for the GRC.
Internal control and risk management
The GRC reviewed the Group’s risk management framework
and system of internal control (other than internal financial
control systems, which were covered by the GAC) and the
developments affecting them over the course of 2016, as part
of the Board’s assessment of internal control.
In 2016 the Group Risk Committee appointed an external
independent expert to assess the effectiveness of the
committee.
Members
Lord Evans of Weardale (Chairman)
Kathleen Casey
Jackson Tai (appointed on 12 September 2016)
Rona Fairhead (resigned on 22 April 2016)
Nick Fishwick, CMG (non-Director member)
Dave Hartnett, CB (non-Director member)
William Hughes, CBE QPM (non-Director member)
Nehchal Sandhu (non-Director member)
Leonard Schrank (non-Director member)
The Honourable Juan Zarate (non-Director member)
Sir William Patey (non-Director member appointed
1 November 2016)
David Irvine (non-Director member appointed
1 November 2016)
The eight non-Director members support the Committee’s work
and between them have extensive experience in geopolitical
risk, financial crime risk, international security, cybersecurity
and law enforcement matters.
Role and responsibilities
The Committee has non-executive responsibility for the
oversight of matters related to financial crime and system
abuse, in particular anti-money laundering; sanctions; terrorist
financing and proliferation financing; anti-bribery and
corruption; and cybersecurity. It is also responsible for
monitoring, reviewing and advising the Board on the
effectiveness of the policies and procedures established by
Management to ensure that HSBC meets its obligations to
regulatory and law enforcement agencies.
Principal activities and significant issues considered
during 2016
Financial crime
During the year, the Committee monitored the Group’s progress
on the implementation of Global Standards and reviewed and
discussed findings from country visits conducted by the
Monitor.
Anti-bribery and corruption
The Committee reviewed the activities underway to address key
bribery and corruption risks and management’s progress with
the implementation of a more robust anti-bribery and corruption
compliance framework.
Engaging with the Monitor
The Committee was responsible for liaising with the Monitor to
ensure his recommendations were acted on.
The information security environment and cybersecurity
risk
During the year, the Committee reviewed HSBC’s progress
towards improving the Group’s cybersecurity and the actions
being taken to mitigate exposure to cyber risk. It also monitored
significant developments in the information security
environment and progress delivering strategic financial crime
risk management IT solutions.
Further information on key activities of the Committee can be
found in the ’Financial crime risk management’ section on
page 81.
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Conduct & Values Committee
Nomination Committee
Members
Rachel Lomax (Chair)
Laura Cha
Lord Evans of Weardale
Jonathan Symonds
Pauline van der Meer Mohr
Role and responsibilities
The CVC has non-executive responsibility for oversight of
culture and conduct risk. It is responsible for HSBC’s policies,
procedures and standards and ensuring that the Group
conducts business responsibly and consistently adheres to
HSBC Values. The CVC is also responsible for Group policies
and procedures for capturing and responding to whistleblowing
reports. Reporting to the GAC where necessary in relation to
allegations relating to accounting, internal controls over
financial reporting or audit matters.
Principal activities and significant issues considered
during 2016
Conduct
During the year the Committee reviewed the implementation of
the Group’s conduct approach and, in particular, how effectively
global programmes were being cascaded through the
organisation.
Sustainability
The Committee was responsible for reviewing how effectively
the Group sought to satisfy itself that it was meeting its
sustainability commitments.
Modern Slavery Act
The Committee and Board reviewed and approved the Group’s
Human Rights and Modern Slavery Act statement.
Further information on conduct can be found in the ‘How we do
business’ section of the Strategic Report and in the Financial
Review.
Group Remuneration Committee
Members
Sam Laidlaw (Chairman)
John Lipsky
Pauline van der Meer Mohr
Paul Walsh
Sir Simon Robertson (resigned on 22 April 2016)
Role and responsibilities
The Committee is responsible for setting the over-arching
principles, parameters and governance framework of the
Group’s remuneration policy, and the remuneration of executive
Directors and other senior Group employees. The Committee
regularly reviews the Group’s remuneration policy in the context
of consistent and effective risk management and the regulatory
requirements of multiple jurisdictions. No Directors are involved
in deciding their own remuneration.
A full report on the role and activities of the Committee is set
out on pages 153 to 172.
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HSBC Holdings plc Annual Report and Accounts 2016
Members
Sam Laidlaw (Chairman)
Laura Cha
John Lipsky
Rachel Lomax
Pauline van der Meer Mohr (appointed on 22 April 2016)
Paul Walsh (appointed on 1 May 2016)
Rona Fairhead (resigned on 22 April 2016)
Role and responsibilities
The Nomination Committee has non-executive responsibility for
leading the Board appointment process and for identifying and
nominating potential candidates for appointment to the Board.
The Committee is responsible for succession planning for both
executive and non-executive Directors and membership of
Board committees.
The Nomination Committee regularly reviews the Board’s
structure, size and composition (including skills, knowledge,
experience, independence and diversity). It recommends any
changes to the Board.
An external search consultancy is used in relation to the
appointment of non-executive Directors. It has no additional
connection with HSBC. A separate external search consultancy
is primarily used for certain senior executive hires.
Principal activities and significant issues considered
during 2016
Succession planning
A committee was established with specific responsibility for
succession planning for the Group Chairman, comprising all
the Nomination Committee members plus Jonathan Symonds,
Jonathan Evans and Joachim Faber, being the chairs of the
GAC, FSVC and GRC respectively.
Diversity
The Committee took responsibility for the implementation of
the Board’s diversity policy against two objectives: at least 30%
of candidates being women and only using external search
consultants signed up to the Voluntary Code of Conduct for
Executive Search Firms.
Philanthropic & Community Investment Oversight
Committee
Members
Laura Cha (Chair)
Lord Evans of Weardale
Sir Malcolm Grant (non-Director member)
Stephen Moss (non-Director member)
Lord Janvrin (non-Director member)
Role and responsibilities
The Philanthropic & Community Investment Oversight
Committee has non-executive responsibility for HSBC’s
philanthropic and community investment activities in support of
the Group’s corporate sustainability objectives. The Committee
was established as a committee of the Board in 2014 to oversee
activity which includes both the Group’s monetary contributions
and also employee volunteering.
Principal activities and significant issues considered
during 2016
Charitable giving
The Committee was responsible for reviewing the Group’s risk
appetite for charitable donations and the budget for future years
and long-term committed funds.
Community investment
During the year, the Committee reviewed and endorsed the
Group’s annual community investment budget and the
proposed allocation of this budget across agreed sustainability
themes.
Chairman’s Committee
The Chairman’s Committee acts on behalf of the Board between
scheduled Board meetings to facilitate ad hoc and other
business requiring Board approval. It meets when necessary,
with the required number of attendees determined by the
nature of the proposed business to be discussed, as set out in
its terms of reference.
Group Management Board
The GMB is a forum chaired by the Group Chief Executive to
provide him with recommendations and advice, and assist him
in his day-to-day management of HSBC and its subsidiaries as
delegated by the Board.
There are special meetings of the GMB that provide oversight
of risk matters (the Risk Management Meeting, chaired by the
Group Chief Risk Officer) and of Global Standards (the Global
Standards Steering Meeting, chaired by the Group Head of
Financial Crime Risk).
Internal control
The Board is responsible for maintaining and reviewing the
effectiveness of risk management and internal control systems,
and for determining the aggregate level and types of risks the
Group is willing to take in achieving its strategic objectives.
To meet this requirement and to discharge its obligations under
the FCA Handbook and the 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 assurance
against material mis-statement, errors, losses or fraud. They are
designed to provide effective internal control within the Group
and accord with the Financial Reporting Council's guidance for
directors issued in 2014, internal control and related financial
and business reporting. The procedures have been in place
throughout the year and up to 21 February 2017, the date
of approval of this Annual Report and Accounts 2016.
In 2014, the GAC 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 key risk management and internal control procedures
include the following:
• The Group’s Global Standards Manual (‘GSM’) outlines the
core principles within which the Group must operate
wherever we conduct business. The GSM overlays all other
policies and procedures throughout the Group. The
requirements of the GSM are mandatory, apply to and must
be observed by all businesses within the Group, regardless
of the nature or location of their activities.
• Delegation of authority within limits set by the Board:
subject to certain matters reserved for the Board, the Group
Chief Executive has been delegated authority limits and
powers within which to manage the day-to-day affairs of the
Group, including the right to sub-delegate those limits and
powers. Each relevant group managing director or executive
Director has delegated authority within which 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.
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.
• Risk identification and monitoring: Systems and procedures
are in place to identify, assess, control and monitor the
material risk types facing HSBC. Our risk measurement and
reporting systems are designed to help ensure that risks are
comprehensively captured with all the attributes necessary
to support well-founded decisions, that those attributes are
accurately assessed and that information is delivered in a
timely manner for those risks to be successfully managed
and mitigated.
• 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. The Group employs a top and emerging risks
framework at all levels of the organisation, which enables
it to identify current and forward-looking risks and to take
action which either prevents them materialising or limits
their impact.
• Responsibility for risk management: All employees are
responsible for identifying and managing risk within the
scope of their role as part of the three lines of defence
model, which is an activity-based model to delineate
management accountabilities and responsibilities for risk
management and the control environment. The second line
of defence sets the policy and guidelines for managing
specific risk areas, provides advice and guidance in relation
to the risk, and challenges the first line of defence (the risk
owners) on effective risk management.
• Strategic plans: strategic plans are prepared for global
businesses, global functions and geographical regions
within the framework of the Group’s overall strategy. Annual
Operating Plans, informed by detailed analysis of risk
appetite describing the types and quantum of risk that the
Group is prepared to take in executing its 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.
•
IT operations: centralised control is exercised over all IT
developments and operations. Common systems are
employed for similar business processes wherever
practicable.
• Subsidiary certifications to GRC: half-yearly confirmations
are provided to the GRC from the risk committees of
principal subsidiary companies confirming that the
committees have challenged management on the quality
of the information provided, reviewed the actions proposed
by management to address any emerging issues or trends
indicating material divergence from the Group’s risk appetite
and that the risk management and internal control systems
in place are operating effectively.
The key risk management and internal control procedures over
financial reporting include the following:
• Disclosure Committee: the Disclosure Committee, which is
chaired by the Group Company Secretary, supports the
discharge of the Group’s obligations under relevant
legislation and regulation including the UK and Hong Kong
Listing Rules, the Market Abuse Regulation and SEC rules.
HSBC Holdings plc Annual Report and Accounts 2016
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In so doing the Committee is empowered to (i) determine
whether a new event or circumstances should be disclosed,
including the form and timing of such disclosure and (ii)
review all material disclosures made or to be made by the
Group. The membership of the Disclosure Committee
includes the Group Finance Director, Group Chief Risk
Officer, Chief Legal Officer, Group Chief Accounting Officer,
Global Head of Public Affairs, Global Head of Investor
Relations, Group Head of Strategy and Planning and Group
Financial Controller. The integrity of disclosures is
underpinned by structures and processes within the Global
Finance and Global Risk functions that support rigorous
analytical review of financial reporting and the maintenance
of proper accounting records.
• Financial reporting: the Group’s financial reporting process
is controlled using documented accounting policies and
reporting formats, supported by detailed instructions and
guidance on reporting requirements, issued to all reporting
entities within HSBC in advance of each reporting period
end. The submission of financial information from each
reporting entity is subject to certification by the responsible
financial officer, and analytical review procedures at
reporting entity and Group levels.
• Subsidiary certifications to the GAC: half-yearly
confirmations are provided to the GAC from the audit
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 and are prepared
on a going concern basis.
The internal control responsibilities of the GRC and GAC were
complemented by the activities of the CVC and the FSVC which,
respectively, oversaw internal control over conduct-related
matters and financial crime compliance. Collectively, these
controls are designed to provide effective internal control within
the Group.
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 the Group's framework of controls. In 2015,
deficiencies in the design and operational effectiveness of a
number of controls associated with IT privileged access were
identified. Significant improvement in the control environment
has been observed as a result of management’s progress on the
execution of the IT privileged access remediation programme.
Management has assessed the effectiveness of relevant IT,
business, monitoring and period-end mitigating controls for
2016.
The Directors, through the GRC and the GAC, have conducted
an annual review of the effectiveness of the Group's 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 Global Risk function, and
their training programmes and budget. The annual review of the
effectiveness of the Group’s system of risk management and
internal control over financial reporting was conducted with
reference to the COSO framework. The annual review of other
controls was undertaken using the Group’s risk management
framework, further details of which can be found on pages 68
to 71. Based on the assessment performed, the Directors
concluded that for the year ended 31 December 2016, the
Group’s internal controls were effective.
Internal audit
The Global Internal Audit function, which is centrally controlled,
provides independent and objective assurance of the design
and operating effectiveness of the Group’s framework of risk
management, control and governance processes, focusing on
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the areas of greatest risk. As mentioned previously, the Group
Head of Internal Audit reports to the Chairman of the GAC and
frequent meetings are held between them during the year.
Administratively the Group Head of Internal Audit reports to the
Group Chief Executive. Executive management is responsible
for ensuring that issues raised by the Global Internal Audit
function are addressed within an appropriate and agreed
timetable. Confirmation to this effect must be provided to
Global Internal Audit.
Going concern and viability
The Directors considered it appropriate to prepare the financial
statements on the going concern basis.
Under the UK Corporate Governance Code, the Directors must
also provide a viability statement. They must state whether
the Group will be able to continue in operation and meet its
liabilities, taking into account its current position and the
principal risks it faces. They must also specify the period
covered by, and the appropriateness of, this statement.
The Directors have specified a period of three years to
31 December 2019. They are satisfied that a forward-looking
assessment of the Group for this period is sufficient to enable
a reasonable statement of viability. In addition, this period is
covered by the Group’s stress testing programmes, and its
internal projections for profitability, key capital ratios and
leverage ratios. Notwithstanding this, our stress testing
programmes also cover scenarios out to five years and our
assessment of risks are beyond three years where appropriate.
Based upon their assessment, the Directors have a reasonable
expectation that the Group will be able to continue in operation
and meet liabilities as they fall due over the next three years.
In making their going concern and viability assessments, the
Directors have considered a wide range of detailed information
relating to present and potential conditions, including
projections for profitability, cash flows, capital requirements and
capital resources.
The Directors have carried out a robust assessment of each
risk facing the Group to determine the principal risks to the
long-term viability of the Group, including those that would
threaten its solvency and liquidity. They have determined that
the principal risks are the Group’s top and emerging risks as set
out on pages 64 to 67, which includes the status of the Deferred
Prosecution Agreement as described on page 66.
The Directors have assessed that all of the top and emerging
risks identified are considered to be material and, therefore,
appropriate to be classified as the principal risks to be
considered in the assessment of viability. They also appraised
the impact that these principal risks could have on the Group’s
risk profile, taking account of mitigating actions planned or
taken for each, and compared this with the Group’s risk
appetite, as approved by the Board. At 31 December 2016,
there were five heightened top and emerging risks: economic
outlook and capital flows, geopolitical risk, cyber threat and
unauthorised access to systems, IT systems infrastructure and
resilience, and enhanced model risk management expectations.
In carrying out their assessment of the principal risks, the
Directors considered a wide range of information including:
• Details of the Group’s business and operating models, and
strategy.
• Details of the Group’s approach to managing risk and
allocating capital.
• A summary of the Group’s financial performance, and its
capital position and annual operating plan.
• Enterprise-wide risk management reports, including the
Group’s risk appetite profile (see page 68), top and emerging
risks (see page 64) and risk map (see page 70).
• Reports and updates regarding regulatory and internal stress
testing exercises (see page 70). In 2016, the published Bank
of England ('BoE') stress test results for HSBC showed that
our capital ratios after taking account of CRD IV restrictions
and strategic management actions exceeded the BoE’s
requirements. The results for HSBC included an assumed
dividend payment in the first year of the severe stress
projection period.
• Reports and updates from management on risk-related
issues selected for in-depth consideration.
• Reports and updates on the Group’s compliance-related
initiatives connected to the resolution of the investigations
by US and UK regulatory and law enforcement authorities in
December 2012, and also regulatory developments more
generally.
• Legal reports.
Share capital and other disclosures
Share buy-back
On 4 August 2016, HSBC Holdings commenced a share buy-
back of its ordinary shares of $0.50 each for up to a maximum
consideration of $2.5bn which concluded on, 19 December
2016. The purpose of the buy-back was to reduce HSBC’s
number of outstanding ordinary shares, and was funded from a
portion of the proceeds received from the sale of the Group’s
operations in Brazil in July 2016. Further information on this
disposal can be found on page 241.
The nominal value of shares purchased during 2016 was
$162,636,704 and the aggregate consideration paid by HSBC
was £1,970,091,769.
The table that follows outlines details of the shares purchased
on a monthly basis during 2016. At 31 December 2016, the total
number of shares purchased was 325,273,407, representing
1.61% of the shares in issue and 1.64% of the shares in issue
(excluding treasury shares).
Number
of shares
Highest price
paid per share
Lowest price
paid per share
Average price
paid per share
Aggregate
price paid
Maximum value of shares
that may yet be purchased
37,287,407
79,160,560
72,211,730
82,231,879
54,381,831
£
5.6950
5.9420
6.3210
6.4560
6.7530
£
5.1140
5.5650
5.7850
5.8840
6.2010
£
£
5.4551
203,408,308
5.7336
453,876,095
6.1503
444,125,860
6.2433
513,399,612
6.5331
355,281,894
$
2,233,620,166
1,636,117,416
1,085,362,266
448,362,392
58
Month
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Dividends
Dividends for 2016
First, second and third interim dividends for 2016, each of
$0.10 per ordinary share, were paid on 6 July 2016,
28 September 2016 and 6 December 2016, respectively. Note 8
on the Financial Statements gives more information on the
dividends declared in 2016. On 21 February 2017, the Directors
declared a fourth interim dividend for 2016 of $0.21 per ordinary
share in lieu of a final dividend, which will be payable on 6 April
2017 in cash in US dollars, or in sterling or Hong Kong dollars at
exchange rates to be determined on 27 March 2017, with a
scrip dividend alternative. As the fourth interim dividend for
2016 was declared after 31 December 2016 it has not been
included in the balance sheet of HSBC as a liability. The reserves
available for distribution at 31 December 2016 were $42bn.
A quarterly dividend of $15.50 per 6.20% non-cumulative US
dollar preference share, Series A (‘Series A dollar preference
share’), (equivalent to a dividend of $0.3875 per Series A
American Depositary Share (‘ADS’), each of which represents
one-fortieth of a Series A dollar preference share), and £0.01
per Series A sterling preference share was paid on 15 March,
15 June, 15 September and 15 December 2016.
Dividends for 2017
Quarterly dividends of $15.50 per Series A dollar preference
share (equivalent to a dividend of $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 was declared on 8 February
2017 for payment on 15 March 2017.
Share capital
Issued share capital
The nominal value of HSBC Holdings’ issued share capital paid
up at 31 December 2016 was $10,095,807,607 divided into
20,191,586,214 ordinary shares of $0.50 each, 1,450,000 non-
cumulative preference shares of $0.01 each and one non-
cumulative preference share of £0.01, representing
approximately 99.9999%, 0.0001%, and 0%, respectively,
of the nominal value of HSBC Holdings’ total issued share
capital paid up at 31 December 2016.
Rights, obligations and restrictions attaching to shares
The rights and obligations attaching to each class of ordinary
and non-cumulative preference shares in our share capital are
set out in full in our Articles of Association. The Articles of
Association may be amended by special resolution of the
shareholders and can be found on our website at
www.hsbc.com/about-hsbc/corporate-governance/corporate-
governance-codes.
Ordinary shares
HSBC Holdings has one class of ordinary share, which carries
no right to fixed income. There are no voting restrictions on the
issued ordinary shares, all of which are fully paid. On a show
of hands, each member present has the right to one vote at
general meetings. On a poll, each member present or voting
by proxy is entitled to one vote for every $0.50 nominal value
of share capital held. There are no specific restrictions on
transfers of ordinary shares, which are governed by the
general provisions of the Articles of Association and prevailing
legislation.
At the 2016 AGM, shareholders gave authority to the Directors
to offer a scrip dividend alternative on any dividend (including
interim dividends) declared up to the conclusion of the AGM
in 2019.
Information on the policy adopted by the Board for paying interim
dividends on the ordinary shares may be found on page 274, under
the heading ‘Shareholder Information’.
Dividend waivers
HSBC Holdings employee benefit trusts, holding shares in HSBC
Holdings in connection with the operation of its share plans,
have lodged standing instructions to waive dividends on shares
held by them that have not been allocated to employees. The
total amount of dividends waived during 2016 was $2.9m.
HSBC Holdings plc Annual Report and Accounts 2016
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Preference shares
The preference shares, which have preferential rights to income
and capital, do not, in general, confer a right to attend and vote
at general meetings.
There are three classes of preference shares in the share capital
of HSBC Holdings: non-cumulative preference shares of $0.01
each (‘dollar preference shares’); non-cumulative preference
shares of £0.01 each (‘sterling preference shares’); and non-
cumulative preference shares of €0.01 (‘euro preference
Share capital changes in 2016
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.
Information on dividends declared for 2016 and 2017 may be found on
page 215, under the heading ‘Dividends’ and in Note 8 on the Financial
Statements.
Further details of the rights and obligations attaching to the HSBC
Holdings’ issued share capital may be found in Note 32 on the Financial
Statements.
The following events occurred during the year in relation to the ordinary share capital of HSBC Holdings:
HSBC Holdings
ordinary shares issued
Aggregate
nominal value
Market value per share
on
number
$
$
£
20 Apr 2016
63,677,983
6 Jul 2016
111,088,990
28 Sep 2016
139,914,936
6 Dec 2016
122,620,319
31,838,992
55,544,495
69,957,468
61,310,160
6.4120
6.3288
7.1015
7.6227
4.5069
4.3274
5.4468
6.2420
Scrip dividends
Issued in lieu of
Fourth interim dividend for 2015
First interim dividend for 2016
Second interim dividend for 2016
Third interim dividend for 2016
All-employee share plans
HSBC Holdings savings-related share option plans
HSBC ordinary shares issued in £
HSBC ordinary shares issued in HK$
HSBC ordinary shares issued in $
HSBC ordinary shares issued in €
Options over HSBC ordinary shares lapsed
15,437,427
7,718,714
Options over HSBC ordinary shares granted in response to approximately
15,500 applications from HSBC employees in the UK on 21 Sep 2016
15,043,601
HSBC International Employee Share Purchase Plan
102,252
51,126
HSBC share plans
Vesting of awards under the HSBC Share Plan and HSBC Share Plan 2011
64,730,777
32,365,389
HSBC Holdings
ordinary shares
issued
Aggregate
nominal
value
$
Number
Aggregate
nominal
value
$
4,230,999
2,115,500
£
63,091
17,053
42,880
31,546
HK$
8,527
21,440
$
€
£
Exercise price
from
£
4.0472
55.4701
7.1456
5.3532
to
£
5.4738
63.9864
8.2094
6.0657
4.1750
6.6010
Market value per share
from
£
4.3000
to
£
6.7380
Compliance with Hong Kong Listing Rule 13.25A(2)
HSBC Holdings has been granted a waiver from strict
compliance with Rule 13.25A(2) of the Rules Governing the
Listing of Securities on the Stock Exchange of Hong Kong.
Under this waiver, HSBC’s obligation to file a Next Day Return
following the issue of new shares pursuant to the vesting of
share awards granted under its share plans to persons who
are not Directors, would only be triggered where it falls within
one of the circumstances set out under Rule 13.25A(3).
Authorities to allot and to purchase shares and
rights
At the AGM in 2016, shareholders renewed the general
authority for the Directors to allot new shares up to
13,138,649,236 ordinary shares, 15,000,000 non-cumulative
preference shares of £0.01 each, 15,000,000 non-cumulative
preference shares of $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 1,970,797,386
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 1,970,797,386
ordinary shares. The Directors exercised this authority during
the year and purchased 325,273,407 ordinary shares.
In addition, shareholders gave authority for the Directors to
grant rights to subscribe for, or to convert any security into,
no more than 3,941,594,772 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 may be found in Note 32 on
the Financial Statements.
Other than as disclosed in the tables above headed ‘Share
capital changes in 2016’, the Directors did not allot any shares
during 2016.
Debt securities
In 2016, following its capital plan, HSBC Holdings issued the
equivalent of $36.0bn of debt securities in the public capital
markets in a range of currencies and maturities, including
$2.0bn of contingent convertible, $2.6bn of subordinated and
$31.4bn of senior securities to ensure it meets the current and
proposed regulatory rules, including those relating to the
availability of adequate total loss-absorbing capacity. For
additional information on capital instruments and bail-inable
debt, refer to Notes 28 and 32 on pages 244 and 253 and to the
Fixed Income Securities section in the HSBC Investor Relations
website.
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HSBC Holdings plc Annual Report and Accounts 2016
Treasury shares
Sufficiency of float
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 2016 and up to the date of this report.
Dealings in HSBC Holdings listed securities
HSBC Group has policies and procedures that, except where
permitted by statute and regulation, prohibit specified
transactions in respect of its securities listed on The Stock
Exchange of Hong Kong Limited. Except for dealings as
intermediaries or as trustees by subsidiaries of HSBC Holdings,
neither HSBC Holdings nor any of its subsidiaries has
purchased, sold or redeemed any of its securities listed on
The Stock Exchange of Hong Kong Limited during the year
ended 31 December 2016.
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 2016 had interests, all beneficial
unless otherwise stated, in the shares or debentures of HSBC
Holdings and its associated corporations as shown below. Save
as stated no further interests were held by Directors and no
Directors or their connected persons were awarded or exercised
any right to subscribe for any shares or debentures in any HSBC
corporation during the year.
No Directors held any short position as defined in the Securities
and Futures Ordinance of Hong Kong in the shares or
debentures of HSBC Holdings and its associated corporations.
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, 325,273,407 ordinary shares are currently held in
treasury. This was the maximum number of shares held at any
time during 2016; representing 1.61% of the shares in issue.
The nominal value of shares purchased during 2016 was
$162,636,704.
Notifiable interests in share capital
At 31 December 2016, HSBC Holdings had received the
following notification of major holdings of voting rights
pursuant to the requirements of Rule 5 of the Disclosure and
Transparency Rules:
• BlackRock, Inc. gave notice on 25 October 2016 that on
24 October 2016 it had the following: an indirect interest in
HSBC Holdings ordinary shares of 1,172,083,824; qualifying
financial instruments with 1,794,677 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 4,861,174
voting rights, each representing 5.89%, 0.00% and 0.02%,
respectively, of the total voting rights at that date.
At 31 December 2016, 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 27 October 2016 that
on 24 October 2016 it had the following interests in HSBC
Holdings ordinary shares: a long position of 924,250,502
shares; a short position of 162,867,748 shares; and a
lending pool of 437,566,359 shares, each representing
4.60%, 0.81% and 2.18%, respectively, of the ordinary
shares in issue at that date; and
• BlackRock, Inc. gave notice on 25 October 2016 that on
21 October 2016 it had the following interests in HSBC
Holdings ordinary shares: a long position of 1,305,933,089
shares and a short position of 14,892,793 shares, each
representing 6.51% and 0.07%, respectively, of the ordinary
shares in issue at that date.
Since 31 December 2016 to date, no further such notifications
had been received.
HSBC Holdings plc Annual Report and Accounts 2016
149
Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the Directors | Corporate Governance
Directors’ interests – shares and debentures
HSBC Holdings ordinary shares
Phillip Ameen
Kathleen Casey
Laura Cha
Henri de Castries
Lord Evans of Weardale
Joachim Faber
Douglas Flint
Stuart Gulliver
Sam Laidlaw
Irene Lee
John Lipsky
Rachel Lomax
Iain Mackay
Heidi Miller
Marc Moses
David Nish
Jonathan Symonds
Jackson Tai
Pauline van der Meer Mohr
Paul Walsh
Footnotes
At 1 Jan
2016
Beneficial
owner
At 31 Dec 2016
Child
under 18
or spouse
Jointly with
another
person
Trustee
Total
interests1
2
2
3
4
2
2
2
5,000
3,540
5,200
—
7,416
45,778
5,000
8,620
5,200
16,165
9,170
66,605
401,450
402,158
—
—
—
—
—
—
—
2,861,265
3,167,323
176,885
38,012
—
16,165
18,900
39,444
10,000
16,165
18,900
223,872
345,469
3,695
3,975
624,643
824,241
—
—
—
—
—
—
—
—
21,771
—
—
—
—
16,886
10,160
15,000
5,079
50,000
4,885
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
21,445
—
—
—
—
—
—
—
—
—
5,000
8,620
5,200
16,165
9,170
66,605
402,158
— 3,344,208
1,416
—
—
—
—
—
—
—
—
—
—
—
40,860
10,000
16,165
18,900
345,469
3,975
824,241
50,000
21,771
31,605
15,000
5,079
1
2
3
4
Executive Directors’ other interests in HSBC Holdings ordinary shares arising from the HSBC Holdings savings-related share option plans and the HSBC Share Plan 2011 are set
out in the Scheme interests in the Directors’ Remuneration Report on page 153. At 31 December 2016, 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 – 405,077; Stuart Gulliver – 6,576,482; Iain Mackay
– 1,842,063; and Marc Moses – 2,626,463. Each Director’s total interests represents less than 0.04% of the shares in issue and 0.04% of the shares in issue (excluding treasury
shares).
Phillip Ameen has an interest in 1,000, Kathleen Casey has an interest in 1,724, John Lipsky has an interest in 3,233, Heidi Miller has an interest in 795 and Jackson Tai has an
interest in 6,321 listed 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.
Since the end of the year, the number of HSBC Holdings ordinary shares held by Douglas Flint has increased by 22, following an acquisition, through regular monthly
contributions in the HSBC Holdings UK Share Incentive Plan.
Sam Laidlaw has a non-beneficial interest in 1,416 shares that he holds as a trustee.
There have been no changes in the shares or debentures of the
Directors from 31 December 2016 to the date of this report
excluding those disclosed in footnote 3 of the above table.
Listing Rule 9.8.4
The information to be disclosed in the Annual Report and
Accounts pursuant to UK Listing Rule 9.8.4 is contained within
the Corporate Governance Report.
Employees
At 31 December 2016, HSBC had a total workforce of 241,000
full and part-time employees compared with 264,000 at the
end of 2015 and 266,000 at the end of 2014. Our main centres
of employment were the UK with approximately 45,000
employees, India 37,000, Hong Kong 29,000, mainland China
24,000, Mexico 16,000, the US 13,000 and France 9,000.
We encourage employees to perform at their best, and create
an environment to make that possible. We also encourage
employees to speak up, and reflect our purpose and values
in the decisions we make and how we make them, as these
decisions shape the future of our customers and colleagues.
Employee relations
We consult with and, where appropriate, negotiate with
employee representative bodies. It is our policy to maintain
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 culture where individuals
are valued, respected and supported; where different ideas,
backgrounds, styles and perspectives are actively sought out
to create business value; and where advancement is based on
objective criteria. Focus continues on the diversity profile of our
workforce to help ensure it is reflective of the communities in
which we operate and the customers we serve.
Building a more inclusive workplace is part of everyone’s role at
HSBC. Our Global Diversity Policy makes clear the responsibility
of all employees and workers to treat colleagues with dignity
and respect and to create an inclusive environment free from
discrimination, bullying, harassment or victimisation,
irrespective of their age, colour, disability, ethnic or national
origin, gender, gender identity/expression, marital status,
pregnancy, race, religion or belief, or sexual orientation. Our
employees are expected to demonstrate openness to different
ideas and cultures, and their performance in this respect is
reviewed in our year-end review process.
Diversity and inclusion carries the highest level of executive
support at HSBC, and oversight of our diversity agenda and
related activities resides with the Global Diversity and Inclusion
sub-function. We also operate governance forums covering
diversity and inclusion at global line, regional and country levels.
Employee development
The development of our employees is essential to the future
strength of our business. We continue to develop and
implement practices that build employee capability, and identify,
develop and deploy talented employees to ensure an
appropriate supply of high calibre individuals with the values,
skills and experience for current and future senior management
positions.
150
HSBC Holdings plc Annual Report and Accounts 2016
In 2016, we focused on developing technical skills, experiences
and behaviours necessary to deliver against our Global
Standards commitments, along with several Group-wide
cultural programmes for employees and managers as part of
our ‘At Our Best’ initiative.
Employment of people with a disability
We believe in providing equal opportunities for all employees.
The employment of people with a disability is included in this
commitment and the recruitment, training, career development
and promotion of people with a disability 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 physical environment for
our customers and employees, as well as those who work with
us. We aim always to meet the minimum health and safety
standards required by law wherever we operate and, where
reasonably practical, to exceed them.
Everyone at HSBC has a responsibility for helping to create a
safe working environment. Employees are expected to take
ownership of their safety and are encouraged and empowered
to report any concerns.
Chief operating officers have overall responsibility for ensuring
that the correct policies, procedures and safeguards are put into
practice. This includes making sure that everyone in HSBC has
access to appropriate information, instruction, training and
supervision.
In 2016, we completed three major global projects to help us
understand the risks we face, educate and inform our staff, and
improve the buildings in which we operate. We have:
• Concluded a survey of earthquake resilience in more than
1,500 HSBC buildings located in countries at medium to
high risk of earthquakes;
• Conducted more than 250 asbestos surveys in countries
without bans or controls on the use of the potentially
harmful material; and
• Completed more than 1,800 fire risk assessments of our
buildings around the world.
Employee health and safety
Footnote
2016
2015
2014
Number of employee workplace fatalities
1
1
—
2
Accidents involving more than three days’
absence
All accident rate per 100,000 employees
75
241
110
274
96
388
1 Non-HSBC staff working on HSBC-related activity.
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 Group.
HSBC’s reward strategy supports this objective through
balancing both short-term and sustainable performance. 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
maintaining a long-term career with the Group while performing
their role in the long-term interests of our stakeholders.
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, and 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 Group.
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 153.
Employee share plans
Share options and discretionary awards of shares granted under
HSBC share plans align the interests of employees with the
creation of shareholder value. The table below sets 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 and suppliers of goods or services, nor 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 2016 is shown
in the table below. 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 http://www.hsbc.com/about-hsbc/
corporate-governance/employee-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 165.
Note 5 on the Financial Statements gives details of share-based payments,
including discretionary awards of shares granted under HSBC share plans.
All-employee share plans
HSBC operates all-employee share option plans under which
options are granted over HSBC ordinary shares. Subject to
leaver provisions, options are normally exercisable after three
to five years. During 2016, options were granted at the mid-
market price for HSBC Holdings ordinary shares quoted on
the London Stock Exchange which, as derived from the Daily
Official List on 20 September 2016, the day prior to grant,
was £5.83.
The UK Sharesave will terminate on 23 May 2025 unless the
Directors resolve to terminate the plans at an earlier date. There
will be no further grants under the HSBC Holdings Savings-
Related Share Option Plan: International.
The HSBC International Employee Share Purchase Plan was
introduced in 2013 and now includes employees based in
26 jurisdictions.
HSBC Holdings plc Annual Report and Accounts 2016
151
Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the Directors | Corporate Governance / Director's Remuneration Report
HSBC Holdings All-employee Share Option Plans
Exercise price
Exercisable
At
Granted
Exercised
Lapsed
At
HSBC Holdings ordinary shares
to
(£)
Dates of awards
from
to
from
Savings-Related Share Option Plan
21 Apr
2010
21 Sep
2016
(£)
4.0472
5.4738
Savings-Related Share Option Plan: International
21 Apr
2010
21 Apr
2010
21 Apr
2010
21 Apr
2010
24 Apr
2012
24 Apr
2012
24 Apr
2012
24 Apr
2012
(£)
(£)
4.4621
5.4573
($)
($)
7.1456
8.2094
(€)
5.3532
(HK$)
(€)
6.0657
(HK$)
55.4701
63.9864
from
to Footnotes
1 Jan 2016
during year
during year
during year 31 Dec 2016
1
2
1 Aug
2015
30 Apr
2022
1 Aug
2014
1 Aug
2014
1 Aug
2015
1 Aug
2015
31 Jan
2018
31 Jan
2018
31 Jan
2018
31 Jan
2018
71,709,819
15,043,601
3,834,045 14,141,959
68,777,416
1,130,991
665,445
153,610
1,114,830
—
—
—
—
396,954
293,728
440,309
17,053
430,654
217,738
42,880
23,814
86,916
63,091
547,272
504,467
1
2
The weighted average closing price of the shares immediately before the dates on which options were exercised was £5.75.
The weighted average closing price of the shares immediately before the dates on which options were exercised was £5.10.
On behalf of the Board
Douglas Flint
Group Chairman
HSBC Holdings plc
Registered number 617987
21 February 2017
152
HSBC Holdings plc Annual Report and Accounts 2016
Directors’ Remuneration Report
Annual Statement from the Group Remuneration
Committee Chairman
Directors’ remuneration policy
Remuneration policy for all employees
Annual report on remuneration
Additional remuneration disclosures
Page
153
155
156
159
170
All disclosures in the Directors’ Remuneration Report are
unaudited unless otherwise stated.
Disclosures marked as audited should be considered audited
in the context of financial statements taken as a whole.
Annual Statement from the Group
Remuneration Committee Chairman
Dear Shareholder,
The Group Remuneration Committee (‘the Committee’) is
guided by a series of principles. These are set out in the
Strategic Report on page 28, but it is worth mentioning a few
here to help explain our work.
To attract and retain talent, remuneration at HSBC must be
competitive. However, we place a strong emphasis on linking
pay to performance. We particularly emphasise the need for
performance that benefits the Group over the long-term, and
reflects HSBC Values and the highest standards of conduct.
In 2016, we introduced a new remuneration policy for our
executive Directors. It reflected feedback from shareholders,
especially in its introduction of a long-term incentive (‘LTI’)
award with a three-year forward-looking performance period, a
seven-year deferral period, and a reduction in the cash in lieu of
pension allowance for the executive Directors. I believe the new
policy achieves strong alignment between the interests of our
executive Directors and shareholders, and the performance
measures for the new LTI award will reward long-term
sustainable performance.
We were pleased that the new policy received strong support at
our Annual General Meeting ('AGM') in April 2016, with over
96% of shareholders voting in favour.
This year’s Remuneration Report shows how the Committee has
applied the new policy, aligning executive pay with the Group’s
performance, both for the year and against its long-term
strategic objectives.
Performance achieved during 2016
Reported profit before tax for the year fell 62% to $7.1bn.
However, on an adjusted basis, excluding significant items and
currency translation differences, profit before tax was $19.3bn,
broadly in line with prior-year. The Group's cost performance
improved as prior-year initiatives gained traction and
substantially offset higher loan impairment charges and
marginally lower revenues.
The Group is now more than a year into implementing the
strategic actions set out in its Investor Update in June 2015.
These aim to improve returns, deliver cost savings, reduce
RWAs, rebuild profitability in Mexico and the US, optimise and
capture value from our international network, and complete the
implementation of Global Standards programme to help combat
financial crime.
Measures were incorporated into the 2016 annual incentive
scorecards of the executive Directors to align their pay with
progress against achievement of these objectives.
The Group made strong progress in a number of areas. It
reduced RWAs by $143bn in 2016, taking it more than 97% of
the way towards its target for the end of 2017. It achieved cost
savings of $2.25bn, despite continued investment in
compliance, regulatory programmes and growth. Furthermore,
it is on its way to restoring profitability in Mexico. In the second
half of 2016, it executed a share buy-back worth approximately
$2.5bn as a way of distributing capital to shareholders. In 2016,
in sterling terms, our share price increased by 23% and the total
shareholder return was 32%.
Group variable pay pool and risk adjustments
The Group variable pay pool is used to fund performance-related
pay across the Group. In determining the size of the pool for
2016, the Committee took into consideration the Group’s
financial performance, fines, penalties and customer redress
costs, as well as progress implementing and embedding Global
Standards.
The total value of the pool for 2016 was $3,035m, which was
12.3% lower than the $3,462m figure for 2015.
In particular, the 2016 pool included the following reductions of:
• $194m for the fines, penalties and cost of customer redress
faced by the Group; and
• $309m for:
–
financial performance in certain key areas, in particular,
profit before tax, return on risk-weighted assets and
adjusted jaws;
– performance against certain metrics in our Group risk
appetite profile; and
– continued work required to address financial crime
compliance issues and the embedding of Global
Standards within our businesses.
In addition to the pool adjustments, we reduced variable pay
awards to certain individuals by $12.1m in aggregate to reflect
their involvement in certain notable events and individual
transgressions.
Executive Directors’ remuneration for 2016
In line with the policy approved by shareholders, we have
reduced the cash in lieu of pension from 50% of base salary to
30% for executive Directors. This has resulted in fixed pay,
including allowances, reducing by 7% in 2016. No increases in
fixed pay are proposed for 2017.
The 2016 annual incentive scorecard outcome for financial
measures was 35.3% for Stuart Gulliver, 30.0% for Iain Mackay
and 15.0% for Marc Moses, reflecting their individual
scorecards and the performance achieved in cost savings,
reductions in RWAs and achievements against our strategic
objectives.
Since establishing the new Financial Crime Risk function in
July 2016, there has been a significant focus on transition from
a programme of change to business-as-usual financial crime
management across all countries, regions and global
businesses. But there is more to be done. The Committee
exercised its discretion to reduce the Global Standards
assessments for executive Directors down to 65%. This was
based on feedback received from the Monitor, matters arising
from risk and compliance incidents, and a number of
unsatisfactory internal audits covering anti-money laundering
(‘AML’) and sanctions-related issues.
Details of the annual incentive scorecard outcome are provided
on page 161.
In line with the new policy, no Group Performance Share Plan
(‘GPSP’) awards were made in respect of the year ended
31 December 2016. This has resulted in a significant decrease in
the total single figure of remuneration for executive Directors
when compared with the year ending 31 December 2015.
The new LTI award for our executives, awarded while taking into
account performance in the financial year ended 31 December
2016, is subject to a forward-looking three-year performance
period (1 January 2017 to 31 December 2019) and a seven-year
HSBC Holdings plc Annual Report and Accounts 2016
153
Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Directors’ Remuneration Report
deferral period. This ensures a significant proportion of
executive Directors’ pay continues to be deferred. This, together
with the fact that the majority of compensation is awarded in
shares, helps ensure it is aligned with the achievement of our
long-term strategic objectives, and the long-term interests of
shareholders and other stakeholders. Details of the performance
measures for the LTI award to be granted in 2017 in respect of
2016, and the relevant targets for each measure, are provided
on page 164.
Implementation of policy for 2017
This year will be the final one for implementing the strategic
actions set out in the Investor Update. The 2017 annual
incentive scorecards for the executive Directors are designed
to drive delivery against these objectives.
Details of the performance measures for the 2017 annual
incentive scorecards are on page 169. However, for reasons of
commercial sensitivity, the specific targets for each measure
will not be disclosed until the end of the 2017 performance
period, when performance against the targets will also be
disclosed.
Fees for non-executive Directors were reviewed by the
Committee in 2016. Recognising the growing regulatory
responsibilities and time commitment required from our
Directors, their fees have been increased with
effect from 1 January 2017. A travel allowance has also been
introduced for non-UK based non-executive Directors to reflect
the additional time commitment required for travel. The details
of the increases are provided on page 156.
The Committee will continue to monitor the remuneration
arrangements for executive Directors, and meet with our major
shareholders on implementation of the policy in 2017. The
Committee will also continue to monitor any reform proposed
for corporate governance and executive pay, and will consider
any changes that may be required to our approach on
remuneration in this regard.
Our annual report on remuneration
The following sections of this Remuneration Report provide
an overview of the policy for executive Directors, which was
approved by shareholders at the 2016 AGM, and details of
remuneration decisions made for executive Directors in 2016.
The report also covers the application of the 2016 policy to
other Group employees.
As Chairman of the Committee, I hope you will support the
report.
Finally, I will be retiring as a non-executive Director of the Group
and as chairman of this Committee at the conclusion of the
2017 AGM. I am delighted that Pauline van der Meer Mohr, who
is already a member of the Committee, has agreed to succeed
me as chairman at that time.
Sam Laidlaw
Chairman
Group Remuneration Committee
21 February 2017
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HSBC Holdings plc Annual Report and Accounts 2016
Implementation in 2017
No change from 2016.
• Douglas Flint: £1,500,000
• Stuart Gulliver: £1,250,000
Iain Mackay: £700,000
•
• Marc Moses: £700,000
No change from 2016.
• Douglas Flint: Nil
• Stuart Gulliver: £1,700,000
Iain Mackay: £950,000
•
• Marc Moses: £950,000
Directors’ Remuneration policy
The tables below summarise our remuneration policy for
executive and non-executive Directors. The policy was approved
at the AGM on 22 April 2016 and is intended to apply for three
performance years until the AGM in 2019. The full remuneration
policy can be found on pages 288 to 299 of our Annual Report
and Accounts 2015 and in the Directors' Remuneration Policy
Supplement 2016 of this Annual Report and Accounts 2016,
which is available in the Investor Relations section of
www.hsbc.com.
Remuneration policy summary – executive Directors
Elements
Operation
Base salary
To attract and retain key talent by being
market competitive and rewarding
ongoing contribution to role.
• Paid in cash on a monthly basis.
• Base salary increases will not exceed 15% in total during the
three-year term of the policy.
Fixed pay allowance
To deliver fixed pay required to reflect
the role, skills and experience of the
Directors and to maintain a competitive
total remuneration package for
retention of key talent.
Pension
To attract and retain key talent by being
market competitive.
• Non-pensionable and paid in shares.
• Released annually on a pro rata basis over five years,
starting from the March immediately following the end of
the financial year in which the shares were granted.
• Dividends paid on the vested shares held during the
retention period.
• Directors receive cash in lieu of a pension equal to 30% of
No change from 2016.
base salary.
Benefits
To provide benefits in accordance with
local market practice.
•
Include, for example, the provision of medical insurance,
income protection insurance, health assessment, life
assurance, club membership, tax return assistance, car
benefit and travel assistance, including any tax due on the
benefit.
No change from 2016.
Annual incentive
To drive and reward performance
against annual financial, non-financial
and personal objectives which are
consistent with the strategy and align
to shareholder interests.
Long-term incentive (‘LTI’)
To incentivise sustainable long-term
alignment with shareholder interests.
Shareholding guideline
To ensure appropriate alignment with
the interest of our shareholders.
• Additional benefits may also be provided where an executive
is relocated or spends a substantial proportion of their time
in more than one jurisdiction for business purposes.
• Maximum opportunity for annual incentive award is 215% of
• See page 169 for details of performance
base salary.
measures.
• Performance is measured against an annual scorecard and
varies by individual.
• Shares issued are subject to a retention
period of up to one year after vesting.
• On vesting, shares are subject to a minimum retention
period of at least six months.
• Maximum opportunity for LTI award is 320% of base salary.
• Award is subject to a three-year forward-looking
performance period.
• Performance is measured against a long-term scorecard.
60% is based on financial outcomes and 40% is based on
non-financial outcome, including risk and strategy-related
measures.
• Awards vest in five equal instalments with the first vesting
on or around the third anniversary of the grant date, and the
last vesting on or around the seventh anniversary of the
grant date.
• Awards are discretionary and subject to malus during the
vesting period and claw-back for a period of seven to
10 years from the date of award.
The shareholding guidelines as a percentage of base salary are:
• Group Chairman: 100%
• Group Chief Executive: 400%
• Group Finance Director and Group Chief Risk Officer: 300%
• Details of the performance measures
and targets for awards to be made in
2017 (in respect of 2016) are set out on
page 164.
• For awards to be made in respect of
2017, the measures and targets will be
determined at the end of 2017 for the
performance period commencing on 1
January 2018.
• On vesting, awards are subject to a
retention period of up to one year.
• Number of shares to be awarded can
be determined using a share price
discounted for dividend yield.
No change from 2016.
Executive Directors are also entitled to participate in all
employee share plans, such as HSBC Sharesave, on the same
basis as all other employees. The policy on payment for loss of
office is detailed online in the Directors’ Remuneration Policy
Supplement 2016.
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Remuneration policy summary – non-executive
Directors
achieved within five years from 2014 or their appointment if
later.
Non-executive Directors are not employees and receive a fee for
their services. The policy for non-executive Directors is to pay:
• base fees; and
•
further fees for the role of Senior Independent Director
(‘SID’) and additional Board duties such as chairmanship or
membership of a committee.
Expenses incurred in performing their roles and any related tax
due are also reimbursed. All non-executive Directors have a
shareholding guideline of 15,000 shares, which has to be
The Committee has reviewed the fee levels payable to non-
executive Directors and decided an increase will be applied to
reflect growing regulatory responsibilities and time
commitment. A travel allowance of £4,000 will also be
introduced for non-UK based non-executive Directors to reflect
the additional time commitment required for travel. The
increases in fees is within the 20% maximum increase during
the three-year term of the remuneration policy. Fees for 2017
are detailed below.
Category
Base fee
SID
Audit, Risk, Remuneration, Financial System Vulnerabilities and Conduct & Values Committees
Nomination Committee
Philanthropic & Community Investment Oversight Committee
Service contracts
Executive Directors
Contract date
(rolling)
Notice period
(Director & HSBC)
Douglas
Flint
14 Feb
2011
Stuart
Gulliver
10 Feb
2011
Iain
Mackay
4 Feb
2011
Marc
Moses
27 Nov
2014
12 months 12 months 12 months 12 months
Letters setting out the terms of appointment of each executive
Director are available for inspection at HSBC Holdings’
registered office. 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.
2016 fees
2017 fees
£
£
95,000
45,000
50,000
30,000
40,000
25,000
25,000
15,000
110,000
54,000
60,000
30,000
40,000
25,000
25,000
15,000
Chairman
Member
Chairman
Member
Chairman
Member
The Directors’ biographies are set out on pages 133 to 136, and
include those directorships provided for under Capital
Requirement Directive IV (‘CRD IV’).
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 AGMs. Non-executive Directors
do not have service contracts, but are bound by letters of
appointment issued for and on behalf of HSBC Holdings. There
are no obligations in the non-executive Director’s 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:
2017 AGM
Kathleen Casey
Laura Cha
Lord Evans of Weardale
Sam Laidlaw
Jonathan Symonds
2018 AGM
Phillip Ameen
Joachim Faber
John Lipsky
Rachel Lomax
Heidi Miller
2019 AGM
Henri de Castries
Irene Lee
Pauline van der Meer Mohr
Paul Walsh
2020 AGM
David Nish
Jackson Tai
Remuneration policy for all employees
The Committee oversees the Group’s remuneration policy and
its application to the wider employee population. The
Committee periodically reviews the adequacy and effectiveness
of the policy and ensures that it:
• meets the commercial requirement to remain competitive;
•
is affordable;
• allows flexibility in response to prevailing circumstances;
•
is compliant with regulatory requirements;
• aligns with the long-term interests of our stakeholders; and
•
is consistent with effective risk management.
The mix of fixed and variable pay granted to an employee
corresponds to the individual’s role, local market factors and
regulatory requirements. The variable pay for all material risk
takers (‘MRTs’) is restricted to a maximum of 200% of their fixed
pay. Individuals are identified as MRTs based on the qualitative
and quantitative criteria set out in the Regulatory Technical
Standard EU 604/2014 and additional criteria determined by the
Committee. The table provides an overview of the different
remuneration elements for our employees.
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Component of remuneration
Application
Fixed pay
• Attract and retain employees by paying market-competitive pay for the role, skills and experience required by the
business.
• This may include salary, fixed pay allowance, cash in lieu of pension and other cash allowances in accordance with
local market practices.
• These payments are fixed and do not vary with performance.
Pension and benefits
• Provided in accordance with local market practice. They include, but are not limited to, the provision of pensions,
medical coverage, life insurance, health assessment, tax return preparation, legal fees and relocation allowances.
Annual incentive
• Awards to drive and reward performance based on annual financial and non-financial measures consistent with the
medium-to-long-term strategy, shareholder interests and adherence to HSBC Values.
• For MRTs, awards are normally subject to a 40% or 60% deferral, delivered in cash and/or shares, subject to a
minimum six-month retention period. From 2016 onwards, the deferral period could be three, five or seven years,
depending on the regulatory status of the employee. Deferred awards are subject to malus. All awards are subject to
claw-back and compliance with local laws.
• For all other employees, awards can be in the form of cash and/or shares. Awards above a specified threshold are
subject to deferral based on a deferral table. All deferred awards are subject to malus.
• HSBC operates an anti-hedging policy for all employees who are required to certify each year that they have not
entered into any personal hedging strategies.
Link between performance and reward
Under our remuneration framework, pay decisions are based
on a number of factors: business results, individual performance
against scorecard objectives and adherence to HSBC Values,
business principles, policies, procedures and Global Standards.
At the end of each performance year, assessment of
performance against scorecard objectives, including non-
financial and risk objectives, forms the basis of remuneration
decisions. This helps ensure risk management is embedded and
forms an integral part of all our activities.
The performance and remuneration of individuals in control
functions is assessed according to a balanced scorecard of
objectives specific to the functional role they undertake, to
ensure their remuneration is determined independent of the
performance of the business areas they control.
Key feature
Application
HSBC Values play a key role in ensuring the Group remains
sound and sustainable. All employees are given a separate
values-aligned behavioural rating, which informs their eligibility
for variable pay and influences their variable pay
determinations.
Regular reviews are undertaken to assess instances of non-
compliance with risk procedures and expected behaviours.
Instances of non-compliance are escalated for consideration
in variable pay decisions, using our adjustment, malus and
claw-back policies (see the next section).
The key features of our remuneration framework that enable us
to achieve alignment between risk, reward and performance are
set out below.
Scorecards
• Assessment of performance with reference to clear and relevant objectives set within a performance scorecard framework.
• Global Standards including risk and compliance measures and conduct, set at a minimum of 25% of the scorecard for Group
Management Board members.
Group variable
pay pool
calculation
Deferral of
variable pay
Malus/adjustment
policy
• Fines and penalties are automatically included in the Committee’s definition of profit.
• Performance against metrics in the Group Risk Appetite Statement and Conduct Framework is taken into consideration.
• Deferral of a significant proportion of variable pay into HSBC shares and/or other instruments to tie recipients to the future
performance of the Group and business units.
• Allows cancellation/reduction of unvested deferred variable pay awards. Longer deferral period under PRA Remuneration
Rules increases the time period over which malus can be applied.
• This is in addition to our in-year variable pay adjustments and other disciplinary actions that can be taken under our global
consequence management policy.
Claw-back policy
• Subject to compliance with local labour laws, allows us to recoup/reclaim paid awards in certain circumstances as defined
by the PRA for a period of up to seven-years from grant (can be extended to 10 years for individuals in PRA designated
Senior Management Function roles).
Retail/wealth
compensation
• We removed commission based sales plans globally for Wealth in 2013 and Retail in 2014.
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The following policies help embed values in our remuneration
structure while ensuring greater global consistency in our
approach to achieving alignment between risk and reward.
Programmes
Application
Values rating for
all employees
Performance
management
• To ensure performance is judged not only on what is achieved in the short and long term but also on how it is achieved,
which contributes to the sustainability of the Group.
• Strong correlation is expected between performance and values.
• No discretionary variable pay for an unacceptable behaviour rating.
• 2016 focus on moving away from traditional cycle-based performance management towards a culture of everyday
performance and development.
Global consequence
management policy
Introduced to increase consistency in approach and actions taken.
•
• Clear messaging to employees on impact of breaches as part of reward communications (through pay statements,
manager guidelines, etc.).
Positive adjustments • To focus on positive behaviours in the context of Global Standards through in-year positive variable pay adjustments.
Global recognition
programme
• Circa 80% of the global employee population can now access a single HSBC recognition platform to perform values-based
peer-to-peer recognition.
Includes communication of positive stories on our intranet (HSBC Now).
•
Variable pay adjustment, malus and claw-back
Where there are instances of conduct breaches, the actions
below can be taken. The Committee has discretion to apply
malus and claw-back under the policies it has adopted, taking
into consideration an individual’s proximity to, and responsibility
for, the issue in question. Where possible, an adjustment will
be made to current-year variable pay, before the application
of malus, then claw-back. This is in line with regulatory
requirements.
Type of action
Type of variable pay award affected
Circumstances where it may apply (including, but not limited to)
Adjustment
• Current-year variable pay.
• Detrimental conduct, including conduct which brings the business into disrepute.
Involvement in events resulting in significant operational losses, or events which
•
have caused or have the potential to cause significant harm to HSBC.
• Non-compliance with HSBC Values and other mandatory requirements or policies.
Adjustment
under the
downward
override policy
• Current-year variable pay for
• Downward override policy was introduced in 2014, based on the
executive Directors and certain other
senior executives.
recommendations received from the independent Monitor as appointed by the US
Deferred Prosecution Agreement (‘DPA’).
• A downward adjustment can be applied where there is:
– insufficient yearly progress in developing an effective AML and sanctions
compliance programme; or
•
– non-compliance with the DPA and other relevant orders.
In deciding the application and degree of any such downward override to reduce
variable pay awards, the Committee considers feedback from the Financial System
Vulnerabilities Committee, the Monitor in relation to cooperation with their review
and Legal.
• Detrimental conduct, including 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.
• Participation in, or responsibility for, conduct which results in significant losses.
• Failing to meet appropriate standards 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 in the
context of Group risk-management standards, policies and procedures.
Malus
• Unvested deferred awards granted in
prior years.
Claw-back
• Vested or paid awards granted to
MRTs on or after 1 January 2015 for
seven years.
• From 2016 onwards, this period may
be extended to 10 years for
employees under the PRA’s Senior
Manager Regime in the event of
ongoing internal/regulatory
investigation at the end of the seven-
year period.
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Annual report on remuneration
Remuneration Committee
Details of the roles, responsibility and membership of the
Committee are set out on page 144. No executive Directors
are involved in deciding their own remuneration.
Activities
The Committee met nine times during 2016. The following is a
summary of the Committee’s key activities during 2016. A copy
of the Committee’s terms of reference can be found on our
website at www.hsbc.com/about-hsbc/corporate-governance/
board-committees.
Details of the Committee’s key activities
Month
Activities
Month
Activities
Jan
• Reviewed and approved pay review matters and regulatory
Jul
filings.
• Received updates on notable events.
• Received updates on regulatory changes.
Feb
• Approved 2015 performance year pay review matters.
• Considered progress update on 2015 Monitor
Sept
recommendations.
• Approved 2015 Directors’ Remuneration Report and
Strategic Report including new policy for Directors.
• Received updates on notable events.
• Received updates on regulatory changes.
• Reviewed and approved regulatory filling for 2016.
• Received updates on notable events.
• Updated on high-priority programmes progress.
• Reviewed 2016 performance year pay review matters.
• Received updates on notable events.
• Noted progress updates from 2016 Monitor
recommendations.
• Reviewed fixed pay framework.
• Reviewed executive Directors’ scorecards.
• Approved Group-wide variable pay deferral policy.
Apr
• Met with Monitor to discuss incentivisation workstream.
• Considered matters discussed with regulators and reviewed
regulatory filings.
May
• Approved 2016 MRT list.
• Received updates on notable events.
• Considered shareholder feedback received on executive
remuneration policy matters.
Advisers
The Committee received input and advice from different
advisers on specific topics during 2016. Deloitte LLP (‘Deloitte’)
was appointed by the Committee in 2015 as an objective,
independent adviser to support the Committee on specific
remuneration matters for executive Directors. The Committee
made the appointment after considering invited proposals from
a number of consultancy firms. In 2016, the Committee agreed
to extend Deloitte’s appointment for a further period of one
year. Deloitte provided benchmarking data on remuneration
policy matters and independent advice to the Committee. The
Committee may request ad-hoc assistance from Deloitte.
Deloitte also provided services to the Group, comprising tax
compliance and other advisory services. To ensure the advice
from Deloitte was objective, the Committee required the advice
to be independent and distinct from any internal review and
analysis on remuneration policy matters. The Committee was
satisfied the advice provided by Deloitte was objective and
independent in 2016. Deloitte is a founding member of the
Remuneration Consultants Group and voluntarily operates
under the Code of Conduct in relation to executive remuneration
consulting in the UK.
For 2016, total fees of £168,150 were incurred in relation to its
remuneration advice provided by Deloitte. This was based on
pre-agreed fees and a time and materials basis.
During the year, the Group Chief Executive provided regular
briefings to the Committee. In addition, the Committee received
updates from the following employees as part of their roles with
HSBC:
Oct
and
Nov
Dec
• Committee Chairman met with shareholders.
• Reviewed 2016 performance year pay review matters.
• Reviewed 2016 regulatory submissions.
• Received updates on notable events.
• Reviewed long-term incentive scorecard.
• Received updates on investor guidelines.
• Approved 2016 performance year pay matters.
• Approved 2016 regulatory submissions.
• Reviewed executive Directors’ scorecards and pay proposals.
• Approved long-term incentive scorecard measures.
• Pierre Goad, Group Head of Human Resources
(until August 2016);
• Donna Wong, Acting Group Head of Human Resources
(from September 2016);
• Alexander Lowen, Group Head of Performance and Reward;
• Marc Moses, Group Chief Risk Officer;
•
Iain Mackay, Group Finance Director;
• Colin Bell, Group Head of Financial Crime Risk;
• Robert Werner, Former Global Head of Financial Crime
Compliance and Group Money Laundering Reporting Officer;
• Ralph Nash, Global Head of Financial Crime Compliance;
• John Flint, Chief Executive Retail Banking and Wealth
Management;
• Stuart Levey, Chief Legal Officer; and
• Andy Maguire, Group Chief Operating Officer.
The Committee also received feedback and input from the
Group Risk Committee, the Financial System Vulnerabilities
Committee and the Conduct & Values Committee on risk and
compliance-related matters relevant to remuneration. This
included input from the Financial System Vulnerabilities
Committee on the implementation and annual assessment of
progress on the AML and sanctions compliance programme
for the purposes of the Committee’s determination on any
adjustments to be made under the downward override policy.
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Single figure of remuneration
The following table shows the single figure total remuneration
of each executive Director for 2016, together with comparative
figures for 2015.
(Audited)
(£000)
Douglas Flint
Stuart Gulliver
Iain Mackay
Marc Moses
2016
2015
2016
2015
2016
2015
2016
2015
Base
salary
1,500
1,500
1,250
1,250
700
700
700
700
Fixed pay
allowance
Pension
Annual
incentive
GPSP/LTI
Sub-total
Taxable
benefits
Non-
taxable
benefits
Notional
returns
—
—
1,700
1,700
950
950
950
950
450
750
375
625
210
350
210
350
—
—
1,695
1,072
987
1,068
1,005
827
—
—
—
1,969
—
1,101
—
1,101
1,950
2,250
5,020
6,616
2,847
4,169
2,865
3,928
100
151
557
662
52
54
15
6
86
95
71
53
37
28
38
29
—
—
27
9
17
5
18
5
Total
2,136
2,496
5,675
7,340
2,953
4,256
2,936
3,968
Year-on-year single figure comparison
(Unaudited)
The GPSP was replaced by the LTI in 2016. As such, no GPSP
award was made for 2016 and the value for 2016 is nil.
The first LTI award will be made in March 2017, with a
performance period ending in 2019. Vesting of the first
LTI award will be included in the single figure table for the
financial year ending on 31 December 2019. For year-on-year
comparison purposes, if target performance is achieved over the
three-year performance period, LTI payout for the 2016 award
would be 50% of grant value. In this case, the 2016 single figure
total remuneration of the executive Directors for year-on-year
comparison would be (in £000) £7,670 for Stuart Gulliver,
£4,069 for Iain Mackay and £4,052 for Marc Moses.
Illustration of release profile
The following chart provides an illustrative release profile for
executive Directors.
Illustration of release profile
Fixed pay
allowance
• Released in five equal annual instalments starting from
March 2017.
Annual
incentive
• Paid in immediately vested shares subject to minimum six-
month retention period.
• Subject to claw-back provisions for seven-years, which
may be extended in the event of an ongoing internal/
regulatory investigation.
• Award subject to three-year forward-looking performance
period.
Long-term
incentive
• Subject to satisfaction of performance conditions, awards
will vest in five equal annual instalments starting from the
third anniversary of the grant date.
• On vesting, shares are subject to a minimum six-month
retention period.
Notes to the single figure of remuneration
(Audited)
Benefits
In the single figure of remuneration table above, ‘Benefits’
refers to:
• all taxable benefits (gross value before payment of tax)
including provision of medical insurance, accommodation
and car, club membership, tax gross-up for accommodation
and car benefit; and
• non-taxable benefits including the provision of life assurance
and other insurance cover.
The values of the significant benefits in the above table are set
out below.
(Audited)
(£000)
Douglas Flint
Stuart Gulliver
Iain Mackay
Marc Moses
2016
2015
2016
2015
2016
2015
2016
2015
Car benefit
(UK and Hong Kong)1
Hong Kong bank-owned
accommodation2
Tax expense on car benefit and
Hong Kong bank-owned
accommodation
Insurance benefit
(non-taxable)1
—
69
64
87
—
—
—
—
—
—
263
281
—
—
—
—
—
57
211
275
—
—
—
—
75
80
63
—
—
—
—
—
1
2
The car benefits, tax on car benefits and insurance benefits for Iain Mackay and Marc Moses are not included in the above table as they were not significant.
Based on the current market rental value of the bank-owned property in Hong Kong, 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.
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Notional returns
In the single figure of remuneration table above, ‘Notional
returns’ refers to the notional return on deferred cash.
The deferred cash portion of the annual incentive also includes
a right to receive notional returns for the period between grant
date and vesting date, which is determined by reference to the
dividend yield on HSBC shares, calculated 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.
Determining executive Directors’ annual
performance
(Audited)
Awards made to executive Directors reflected the Committee’s
assessment of the extent to which they had achieved personal
and corporate objectives set within their performance scorecard
as agreed at the beginning of the year, which had been set to
reflect the risk appetite and strategic priorities. In accordance
with the downward override policy, the Committee also
consulted the Financial System Vulnerabilities Committee and
took into consideration their feedback in relation to progress on
enhancing AML and sanctions compliance along with progress
in meeting the Group’s obligations under the US DPA and other
relevant orders. The Committee also took into consideration the
report of the independent Monitor in determining the scorecard
outcomes.
In order for any annual incentive award to be made, each
executive Director must meet a required behavioural rating
which is assessed with reference to the HSBC Values. For 2016,
all executive Directors met the required behavioural rating.
For 2016, the Committee exercised its discretion and reduced
the Global Standards assessments from 75% to 65% for Stuart
Gulliver, from 86% to 65% for Iain Mackay and from 74% to
65% for Marc Moses. This was based on feedback received
from the Monitor, matters arising from risk and compliance
incidents, and a number of unsatisfactory internal audits
covering AML and sanctions-related issues.
The performance achieved by executive Directors in the year is
shown in the table below.
Annual assessment
Profit before tax1
Deliver cost savings
Reduce Group RWAs
Strategic growth
Global Standards including
risk and compliance
Personal objectives
Total
Maximum annual incentive
opportunity (£000)
Annual incentive (£000)
Stuart Gulliver
Iain Mackay
Marc Moses
Weighting
(%)
Assessment
(%)
Outcome
(%)
Weighting
(%)
Assessment
(%)
Outcome
(%)
Weighting
(%)
Assessment
(%)
Outcome
(%)
20.00
20.00
10.00
10.00
25.00
15.00
100.00
0.00
100.00
100.00
52.70
65.00
81.27
0.00
20.00
10.00
5.27
16.25
12.19
63.71
£2,660
£1,695
20.00
20.00
10.00
–
25.00
25.00
100.00
0.00
100.00
100.00
–
65.00
80.00
0.00
20.00
10.00
–
16.25
20.00
66.25
£1,490
£987
10.00
–
0.00
–
15.00
100.00
–
–
50.00
25.00
100.00
65.00
80.00
0.00
–
15.00
–
32.50
20.00
67.50
£1,490
£1,005
1 Adjusted profit before tax, as defined for Group annual bonus pool calculation. This excludes the year-on-year effects of foreign currency translation differences, fair value
movements on our own debt, business disposal gains and losses, acquisitions and goodwill, debt valuation adjustments, restructuring costs included in costs to achieve and
variable pay expense. The adjusted profit before tax includes the cost of fines, penalties and costs of customer redress.
Financial performance
Annual assessment
Measure
Profit before tax
Deliver cost savings1
Reduce Group RWAs
Strategic growth2
Minimum
(25% payout)
Maximum
(100% payout)
Performance
Assessment
$19.7bn
$34.0bn
$100.0bn
Various
$20.6bn
$32.9bn
$110.0bn
Various
$18.2bn
$30.7bn
$143.0bn
Partly met targets for seven measures
and did not meet minimum targets for
two measures.
0%
100%
100%
5.27%
1 Measured by reference to Group adjusted cost base.
2
Strategic growth measures on optimising global network, rebuilding NAFTA region profitability, delivering growth above GDP from international network, pivot to Asia and
renminbi internationalisation.
HSBC Holdings plc Annual Report and Accounts 2016
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Non-financial performance
The table below provides an overview of the non-financial
performance achieved by each executive Director.
Stuart Gulliver
Global Standards including risk
and compliance
• Effective risk management in
compliance with AML, sanctions
and anti-bribery and corruption
policies.
• Enhancement of customer due
•
diligence.
Implementation and embedding
of global conduct programme.
• Progress on embedding Global
Standards.
Personal objectives
• Progress transactions in Brazil
and Turkey.
• Progress key milestones on set-up
of UK ring-fenced bank.
• Delivery of other high-priority
projects.
• People development including
diversity.
Iain Mackay
Global Standards including risk and
compliance
• Strengthen governance and control
around financial processes.
• Delivery of controls optimisation
•
project.
Implementation and embedding
of global conduct programme.
• Enhancement of operational risk
management framework.
• Successful delivery of stress
testing in key markets.
Personal objectives
• Deliver cost savings.
•
Implementation of consistent
capital management framework.
• Progress key milestones on set-up
of UK ring-fenced bank.
• People development including
diversity.
Performance
Assessment
• Progressive implementation of the most effective Global Standards to combat financial
65.0%
crime across the Group continues, including related attestations by country chief
executive officers.
• AML and sanctions policy outcomes strengthened with strategic deployments covering
client due diligence, sanctions screening and transaction monitoring.
• Empirical measurements used to assess sustainable operational effectiveness in financial
crime compliance.
• Conduct programme implementation progressed largely to plan.
• For 2016, the Committee exercised its discretion and reduced the Global Standards
assessments from 75% to 65%. This was based on feedback received from the Monitor,
matters arising from risk and compliance incidents, and a number of unsatisfactory
internal audits covering AML and sanctions-related issues.
• Completed sale of operations in Brazil and maintained a presence to serve large corporate
81.3%
clients. Restructuring of business in Turkey to make it a profitable franchise largely
complete.
• Overall implementation of high-priority programmes is fully met including the
establishment of the ring-fenced bank in the UK which is on track for completion by
1 July 2018.
• Comprehensive review of diversity and inclusion completed. Refreshed diversity and
inclusion strategy and targets.
• Exceeded target for female share of promotions into senior management.
Assessment
65.0%
Performance
• Continued enhancement of the Sarbanes Oxley framework and alignment with the
operational risk management framework ('ORMF'). Delivery of 2016 milestones for the
controls optimisation project which is on track to be completed by April 2017.
• Effective execution of operational risk management through embedding of the three lines
of defence, with remediation plans in place to address any gaps identified against ORMF.
• Continued progress to comply with regulatory requirements including 2016 stress tests
for the PRA, European Banking Authority and US Federal Reserve Bank, and successful
submission of the inaugural Group-wide individual liquidity adequacy assessment
process.
• Embedding of the tax risk management framework in businesses and functions
continues. Significant progress achieved in embedding US Foreign Account Tax
Compliance Act ('FATCA') related measures, common reporting standards and tax
transparency.
Implementation of global conduct programme milestones and outcomes were largely
met.
•
• For 2016, the Committee exercised its discretion and reduced the Global Standards
assessments from 86% to 65%. This was based on feedback received from the Monitor,
matters arising from risk and compliance incidents, and a number of unsatisfactory
internal audits covering AML and sanctions-related issues.
• 2016 Global Finance function direct costs and FTE targets met via significant
80.0%
restructuring (transforming the function from geographically aligned to a global operating
model), accompanied by enhancements of technology, demand management, process re-
engineering and off-shoring. Material progress achieved in the strengthening of the
Global Finance Centre.
• Activities to implement business segmentation on track and further enhancements to the
capital management framework delivered.
• New internal liquidity framework fully implemented.
• Delivery against 2016 milestones for UK ring-fencing requirements and other high-priority
programmes were fully met.
• Delivery of the Global Finance function people agenda, including implementation of
accelerated development programmes for targeted employees, the sponsorship and
development of careers and capabilities of employees, and improvement of gender
diversity in the function.
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HSBC Holdings plc Annual Report and Accounts 2016
Marc Moses
Performance
Global Standards including risk and
compliance
• Effective risk management in
compliance with AML, sanctions and
anti-bribery and corruption policies.
• Enhancement of customer due
•
diligence.
Implementation and embedding of
global conduct programme.
• Enhancement of operational risk
•
management framework.
Implementation of US risk
management measures.
• Global Financial Crime Compliance function focus progressed, although not as quickly
as planned. Progress in enhancing know your customer, customer due diligence, and
effective risk management in compliance with AML, sanctions, anti-bribery and
corruption policies and Global Standards, were somewhat met as certain key
components were not fully developed at the mid-year.
• Management oversight of Global Financial Crime Risk function activities were effectively
handed over to the newly appointed Group Head of Financial Crime Risk following the
establishment of the new Financial Crime Risk function.
• The conduct programme implementation progressed largely to plan.
• Our operational risk transformation programme on track with all key milestones
delivered. Embedding of the three lines of defence framework continues with the
management of ‘High’ rated residual risks, mitigating actions and remediation activities
largely meeting expectations. However, further work to self-identify issues is required.
• Successfully completed all 2016 outcomes to enable compliance with conduct
Assessment
65.0%
Personal objectives
• Deliver cost savings.
• Successful delivery of stress testing.
• Support business growth and improve
RWA effectiveness/efficiency.
• People development including
diversity.
regulation.
• For 2016, the Committee exercised its discretion and reduced the Global Standards
assessments from 74% to 65%. This was based on feedback received from the Monitor,
matters arising from risk and compliance incidents, and a number of unsatisfactory
internal audits covering AML and sanctions-related issues.
• Effective cost management driven through management of business performance and
Global Risk function transformation activities including process re-engineering and
location optimisation.
80.0%
• Satisfactorily progressed the 2016 PRA and European Banking Authority stress tests and
stress testing for other key regulators.
• RBWM expansion in the Pearl River Delta and creation of the risk infrastructure to
launch credit cards in China fully met. Improved RWA effectiveness and efficiency
within CMB and GBM to support overall reduction in Group RWAs.
• Delivered Global Risk function people initiatives including performance and reward
plans, mandatory and key learning initiatives, and strengthened gender diversity.
HSBC Holdings plc Annual Report and Accounts 2016
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Awards under the long-term incentives
(Audited)
Under the new policy approved by shareholders, executive
Directors are eligible to receive an LTI award. For the 2016
performance year, the award will be made in March 2017 with
a three-year performance period starting 1 January 2017.
For 2016, all executive Directors will be awarded an LTI grant
equivalent to 319% of base salary. The details of the measures
that will be used to assess performance and payout are
provided below. To the extent performance conditions are
satisfied, the awards will vest in five equal annual instalments
commencing from around the third anniversary of the grant
date. On vesting, awards are subject to a minimum six-month
retention period.
Performance conditions
Measures
Average return on equity1
Cost efficiency (adjusted jaws)
Relative total shareholder return2
Minimum
(25% payout)
7.0%
Positive
At median of the
peer group.
Target
(50% payout)
8.5%
1.5%
Maximum
(100% payout)
10.0%
3.0%
Straight-line vesting
between minimum and
maximum.
At upper quartile of the
peer group.
Global Standards including risk and
compliance
• Status of DPA.
Not applicable
Not applicable
Met all commitments to
achieve closure of the DPA
and protect HSBC from
further regulatory censure
for financial crime
compliance failings.
• Achieve and sustain compliance with Global
Financial Crime Compliance policies and
procedures.
Performance will be assessed by the Committee based on a number of qualitative
and quantitative inputs such as feedback from the Financial System Vulnerabilities
Committee, Group Financial Crime Risk assessment against Financial Crime
Compliance objectives, outcome of assurance and audit reviews, and achievement
of the long-term Group objectives and priorities during the performance period.
Strategy
•
International client revenues.
(Share of revenues supported by
international network)
• Revenue synergies.
(Share of revenues supported by universal
banking model)
• Employee engagement.
(Results of employee survey)
• Customer.
(Based on customer recommendation in
home country markets)
Total
50%
22%
65%
51%
23%
67%
52%
24%
70%
Rank within top three in
at least two of the four
RBWM and CMB customer
segments in home country
markets.
Rank within top three in
three of the four RBWM
and CMB customer
segments in home country
markets.
Rank within top three in
all four RBWM and CMB
customer segments in
home country markets.
Weighting
%
20
20
20
25
15
100
1
2
Significant items are excluded from the profit attributable to ordinary shareholders of the company for the purpose of computing adjusted return on equity.
The peer group for the 2016 award is: Australia and New Zealand Banking Group, Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse Group, DBS Group
Holdings, Deutsche Bank, JPMorgan Chase & Co., Lloyds Banking Group, Standard Chartered and UBS Group.
Payments to past Directors
(Audited)
No payments were made to or in respect of former Directors
in the year in excess of the minimum threshold of £50,000 set
for this purpose.
Total pension entitlements
(Audited)
No employees who served as executive Directors during the
year have a right to amounts under any HSBC final salary
pension scheme for their services as executive Directors 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.
External appointments
During 2016, Stuart Gulliver received S$10,000 in fees as a
member of the Monetary Authority of Singapore International
Advisory Panel, which was donated to charity.
Exit payments made in year
(Audited)
No payments for loss of office were made in 2016 to any person
serving as a Director in the year or any previous years.
Scheme interests awarded during 2016
(Audited)
The table below sets out the scheme interests awarded to
Directors in 2016 (for performance in 2015) as disclosed in
the 2015 Directors’ Remuneration Report. No non-executive
Directors received scheme interests during the financial year.
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HSBC Holdings plc Annual Report and Accounts 2016
Scheme awards in 2016
(Audited)
Type of interest
awarded
Basis on which
award made
Date of award
Stuart
Gulliver
Deferred cash
Annual incentive 2015
29 Feb 2016
Deferred shares
Annual incentive 2015
29 Feb 2016
Deferred shares
GPSP 2015
29 Feb 2016
Iain Mackay
Deferred cash
Annual incentive 2015
29 Feb 2016
Deferred shares
Annual incentive 2015
29 Feb 2016
Deferred shares
GPSP 2015
29 Feb 2016
Marc Moses
Deferred cash
Annual incentive 2015
29 Feb 2016
Deferred shares
Annual incentive 2015
29 Feb 2016
Deferred shares
GPSP 2015
29 Feb 2016
Face value
awarded1
£000
Percentage
receivable for
minimum
performance1
Number of
shares
awarded
Share price
on date
of grant2
End of
performance
period
322
322
1,969
320
320
1,101
248
248
1,101
—
—
—
—
—
—
—
—
—
n/a
68,845
421,232
n/a
68,556
235,654
n/a
53,065
235,654
n/a 31 Dec 2015
£4.6735 31 Dec 2015
£4.6735 31 Dec 2015
n/a 31 Dec 2015
£4.6735 31 Dec 2015
£4.6735 31 Dec 2015
n/a 31 Dec 2015
£4.6735 31 Dec 2015
£4.6735 31 Dec 2015
1 Unvested awards determined based on performance achieved during the period to 31 December 2015. The overall award level could have been 0% of the maximum
opportunity if minimum performance was achieved for the period to 31 December 2015. After grant, awards are subject to service condition and malus provisions.
Share price used is the closing mid-market price on the last working day preceding the date of grant.
2
GPSP awards were 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 until the vesting date. The net of tax
shares 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.
Directors’ interests in shares
(Audited)
The shareholdings of all persons who were Directors in 2016,
including the shareholdings of their connected persons, at
31 December 2016 are set out below. The table below shows
the comparison of shareholdings to the company shareholding
guidelines. There have been no changes in the shareholdings of
the Directors from 31 December 2016 to the date of this report
excluding those disclosed in footnote 8 of the below table.
Shares
(Audited)
Executive Directors
Douglas Flint8
Stuart Gulliver
Iain Mackay
Marc Moses
Group Managing Directors9
Shareholding
guidelines2
(% of salary)
Current
shareholding
as at Dec 20163
(% of salary)
100%
400%
300%
300%
170%
1,691%
312%
744%
250,000 shares
250,000 shares
Share
interests4
(number
of shares)
402,158
3,344,208
345,469
824,241
n/a
At 31 Dec 2016
Scheme interests
Shares awarded subject to deferral1
Share options5
without
performance
conditions4, 6
with
performance
conditions7
2,919
—
3,469
—
n/a
—
3,132,917
1,424,437
1,735,488
n/a
—
99,357
68,688
66,734
n/a
The gross number of shares is disclosed. A portion of these shares will be sold at vesting to cover any income tax and social security which falls due at the time of vesting.
The current shareholding guideline does not count unvested share-based incentives.
1
2
3 An average of three-month closing share price as on 31 December 2016 (£6.3224) has been used to calculate current shareholding as a percentage of salary.
4 Under the annual incentive, in line with regulatory requirements, any deferred shares (net of tax) which the Director becomes entitled to are subject to a retention requirement,
such that they must be held for a predefined period of time. To provide the executive Directors with appropriate flexibility, the Committee determined that, the requirement to
hold these shares could be met either by (i) retaining the shares that vested from the underlying award (net of tax) or (ii) by separately retaining a number of shares equivalent to
those that vested under the award. The Committee consider that such an arrangement results in the employee holding the same number of shares as per the original intention
of the retention period as set out in the remuneration policy approved by shareholders in 2014.
5 All share options are unvested and unexercised.
6
Includes GPSP awards, which were 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.
7 Awards granted in March 2013 are subject to service conditions and satisfactory completion of the DPA, as determined by the Committee. The DPA condition ends on 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 the date on which the DPA expires
and otherwise ceases to operate. This award will lapse if the Committee determines that the performance conditions are not satisfied.
Since the end of the year, the number of HSBC Holdings ordinary shares held by Douglas Flint has increased by 22, following an acquisition, through regular monthly
contributions in the HSBC Holdings UK Share Incentive Plan.
8
9 All Group Managing Directors are expected to meet their minimum shareholding guideline by 2019 or within five years of the date of their appointment, whichever is later.
Share options
(Audited)
Date of award
Exercise price
Douglas Flint
Iain Mackay
23 Sep 2014
23 Sep 2014
£
5.1887
5.1887
Exercisable
from1
1 Nov 2019
1 Nov 2017
until
30 April 2020
30 April 2018
At 1 Jan
2016
2,919
3,469
Exercised
in year
—
—
At 31 Dec
2016
2,919
3,469
1 May be advanced to an earlier date in certain circumstances, such as retirement.
The above awards were made under HSBC UK Sharesave, an
all-employee share plan under which eligible employees may
be granted options to acquire HSBC Holdings ordinary shares.
The exercise price is set at a 20% discount to the share price
immediately prior to the start of the invitation period. Employees
may make contributions of up to £500 each month over a period
of three or five years. The market value per ordinary share at
31 December 2016 was £6.5690. Market value is the mid-
HSBC Holdings plc Annual Report and Accounts 2016
165
Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Directors’ Remuneration Report
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.
Summary of shareholder return and Group Chief
Executive remuneration
The following graph shows the total shareholder return (‘TSR’)
performance against the FTSE 100 Total Return Index for the
HSBC TSR and FTSE 100 Total Return Index
eight-year period that ended on 31 December 2016. The
FTSE 100 Total Return Index has been chosen as this is a
recognised broad equity market index of which HSBC Holdings
is a member. The single figure remuneration over the past
eight years together with the outcomes of the respective
annual incentive and long-term incentive awards are also
presented below.
Group Chief
Executive
Total single figure
£000
Annual incentive1
(% of max.)
Long-term incentive2,3
(% of max.)
2009
2010
Michael
Geoghegan
Michael
Geoghegan
2011
Stuart
Gulliver
2012
Stuart
Gulliver
2013
Stuart
Gulliver
2014
Stuart
Gulliver
2015
Stuart
Gulliver
2016
Stuart
Gulliver
7,580
7,932
8,047
7,532
8,033
7,619
7,340
5,675
94%
25%
82%
19%
58%
50%
52%
40%
49%
49%
54%
44%
45%
41%
64%
—
1
2
3
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 and subject to service conditions and satisfactory completion of the DPA, as determined by the Committee. The DPA condition ends on 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 the date on which the DPA expires
and otherwise ceases to operate. This award will lapse if the Committee determines that the performance conditions are not satisfied.
Long-term incentive awards are included in the single figure for the year in which the performance period is deemed to be substantially completed. For GPSP awards this is the
end of the financial year preceding the date of grant (GPSP awards shown in 2011 to 2015 therefore relate to awards granted in 2012 to 2016). For performance share awards
that were awarded before introduction of GPSP, the value of awards that vested subject to satisfaction of performance conditions attached to those awards are included at the
end of the third financial year following the date of grant (for example, performance share awards shown in 2010 relates to awards granted in 2008).
The GPSP was replaced by the LTI in 2016 and the value for GPSP is nil for 2016 as no GPSP award was made for 2016. The first LTI award will be made in March 2017, with a
performance period ending in 2019. Vesting of the first LTI award will be included in the single figure table for the financial year ending on 31 December 2019. For year-on-year
comparison purposes, if target performance is achieved over the three-year performance period, LTI payout for the 2016 award would be 50% of grant value. In this case, the
single figure total remuneration of the executive Directors for year-on-year comparison would be (in £000) £7,670 for Stuart Gulliver.
166
HSBC Holdings plc Annual Report and Accounts 2016
Comparison of Group Chief Executive and all-employee
pay
The following charts compare the changes in Group Chief
Executive pay to changes in employee pay between 2015 and
2016, and provide a breakdown of total staff pay relative to the
amount paid out in dividends.
Percentage change in remuneration between 2015 and 2016
Group Chief Executive
Employee Group
Base salary 1
Benefits 2, 3
Annual incentive 4
0%
(12)%
58 %
4%
(11)%
(5)%
1
2
3
4
Employee group consists of local full-time UK employees as representative of
employees from different businesses and functions across the Group. Group
Chief Executive's total fixed pay has not increased since 1 January 2014.
There has been no change in the benefits provided to the Group Chief Executive.
The change in the value of the benefit is due to the change in the taxable value of
the benefit as reported in the single figure table.
Employee group consists of UK employees eligible for taxable benefits which was
deemed the most appropriate comparison for the Group Chief Executive given
varying local requirements. There has been no change in the benefit coverage for
employees from 2015 to 2016. The reduction in the average cost of benefits per
employee is reflective of the decrease in the cost of providing such benefit on
average.
Employee group consists of all employees globally, based on annual incentive
pool as disclosed on page 29 and staff numbers (full-time equivalents at the
financial year-end). The percentage change in annual incentive award of the
Group Chief Executive is primarily driven by the difference in the 2015 and 2016
scorecard outcome, reflecting performance achieved in those years, and change
in policy. Details of the 2016 total single figure of remuneration for the Group Chief
Executive are on page 160.
Relative importance of spend on pay
26%
9%
Return to shareholder
Employee compensation
and benefits
Dividends
Share buy-back
The chart above shows the change in:
•
total staff pay between 2015 and 2016; and
• dividends paid out in respect of 2015 and 2016.
We also executed a share buy-back worth approximately $2.5bn
in the second half of 2016, and completed this early in the first
quarter of 2017.
HSBC Holdings plc Annual Report and Accounts 2016
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Non-executive Directors
The table below shows the total fees of non-executive Director for 2016, together with comparative figures for 2015.
Fees and benefits
(Audited)
(£000)
Phillip Ameen
Kathleen Casey
Henri de Castries (Appointed 1 Mar 2016)
Laura Cha
Lord Evans of Weardale
Joachim Faber
Rona Fairhead (Retired on 22 Apr 2016)
Sam Laidlaw
Irene Lee
John Lipsky
Rachel Lomax
Heidi Miller
David Nish (Appointed 1 May 2016)
Sir Simon Robertson (Retired on 22 Apr 2016)
Jonathan Symonds
Jackson Tai (Appointed 12 Sep 2016)
Pauline van der Meer Mohr
Paul Walsh (Appointed 1 Jan 2016)
Total
Total ($000)
Footnotes
2016
2015
2016
2015
2016
2015
Fees
Benefits9
Total
1
2
3
4
5
6
7
8
440
155
79
247
190
152
78
185
268
180
254
536
83
49
520
48
172
142
403
155
—
238
190
151
510
174
184
180
253
175
—
195
520
—
32
—
3,778
5,097
3,360
5,135
43
24
4
23
5
12
9
13
10
21
6
35
22
2
7
4
10
6
256
345
13
29
—
14
9
14
14
13
2
49
11
31
—
12
1
—
5
—
483
179
83
270
195
164
87
198
278
201
260
571
105
51
527
52
182
148
416
184
—
252
199
165
524
187
186
229
264
206
—
207
521
—
37
—
217
332
4,034
5,442
3,577
5,467
1
2
3
4
5
Includes fees of £315,000 in 2016 (£278,000 in 2015) as a Director, Chairman of the Audit Committee and member of the Risk Committee of HSBC North America Holdings Inc.
Includes fees of £72,000 for 2016 (£63,000 for 2015) as a Director, Deputy Chairman and member of the Nomination Committee of The Hongkong and Shanghai Banking
Corporation Limited.
Includes £7,000 (inclusive of VAT) in respect of his membership of a verwaltungsrat (advisory body) to HSBC Trinkaus & Burkhardt AG. These fees were received in respect of
2015 also, although they were not included in the disclosure.
Includes fees of £31,000 for 2016 (£360,000 in 2015) as Chairman of HSBC North America Holdings Inc.
Includes fees of £173,000 in 2016 as Director and member of the Audit Committee and the Risk Committee of The Hongkong and Shanghai Banking Corporation Limited and as
Director, member of the Audit Committee and Chairman of the Risk Committee of Hang Seng Bank Limited.
Includes a fee of £411,000 as Chairman of HSBC North America Holdings Inc. following appointment on 1 January 2016.
Includes a fee of £345,000 in 2016 (£345,000 in 2015) as non-executive Chairman of HSBC Bank plc.
6
7
8 Appointed as a Director on 1 September 2015 and as a member of the Conduct & Values Committee and Group Remuneration Committee on 1 January 2016 and the
9
Nomination Committee on 22 April 2016.
Benefits include accommodation and travel-related expenses relating to attendance at Board and other meetings at HSBC Holdings' registered office. Amounts disclosed have
been grossed up using a tax rate of 45%, where relevant.
Non-executive Directors’ interests in shares
(Audited)
The shareholdings of persons who were non-executive Directors
in 2016, including the shareholdings of their connected persons,
at 31 December 2016 are set out below. The table below shows
the comparison of shareholdings to the company shareholding
guidelines.
Phillip Ameen
Kathleen Casey
Laura Cha
Henri de Castries
Lord Evans of Weardale
Joachim Faber
Sam Laidlaw
Irene Lee
John Lipsky
Rachel Lomax
Heidi Miller
David Nish
Jonathan Symonds
Jackson Tai
Pauline van der Meer Mohr
Paul Walsh
Shareholding guidelines
(number of shares)
Share interests
(number of shares)
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
5,000
8,620
5,200
16,165
9,170
66,605
40,860
10,000
16,165
18,900
3,975
50,000
21,771
31,605
15,000
5,079
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HSBC Holdings plc Annual Report and Accounts 2016
Voting results from 2016 Annual General Meeting
The table below summarises the voting results at our last AGM.
Remuneration Report
Remuneration Policy
For
90.49%
Against
9.51%
Withheld
54,280,789
(8,327,033,672)
(875,494,490)
96.05%
3.95%
35,165,873
(8,887,168,002)
(365,908,568)
Implementation of remuneration policy in 2017 for
executive Directors
Implementation of fixed remuneration is disclosed on page 156
along with the remuneration policy summary. Further details on
performance measures and weightings for the 2017 annual
incentive award are provided below.
strategic and financial objectives set out in our Investor Update
in June 2015. The performance targets for the annual incentive
are commercially sensitive and it would be detrimental to the
Group’s interests to disclose them at the start of the financial
year. Subject to commercial sensitivity, we will disclose the
targets after the end of a relevant financial year in that year’s
remuneration report.
Annual incentive scorecards
The weightings and performance measures to apply to the 2017
annual incentive award for Stuart Gulliver, Iain Mackay and
Marc Moses are disclosed below. These align to the Group’s
2017 annual incentive scorecards
Executive Directors will be eligible for an annual incentive award
of up to 213% of base salary.
Measures
Profit before tax1
Capital management
Deliver cost savings
Reduce Group RWAs
Strategic growth
Global Standards including risk and compliance
Personal objectives
Total
Stuart Gulliver
Iain Mackay
Marc Moses
%
20
—
20
10
10
25
15
100
%
10
25
10
10
—
25
20
100
%
10
—
—
15
—
50
25
100
1
Adjusted profit before tax as defined for Group annual bonus pool calculation.
Details of the Global Standards and personal objectives measures are provided below.
Stuart Gulliver
Iain Mackay
Marc Moses
Measures
Global
Standards
including
risk and
compliance
Personal
objectives
• Achieve and sustain compliance
• Effective management of material
• Ensure the Global Risk function enables and
with global financial crime
compliance policies and
procedures, and/or have approved
dispensations in place.
Implement the operational risk
management framework.
Implementation of global conduct
programme and maturity level
achieved against the required
conduct outcomes.
•
•
• Effective risk management with
AML, sanctions, anti-bribery and
corruption policies and Global
Standards.
•
operational risks.
Implementation of the operational
risk management framework.
• Proactively review and challenge
the first line of defence to assess
the adequacy of risk management
activities relating to accounting
and tax.
Implementation of global conduct
programme and maturity level
achieved against the required
conduct outcomes.
•
• Successful delivery of regulatory
and internal stress tests in 2017.
• Ensure climate change is reflected
• Enhanced environmental, social
across the Group’s activities.
• Optimise global network and
reduce complexity.
• Set-up UK ring-fenced bank
headquartered in Birmingham and
move the business to be ready for
a UK departure from the EU.
• Delivery of high-priority projects.
•
Improve customer satisfaction and
employee diversity.
• Complete succession and
transition planning.
and governance (‘ESG’) disclosures
in collaboration with External
Affairs function and global
businesses.
• Deliver Global Finance
transformation.
• Set-up UK ring-fenced bank
headquartered in Birmingham and
move the business to be ready for
a UK departure from the EU.
Improve employee diversity.
•
• Complete succession and
transition planning.
supports Financial Crime Risk function to achieve
and sustain compliance with global financial crime
compliance policies and procedures.
• Effective management of material operational
•
risks.
Implementation of the operational risk
management framework.
• Proactively review and challenge the first line of
defence to assess the adequacy of risk
management activities and fulfil risk steward
responsibilities.
• Manage credit and market risk, and oversee
liquidity risk within the Board approved risk
appetite.
Implementation of global conduct programme and
maturity level achieved against the required
conduct outcomes.
•
• Successful delivery of regulatory and internal
stress tests in 2017.
• Develop processes to measure exposure to
carbon-intensive and low-carbon-intensive
activities.
• Define opportunities to develop risk management
policies and procedures consistent with Group risk
appetite to protect the Group from climate change
risk, and enable business activities supporting a
transition to a low-carbon economy.
• Pivot to Asia and support growth of customer
lending.
• Deliver Global Risk transformation.
•
•
• Complete succession and transition planning.
Improve RWA effectiveness and efficiency.
Improve employee diversity.
HSBC Holdings plc Annual Report and Accounts 2016
169
Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Directors’ Remuneration Report
Long-term incentives
Details of the performance measures and targets for LTI
awards to be made in 2017, in respect of 2016, are provided
on page 164.
The performance measures and targets for awards to be made
in respect of 2017, granted in 2018, will be provided in the
Annual Reports and Accounts 2017.
Implementation of remuneration policy in 2017 for
non-executive Directors
The Committee has reviewed the fee levels payable to the non-
executive Directors and details can be found on page 155.
Additional remuneration disclosures
This section provides disclosures required under the Hong Kong
Ordinances, Hong Kong Listing Rules, the US Securities and
Exchange Commission Form 20-F and the Pillar 3 remuneration
disclosures.
Employee compensation and benefits
Executive Directors
Set out below are details of compensation paid to executive
Directors for the year ended 31 December 2016.
Basic salaries, allowances and benefits in kind
Pension contributions
Performance-related pay paid or receivable 1,2
Inducements to join paid or receivable
Compensation for loss of office
Notional return on deferred cash
Total
Total ($000)
Douglas Flint
Stuart Gulliver
Iain Mackay
Marc Moses
2016
£000
2,136
—
—
—
—
—
2015
£000
2,496
—
—
—
—
—
2016
£000
3,953
—
1,695
—
—
27
2015
£000
4,290
—
3,041
—
—
9
2016
£000
1,949
—
987
—
—
17
2,136
2,882
2,496
3,815
5,675
7,656
7,340
11,218
2,953
3,984
2015
£000
2,082
—
2,169
—
—
5
4,256
6,505
2016
£000
1,913
—
1,005
—
—
18
2,936
3,961
2015
£000
2,035
—
1,928
—
—
5
3,968
6,065
1
For the 2016 performance year, Stuart Gulliver, Iain Mackay and Marc Moses will receive an LTI award with a face value of £3,990,000, £2,232,000 and £2,232,000,
respectively, which is not included in the amount above. Vesting of the award is subject to the performance conditions detailed on page 164.
For the 2015 performance year, performance-related pay includes annual incentives and GPSP.
2
3 Deferred compensation accrued in 2016 for awards granted in prior years was £3,630,102 ($4,897,447) for Stuart Gulliver, £1,806,500 ($2,437,187) for Iain Mackay and
£2,033,451 ($2,743,371) for Marc Moses. Deferred compensation accrued in 2015 for awards granted in prior years was £3,179,883 ($4,860,042) for Stuart Gulliver,
£1,378,660 ($2,107,104) for Iain Mackay and £1,674,155 ($2,558,730) for Marc Moses.
The aggregate amount of Directors' emoluments as defined
above (including both executive Directors and non-executive
Directors) for the year ended 31 December 2016 was
$23,925,335. As per our policy, benefits in kind may include, but
are not limited to, the provision of medical insurance, income
protection insurance, health assessment, life assurance, club
membership, tax assistance, Hong Kong accommodation for
Stuart Gulliver, car benefit, travel assistance, and relocation
costs (including any tax due on the benefit, where applicable).
Medical insurance benefit of £1,605 ($2,165) was provided to a
past director, Alexander Flockhart, during the year ended 31
December 2016. Amounts are converted into US dollars based
on the average year-to-date exchange rates for the respective
year.
Emoluments of senior management and five highest paid
employees
Set out below are details of emoluments paid to senior
management (being here, executive Directors and Group
Managing Directors of HSBC Holdings) for the year ended
31 December 2016 or for the period of appointment in 2016 as
a Director or Group Managing Director. Details of remuneration
paid to the five highest paid employees, including three
executive Directors and two Group Managing Directors of HSBC
Holdings, for the year ended 31 December 2016 are also
presented below.
Emoluments
Basic salaries, allowances and benefits in kind
Pension contributions
Performance-related pay paid or receivable1
Inducements to join paid or receivable
Compensation for loss of office
Total
Total ($000)
1
Includes the face value of LTI awards at grant.
Five highest paid employees
Senior management
£000
15,474
82
17,916
—
—
33,472
45,158
£000
34,101
251
32,818
—
2,669
69,839
94,222
170
HSBC Holdings plc Annual Report and Accounts 2016
The emoluments of senior management were within the
following bands:
Hong Kong dollars
US dollars
HK$5,500,001 – 6,000,000
$708,536 – 772,948
HK$10,000,001 – 10,500,000
$1,288,246 – 1,352,658
HK$16,500,001 – 17,000,000
$2,125,606 – 2,190,018
HK$22,000,001 – 22,500,000
$2,834,142 – 2,898,554
HK$23,500,001 – 24,000,000
$3,027,379 – 3,091,791
HK$29,500,001 – 30,000,000
$3,800,326 – 3,864,738
HK$30,500,001 – 31,000,000
$3,929,151 – 3,993,563
HK$34,500,001 – 35,000,000
$4,444,449 – 4,508,862
HK$39,500,001 – 40,000,000
$5,088,572 – 5,152,985
HK$44,500,001 – 45,000,000
$5,732,695 – 5,797,108
HK$46,000,001 – 46,500,000
$5,925,932 – 5,990,345
HK$47,500,001 – 48,000,000
$6,119,169 – 6,183,581
HK$53,500,001 – 54,000,000
$6,892,117 – 6,956,529
HK$54,000,001 – 54,500,000
$6,956,529 – 7,020,941
HK$61,000,001 – 61,500,000
$7,858,302 – 7,922,714
HK$80,000,001 – 80,500,000
$10,305,969 – 10,370,381
HK$100,500,001 – 101,000,000
$12,946,874 – 13,011,286
Number of
highest paid employees
Number of
senior management
—
—
—
—
—
—
—
—
—
—
—
—
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Pillar 3 remuneration disclosures
The following tables show the remuneration awards made by
HSBC to its MRTs for 2016. Individuals have been identified as
MRTs based on the qualitative and quantitative criteria set out in
the Regulatory Technical Standard EU 604/2014 and additional
criteria determined by the Committee.
Aggregate remuneration expenditure
2016
Global business aligned
Retail Banking
and Wealth
Management
Commercial
Banking
Global Banking
and Markets
Global Private
Banking
$m
94.2
$m
67.4
$m
756.9
$m
66.8
Corporate
Centre
$m
391.1
Total
$m
1,376.4
Includes salary and incentives awarded in respect of the performance year 2016 (including deferred component) and any pension or benefits outside of policy.
Remuneration – fixed and variable amounts – Group-wide
Senior management1
MRTs (non-senior management)
Number of MRTs
Fixed
Cash-based
Shares-based
Total fixed
Variable2
Cash
Non-deferred shares3
Deferred cash
Deferred shares
Total variable pay4
114
$m
116.8
13.6
130.4
20.9
25.9
29.1
40.5
116.4
1,203
$m
619.8
7.9
627.7
138.2
127.7
116.3
119.7
501.9
Total
1,317
$m
736.6
21.5
758.1
159.1
153.6
145.4
160.2
618.3
1 Definition of senior management for Pillar 3 disclosure includes our members of the Group Management Board, Group General Managers and non-executive Directors.
2
3
4
Variable pay awarded in respect of 2016.
Vested shares, subject to a six-month retention period.
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 the total remuneration of the MRT.
HSBC Holdings plc Annual Report and Accounts 2016
171
Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Directors’ Remuneration Report
Remuneration – fixed and variable amounts – UK based
Senior management1
MRTs (non-senior management)
Number of MRTs
Total fixed
Variable2
Cash
Non-deferred shares3
Deferred cash
Deferred shares
Total variable pay4
76
$m
80.4
11.6
16.6
16.3
27.7
72.2
522
$m
255.8
57.3
51.4
47.7
48.4
204.8
1 Definition of senior management for Pillar 3 disclosure includes our members of the Group Management Board, Group General Managers and non-executive Directors.
2
3
4
Variable pay awarded in respect of 2016.
Vested shares, subject to a six-month retention period.
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 the total remuneration of the MRT.
Deferred remuneration1
Deferred remuneration at 31 Dec
Outstanding, unvested
Awarded during the year
Paid out2
Reduced through malus
Senior management
MRTs (non-senior management)
$m
280.3
86.2
53.2
—
$m
657.1
331.1
216.8
—
1
2
This table provides details of actions taken during performance year 2016. For details of variable pay awards granted for 2016, please refer to both the ‘remuneration’
tables above.
Vested shares are valued using the closing share price on the business day immediately preceding the vesting day.
Sign-on and severance payments
Sign-on payments1
Made during year ($m)
Number of beneficiaries
Severance payments2
Awarded and made during year ($m)
Number of beneficiaries
Highest such award to a single person ($m)
Senior management
MRTs (non-senior management)
1.6
1
3.2
1
3.2
11.7
18
4.0
7
1.8
1 Guaranteed variable pay awards granted to new hires and limited to their first year of service.
2
Represents non-standard termination payments made in excess of any local policies, standards or statutory amounts.
Material risk takers’ remuneration by band1
Senior management
MRTs (non-senior management)
€0 – 1,000,000
€1,000,000 – 1,500,000
€1,500,000 – 2,000,000
€2,000,000 – 2,500,000
€2,500,000 – 3,000,000
€3,000,000 – 3,500,000
€3,500,000 – 4,000,000
€4,000,000 – 4,500,000
€4,500,000 – 5,000,000
€5,000,000 – 6,000,000
€6,000,000 – 7,000,000
€7,000,000 – 8,000,000
€8,000,000 – 9,000,000
€9,000,000 – 10,000,000
€10,000,000 – 11,000,000
37
20
13
12
10
6
3
3
1
5
2
—
1
—
1
917
180
53
29
13
3
2
5
—
1
—
—
—
—
—
Total
598
$m
336.2
68.9
68.0
64.0
76.1
277.0
Total
$m
937.4
417.3
270.0
—
Total
13.3
19
7.2
8
5.0
Total
954
200
66
41
23
9
5
8
1
6
2
—
1
—
1
1
Table prepared in euros in accordance with Article 450 of the European Union 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 its website.
172
HSBC Holdings plc Annual Report and Accounts 2016
Directors’ Responsibility Statement
Directors’ Responsibility Statement
The Directors are responsible for preparing the Annual Report and Accounts, the Directors’ Remuneration Report and the financial
statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have
prepared the parent company (‘Company’) and Group financial statements in accordance with International Financial Reporting
Standards (‘IFRSs’) as adopted by the European Union. In preparing these financial statements, the Directors have also elected to
comply with IFRSs, issued by the International Accounting Standards Board (‘IASB’). Under company law the Directors must not
approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company
and Group and of the profit or loss of the Company and Group for that period. In preparing these 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 applicable IFRSs as adopted by the European Union and IFRSs issued by IASB have been followed, subject to any
material departures disclosed and explained in the financial statements; and
• prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company and Group will
continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable
them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as
regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the
Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the Annual Report and Accounts 2016 as they appear on the
Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
The Directors consider that the Annual Report and Accounts 2016, taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess the Company’s position, performance, business model and strategy.
Each of the Directors, whose names and functions are listed in the ‘Report of the Directors: Corporate Governance’ section on pages
133 to 137 of the Annual Report and Accounts 2016, confirm that, to the best of their knowledge:
•
•
the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair
view of the assets, liabilities, financial position and profit or loss of the Group; and
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 Group, together with a description of the principal risks and uncertainties that it faces.
In accordance with Section 418 of the Companies Act 2006, the Directors’ report includes a statement, in the case of each Director
in office as at the date the Report of the Directors is approved, that:
• so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and
•
they have taken all the steps they ought to have taken as a Director in order to make themselves aware of any relevant audit
information and to establish that the Company’s auditors are aware of that information.
On behalf of the Board
Douglas Flint
Group Chairman
21 February 2017
HSBC Holdings plc Annual Report and Accounts 2016
173
Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the independent auditors to the members of HSBC Holdings plc
Report of the independent auditors to the members of HSBC Holdings plc
Report on the financial statements1
Our opinion on the financial statements
In our opinion HSBC Holdings plc’s (‘HSBC’) Group financial statements and parent company financial statements:
• give a true and fair view of the state of the Group’s and parent company's affairs at 31 December 2016 and of the Group’s and
parent company’s profit and cash flows for the year then ended;
• have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union
(‘IFRS’); and
• have been prepared in accordance with the requirements of the Companies Act 2006, and as regards the Group financial
statements, Article 4 of the IAS Regulation.
Performing the audit
On behalf of PricewaterhouseCoopers LLP (‘PwC’), it is my responsibility to form these opinions. This was the second year that you
have appointed PwC as HSBC’s auditors, and I have therefore provided information on how PwC approached the audit, how it
changed from the previous year and details of the significant discussions on key audit matters that I, and my senior colleagues, had
with the Group Audit Committee (‘GAC’).
How the audit approach was structured
The audit approach was structured to reflect how HSBC is organised. It incorporated 4 important aspects.
(1) Risk assessment and audit planning at a Group level, having regard to HSBC’s global businesses and its key legal entities:
In 2015 I appointed partners to lead the audits for each global business. These partners continued in their roles and met regularly
with the relevant HSBC management to understand strategy and matters which arose throughout the year that could have impacted
financial reporting. The partners are specialists in the nature of the relevant businesses and were best placed to design the
appropriate audit approach for that part of HSBC. They oversaw each PwC member firm involved in the audit of that global business
and assisted me in my review of their work.
(2) Audit work performed at global shared service centres:
A significant amount of HSBC’s operational processes which are critical to financial reporting are undertaken in global shared service
centres across 10 individual sites in 6 countries. Additionally, many financial reporting processes required to produce the financial
statements are performed in HSBC’s Global Finance Centre based in Gurugram and Hyderabad, India. Working closely with me, a
partner coordinated the audit work performed by PwC member firms in each of the global shared service locations. This work
established an end-to-end picture of the key processes that supported material balances, classes of transactions and disclosures
within the HSBC financial statements. We then evaluated the effectiveness of the controls over these processes and considered the
implications for the remainder of our audit work.
(3) Audit work executed on individual legal entities:
We received opinions from PwC member firms which have been appointed as the external auditors of The Hongkong and Shanghai
Banking Corporation Limited, HSBC Bank plc, HSBC North America Holdings Inc, HSBC Mexico S.A., HSBC Bank Argentina S.A.,
HSBC Bank Middle East Limited, HSBC Bank Canada and HSBC Private Banking Holdings (Suisse) S.A.
I was in active dialogue throughout the year with the partners responsible for these audits; this included consideration of how well
they planned and performed their work. My senior colleagues and I visited these subsidiaries, and attended Audit Committees
meetings for most of them. We also visited businesses in a further 5 countries. I also attended meetings with management in each of
these key subsidiaries at the year-end.
The audits of these key subsidiaries relied upon work performed by PwC member firms in Bahrain, China, France, Germany, India,
Qatar and Turkey. I considered how my subsidiary audit teams instructed and reviewed the work undertaken in these locations in
order to ensure the quality and adequacy of their work. Collectively, the PwC member firms completed procedures covering 85% of
assets, 85% of total operating income and 92% of profit before tax.
(4) Audit procedures undertaken at a Group level and on the parent company:
I ensured that appropriate further work was undertaken for the HSBC parent company. This work included auditing, for example,
the consolidation of the Group’s results, the preparation of the financial statements, certain disclosures within the Directors'
Remuneration Report, litigation provisions and exposures, and management’s entity level and oversight controls relevant to financial
reporting. A consideration was also made of all changes to, and pending changes to, financial reporting standards and requirements.
As an example, we considered the parent company’s decision to adopt the provisions of IFRS 9 ‘Financial Instruments’ relating to the
fair value of its own debt, and work continues to be performed as part of wider preparations for the full implementation of the
standard.
In aggregate, these four areas provided me with the evidence required to form an opinion on the consolidated financial statements of
HSBC.
1 HSBC Holdings plc’s financial statements comprise the consolidated and parent company balance sheets as at 31 December 2016, the consolidated and parent company
income statements and the consolidated statement of comprehensive income for the year then ended, the consolidated and parent company statement of cash flows for the
year then ended, the consolidated and parent company statements of changes in equity for the year then ended, and the notes to the financial statements, which include a
summary of significant accounting policies and other explanatory information. Certain required disclosures have been presented elsewhere in the Annual Report and Accounts
2016, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.
174
HSBC Holdings plc Annual Report and Accounts 2016
Changes to the approach in 2016
In March, I chaired a two-day meeting in London of the partners and staff from PwC member firms who undertake audits of the most
significant HSBC subsidiaries. This meeting provided an opportunity for those partners and staff to hear directly from HSBC
management and the Chair of the GAC. We considered during this meeting how our view of significant audit risks had changed. In
doing so, we used our experience in 2015 and considered how the strategic actions and their related targets may influence areas of
significant judgement.
The amount of work required to perform the audit was lower because of the audit knowledge that we had acquired during the
previous 18 months, and many of the transition processes were not repeated.
More detailed changes in the approach arose because of 4 areas:
(1) Changes in the structure and strategy of the HSBC Group
The presentation of the financial statements has been amended to reflect the new operating segments adopted by HSBC. Audit work
has been completed to ensure that this change is both appropriate, and that previously reported information has been represented
correctly.
During the year, HSBC Bank Brazil was sold. As a consequence the audit work undertaken on this business was limited to detailed
procedures on the loss on disposal and an assessment of whether it is appropriately classified in the Group’s income statement.
In assessing the subsidiaries which were significant in 2016, I concluded that HSBC Insurance (Bermuda) Limited was no longer
material, and therefore the scope of the audit was changed.
(2) Changes to HSBC processes and controls
As part of the efforts to streamline controls and reduce costs, more activities continued to be migrated to the global shared service
centres. This resulted in work moving between PwC member firms. In July, a workshop was held in Paris for significant subsidiaries
and service centre teams so that they could understand the impact of these changes. The other objective was to further standardise
controls tested and understand the end to end process for significant classes of transaction.
(3) Assessment of controls
I reported to the GAC detailed observations on controls over financial reporting in relation to our work in 2015. The audit was
designed to consider the work that HSBC management undertook to address these observations. For example, in my 2015 report to
you I referenced the improvements management was making to controls around privileged access to systems. During 2016, my team
performed extensive work on management’s actions in this area.
(4) Changes in the macro environment
I considered other macro factors to determine if changes in the approach were required, for example the impact of the United
Kingdom’s decision to leave the European Union, the devaluation of the Mexican Peso and changes in the credit environment. I
reported to the GAC in December that I did not believe that these changed my original risk assessment.
The purpose and scope of the audit
An audit has an important role in providing confidence in the financial statements that are provided by companies to their members.
The audit opinion does not provide assurance over any particular number or disclosure, but over the financial statements taken as a
whole. It is the Directors’ responsibility to prepare the financial statements and to be satisfied that they give a true and fair view.
These responsibilities have been recognised on behalf of the Board of Directors on page 173.
The scope of an audit is sometimes not fully understood. I believe that it is important that you understand the scope in order to
understand the assurance that my opinion provides. My responsibility is to undertake my work and express my opinion in
accordance with applicable law and the International Standards on Auditing (UK and Ireland) as issued by the Financial Reporting
Council of the United Kingdom. These standards also require me to comply with the Auditing Practices Board’s Ethical Standards for
Auditors. A description of the scope of an audit is provided on the Financial Reporting Council’s website at www.frc.org.uk/
auditscopeukprivate; I recommend that you read this description carefully. It is also important that you understand the inherent
limitations of the audit which are disclosed in this description, for example the possibility that an approach based upon sampling and
other audit techniques may not identify all issues.
In order for me to perform my work, I had regard to the concept of materiality. I determined materiality as follows:
Overall Group materiality $950m.
How I determined it
5% of adjusted profit before tax excluding the debit valuation adjustment and non-qualifying hedges.
Why I believe this is
appropriate
Given the geographically dispersed nature of HSBC and the diversity of its banking activities, I believe a standard
benchmark of 5% of adjusted profit before tax is an appropriate quantitative indicator of materiality, although of course
an item could also be material for qualitative reasons.
I selected adjusted profit before tax, because as discussed on page 48, management believes it best reflects the
performance of HSBC. I excluded the debit valuation adjustment and non-qualifying hedges as they are recurring items
that in my view form part of ongoing business performance.
When planning the audit, I considered if multiple errors might exist which, when aggregated, could exceed $950m. In order to
reduce the risk of multiple errors that could aggregate to this amount, I used a lower level of materiality, known as performance
materiality, of $710m to identify the individual balances, classes of transactions and disclosures that were subject to audit. I asked
each of the partners reporting to me on the subsidiaries of HSBC to work to assigned materiality levels reflecting the size of the
operations they audited. These ranged from $67m (HSBC Mexico S.A.) to $760m (The Hongkong and Shanghai Banking Corporation
Limited).
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Where the audit identified some items that were not reflected appropriately in the audited financial information, I considered these
items carefully to assess if they were individually or in aggregate material. I reported any such items which exceeded $50m to the
GAC. The Directors have concluded that all items which remained unadjusted were not material to the financial statements, either
individually or in aggregate. I agree with their conclusion.
Matters discussed with the GAC
I attended each of the 8 GAC meetings held during the year. Part of each meeting involved a discussion with me without
management present. I also met with members of the Committee on an ad hoc basis. During these various conversations we
discussed my observations on a variety of accounting matters and observations on controls over financial reporting.
During the April meeting, the audit plan was presented to the Committee. The plan included the matters which I considered
presented the highest risk to the audit and other information, such as our approach to the audit of journals, interest income and
financial instrument valuation, and where the latest technology would be used to obtain better quality audit evidence. Throughout
the year, this plan was refreshed and revised to account for changes in the external and internal environment at HSBC. As a result of
operational issues in the US we changed our view of the risks associated with the accounting for pensions. This change led to a
change in our audit approach which was discussed with the GAC.
In December, the GAC held a meeting with a particular focus on control matters. We also discussed their impact on our audit
approach, for example we explored how our audit approach would be amended to focus more on the controls used by management
over key spreadsheets and system-generated information used in financial reporting.
The areas of highest audit risk, where I focused most effort and resource, were:
•
•
IT access management;
impairment of loans and advances;
• goodwill;
•
investment in Bank of Communications Co., Ltd (BoCom);
• application of hedge accounting;
•
•
litigation and regulatory enforcement actions;
impact of the deferred prosecution agreement (DPA); and
• pension liabilities.
To help you understand their impact on the audit, I have listed them in order of decreasing audit effort. Some of them are common to
other international banks, and some are specific to HSBC. I have included at the end of this report an explanation of each item, why
it was considered an area of audit focus and how the audit approach was tailored to address the risk of misstatement.
Going concern
The Directors have made a statement on page 146 regarding going concern. This statement is based on their belief that the Group
and parent company intend to, and have sufficient resources to, remain in business for 12 months from the date of this report. I am
required to review this statement, and in doing so I have considered HSBC’s budgets, cash flows, capital plan and stress tests. I have
nothing to report as a result of my review. I also have nothing material to add or draw attention to in relation to the statement.
Other reporting
The Annual Report and Accounts 2016 also contains a considerable amount of other information that is required by various regulators
or standard setters. In respect of this information, my responsibilities and my reporting are set out in the table below.
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HSBC Holdings plc Annual Report and Accounts 2016
Area of the Annual Report and Accounts 2016 My responsibility
My reporting
Directors’ Remuneration Report on pages 153 to 172
Those parts of which are clearly marked as
audited.
Consider whether the information is properly prepared.
In my opinion, this information has
been properly prepared in accordance
with the Companies Act 2006.
Other remuneration report disclosures.
Consider whether certain other disclosures specified by the
Companies Act have been made.
The other required disclosures have
been made.
Other areas
Strategic Report and the Directors’ Report
(as defined on page 30).
Viability statement on page 146 which
considers the longer term sustainability of
the Group’s business model.
Directors’ confirmation of their robust
assessment of principal risks, and
disclosures describing those risks and how
they are managed or mitigated on page 146.
GAC Report on page 141.
Directors’ statement (on page 173) that they
consider the HSBC Annual Report and
Accounts 2016, taken as a whole, to be fair,
balanced and understandable and provides
the information necessary for you to assess
HSBC’s position and performance, business
model and strategy.
Corporate governance report (on pages 132
to 173).
All other information in the Annual Report
and Accounts 2016 aside from the audited
financial statements.
Consider whether they are consistent with the audited
financial statements.
Consider whether they are prepared in accordance with
applicable legal requirements.
Report if I have identified any material misstatements in either
report. This is based on my knowledge and understanding of
the Group and parent company that was obtained during the
audit, and the environment they operate in.
In my opinion, the information in these
reports is consistent with the audited
financial statements and prepared in
accordance with applicable legal
requirements.
I have no material misstatements to
report.
Review the statement in the light of the knowledge gathered
during the audit.
I have nothing material to draw
attention to or to add to the statement.
Review the confirmation and description in the light of the
knowledge gathered during the audit.
I have nothing material to draw
attention to or to add to the
confirmation or description.
Consider whether it deals appropriately with those matters
that I reported to the GAC.
No exceptions to report.
Consider whether any information found during the course of
the audit would cause me to disagree.
No disagreements to report.
Review the remaining 10 provisions of the UK Corporate
Governance Code specified for our review by the UK Listing
Rules.
Consider whether it is materially inconsistent or materially
incorrect based on the knowledge gained in my audit, or
otherwise misleading.
Consider whether it is materially inconsistent with the audited
financial statements.
Nothing to report following our review.
No exceptions to report.
In addition, I am required to report to you if:
•
I have not received all of the information and explanations required for my audit;
• adequate accounting records have not been kept by the parent company;
•
•
returns adequate for my audit have not been received from branches not visited by PwC; and
the parent company financial statements and the audited part of the Directors’ Remuneration Report do not agree with the
accounting records and returns.
I have no exceptions to report as a result of any of these responsibilities.
Use of this report
This report, including the opinions, has been prepared for and only for you, the parent company’s members as a body in accordance
with Chapter 3 of Part 16 of the Companies Act 2006, and for no other purpose. We do not, in giving these opinions, accept or
assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come
except where expressly agreed by our prior written consent.
Richard Oldfield
(Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London, United Kingdom
21 February 2017
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Appendix: Key audit matters discussed with the Group Audit Committee (‘GAC’)
Those areas which presented the greatest risk of material misstatement in the financial statements are required to be discussed with
the GAC. They had the greatest effect on the audit, including the allocation of resources and effort and are discussed below together
with an explanation of how the audit was tailored to address these specific areas.
IT Access Management
Nature of area of focus
All banks are highly dependent on technology due to the significant number of
transactions that are processed daily. The audit approach relies extensively on automated
controls and therefore procedures are designed to test access and control over IT
systems.
As reported in the prior year, controls over individuals’ access rights to operating
systems, applications and data used in the financial reporting process required
improvement. Access rights are important as they ensure that changes to applications
and data are authorised and made in an appropriate manner. Ensuring staff only have
appropriate access, and that the access is monitored, are key controls to mitigate the
potential for fraud or error as a result of a change to an application or underlying data.
A number of enhancements to the control environment have been made by management
since our last report but some controls were not fully remediated by the year end and we
continued to assess the risk of a material misstatement arising from access to
technology as significant for the audit.
Procedures performed to support our discussions and conclusions
Matters discussed with the GAC
The original approach discussed with the GAC was based
on the control enhancements proposed by management,
and involved the testing of new and improved control
processes. This was supplemented with other control and
substantive procedures required for the periods of the year
when the changes would not yet have been effective. As
the timing of the enhancements to controls changed
during the year, we reflected this in the nature and extent
of testing, and our final approach was discussed with the
GAC in October.
At each GAC meeting, there was a discussion on the status
of the control remediation programme, work performed by
management and results of testing performed.
Access rights were tested over the various aspects of technology relied upon for financial reporting. Specifically, the audit tested that:
• new access requests for joiners were properly reviewed and authorised;
• application user access rights were removed on a timely basis when an individual left or moved role;
• access rights to applications were periodically monitored for appropriateness; and
• highly privileged access was restricted to appropriate personnel.
Other areas that were independently assessed included password policies, security configurations, controls over changes to applications and
databases and that business users, developers and production support did not have access to change applications, the operating system or databases
in the production environment.
As a consequence of the deficiencies identified a range of other procedures were performed:
• where inappropriate access was identified, we understood the nature of the access, and, where possible, obtained additional evidence on the
appropriateness of the activities performed;
• additional substantive testing was performed on specific year-end reconciliations (i.e. custodian, bank account and suspense account
reconciliations) and confirmations with external counterparties;
• testing was performed on other compensating controls such as business performance reviews; and
• a list of users with access to systems was obtained and manually compared to other access lists where segregation of duties was deemed to be of
higher risk, for example users having access to both core banking and payments systems.
Relevant references in the Annual Report and Accounts 2016
GAC Report, page 141.
Effectiveness of internal controls, page 145.
Impairment of loans and advances
Nature of the area of focus
Impairment allowances represent management’s best estimate of the losses incurred
within the loan portfolios at the balance sheet date. They are calculated on a collective
basis for portfolios of loans of a similar nature and on an individual basis for significant
loans. The calculation of both collective and individual impairment allowances is
inherently judgemental for any bank.
Collective impairment allowances are calculated using models which approximate the
impact of current economic and credit conditions on large portfolios of loans. The inputs
to these models are based on historical loss experience with judgement applied to
determine the assumptions used to calculate impairment. Model overlays are applied
where data driven parameters or calculations are not considered representative of
current risks or conditions of the loan portfolios.
For specific impairments, judgement is required to determine when an impairment event
has occurred and then to estimate the expected future cash flows related to that loan.
The audit was focused on impairment due to the materiality of the loan balances and
associated impairment allowances and the subjective nature of the impairment
calculation.
The largest loan portfolios are in Europe and Asia with the more significant impairment
allowances being in Europe, North America and Latin America.
Matters discussed with the GAC
At each GAC and Group Risk Committee meeting there
was a discussion on changes to risk factors and other
inputs within the collective allowance models as well as
discussions on individually significant loan impairments.
We discussed a number of specific risks that changed or
emerged during the course of the year, including the
impact of the UK’s decision to leave the European Union;
the economic slowdown in China; volatility in the oil price
which impacted individual credits; and the increased
macroeconomic uncertainty in North America. In all of
these cases we discussed the performance of the existing
credit exposures, and the potential need for changes to
modelling approaches.
We also discussed any significant changes made to the
inputs or models impacting the collective impairment
allowance as well as changes in the control environment.
These included key assumptions over the retail impairment
models and improvements in the way higher risk loans
were identified and escalated within the organisation.
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Impairment of loans and advances
Procedures performed to support our discussions and conclusions
The controls management has established to support their collective and specific impairment calculations were tested.
• For collective impairment, this included controls over the appropriateness of models used to calculate the charge, the process of determining key
assumptions and the identification of loans to be included within the calculation.
• For specific impairment charges on individual loans, this included controls over the monitoring of the credit watch list, credit file review processes,
approval of external collateral valuation vendors and review controls over the approval of significant individual impairments.
• For collective allowances, the appropriateness of the modelling policy and methodology used for material portfolios was independently assessed by
reference to the accounting standards and market practices. Model calculations were tested through reperformance and code review. Specifically
with respect to the collective impairment models for the retail portfolios, we reviewed the enhancements made to the models and methodology to
ensure they were appropriate.
• The appropriateness of management’s judgements was also independently considered in respect of calculation methodologies, segmentation,
economic factors and judgemental overlays, the period of historical loss rates used, loss emergence periods, cure rates for impaired loans, and the
valuation of recovery assets and collateral.
• For specific allowances, the appropriateness of provisioning methodologies and policies was independently assessed for a sample of loans across
the portfolio selected on the basis of risk. An independent view was formed on the levels of provisions booked based on the detailed loan and
counterparty information in the credit file. Calculations within a sample of discounted cash flow models were reperformed.
Relevant references in the Annual Report and Accounts 2016
Impaired loans, page 90.
GAC Report, page 141.
Note 1 (d): Financial instruments measured at amortised cost, page 198.
Goodwill
Nature of the area of focus
Matters discussed with the GAC
The Group had goodwill of $15.5bn from a number of historical
acquisitions across cash-generating units (CGUs).
An assessment is required annually to establish whether
a CGU’s goodwill should continue to be recognised, or if any
impairment exists. At each reporting period, management is also
required to identify any potential indicators, and to perform an
impairment assessment if any are identified.
The impairment assessment calculation used for the tests were
based on estimated future cash flows for each CGU discounted
at an appropriate cost of equity rate. HSBC used its Annual
Operating Plan as the basis for the first five years of cash flows
and then extrapolated returns into perpetuity using a terminal
growth factor. Cost of equity rates were based on the investment
rates used within the global business and approved by the
Board.
The estimation of future cash flows and the level to which they
are discounted is inherently uncertain and requires significant
judgement. The extent of judgement and the size of the
goodwill, resulted in this matter being identified as an area of
focus.
We discussed the conclusions of goodwill assessments with the GAC when they
considered the annual test and at each reporting period when they considered
whether indicators of impairment existed.
At 30 June, indicators of impairment were identified in GPB – Europe and GB&M –
Europe, which prompted a full impairment test for these two CGUs. This led to an
impairment of $800m of goodwill in GPB – Europe.
The annual assessment was performed in the third quarter based on 1 July data.
This assessment concluded no further impairment of goodwill was required. The
discussions with the GAC focused on the key assumptions, both individually and
when combined together. During these discussions, management confirmed their
view that the forecasts for each CGU remained appropriate.
Subsequently, we discussed with the GAC the impact of changing segments on the
CGUs, particularly the decision to change the CGU associated with GB&M, as
disclosed on page 240. The discussion also covered the decision not to change the
other CGUs.
At 31 December, management identified further indicators of impairment in the
GPB - Europe CGU. A retest was performed and it was concluded that all remaining
goodwill for the CGU should be written off. In reaching this conclusion, a view was
taken on the future performance of the business, and the risk associated with these
forecasts. We discussed the approach and adjustments with the GAC.
Procedures performed to support our discussions and conclusions
• Goodwill was assessed immediately before and after the new reporting segments were established. Both bases of the assessment were considered
in the audit.
• PwC’s independent valuation experts critically assessed the discount rate and terminal growth rates used in the discounted cash flow models. The
focus was on the methodology used to estimate discount rates of a CGU; and whether the use of the nominal GDP growth rates was the most
appropriate in estimating the terminal growth rates into perpetuity for each CGU.
• The calculations used in the model were reperformed to check accuracy and the key inputs in the model were agreed to underlying sources.
• Management’s future cash flow forecasts used in the model were assessed by:
– testing that the forecasts agreed to the latest Annual Operating Plan approved by management;
– considering current year performance against plan and the reasons for any deviation, and key drivers or strategies underlying the plan. These were
discussed with management of the Global Businesses for each sensitive CGU;
– reviewing the historical achievement of the Annual Operating Plan. Given the uncertainties in forecasting, this identified that forecasts have been
less accurate for prior periods, and we considered if this was appropriately factored into the valuation model;
– independent sensitivity analysis was performed to identify any further CGUs with a risk of impairment. The reasonableness of management’s
threshold of sensitive CGUs was assessed; and
– the appropriateness of disclosures made in relation to goodwill was also considered.
Relevant references in the Annual Report and Accounts 2016
GAC Report, page 141.
Note 20: Goodwill and intangible assets, page 239.
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Investment in associate – Bank of Communications Company, Limited (‘BoCom’)
Nature of the area of focus
Matters discussed with the GAC
HSBC's investment in BoCom is accounted for as an associate, using the equity
method.
This is the fourth consecutive year end that the market value of BoCom has been
below the carrying value. At 31 December, the market value based on the share
price was $11.1bn compared with the carrying value of $15.8bn.
This is considered an indicator of potential impairment under IFRS. An impairment
test was performed by HSBC using a value in use model to estimate the
investment’s value assuming it continues to be held in perpetuity rather than sold
($16.1bn). On this basis no impairment was recorded and the share of BoCom’s
profits has been recognised in the consolidated income statement.
The value in use model determines the present value of HSBC’s share of BoCom’s
future cash flows. The model is dependent on many assumptions, both short-term
and long-term in nature. These assumptions are derived from a combination of
management estimates, analysts’ forecasts and market data, and are highly
judgemental.
Discussions with the GAC were focused on:
• the continued appropriateness of the value in use model given the
period of time that the carrying value has been in excess of market
value;
• the key assumptions used in the model with a particular focus on
the assumptions with the highest level of uncertainty including the
long-term growth rate and the long term loan loss rate;
• the reasonably possible alternative assumptions that were
considered to identify those assumptions to which the value in use
was most sensitive and to demonstrate the impact on the value in
use of a movement in those assumptions; and
• the overall justifications for the divergence between the value in
use and market value.
During these discussions, HSBC confirmed its view that the model,
assumptions and cash flow forecasts remained appropriate.
Procedures performed to support our discussions and conclusions
• The conclusions on the appropriateness of the model were reviewed and the discount rate used within the model was independently recalculated
•
with the assistance of our valuation experts.
Inputs used in the determination of assumptions within the model were challenged and corroborating information was obtained with reference to
external market information, third-party sources, including analyst reports, and historical publicly available BoCom information.
• The controls in place over the model were tested.
• The year-end meeting between management and senior BoCom executive management, held specifically to identify facts or circumstances impacting
management assumptions, was observed.
• The mathematical accuracy of the model was tested.
• Disclosures made in the Annual Report and Accounts 2016 in relation to BoCom were reviewed.
Relevant references in the Annual Report and Accounts 2016
Note 1.1(f): Critical accounting estimates and judgements, page 196.
Note 17: Interests in associates and joint ventures, page 232.
Application of hedge accounting
Nature of the area of focus
Matters discussed with the GAC
To qualify for hedge accounting, certain criteria must be met including
documenting the nature and purpose of the hedge and performing regular
testing over its effectiveness.
Due to the complex nature of the hedge accounting rules this is often an area of
significant risk for banks.
In our prior report to you, we noted that audit testing had identified a number of
instances where hedging was applied, but the accounting rules had not been
adequately met. This resulted in the remediation of existing controls and the
implementation of new controls in the last quarter of 2015.
In light of the prior year matters, we determined this to be an area of significant
audit risk.
We discussed with the GAC during the year, the progress made by
management in the implementation of the new controls.
During December 2016, management in France identified a further
issue with an established hedging relationship, which resulted in a
partial discontinuation of the hedge. A discussion was held with the
GAC regarding both the root cause of the matter, the period in
which the adjustment should be recognised and over which controls
that had not operated effectively.
As indicated by the above matter, not all of the hedge accounting
controls operated effectively in the year. The exceptions noted were
limited to France.
Procedures performed to support our discussions and conclusions
• For all significant macro cash flow hedges, documentation was examined and the relationships assessed to determine if the hedges had been
appropriately designated. This included consideration of the hedge objectives and specific compliance with IFRS.
• A sample of new hedging relationships was examined and the relationships assessed to determine if they had been appropriately designated.
This included consideration of the hedge objectives and specific compliance with IFRS.
• Management’s hedge effectiveness reviews, and the measurement and recording of hedge ineffectiveness, were tested for a sample of hedge
relationships.
• Understood and tested controls over the documentation and review of the hedge relationships and their initial and ongoing effectiveness.
• Additional substantive audit procedures were performed over the partial discontinuation of the hedging relationship in France.
Relevant references in the Annual Report and Accounts 2016
GAC Report, page 141.
Note 14: Derivatives, page 227.
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Litigation and regulatory enforcement actions
Nature of the area of focus
Matters discussed with the GAC
HSBC, like other global banking institutions, is exposed to a significant
number of open legal cases and regulatory investigations in a number of
its markets. Given the business is geographically dispersed, the same
matter could be subject to investigation in multiple jurisdictions.
Provisions of $2.4bn have been established to account for legal
settlements and regulatory fines. The most significant provisions relate to
tax-related investigations and foreign exchange market manipulation.
There are a number of legal and regulatory matters for which no provision
has been established, as discussed on page 257.
There is an inherent risk that legal exposures are not identified and
considered for financial reporting purposes on a timely basis. Importantly,
the decision to recognise a provision and the basis of measurement are
judgemental.
Procedures performed to support our discussions and conclusions
Group Legal provided to each GAC meeting an update on the status of
legal cases. These updates considered whether all related litigation or
investigations about a specific matter had been identified.
Material matters were discussed during each meeting and the need for
changes to provisions considered. We participated in these discussions,
including consideration of whether any constructive obligation had arisen
in individual cases.
• Controls designed to ensure the completeness and adequacy of current legal and regulatory provisions were tested. Regulatory correspondence from
material markets was also read, and a sample of legal expenses were reviewed.
• Open legal cases were discussed with Group Legal and in certain instances we obtained and reviewed the relevant regulatory and litigation documents
in order to assess the facts and circumstances.
• The range of reasonably possible outcomes was considered for material provisions to independently assess the appropriateness of the judgement
made by HSBC.
• The disclosures of legal exposures and provisions were assessed for completeness and accuracy.
Relevant references in the Annual Report and Accounts 2016
GAC Report, page 141.
Note 27: Provisions, page 244.
Note 35: Legal proceedings and regulatory matters, page 257.
Impact of the deferred prosecution agreement (‘DPA’)
Nature of the area of focus
Matters discussed with the GAC
HSBC and HSBC Bank USA, N.A., (‘HBUS’) entered into a DPA with the
US Department of Justice (DoJ), Federal Reserve Board and Financial
Conduct Authority in 2012 regarding non-compliance with the US Bank
Secrecy Act, anti-money laundering rules, and sanctions laws. The
duration of the DPA is five years.
If the DOJ were to conclude that a breach of the DPA had occurred, there
are a number of potential penalties that could be imposed that could have
a material adverse effect on HSBC’s business. This could include loss of
business and withdrawal of funding, restrictions on US dollar clearing
functions through HSBC Bank USA or revocation of bank licences. The
loss of this ability could have a significant adverse impact on the going
concern status of HSBC and its individual subsidiaries in the future.
In considering going concern as the basis of preparation of the financial
statements, a discussion was held with the GAC about the progress being
made in responding to the requirements of the DPA. The conversation
specifically considered the 2016 report of the Monitor.
In the report, he expressed significant concerns about the pace of
progress, instances of potential financial crime and systems and control
deficiencies, whether HSBC is on track to meet its goal to the Monitor’s
satisfaction within the five-year period and, pending further review and
discussion with HSBC, did not certify as to HSBC’s implementation of,
and adherence to, remedial measures specified in the DPA.
Assurances were sought from the Directors that they were not aware of
any information to suggest that the DoJ had concluded that the DPA had
been breached.
Procedures performed to support our discussions and conclusions
• The likelihood of the DPA being breached and a restriction to US dollar clearing imposed was independently assessed through:
– inquiry with the Monitor, whose role is explained on page 82, to understand the status of his work, the outcome of his most recent country
reviews, his assessment of management’s progress against the requirements of the DPA and his reporting to the DoJ and FCA;
– reading the 2016 Monitor annual report and the 11 country reports issued during the year; and
– reading a sample of reports produced by the compliance function that undertook a Global Standards operational effectiveness exercise, and an
assessment of the findings.
• Each Group Risk Committee meeting was attended during the year. At each meeting a report was provided by Group Risk on the status of the
Global Standards programme, which aims to address the DPA recommendations. The related discussion was observed.
• The papers supporting the Financial System Vulnerabilities Committee meeting at the year-end were read. This meeting discussed the 2016
Monitor report and management’s response.
• Compliance with the DPA was discussed with Group Legal and other members of senior management.
Relevant references in the Annual Report and Accounts 2016
Top and emerging risks, page 64.
Areas of special interest: the Monitor, page 82.
Financial System Vulnerabilities Committee, page 143.
Going concern and viability statements, page 146.
Note 35: Legal proceedings and regulatory matters, page 257.
HSBC Holdings plc Annual Report and Accounts 2016
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Pension liabilities
Nature of the area of focus
HSBC has $39.8bn of pension liabilities as a result of defined benefit
pension schemes.
The calculation of these pension liabilities is complex and HSBC uses third
party actuaries to provide support in the process to ensure appropriate
expertise is applied to the calculation. The use of these actuaries also
increases the risk of error as data is passed to third parties for analysis
and calculation purposes.
Considering all of these factors, our initial assessment of the risk of
misstatement did not identify pension liabilities as an area of significant
focus as there was no history of error and the pension funds were in
surplus reducing the risk of fraud.
During the year management identified errors in the transfer and use of
data by third parties for one of the schemes in the US. As a result of this
error, we reconsidered our assessment of the audit risk surrounding
pension liability valuations and increased our scope of testing in this area.
Procedures performed to support our discussions and conclusions
Matters discussed with the GAC
The change in the assessment of risk was discussed and agreed with the
GAC in December 2016.
We focused our testing response and our discussions with GAC on the
largest schemes in the UK and US, which made up 84% of the overall
liability balance at 31 December 2016. Our increased testing was focused
on the transfer and use of data by third parties to form the calculation.
• The controls over the review and approval of actuarial assumptions, the completeness and accuracy of data provided to external actuaries, and the
reconciliation to data used in experts calculation were tested.
• Controls over the third party vendors were tested and the third party assurance reports covering controls operated by the vendors were reviewed.
• The output from external actuaries was inspected and an independent view was formed of key actuarial assumptions.
• Data used by the actuary in the calculation and the system to ledger reconciliations was independently tested.
Relevant references in the Annual Report and Accounts 2016
Note 5: Page 208
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HSBC Holdings plc Annual Report and Accounts 2016
Financial Statements
12 Fair values of financial instruments not carried at fair value
13 Financial assets designated at fair value
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of cash flows
Consolidated statement of changes in equity
HSBC Holdings income statement
HSBC Holdings statement of comprehensive income
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 and significant accounting policies
2 Net income/(expense) from financial instruments designated
at fair value
3 Insurance business
4 Operating profit
5 Employee compensation and benefits
6 Auditors’ remuneration
7 Tax
8 Dividends
9 Earnings per share
10 Trading assets
11 Fair values of financial instruments carried at fair value
Page
184
185
186
187
188
190
190
191
192
193
194
203
204
206
206
212
213
215
216
216
217
14 Derivatives
15 Financial investments
16 Assets pledged, collateral received and assets transferred
17 Interests in associates and joint ventures
18 Investments in subsidiaries
19 Structured entities
20 Goodwill and intangible assets
21 Prepayments, accrued income and other assets
22 Assets held for sale and liabilities of disposal groups held
for sale
23 Trading liabilities
24 Financial liabilities designated at fair value
25 Debt securities in issue
26 Accruals, deferred income and other liabilities
27 Provisions
28 Subordinated liabilities
29 Maturity analysis of assets, liabilities and off-balance sheet
commitments
30 Offsetting of financial assets and financial liabilities
31 Non-controlling interests
32 Called up share capital and other equity instruments
33 Contingent liabilities, contractual commitments
and guarantees
34 Lease commitments
35 Legal proceedings and regulatory matters
36 Related party transactions
37 Events after the balance sheet date
38 HSBC Holdings’ subsidiaries, joint ventures and associates
224
226
226
229
230
231
235
236
238
241
241
242
242
242
243
243
244
247
252
253
253
255
256
256
262
264
265
HSBC Holdings plc Annual Report and Accounts 2016
183
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Financial Statements
Consolidated income statement
for the year ended 31 December
Net interest income
– interest income
– interest expense
Net fee income
– fee income
– fee expense
Net trading income
– trading income excluding net interest income
– net interest income on trading activities
Net income/(expense) from financial instruments designated at fair value
– changes in fair value of long-term debt and related derivatives
– net income from other 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 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
Goodwill impairment of Global Private Banking – Europe
Total operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
Tax expense
Profit for the year
Attributable to:
– ordinary shareholders of the parent company
– preference shareholders of the parent company
– other equity holders
– non-controlling interests
Profit for the year
Basic earnings per ordinary share
Diluted earnings per ordinary share
Notes
2
3
3
4
5
20
4
17
7
8
8
9
9
2016
$m
29,813
42,414
(12,601)
12,777
15,669
(2,892)
9,452
8,066
1,386
(2,666)
(3,975)
1,309
1,385
95
9,951
(971)
59,836
(11,870)
47,966
(3,400)
44,566
(18,089)
(16,473)
(1,229)
(777)
(3,240)
(39,808)
4,758
2,354
7,112
(3,666)
3,446
1,299
90
1,090
967
3,446
$
0.07
0.07
2015
$m
32,531
47,189
(14,658)
14,705
18,016
(3,311)
8,723
6,948
1,775
1,532
863
669
2,068
123
10,355
1,055
71,092
(11,292)
59,800
(3,721)
56,079
(19,900)
(17,662)
(1,269)
(937)
—
(39,768)
16,311
2,556
18,867
(3,771)
15,096
2014
$m
34,705
50,955
(16,250)
15,957
19,545
(3,588)
6,760
4,853
1,907
2,473
508
1,965
1,335
311
11,921
1,131
74,593
(13,345)
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
12,572
13,115
90
860
1,574
15,096
$
0.65
0.64
90
483
1,017
14,705
$
0.69
0.69
184 HSBC Holdings plc Annual Report and Accounts 2016
Consolidated statement of comprehensive income
for the year ended 31 December
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 investments
– 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 (losses)/gains
– fair value losses/(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:
– ordinary shareholders of the parent company
– preference shareholders of the parent company
– other equity holders
– non-controlling interests
Total comprehensive income for the year
2016
$m
3,446
(299)
475
(895)
71
50
(68)
(297)
195
34
54
54
—
(8,092)
1,894
(9,791)
(195)
7
(84)
91
(8,398)
(4,952)
(6,968)
90
1,090
836
(4,952)
2015
$m
15,096
(3,072)
(1,231)
(2,437)
127
469
(24)
704
(705)
(23)
(9)
(9)
—
(10,945)
—
(11,112)
167
101
130
(29)
(13,949)
1,147
(490)
90
860
687
1,147
2014
$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
8,672
90
483
1,782
11,027
HSBC Holdings plc Annual Report and Accounts 2016
185
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Financial Statements
Consolidated balance sheet
at 31 December
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
Reverse repurchase agreements – non-trading
Financial investments
Assets held for sale
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 Dec
Liabilities and equity
Liabilities
Hong Kong currency notes in circulation
Deposits by banks
Customer accounts
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
Liabilities of disposal groups held for sale
Accruals, deferred income and other liabilities
Current tax liabilities
Liabilities under insurance contracts
Provisions
Deferred tax liabilities
Subordinated liabilities
Total liabilities at 31 Dec
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 Dec
Notes
10
13
14
15
22
21
17
20
7
23
24
14
25
22
26
3
27
7
28
32
32
31
2016
$m
128,009
5,003
31,228
235,125
24,756
290,872
88,126
861,504
160,974
436,797
4,389
59,520
1,145
20,029
21,346
6,163
2015
$m
98,934
5,768
28,410
224,837
23,852
288,476
90,401
924,454
146,255
428,955
43,900
54,398
1,221
19,139
24,605
6,051
2,374,986
2,409,656
31,228
59,939
28,410
54,371
1,272,386
1,289,586
88,958
5,977
153,691
86,832
279,819
65,915
2,790
41,501
719
75,273
4,773
1,623
20,984
80,400
5,638
141,614
66,408
281,071
88,949
36,840
38,116
783
69,938
5,552
1,760
22,702
2,192,408
2,212,138
10,096
12,619
17,110
(1,234)
136,795
175,386
7,192
182,578
9,842
12,421
15,112
7,109
143,976
188,460
9,058
197,518
Total liabilities and equity at 31 Dec
2,374,986
2,409,656
The accompanying notes on pages 194 to 271, the audited sections in ‘Global businesses and regions’ on pages 44 to 60, ‘Risk’ on
pages 64 to 126, ‘Capital’ on pages 127 to 131 and ‘Directors’ Remuneration Report’ on pages 153 to 170 form an integral part of
these financial statements.
These financial statements were approved by the Board of Directors on 21 February 2017 and signed on its behalf by:
Douglas Flint
Group Chairman
Iain Mackay
Group Finance Director
186 HSBC Holdings plc Annual Report and Accounts 2016
Consolidated statement of cash flows
for the year ended 31 December
Profit before tax
Adjustments for non-cash items:
Depreciation, amortisation and impairment
Net gain from investing activities
Share of profits in associates and joint ventures
(Gain)/loss on disposal of subsidiaries, businesses, associates and joint ventures
Loan impairment losses gross of recoveries and other credit risk provisions
Provisions including pensions
Share-based payment expense
Other non-cash items included in profit before tax
Elimination of exchange differences
Changes in operating assets and liabilities
Change in net trading securities and derivatives
Change in loans and advances to banks and customers
Change in reverse repurchase agreements – non-trading
Change in financial assets designated at fair value
Change in other assets
Change in deposits by banks and 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
Dividends received from associates
Contributions paid to defined benefit plans
Tax paid
Net cash from operating activities
Purchase of financial investments
Proceeds from the sale and maturity of financial investments
Net cash flows from the purchase and sale of property, plant and equipment
Net cash inflow/(outflow) from disposal of customer and loan portfolios
Net investment in intangible assets
Net cash flow on disposal of subsidiaries, businesses, associates and joint ventures
Net cash from investing activities
Issue of ordinary share capital and other equity instruments
Net sales/(purchases) of own shares for market-making and investment purposes
Purchase of treasury shares
Redemption of preference shares and other equity instruments
Subordinated loan capital issued
Subordinated loan capital repaid
Dividends paid to shareholders of the parent company and non-controlling interests
Net cash from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 Jan
Exchange differences in respect of cash and cash equivalents
Cash and cash equivalents at 31 Dec
Cash and cash equivalents comprise:
– 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 or less
– treasury bills, other bills and certificates of deposit less than three months
– less: items in the course of transmission to other banks
Footnotes
2016
$m
7,112
5,212
(1,215)
(2,354)
1,743
4,090
2,482
534
(207)
2015
$m
18,867
2,181
(1,935)
(2,556)
—
4,546
3,472
757
(191)
2014
$m
18,680
2,251
(1,928)
(2,532)
41
5,125
3,609
732
(487)
1
15,364
18,308
24,571
4,395
52,868
(13,138)
(1,235)
(6,591)
(8,918)
8,558
(23,034)
17,802
8,792
689
(726)
(3,264)
68,959
(457,084)
430,085
(1,151)
9,194
(906)
4,802
(15,060)
2,024
523
(2,510)
(1,825)
2,622
(595)
(9,157)
(8,918)
44,981
243,863
(14,294)
274,550
128,009
5,003
77,318
55,551
14,646
(5,977)
274,550
24,384
32,971
(3,011)
2,394
9,090
(65,907)
(26,481)
960
(10,785)
(4,549)
879
(664)
(3,852)
(1,122)
(438,376)
399,636
(1,249)
2,023
(954)
8
(38,912)
3,727
331
—
(463)
3,180
(2,157)
(8,195)
(3,577)
(43,611)
301,301
(13,827)
243,863
98,934
5,768
70,985
53,971
19,843
(5,638)
243,863
(18,498)
17,813
18,900
3,269
4,393
(17,443)
(56,788)
(8,133)
(10,734)
(716)
757
(681)
(3,573)
(21,372)
(384,199)
382,837
(1,389)
(1,035)
(903)
(272)
(4,961)
5,948
(96)
—
(234)
3,500
(3,163)
(7,823)
(1,868)
(28,201)
346,281
(16,779)
301,301
129,957
4,927
89,285
68,930
14,192
(5,990)
301,301
2
3
Interest received was $42,586m (2015: $47,623m; 2014: $51,522m), interest paid was $12,027m (2015: $14,559m; 2014: $15,633m)
and dividends received were $475m (2015: $914m; 2014: $1,199m).
1 Adjustment to bring changes between opening and closing balance sheet amounts to average rates. This is not done on a line-by-line basis, as details cannot be determined
without unreasonable expense.
In July 2016, we completed the disposal of the Brazilian operations resulting in net cash inflow of $4.8bn.
2
3 At 31 December 2016 $35,501m (2015: $33,744m) was not available for use by HSBC, of which $21,108m (2015: $21,773m) related to mandatory deposits at central banks.
HSBC Holdings plc Annual Report and Accounts 2016
187
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Financial Statements
Consolidated statement of changes in equity
for the year ended 31 December
Other reserves5
Called up
share
capital
and share
premium1
Other
equity
instru-
ments2
Retained
earnings3, 4
Available-
for-sale
fair value
reserve
Cash
flow
hedging
reserve
Foreign
exchange
reserve
Total
share-
holders’
equity
Non-
controlling
interests
Merger
reserve6
Total
equity
$m
$m
$m
22,263
15,112
143,976
$m
$m
$m
$m
$m
(20,044)
27,308 188,460
9,058 197,518
2,538
(271)
(61)
(7,994)
$m
(189)
—
(271)
(271)
—
—
—
—
—
$m
34
—
(61)
—
(61)
—
—
—
—
—
(7,994)
—
—
—
—
1,894
(9,888)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(17)
(477)
2,143
—
(2,332)
(2,332)
—
—
—
—
2,479
59
—
—
5
54
—
—
(425)
3,040
(2,510)
—
(11,279)
534
921
137,144
13,522
73
—
—
82
(9)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,479
967
3,446
(8,267)
(131)
(8,398)
(271)
(61)
5
54
(28)
(7)
(299)
(68)
2
—
7
54
1,894
(9,888)
—
1,894
(98)
(9,986)
(5,788)
836
(4,952)
27
3,040
(2,510)
1,998
—
—
—
—
27
3,040
(2,510)
1,998
— (11,279)
(919)
(12,198)
—
—
534
904
—
(1,783)
534
(879)
(27)
(28,038)
27,308 175,386
7,192 182,578
58
—
(24)
—
(24)
—
—
—
(9,265)
27,308
190,447
—
—
13,522
9,531
1,574
199,978
15,096
(10,779)
— (13,062)
(887)
(13,949)
—
—
—
—
—
—
—
—
(2,332)
(24)
82
(9)
(740)
(3,072)
—
19
—
(24)
101
(9)
(10,779)
— (10,779)
(166)
(10,945)
At 1 Jan 2016
Profit for the year
Other comprehensive income
(net of tax)
– available-for-sale investments
– cash flow hedges
– remeasurement of defined benefit
asset/liability
– share of other comprehensive
income of associates and joint
ventures
– foreign exchange reclassified to
income statement on disposal of a
foreign operation
– exchange differences
Total comprehensive income for
the year
Shares issued under employee
remuneration and share plans
Shares issued in lieu of dividends and
amounts arising thereon
Net increase in treasury shares
Capital securities issued
Dividends to shareholders
Cost of share-based payment
arrangements
Other movements
At 31 Dec 2016
At 1 Jan 2015
Profit for the year
Other comprehensive income
(net of tax)
– available-for-sale investments
– cash flow hedges
– remeasurement of defined benefit
asset/liability
– share of other comprehensive
income of associates and joint
ventures
– exchange differences
Total comprehensive income for
the year
Shares issued under employee
remuneration and share plans
Shares issued in lieu of dividends and
amounts arising thereon
Capital securities issued
Dividends to shareholders
Cost of share-based payment
arrangements
Other movements
At 31 Dec 2015
—
—
—
—
—
—
—
—
—
452
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,998
—
—
—
21,527
11,532
—
—
—
—
—
—
—
—
736
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,580
—
—
—
22,715
17,110
136,795
13,595
(2,332)
(24)
(10,779)
(589)
3,162
—
(10,660)
757
567
—
—
—
—
—
—
—
—
—
—
—
—
34
—
—
—
—
—
—
—
—
—
—
460
147
3,162
3,580
687
1,147
—
—
—
147
3,162
3,580
— (10,660)
(697)
(11,357)
—
—
757
567
—
(463)
757
104
22,263
15,112
143,976
(189)
(20,044)
27,308
188,460
9,058
197,518
188 HSBC Holdings plc Annual Report and Accounts 2016
Consolidated statement of changes in equity (continued)
Other reserves5
Available-
for-sale
fair value
reserve
Cash flow
hedging
reserve
Foreign
exchange
reserve
Merger
reserve6
Total
share-
holders’
equity
Non-
controlling
interests
Called up
share
capital and
share
premium1
Other
equity
instru-
ments2
$m
$m
20,550
5,851
—
—
—
—
—
—
—
—
977
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,681
—
—
—
Retained
earnings3, 4
$m
128,728
13,688
2,066
—
—
1,986
80
—
$m
97
—
2,025
2,025
—
—
—
—
$m
(121)
—
189
—
189
—
—
—
$m
(542)
—
(8,723)
—
—
—
—
(8,723)
15,754
2,025
189
(8,723)
(710)
2,709
—
(9,893)
732
(176)
—
—
—
—
—
21
—
—
—
—
—
(10)
58
—
—
—
—
—
—
$m
$m
27,308
181,871
13,688
(4,443)
2,025
189
1,986
Total
equity
$m
190,459
14,705
(3,678)
2,972
188
1,985
$m
8,588
1,017
765
947
(1)
(1)
80
—
80
(8,723)
(180)
(8,903)
9,245
1,782
11,027
267
2,709
5,681
(9,893)
732
(165)
—
—
—
267
2,709
5,681
(712)
(10,605)
—
(127)
732
(292)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
At 1 Jan 2014
Profit for the year
Other comprehensive income
(net of tax)
– available-for-sale investments
– cash flow hedges
– remeasurement of defined benefit
asset/liability
– share of other comprehensive
income of associates and joint
ventures
– exchange differences
Total comprehensive income for
the year
Shares issued under employee
remuneration and share plans
Shares issued in lieu of dividends and
amounts arising thereon
Capital securities issued
Dividends to shareholders
Cost of share-based payment
arrangements
Other movements
At 31 Dec 2014
21,527
11,532
137,144
2,143
(9,265)
27,308
190,447
9,531
199,978
For further details refer to Note 32.
1
2 During 2016, HSBC Holdings issued $2,000m of perpetual subordinated contingent convertible capital securities, after issuance costs of $6m and tax benefits of $4m. In 2015,
HSBC Holdings issued $2,450m and €1,000m of perpetual subordinated contingent convertible capital securities, on which there were $12m of external issuance costs, $25m
of intra-group issuance costs and $19m of tax. In 2014, HSBC Holdings issued $2,250m, $1,500m and €1,500m of perpetual subordinated contingent convertible capital
securities, on which there were $13m of external issuance costs and $33m of intra-group issuance costs. Under IFRSs these issuance costs and tax benefits are classified as
equity.
3 At 31 December 2016, retained earnings included 353,356,251 treasury shares (2015: 81,580,180; 2014: 85,337,430). The increase principally reflects the share buy-back
initiative, with the purchase of 325,273,407 ordinary shares to reduce outstanding ordinary shares. In addition, treasury shares are also held within HSBC’s Insurance business
retirement funds for the benefit of policyholders or beneficiaries within employee trusts for the settlement of shares expected to be delivered under employee share schemes or
bonus plans, and the market-making activities in Markets.
Cumulative goodwill amounting to $5,138m has been charged against reserves in respect of acquisitions of subsidiaries prior to 1 January 1998, including $3,469m charged
against the merger reserve arising on the acquisition of HSBC Bank plc. The balance of $1,669m has been charged against retained earnings.
4
5 At 31 December 2015, our operations in Brazil were classified as held for sale (see Note 22). The cumulative amount of other reserves attributable to these operations were as
6
follows: available-for-sale fair value reserve debit of $176m, cash flow hedging reserve credit of $34m and foreign exchange reserve debit of $2.6bn.
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 $8,290m in respect of HSBC France and $12,768m in respect of HSBC Finance Corporation were recognised in the merger reserve. The merger reserve created on
the acquisition of HSBC Finance Corporation subsequently became attached to HSBC Overseas Holdings (UK) Limited (‘HOHU’), following a number of intra-group
reorganisations. During 2009, pursuant to Section 131 of the Companies Act 1985, statutory share premium relief was taken in respect of the rights issue and $15,796m was
recognised in the merger reserve. The merger reserve includes a deduction of $614m in respect of costs relating to the rights issue, of which $149m was subsequently
transferred to the income statement. Of this $149m, $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 $344m on a forward foreign exchange contract associated with hedging the proceeds of the rights issue.
HSBC Holdings plc Annual Report and Accounts 2016
189
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Financial Statements
HSBC Holdings income statement
for the year ended 31 December
Net interest expense
– interest income
– interest expense
Fee (expense)/income
Net trading income/(expense)
Net (expense)/income from financial instruments designated at fair value
Dividend income from subsidiaries
Other operating income
Total operating income
Employee compensation and benefits
General and administrative expenses
Impairment of subsidiaries
Total operating expenses
Profit before tax
Tax credit
Profit for the year
Notes
2
5
HSBC Holdings statement of comprehensive income
for the year ended 31 December
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 investments
– fair value gains/(losses)
– income taxes
Items that will not be reclassified subsequently to profit or loss:
Changes in fair value of financial liabilities designated at fair value due to movement in own credit risk
– before income taxes
– income taxes
Other comprehensive income for the year, net of tax
Total comprehensive income for the year
2016
$m
(424)
1,380
(1,804)
(1)
119
(49)
10,436
696
10,777
(570)
(4,014)
—
(4,584)
6,193
402
6,595
2016
$m
6,595
(72)
(83)
11
(896)
(1,030)
134
(968)
5,627
2015
$m
(438)
866
(1,304)
39
(349)
276
8,469
654
8,651
(908)
(3,434)
(26)
(4,368)
4,283
570
4,853
2015
$m
4,853
(57)
(77)
20
—
—
—
(57)
4,796
2014
$m
(486)
944
(1,430)
47
(215)
438
9,077
608
9,469
(681)
(2,522)
(38)
(3,241)
6,228
299
6,527
2014
$m
6,527
116
152
(36)
—
—
—
116
6,643
190 HSBC Holdings plc Annual Report and Accounts 2016
HSBC Holdings balance sheet
at 31 December
Assets
Cash and 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
Intangible assets
Deferred tax assets
Total assets at 31 Dec
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
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 Dec
Notes
14
18
24
14
25
28
32
2016
$m
247
2,148
77,421
3,590
503
631
2015
$m
242
2,467
44,350
4,285
265
723
95,850
97,770
176
232
75
17
180,798
150,194
2,157
30,113
5,025
21,805
1,651
—
15,189
75,940
10,096
12,619
17,004
37,483
27,656
104,858
180,798
2,152
19,853
2,278
960
1,642
—
15,895
42,780
9,842
12,421
15,020
37,907
32,224
107,414
150,194
The accompanying notes on pages 194 to 271 and the audited sections in ‘Global businesses and regions’ on pages 44 to 60, ‘Risk’
on pages 64 to 126, ‘Capital’ on pages 127 to 131 and ‘Directors’ Remuneration Report’ on pages 153 to 170 form an integral part of
these financial statements.
These financial statements were approved by the Board of Directors on 21 February 2017 and signed on its behalf by:
Douglas Flint
Group Chairman
Iain Mackay
Group Finance Director
HSBC Holdings plc Annual Report and Accounts 2016
191
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Financial Statements
HSBC Holdings statement of cash flows
for the year ended 31 December
Profit before tax
Adjustments for non-cash items:
– depreciation, amortisation and impairment
– charge for share-based payment
– other non-cash items included in profit before tax
Changes in operating assets and liabilities
Change in loans to HSBC undertakings
Change in net trading securities and net derivatives
Change in other assets
Change in debt securities in issue
Change in financial liabilities designated at fair value
Change in other liabilities
Tax received
Net cash from operating activities
Purchase of financial investments in HSBC undertakings
Proceeds from the sale and maturity of financial investments in HSBC undertakings
Net cash outflow from acquisition of or increase in stake of subsidiaries
Repayment of capital from subsidiaries
Net investment in intangible assets
Net cash from investing activities
Issue of ordinary share capital and other equity instruments
Purchase of treasury shares
Subordinated loan capital issued
Subordinated loan capital repaid
Debt securities issued
Debt securities repaid
Dividends paid on ordinary shares
Dividends paid to holders of other equity instruments
Net cash from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 Dec
Cash and cash equivalents comprise
Cash at bank with HSBC undertakings
2016
$m
6,193
48
10
34
4
(33,069)
3,066
(239)
(1,633)
(1,229)
(693)
646
(26,910)
—
610
(2,073)
3,920
(109)
2,348
2,381
(2,510)
2,636
(1,781)
32,080
—
(7,059)
(1,180)
24,567
5
242
247
247
2015
$m
4,283
114
30
86
(2)
(454)
1,413
(141)
(49)
(1,228)
(1,065)
470
3,343
(276)
—
(2,118)
790
(79)
(1,683)
4,216
—
3,180
(1,565)
0
—
(6,548)
(950)
(1,667)
(7)
249
242
242
2014
$m
6,228
52
39
74
(61)
3,474
483
7
(149)
(694)
(9,071)
133
463
(2,410)
300
(1,603)
3,505
—
(208)
6,559
—
3,500
(1,654)
—
(1,634)
(6,611)
(573)
(413)
(158)
407
249
249
Interest received was $2,605m (2015: $2,026m), interest paid was $2,910m (2015: $2,309m) and dividends received were $10,412m
(2015: $8,469m).
192 HSBC Holdings plc Annual Report and Accounts 2016
HSBC Holdings statement of changes in equity
for the year ended 31 December
Other reserves
Called
up
share
capital
Share
premium
Other
equity
instruments
Retained
earnings1
Available-
for-sale
fair value
reserve
$m
$m
$m
$m
9,842
12,421
15,020
32,224
At 1 Jan 2016
Profit for the year
Other comprehensive income (net of tax)
– available-for-sale investments
– changes in fair value of financial liabilities designated at
fair value due to movement in own credit risk
Total comprehensive income for the year
Shares issued under employee share plans
Shares issued in lieu of dividends and amounts arising
thereon
219
(219)
10,096
12,619
17,004
27,656
112
2,244
35,127
104,858
9,609
11,918
11,476
—
—
—
—
—
35
—
—
—
—
—
417
—
—
—
—
—
—
—
—
—
—
—
—
—
45
—
—
—
—
691
—
—
—
—
—
—
—
—
—
—
—
—
60
—
—
—
—
917
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,984
—
—
—
6,595
(896)
—
(896)
5,699
(51)
3,040
(2,510)
—
(11,279)
34
499
—
—
—
—
—
—
3,544
—
—
—
—
—
—
—
—
—
5,648
—
—
—
34,986
4,853
—
—
4,853
(59)
3,162
—
(10,660)
86
(144)
35,406
6,527
—
—
6,527
(53)
2,709
—
(9,893)
74
216
9,842
12,421
15,020
32,224
9,415
11,135
5,828
Other
paid-in
capital2
Merger
and other
reserves
Total
share-
holders’
equity
$m
$m
$m
2,597
35,127
107,414
—
—
—
—
—
—
—
—
—
—
—
(353)
—
—
—
—
—
—
—
—
—
—
—
—
6,595
(968)
(72)
(896)
5,627
401
3,040
(2,510)
1,984
(11,279)
34
147
$m
183
—
(72)
(72)
—
(72)
—
—
—
—
—
—
1
240
—
(57)
(57)
(57)
—
—
—
—
—
—
183
124
—
116
116
116
—
—
—
—
—
—
2,089
35,127
105,445
—
—
—
—
—
—
—
—
—
508
2,597
—
—
—
—
—
—
—
—
—
—
4,853
(57)
(57)
4,796
677
3,162
3,544
(10,660)
86
364
35,127
107,414
2,052
35,127
—
—
—
—
—
—
—
—
—
37
—
—
—
—
—
—
—
—
—
—
99,087
6,527
116
116
6,643
924
2,709
5,648
(9,893)
74
253
Shares issued in lieu of dividends and amounts arising
thereon
188
(188)
Net increase in treasury shares
Capital securities issued
Dividends to shareholders
Cost of share-based payment arrangements
Other movements
At 31 Dec 2016
At 1 Jan 2015
Profit for the year
Other comprehensive income (net of tax)
– available-for-sale investments
Total comprehensive income for the year
Shares issued under employee share plans
Capital securities issued
Dividends to shareholders
Cost of share-based payment arrangements
Other movements
At 31 Dec 2015
At 1 Jan 2014
Profit for the year
Other comprehensive income (net of tax)
– available-for-sale investments
Total comprehensive income for the year
Shares issued under employee share plans
Capital securities issued
Dividends to shareholders
Cost of share-based payment arrangements
Other movements
At 31 Dec 2014
Shares issued in lieu of dividends and amounts arising
thereon
134
(134)
9,609
11,918
11,476
34,986
240
2,089
35,127
105,445
Dividends per ordinary share at 31 December 2016 were $0.51 (2015: $0.50; 2014:$0.49).
1 At 31 December 2016, retained earnings included 325,499,152 ($2,499m) of treasury shares (2015: 67,881 ($1m); 2014: 179,419 ($3m)). The increase principally reflects the
share buy-back initiative, with the purchase of 325,273,407 ordinary shares ($2,497m) to reduce outstanding ordinary shares. In addition, treasury shares are held to fund
employee share plans.
2 Other paid-in capital arises from the exercise and lapse of share options granted to employees of HSBC Holdings subsidiaries.
HSBC Holdings plc Annual Report and Accounts 2016
193
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
1 Basis of preparation and significant accounting policies
1.1 Basis of preparation
(a) Compliance with International Financial Reporting Standards
The consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings have been prepared in
accordance with IFRSs as issued by the IASB, including interpretations (‘IFRICS’) issued by the IFRS Interpretations Committee, and
as endorsed by the European Union (‘EU’). At 31 December 2016, there were no unendorsed standards effective for the year ended
31 December 2016 affecting these consolidated and separate financial statements, and HSBC’s application of IFRSs results in no
differences between IFRSs as issued by the IASB and IFRSs as endorsed by the EU.
Standards adopted during the year ended 31 December 2016
There were no new standards applied during the year ended 31 December 2016 by HSBC.
The requirements of IFRS 9 ‘Financial Instruments’ relating to the presentation of gains and losses on financial liabilities designated
at fair value were adopted in the separate financial statements of HSBC Holdings. As a result, the effects of changes in those
liabilities’ credit risk is presented in other comprehensive income with the remaining effect presented in profit or loss. In accordance
with the transitional requirements of IFRS 9, comparatives have not been restated. Adoption increased profit before tax by $896m
with the opposite effect on other comprehensive income, with no effect on net assets.
During 2016, 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
Minor amendments to IFRSs
The IASB has published a number of minor amendments to IFRSs in the ‘Annual Improvements to IFRSs 2012-2014’ and in a series
of stand-alone amendments, one of which has not yet been endorsed for use in the EU. HSBC has not early adopted any of the
amendments effective after 31 December 2016 and it expects they will have an insignificant effect, when adopted, on the
consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings.
Major new IFRSs
The IASB has published IFRS 9 ‘Financial Instruments’, IFRS 15 ‘Revenue from Contracts with Customers’ and IFRS 16 ‘Leases’.
IFRS 9 and IFRS 15 have been endorsed for use in the EU and IFRS 16 has not yet been endorsed.
IFRS 9 ‘Financial Instruments’
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 how these are managed (the entity’s business model) and
their contractual cash flow characteristics. These factors determine whether the financial assets are measured at amortised cost,
fair value through other comprehensive income (‘FVOCI’) or fair value through profit or loss (‘FVPL’). 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. However, based on an assessment of financial
assets performed to date and expectations around changes to balance sheet composition, HSBC expects that the overall impact of
any change will not be significant.
For financial liabilities designated to be 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, an impairment 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, an allowance (or provision) is required for ECL
resulting from all possible default events over the expected life of the financial instrument (‘lifetime ECL’). Financial assets where
ECL is recognised are in ‘stage 1’; financial assets that are considered to have experienced a significant increase in credit
risk are in ‘stage 2’; and financial assets for which there is objective evidence of impairment, so are considered to be in default or
otherwise credit impaired, are in ‘stage 3’.
The assessment of credit risk and the estimation of ECL are required to be unbiased and probability-weighted, and should
incorporate all available information relevant to the assessment, including information about past events, current conditions and
reasonable and supportable forecasts of 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. IFRS 9 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.
194 HSBC Holdings plc Annual Report and Accounts 2016
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. However they do not
explicitly address macro hedge accounting strategies, which are particularly important for banks. As a result, IFRS 9 includes an
accounting policy choice to remain with IAS 39 hedge accounting.
Based on the analysis performed to date, HSBC expects to exercise the accounting policy choice to continue IAS 39 hedge
accounting and therefore is not currently planning to change hedge accounting, although it will implement the revised hedge
accounting disclosures required by the related amendments to IFRS 7 ‘Financial Instruments: Disclosures’.
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. HSBC does not intend to restate comparatives.
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 has early adopted the revised presentation of fair value gains and
losses relating to an entity’s own credit risk on certain liabilities in the separate financial statements of HSBC Holdings from
1 January 2016, and since interim financial statements have been issued during 2016 without adoption, will adopt new requirements
in the consolidated financial statements from 1 January 2017. If this presentation was applied in the consolidated financial
statements at 31 December 2016, 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 the change in fair value attributable to changes in credit risk, including HSBC’s credit risk, is disclosed in Note
24. HSBC is assessing the impact that the impairment requirements will have on the financial statements.
The joint Global Risk and Global Finance IFRS 9 Implementation Programme continues to progress with the documentation of Group
accounting policy, the development of operating and system target operating models and the development, build and testing of risk
modelling methodologies for the calculation of impairment nearing completion. HSBC intends to perform a parallel run during the
second half of 2017 to gain a better understanding of the potential effect of the new standard and for the governance framework to
gain experience. HSBC intends to quantify the potential impact of IFRS 9 once it is practicable to provide reliable estimates, which
will be no later than in the Annual Report and Accounts 2017. Until reliable estimates of the impact are available, particularly on the
interaction with the regulatory capital requirements, further information on the expected impact on the financial position and on
capital planning cannot be provided. Further information about the application of IFRS 9 by HSBC is available on pages 347 to 352 of
the Annual Report and Accounts 2015.
IFRS 15 ‘Revenue from Contracts with Customers’
In May 2014, the IASB issued IFRS 15 ‘Revenue from Contracts with Customers’. The original effective date of IFRS 15 has been
delayed by one year and the standard is now effective for annual periods beginning on or after 1 January 2018 with early application
permitted. IFRS 15 provides a principles-based approach for revenue recognition, and introduces the concept of recognising revenue
for performance obligations as they are satisfied. The standard should be applied retrospectively, with certain practical expedients
available. HSBC has assessed the impact of IFRS 15 and expects that the standard will have no significant effect, when applied, on
the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings.
IFRS 16 ‘Leases’
In January 2016, the IASB issued IFRS 16 ‘Leases’ with an effective date for annual periods beginning on or after 1 January 2019.
IFRS 16 results in lessees accounting for most leases within the scope of the standard in a manner similar to the way in which
finance leases are currently accounted for under IAS 17 ‘Leases’. Lessees will recognise a ‘right of use’ asset and a corresponding
financial liability on the balance sheet. The asset will be amortised over the length of the lease and the financial liability measured at
amortised cost. Lessor accounting remains substantially the same as under IAS 17. HSBC is currently assessing the impact of IFRS
16, and it is not practicable to quantify the effect at the date of the publication of these financial statements. Existing operating lease
commitments are set out in Note 34.
(d) Foreign currencies
HSBC’s consolidated financial statements are presented in US dollars because the US dollar and currencies linked to it form the
major currency bloc in which HSBC transacts and funds its business. The US dollar is also HSBC Holdings’ functional currency
because the US dollar and currencies linked to it are the most significant currencies relevant to the underlying transactions, events
and conditions of its subsidiaries, as well as representing a significant proportion of its funds generated from financing activities.
Transactions in foreign currencies are recorded at the rate of exchange on the date of the transaction. Assets and liabilities
denominated in foreign currencies are translated at the rate of exchange at the balance sheet date except non-monetary assets
and liabilities measured at historical cost that are translated using the rate of exchange at the initial transaction date. Exchange
differences are included in other comprehensive income or in the income statement depending on where the gain or loss on the
underlying item is recognised.
In the consolidated financial statements, the assets, liabilities and results of foreign operations whose functional currency is not US
dollars are translated into the Group’s presentation currency at the reporting date. Exchange differences arising are recognised in
other comprehensive income. On disposal of a foreign operation, exchange differences previously recognised in other comprehensive
income are reclassified to the income statement.
(e) Presentation of information
Certain disclosures required by IFRSs have been included in the audited sections of this Annual Report and Accounts as follows:
• segmental disclosures are included in the ‘Report of the Directors: Financial Review’ on pages 30 to 63;
• disclosures concerning the nature and extent of risks relating to insurance contracts and financial instruments are included in
the ‘Report of the Directors: Risk’ on pages 64 to 126;
• capital disclosures are included in the ‘Report of the Directors: Capital’ on pages 127 to 131; and
HSBC Holdings plc Annual Report and Accounts 2016
195
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
• disclosures relating to HSBC’s securitisation activities and structured products are included in the ‘Report of the Directors: Risk’
on pages 64 to 126.
In accordance with HSBC’s policy to provide disclosures that help investors and other stakeholders understand the Group’s
performance, financial position and changes to them, 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 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.
(f)
Critical accounting estimates and judgements
The preparation of financial information requires the use of estimates and judgements about future conditions. In view of the
inherent uncertainties and the high level of subjectivity involved in the recognition or measurement of items highlighted as the critical
accounting estimates and judgements in section 1.2 below, 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 these Financial Statements. Management’s selection of HSBC’s accounting policies which contain
critical estimates and judgements reflects the materiality of the items to which the policies are applied and the high degree of
judgement and estimation uncertainty involved.
(g) Segmental analysis
HSBC’s chief operating decision-maker is the Group Chief Executive, supported by the Group Management Board (‘GMB’), which
operates as a general management committee under the direct authority of the Board, and operating segments are reported in a
manner consistent with the internal reporting provided to the Group Chief Executive and the GMB.
Measurement of segmental assets, liabilities, income and expenses is in accordance with the Group’s accounting policies.
Segmental income and expenses include transfers between segments, and these transfers are conducted at arm’s length. Shared
costs are included in segments on the basis of the actual recharges made.
(h) Going concern
The financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company
have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a
wide range of information relating to present and future conditions, including future projections of profitability, cash flows and
capital resources.
1.2 Summary of significant accounting policies
(a) Consolidation and related policies
Investments in subsidiaries
Where an entity is governed by voting rights, HSBC consolidates when it holds, directly or indirectly, the necessary voting rights to
pass resolutions by the governing body. In all other cases, the assessment of control is more complex and requires judgement of
other factors, including having exposure to variability of returns, power to direct relevant activities and whether power is held as
agent or principal.
Business combinations are accounted for using the acquisition method. The amount of non-controlling interest is measured either
at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. This election is made
for each business combination.
HSBC Holdings’ investments in subsidiaries are stated at cost less impairment losses.
Goodwill
Goodwill is allocated to cash-generating units (‘CGUs’) for the purpose of impairment testing, which is undertaken at the lowest level
at which goodwill is monitored for internal management purposes. HSBC’s CGUs are based on geographical regions subdivided by
global business, except for Global Banking and Markets, for which goodwill is monitored on a global basis.
Impairment testing is performed at least once a year, or whenever there is an indication of impairment, by comparing the recoverable
amount of a CGU with its carrying amount.
Goodwill is included in a disposal group if the disposal group is a CGU to which goodwill has been allocated or it is an operation
within such a CGU. The amount of goodwill included in a disposal group is measured on the basis of the relative values of the
operation disposed of and the portion of the CGU retained.
Critical accounting estimates and judgements
The review of goodwill 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.
• 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.
The accuracy of forecast cash flows is subject to a high degree of uncertainty in volatile market conditions. In such circumstances, management
retests goodwill for impairment more frequently than once a year when indicators of impairment exist 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.
196 HSBC Holdings plc Annual Report and Accounts 2016
HSBC sponsored structured entities
HSBC is considered to sponsor another entity if, in addition to ongoing involvement with the entity, it had a key role in establishing
that entity or in bringing together relevant counterparties so the transaction that is the purpose of the entity could occur. HSBC is
generally not considered a sponsor if the only involvement with the entity is merely administrative.
Interests in associates and joint arrangements
Joint arrangements are investments in which HSBC, together with one or more parties, has joint control. Depending on HSBC’s
rights and obligations, the joint arrangement is classified as either a joint operation or a joint venture. HSBC classifies investments
in entities over which it has significant influence, and that are neither subsidiaries nor joint arrangements, as associates.
HSBC recognises its share of the assets, liabilities and results in a joint operation. Investments in associates and interests in joint
ventures are recognised using the equity method. The attributable share of the results and reserves of joint ventures and associates
are included in the consolidated financial statements of HSBC based on either financial statements made up to 31 December or pro-
rated amounts adjusted for any material transactions or events occurring between the date the financial statements are available and
31 December.
Investments in associates and joint ventures are assessed at each reporting date and tested for impairment when there is an
indication that the investment may be impaired. Goodwill on acquisitions of interests in joint ventures and associates is not tested
separately for impairment but is assessed as part of the carrying amount of the investment.
Critical accounting estimates and judgements
Impairment testing of investments in associates 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 Co., Limited (‘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 Note 17.
(b)
Income and expense
Operating income
Interest income and expense
Interest income and expense for all financial instruments, excluding those classified as held for trading or designated at fair value are
recognised in ‘Interest income’ and ‘Interest expense’ in the income statement using the effective interest method. However, as an
exception to this, interest on debt securities issued by HSBC that are designated under the fair value option and derivatives managed
in conjunction with those debt securities are included in interest expense.
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 a transaction, such as the acquisition of shares, for a third party); and
income earned from the provision of services is recognised as revenue as the services are provided (for example, asset
management services).
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 approve the dividend for unlisted equity securities.
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 derivatives that are managed in conjunction
with those financial assets and liabilities, and liabilities under investment contracts. Interest income, interest expense and dividend
income in respect of those financial instruments are also included, except for interest arising from debt securities issued by HSBC
and derivatives managed in conjunction with those debt securities, which is recognised in ‘Interest expense’.
The accounting policies for insurance premium income are disclosed in Note 1.2(f).
(c) Valuation of financial instruments
All financial instruments are initially recognised at fair value. Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of a financial
instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received).
However, if there is a difference between the transaction price and the fair value of financial instruments whose fair value is based
on a quoted price in an active market or a valuation technique that uses only data from observable markets, HSBC recognises the
difference as a trading gain or loss at inception (‘day 1 gain or loss’). In all other cases, the entire day 1 gain or loss is deferred and
recognised in the income statement over the life of the transaction until the transaction matures or is closed out, the valuation inputs
become observable or HSBC enters into an offsetting transaction.
The fair value of financial instruments is generally measured on an individual basis. However, in cases where HSBC manages a group
of financial assets and liabilities according to its net market or credit risk exposure, the fair value of the group of financial instruments
is measured on a net basis but the underlying financial assets and liabilities are presented separately in the financial statements,
unless they satisfy the IFRS offsetting criteria.
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Critical accounting estimates and judgements
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).
(d) Financial instruments measured at amortised cost
Loans and advances to banks and customers, held-to-maturity investments and most financial liabilities are measured at amortised
cost. The carrying value of these financial assets at initial recognition includes any directly attributable transactions costs. If the initial
fair value is lower than the cash amount advanced, such as in the case of some leveraged finance and syndicated lending activities,
the difference is deferred and recognised over the life of the loan (as described in paragraph (c) above) through the recognition of
interest income, unless the loan becomes impaired.
HSBC may commit to underwriting loans on fixed contractual terms for specified periods of time. When the loan arising from the
lending commitment is expected to be held for trading, the commitment to lend is recorded as a derivative. When HSBC intends
to hold the loan, a provision on the loan commitment is only recorded where it is probable that HSBC will incur a loss.
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. 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, the importance of the individual loan relationship and how this is managed.
Loans that are determined to be individually significant will be individually assessed for impairment, except when volumes of defaults
and losses are sufficient to justify treatment under a collective methodology.
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 determination of the realisable value of security is based on the most recently updated 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 include expected future receipts of
contractual interest, at the loan’s original effective interest rate or an approximation thereof, and comparing the resultant present
value with the loan’s current carrying amount.
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, generally retail lending
portfolios.
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. 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 a group, those loans are removed from the group and assessed individually.
Homogeneous groups of loans and advances
Statistical methods are used to determine collective impairment losses for homogeneous groups of loans not considered individually
significant. The methods used to calculate collective allowances are set out below:
• 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. Individual loans are grouped using ranges of past
due days, and statistical estimates are made of 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, such
as industry sector, loan grade or product. In applying this methodology, adjustments are made to estimate the periods of time
between a loss event occurring, for example because of a missed payment, and its confirmation through write-off (known as the
loss identification period). Current economic conditions are also evaluated when calculating the appropriate level of allowance
required to cover inherent loss. In certain highly developed markets, 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 estimated by local
management, and is typically between six and 12 months.
198 HSBC Holdings plc Annual Report and Accounts 2016
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
When non-financial assets acquired in exchange for loans as part of an orderly realisation are held for sale, these assets are recorded
as ‘Assets held for sale.’
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 has been received. Where
collectively assessed loan portfolios include significant levels of renegotiated loans, these loans 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 loans that arise following derecognition events will continue to be disclosed as renegotiated loans
and are assessed for impairment as above.
Critical accounting estimates and judgements
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.
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 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 determines 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 the different credit risk characteristics of forbearance cases, 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 run-off 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.
Non-trading reverse repurchase and repurchase agreements
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.
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(e)
Financial instruments measured at fair value
Available-for-sale financial assets
Available-for-sale financial assets are recognised on the trade date when HSBC enters into contractual arrangements to purchase
those instruments, and are normally derecognised when the securities are either sold or redeemed. They are subsequently
remeasured at fair value, and changes therein are recognised in other comprehensive income until the assets are either sold or
become impaired. Upon disposal, the cumulative gains or losses in other comprehensive income are recognised in the income
statement as ‘Gains less losses from financial investments’.
Impairment of available-for-sale financial assets
Available-for-sale financial assets are assessed at each balance sheet date for objective evidence of impairment. 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.
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.
A subsequent decline in the fair value of the instrument is recognised in the income statement when there is objective evidence of
impairment as a result of decreases in the estimated future cash flows. 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.
Available-for-sale equity securities
A significant or prolonged decline in the fair value of the equity below its cost is 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.
All subsequent increases in the fair value of the instrument are treated as a revaluation and are recognised in other comprehensive
income. 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. Impairment losses recognised on the equity security are not
reversed through the income statement.
Financial instruments designated at fair value
Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out
below, and are so designated irrevocably at inception:
•
the use of the designation removes or significantly reduces an accounting mismatch;
• when a group of financial assets, liabilities or both is managed and its performance is evaluated on a fair value basis, in
accordance with a documented risk management or investment strategy; and
• where financial instruments contain one or more non-closely related embedded derivatives.
Designated financial assets are recognised when HSBC enters into contracts with counterparties, which is generally on trade date,
and are normally derecognised when the rights to the cash flows expire or are transferred. Designated financial liabilities are
recognised when HSBC enters into contracts with counterparties, which is generally on settlement date, and are normally
derecognised when extinguished. Subsequent changes in fair values are recognised in the income statement in ‘Net income/
(expense) from financial instruments designated at fair value’.
Under this criterion, the main classes of financial instruments designated by HSBC are:
Long-term debt issues
The interest and/or foreign exchange exposure on certain fixed rate debt securities issued has been matched with the interest and/
or foreign exchange exposure on certain swaps as part of a documented risk management strategy.
Financial assets and financial liabilities under unit-linked and non-linked investment contracts
A contract under which HSBC does not accept significant insurance risk from another party is not classified as an insurance contract,
other than investment contracts with discretionary participation features ('DPF'), but is accounted for as a financial liability. See Note
1.2(f) for investment contracts with DPF and 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.
Derivatives
Derivatives are financial instruments that derive their value from the price of underlying items such as equities, interest rates or other
indices. Derivatives are recognised initially and are subsequently measured at fair value. Derivatives are classified as assets when
their fair value is positive or as liabilities when their fair value is negative; this includes embedded derivatives which are bifurcated
from the host contract when they meet the definition of a derivative on a stand-alone basis.
Gains and losses from changes in the fair value of derivatives that do not qualify for hedge accounting are reported in ‘Net trading
income’. Gains and losses on derivatives managed in conjunction with financial instruments designated at fair value are reported in
‘Net income/(expense) from financial instruments designated at fair value’ together with the gains and losses on the economically
200 HSBC Holdings plc Annual Report and Accounts 2016
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 held for risk management purposes they are designated in hedge relationships where the required criteria for
documentation and hedge effectiveness are met. HSBC enters into fair value hedges, cash flow hedges or hedges of net investments
in foreign operations as appropriate to the risk being hedged.
Fair value hedge
Changes in the fair value of derivatives are recorded in the income statement, along with changes in the fair value of the hedged
assets or liabilities attributable to the hedged risk. If a hedge relationship no longer meets the criteria for hedge accounting, 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 is recognised in other comprehensive income; the ineffective portion
of the change in fair value is recognised immediately in the income statement within ‘Net trading income’. The accumulated gains
and losses recognised in other comprehensive income are reclassified to the income statement in the same periods in which the
hedged item affects profit or loss. In hedges of forecast 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 hedge relationship is discontinued, or partially discontinued, any cumulative gain or loss recognised in other comprehensive
income remains in equity until the forecast transaction is recognised in the income statement. When a forecast transaction is no
longer expected to occur, the cumulative gain or loss previously recognised in other comprehensive income is immediately
reclassified to the income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. 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.
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.
(f)
Insurance contracts
A contract is classified as an insurance contract where HSBC accepts significant insurance risk from another party by agreeing to
compensate that party on the occurrence of a specified uncertain future event. An insurance contract may also transfer financial risk,
but is accounted for as an insurance contract if the insurance risk is significant. In addition, HSBC issues investment contracts with
DPF which are also accounted for as insurance contracts as required by IFRS 4 ‘Insurance Contracts’.
Net insurance premium income
Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance contracts where premiums
are accounted for when liabilities are established.
Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance contracts to which
they relate.
Net insurance claims and benefits paid and movements in liabilities to policyholders
Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year, including claim handling
costs and any policyholder bonuses allocated in anticipation of a bonus declaration.
Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date on which, following
notification, the policy ceases to be included within the calculation of the related insurance liabilities. Death claims are recognised
when notified.
Reinsurance recoveries are accounted for in the same period as the related claim.
Liabilities under insurance contracts
Liabilities under non-linked life insurance contracts are calculated by each life insurance operation based on local actuarial principles.
Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value, which is calculated by
reference to the value of the relevant underlying funds or indices.
Future profit participation on insurance contracts with DPF
Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts include provisions
for the future discretionary benefits to policyholders. These provisions reflect the actual performance of the investment portfolio to
date and management’s expectation of the future performance of the assets backing the contracts, as well as other experience
factors such as mortality, lapses and operational efficiency, where appropriate. The benefits to policyholders may be determined by
the contractual terms, regulation, or past distribution policy.
Investment contracts with DPF
While investment contracts with DPF are financial instruments, they continue to be treated as insurance contracts as required by
IFRS 4. The Group therefore recognises the premiums for these contracts as revenue and recognises as an expense the resulting
increase in the carrying amount of the liability.
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In the case of net unrealised investment gains on these contracts, whose discretionary benefits principally reflect the actual
performance of the investment portfolio, the corresponding increase in the liabilities is recognised in either the income statement or
other comprehensive income, following the treatment of the unrealised gains on the relevant assets. In the case of net unrealised
losses, a deferred participating asset is recognised only to the extent that its recoverability is highly probable. Movements in the
liabilities arising from realised gains and losses on relevant assets are recognised in the income statement.
Present value of in-force long-term insurance business
HSBC recognises the value placed on insurance contracts and investment contracts with DPF, which are classified as long-term and
in-force at the balance sheet date, as an asset. The asset represents the present value of the equity holders’ interest in the issuing
insurance companies’ profits expected to emerge from these contracts written at the balance sheet date. The present value of in-
force business (‘PVIF’) is determined by discounting those expected future profits using appropriate assumptions in assessing factors
such as future mortality, lapse rates and levels of expenses, and a risk discount rate that reflects the risk premium attributable to the
respective contracts. The PVIF incorporates allowances for both non-market risk and the value of financial options and guarantees.
The PVIF asset is presented gross of attributable tax in the balance sheet and movements in the PVIF asset are included in ‘Other
operating income’ on a gross of tax basis.
(g) Employee compensation and benefits
Share-based payments
HSBC enters into both equity-settled and cash-settled share-based payment arrangements with its employees as compensation for
services provided by employees.
The vesting period for these schemes may commence before the grant date if the employees have started to render services in
respect of the award before the grant date. Expenses are recognised when the employee starts to render service to which the award
relates.
Cancellations result from the failure to meet a non-vesting condition during the vesting period, and are treated as an acceleration of
vesting recognised immediately in the income statement. Failure to meet a vesting condition by the employee is not treated as a
cancellation, and the amount of expense recognised for the award is adjusted to reflect the number of awards expected to vest.
Post-employment benefit plans
HSBC operates a number of pension schemes (including defined benefit and defined contribution) and post-employment benefit
schemes.
Payments to defined contribution plans are charged as an expense as the employees render service.
Defined benefit pension obligations are calculated using the projected unit credit method. The net charge to the income statement
mainly comprises the service cost and the net interest on the net defined benefit asset or liability, and is presented in operating
expenses.
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. The net defined benefit asset or liability represents the present value of defined benefit obligations reduced by the fair value
of plan assets, after applying the asset ceiling test, where the net defined benefit surplus is limited to the present value of available
refunds and reductions in future contributions to the plan.
The cost of obligations arising from other post-employment plans are accounted for on the same basis as defined benefit pension
plans.
(h) Tax
Income tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it
relates to items recognised in other comprehensive income or directly in equity, in which case the tax is recognised in the same
statement as the related item appears.
Current tax is the tax expected to be payable on the taxable profit for the year and any adjustment to tax payable in respect of
previous years. HSBC provides for potential current tax liabilities that may arise on the basis of the amounts expected to be paid to
the tax authorities.
Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet, and
the amounts attributed to such assets and liabilities for tax purposes. Deferred tax is calculated using the tax rates expected to apply
in the periods in which the assets will be realised or the liabilities settled.
Current and deferred tax is calculated based on tax rates and laws enacted, or substantively enacted, by the balance sheet date.
Critical accounting estimates and judgements
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 the 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.
(i)
Provisions, contingent liabilities and guarantees
Provisions
Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a present legal or
constructive obligation that has arisen as a result of past events and for which a reliable estimate can be made.
202 HSBC Holdings plc Annual Report and Accounts 2016
Critical accounting estimates and judgements
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, such as, 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.
Contingent liabilities, contractual commitments and guarantees
Contingent liabilities
Contingent liabilities, which include certain guarantees and letters of credit pledged as collateral security, and contingent liabilities
related to legal proceedings or regulatory matters, are not recognised in the financial statements but are disclosed unless the
probability of settlement is remote.
Financial guarantee contracts
Liabilities under financial guarantee contracts 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.
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.
2 Net income/(expense) from financial instruments designated at fair value
Net income/(expense) arising on:
Financial assets
Financial assets held to meet liabilities under insurance and investment contracts
Other financial assets designated at fair value
Derivatives managed with other financial assets designated at fair value
Financial liabilities
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 with other financial liabilities designated at fair value
Year ended 31 Dec
HSBC Holdings
Net income/(expense) arising on HSBC Holdings’ long-term debt issued and related derivatives
Net income/(expense) arising on:
– changes in own credit spread on long-term debt
– derivatives managed in conjunction with HSBC Holdings’ issued debt securities
– other changes in fair value
Year ended 31 Dec
Footnotes
1
2016
$m
1,480
90
(43)
1,527
(218)
(3,975)
(1,792)
(1,367)
(816)
(6)
6
(4,193)
(2,666)
2016
$m
—
(642)
593
(49)
2015
$m
531
89
13
633
34
863
1,002
(1,997)
1,858
3
(1)
899
1,532
2015
$m
348
(927)
855
276
2014
$m
2,300
131
(19)
2,412
(435)
508
417
333
(242)
(23)
11
61
2,473
2014
$m
339
126
(27)
438
1
From 1 January 2016, HSBC Holdings adopted, in its separate financial statements, the requirements of IFRS 9 'Financial Instruments' relating to the presentation of gains and
losses on financial liabilities designated at fair value. As a result, the effects of changes in those liabilities' credit risk is presented in other comprehensive income with the
remaining effect presented in profit or loss.
HSBC Holdings plc Annual Report and Accounts 2016
203
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
3
Insurance business
Net insurance premium income
Gross insurance premium income
Reinsurers’ share of gross insurance premium income
Year ended 31 Dec 2016
Gross insurance premium income
Reinsurers’ share of gross insurance premium income
Year ended 31 Dec 2015
Gross insurance premium income
Reinsurers’ share of gross insurance premium income
Year ended 31 Dec 2014
1 Discretionary participation features.
Non-linked
insurance
Linked life
insurance
Investment
contracts
with DPF1
$m
8,036
(629)
7,407
7,506
(648)
6,858
7,705
(441)
7,264
$m
675
(8)
667
1,409
(9)
1,400
2,195
(8)
2,187
$m
1,877
—
1,877
2,097
—
2,097
2,470
—
2,470
Net insurance claims and benefits paid and movement in liabilities to policyholders
Non-linked
insurance
Linked life
insurance
Investment
contracts
with DPF1
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 Dec 2016
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 Dec 2015
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 Dec 2014
1 Discretionary participation features.
$m
8,778
2,828
5,950
(560)
(112)
(448)
8,218
7,746
3,200
4,546
(575)
(153)
(422)
7,171
7,770
3,575
4,195
(411)
(176)
(235)
7,359
204 HSBC Holdings plc Annual Report and Accounts 2016
Total
$m
10,588
(637)
9,951
11,012
(657)
10,355
12,370
(449)
11,921
Total
$m
12,508
5,594
6,914
(638)
(126)
(512)
$m
1,321
749
572
(78)
(14)
(64)
$m
2,409
2,017
392
—
—
—
1,243
2,409
11,870
1,398
1,869
(471)
(5)
(64)
59
1,393
2,765
1,499
1,266
33
(88)
121
2,798
2,728
2,101
627
—
—
—
2,728
3,188
2,215
973
—
—
—
11,872
7,170
4,702
(580)
(217)
(363)
11,292
13,723
7,289
6,434
(378)
(264)
(114)
3,188
13,345
Liabilities under insurance contracts
Gross liabilities under insurance contracts at 1 Jan 2016
Claims and benefits paid
Increase in liabilities to policyholders
Disposals/transfers to held-for-sale
Exchange differences and other movements
Gross liabilities under insurance contracts at 31 Dec 2016
Reinsurers’ share of liabilities under insurance contracts
Net liabilities under insurance contracts at 31 Dec 2016
Gross liabilities under insurance contracts at 1 Jan 2015
Claims and benefits paid
Increase in liabilities to policyholders
Disposals/transfers to held-for-sale
Exchange differences and other movements
Gross liabilities under insurance contracts at 31 Dec 2015
Reinsurers’ share of liabilities under insurance contracts
Net liabilities under insurance contracts at 31 Dec 2015
Footnotes
2
2
Non-linked
insurance
Linked life
insurance
Investment
contracts
with DPF1
$m
40,538
(2,828)
8,778
—
(445)
46,043
(1,500)
44,543
36,973
(3,200)
7,746
(443)
(538)
40,538
(1,115)
39,423
$m
6,791
(749)
1,321
—
(414)
6,949
(320)
6,629
11,820
(1,869)
1,398
(4,594)
36
6,791
(263)
6,528
$m
22,609
(2,017)
2,409
—
(720)
22,281
—
22,281
25,068
(2,101)
2,728
—
(3,086)
22,609
—
22,609
Total
$m
69,938
(5,594)
12,508
—
(1,579)
75,273
(1,820)
73,453
73,861
(7,170)
11,872
(5,037)
(3,588)
69,938
(1,378)
68,560
1 Discretionary participation features.
2
‘Exchange differences and other movements’ includes movements in liabilities arising from net unrealised investment gains recognised in other comprehensive income.
The key factors contributing to the movement in liabilities to policyholders included 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.
HSBC Holdings plc Annual Report and Accounts 2016
205
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
4 Operating profit
Operating profit is stated after the following items:
Income
Interest recognised on impaired financial assets
Fees earned on financial assets that are not at fair value through profit or loss (other than amounts
included in determining the effective interest rate)
Fees earned on trust and other fiduciary activities
Expense
2016
$m
574
7,732
2,543
2015
$m
934
8,736
3,052
2014
$m
1,137
9,438
3,253
Interest on financial instruments, excluding interest on financial liabilities held for trading or designated at
fair value
(11,858)
(13,680)
(15,322)
Fees payable on financial liabilities that are not at fair value through profit or loss (other than amounts
included in determining the effective interest rate)
Fees payable relating to trust and other fiduciary activities
Payments under lease and sublease agreements
– minimum lease payments
– contingent rents and sublease payments
UK bank levy
Restructuring provisions
Gains/(losses)
Impairment of available-for-sale equity securities
Gains/(losses) recognised on assets held for sale
Gains on the partial sale of shareholding in Industrial Bank
Loss on disposal of Brazilian operations
Loan impairment charges and other credit risk provisions
– net impairment charge on loans and advances
– release of impairment on available-for-sale debt securities
– other credit risk provisions
(1,214)
(129)
(969)
(945)
(24)
(922)
(415)
(36)
(206)
—
(1,743)
(3,400)
(3,350)
63
(113)
(1,251)
(166)
(1,190)
(1,058)
(132)
(1,421)
(430)
(111)
(244)
1,372
—
(3,721)
(3,592)
17
(146)
(1,427)
(185)
(1,548)
(1,199)
(349)
(1,066)
(147)
(373)
220
—
—
(3,851)
(4,055)
319
(115)
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:
External net operating income by country
Footnote
1
– UK
– Hong Kong
– US
– France
– other countries
– of which: Brazil
1 Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue.
5
Employee compensation and benefits
Wages and salaries
Social security costs
Post-employment benefits
Year ended 31 Dec
Average number of persons employed by HSBC during the year by global business
Retail Banking and Wealth Management
Commercial Banking
Global Banking and Markets
Global Private Banking
Corporate Centre
Year ended 31 Dec
2016
$m
47,966
9,495
12,864
5,094
2,571
17,942
(204)
2016
$m
15,735
1,312
1,042
18,089
2016
137,234
45,912
47,623
8,322
7,842
2015
$m
59,800
14,132
14,447
5,541
2,706
22,974
3,546
2015
$m
17,245
1,600
1,055
19,900
2015
155,859
51,007
49,912
8,934
2,721
2014
$m
61,248
14,392
12,656
5,736
2,538
25,926
4,817
2014
$m
17,477
1,666
1,223
20,366
2014
156,397
50,519
47,219
8,799
1,833
246,933
268,433
264,767
206 HSBC Holdings plc Annual Report and Accounts 2016
Average number of persons employed by HSBC during the year by geographical region
Europe
Asia
Middle East and North Africa
North America
Latin America
Year ended 31 Dec
1
2015 and 2014 figures are restated for the changes explained on page 44.
Reconciliation of total incentive awards granted to income statement charge
Total incentive awards approved and granted for the current year
Less: deferred bonuses awarded, expected to be recognised in future periods
Total incentives awarded and recognised in the current year
Add: current year charges for deferred bonuses from previous years
Other
Income statement charge for incentive awards
Year in which income statement is expected to reflect deferred bonuses
Footnote
1
1
2016
71,196
122,282
12,021
20,353
21,081
2015
68,408
121,438
14,467
21,506
42,614
2014
68,163
116,492
14,477
21,983
43,652
246,933
268,433
264,767
2016
$m
3,035
(323)
2,712
371
(128)
2,955
2015
$m
3,462
(387)
3,075
483
(40)
3,518
2014
$m
3,660
(359)
3,301
425
(114)
3,612
Variable compensation from 2016 bonus pool
Variable compensation from 2015 bonus pool
Variable compensation from 2014 bonus pool and earlier
Total
Cash awards
Equity awards
Share-based payments
Charge recognised
Expected charge
2016
2015
$m
152
168
203
523
163
360
$m
—
253
483
736
168
568
2014
$m
—
—
670
670
150
520
2017
$m
137
128
88
353
102
251
2018 and
beyond
$m
186
76
28
290
98
192
‘Wages and salaries’ includes the effect of share-based payments arrangements, of which $534m were equity settled (2015: $757m;
2014: $732m), as follows:
Restricted share awards
Savings-related and other share award option plans
Year ended 31 Dec
HSBC share awards
Award
Policy
2016
$m
591
33
624
2015
$m
748
43
791
2014
$m
738
36
774
Restricted share awards
(including annual incentive
awards delivered in shares)
and GPSP
International Employee
Share Purchase Plan
(‘ShareMatch’)
• An assessment of performance over the relevant period ending on 31 December is used to determine the amount
of the award to be granted.
• Deferred awards generally require employees to remain in employment over the vesting period and are not
subject to performance conditions after the grant date.
• Deferred share awards generally vest over a period of three years and GPSP awards vest after five years.
• Vested shares may be subject to a retention requirement post-vesting. GPSP awards are retained until cessation
of employment.
• Awards granted from 2010 onwards are subject to a malus provision prior to vesting.
• Awards granted to Material Risk Takers from 2015 onwards are subject to clawback post vesting.
• The plan was first introduced in Hong Kong in 2013 and now includes employees based in 25 jurisdictions.
• Shares are purchased in the market each quarter up to a maximum value of £750, or the equivalent in local
currency.
• Matching awards are added at a ratio of one free share for every three purchased.
• Matching awards vest subject to continued employment and the retention of the purchased shares for a
maximum period of two years and nine months.
HSBC Holdings plc Annual Report and Accounts 2016
207
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
Movement on HSBC share awards
Restricted share awards outstanding at 1 Jan
Additions during the year
Released in the year
Forfeited in the year
Restricted share awards outstanding at 31 Dec
Weighted average fair value of awards granted ($)
HSBC share option plans
Main plans
Policy
2016
Number
(000s)
118,665
94,981
(76,552)
(13,928)
123,166
7.25
2015
Number
(000s)
116,483
80,749
(75,235)
(3,332)
118,665
9.67
Savings-related share
option plans (‘Sharesave’)
• Two plans: the UK Plan and the International Plan. The last grant of options under the International Plan was in
2012.
• From 2014, eligible employees can save up to £500 per month 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.
• The exercise price is set at a 20% (2015: 20%) discount to the market value immediately preceding the date of
invitation.
HSBC Holdings Group share
option plan
• Plan ceased in May 2005.
• Exercisable between the third and 10th anniversaries of the date of grant.
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 Jan 2016
Granted during the year
Exercised during the year
Expired during the year
Outstanding at 31 Dec 2016
Weighted average remaining contractual life (years)
Outstanding at 1 Jan 2015
Granted during the year
Exercised during the year
Expired during the year
Outstanding at 31 Dec 2015
Weighted average remaining contractual life (years)
Footnotes
2
3
2
3
Savings-related
share option plans
HSBC Holdings Group
share option plan
Number
(000s)
74,775
15,044
(4,354)
(15,438)
70,027
2.91
66,366
52,629
(21,120)
(23,100)
74,775
3.92
WAEP1
£
4.36
4.40
5.02
4.47
4.30
4.89
4.05
4.45
5.11
4.36
Number
(000s)
—
—
—
—
—
—
6,374
—
—
(6,374)
—
—
WAEP1
£
—
—
—
—
—
7.29
—
—
7.29
—
1 Weighted average exercise price.
2
3
The weighted average fair value of options granted during the year was $1.28 (2015: $1.09).
The weighted average share price at the date the options were exercised was $6.98 (2015: $8.50) and $0 (2015: $0) for the savings-related share option plans and HSBC
Holdings Group share option plan, respectively.
Post-employment benefit plans
The Group operates pension plans throughout the world for its employees. ‘Pension risk management’ on page 84 contains details of
the policies and practices associated with these pension plans. Some are defined benefit plans, of which the largest is the HSBC
Bank (UK) Pension Scheme (‘the principal plan’).
The principal plan
The principal plan has a defined benefit section and a defined contribution section. The defined benefit section was closed to future
benefit accrual in 2015, with defined benefits earned by employees at that date continuing to be linked to their salary while they
remain employed by HSBC Bank. The plan is overseen by an independent corporate trustee, who has a fiduciary responsibility for the
operation of the plan. Its assets are held separately from the assets of the Group.
The investment strategy of the plan is to hold the majority of assets in bonds, with the remainder in a diverse range of investments. It
also includes some interest rate swaps to reduce interest rate risk and inflation swaps to reduce inflation risk.
208 HSBC Holdings plc Annual Report and Accounts 2016
The latest funding valuation of the plan at 31 December 2014 was carried out by Colin G Singer, of Willis Towers Watson Limited,
who is a Fellow of the UK Institute and Faculty of Actuaries, using the projected unit credit method. At that date, the market value of
the plan’s assets was £24.6bn ($30.3bn) and this exceeded the value placed on its liabilities on an ongoing basis by £520m ($641m),
giving a funding level of 102%. The main differences between the assumptions used for assessing the liabilities for this funding
valuation and those used for IAS 19 (see ‘Key actuarial assumptions’ section below) are more prudent discount rate, inflation and
longevity assumptions.
Although the plan was in surplus at the valuation date, HSBC agreed to make further contributions to the plan to support a lower-risk
investment strategy over the longer term. These contributions amounted to £128m ($158m) in 2016 and are expected to amount to
£64m ($79m) in each of 2017, 2018 and 2019, and £160m ($197m) in each of 2020 and 2021.
The chart below shows the expected profile of future benefits payable from the plan.
Future benefit payments ($bn)
The actuary also assessed the value of the liabilities if the plan were to be stopped and an insurance company asked to secure all
future pension payments. This is generally larger than the amount needed on the ongoing basis described above because an
insurance company would use more prudent assumptions and include an explicit allowance for the future administrative expenses
of the plan. Under this approach, the amount of assets needed was estimated to be £31bn ($38bn) at 31 December 2014.
Income statement charge
Defined benefit pension plans
Defined contribution pension plans
Pension plans
Defined benefit and contribution healthcare plans
Year ended 31 Dec
2016
$m
218
783
1,001
41
1,042
2015
$m
256
793
1,049
6
1,055
Net assets/(liabilities) recognised on the balance sheet in respect of defined benefit plans
Defined benefit pension plans
Defined benefit healthcare plans
At 31 Dec 2016
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 Dec 2015
Total employee benefit liabilities
(within ‘Accruals, deferred income and other liabilities’)
Total employee benefit assets
(within ‘Prepayments, accrued income and other assets’)
Fair value of
plan assets
Present value of
defined benefit
obligations
Effect of
limit on plan
surpluses
$m
42,397
118
42,515
$m
(39,747)
(711)
(40,458)
41,424
141
41,565
(38,326)
(762)
(39,088)
$m
(24)
—
(24)
(14)
—
(14)
2014
$m
469
687
1,156
67
1,223
Total
$m
2,626
(593)
2,033
(2,681)
4,714
3,084
(621)
2,463
(2,809)
5,272
HSBC Holdings plc Annual Report and Accounts 2016
209
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans
Fair value of plan
assets
Present value of
defined benefit
obligations
Effect of the asset
ceiling
Net defined benefit
asset/(liability)
Principal
plan
$m
Other
plans
$m
Principal
plan
$m
Other
plans
$m
Principal
plan
$m
At 1 Jan 2016
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 gains/(losses)
– other changes
Exchange differences
Contributions by HSBC
– normal
– special
Contributions by employees
Benefits paid
Administrative costs and taxes paid by plan
32,670
8,754
(27,675)
(10,651)
—
—
—
—
(1)
(1)
(70)
—
(70)
(235)
(39)
(274)
1,085
294
(914)
(337)
6,449
6,449
—
—
671
671
—
—
(6,097)
(534)
347
64
283
—
(970)
(42)
379
207
172
30
(623)
(15)
(6,886)
—
(7,029)
143
5,254
—
—
—
—
970
42
(299)
—
(152)
(147)
410
—
—
—
(30)
698
15
At 31 Dec 2016
33,442
8,955
(29,279)
(10,468)
Present value of defined benefit obligation relating to:
– actives
– deferreds
– pensioners
At 1 Jan 2015
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 gains/(losses)
– other changes
Exchange differences
Contributions by HSBC
– normal
– special
Contributions by employees
Benefits paid
Administrative costs and taxes paid by plan
(7,066)
(9,219)
(12,994)
(5,066)
(2,306)
(3,096)
35,244
9,580
(30,480)
(11,582)
—
—
—
—
(3)
(3)
(129)
(53)
(182)
(268)
71
(197)
1,265
322
(1,088)
(371)
(1,521)
(1,521)
—
—
(394)
(394)
—
—
(1,704)
(458)
376
159
217
17
(970)
(37)
279
227
52
35
(590)
(17)
1,642
—
1,392
250
1,443
—
—
—
(17)
970
37
339
—
339
—
529
—
—
—
(35)
649
17
At 31 Dec 2015
32,670
8,754
(27,675)
(10,651)
Present value of defined benefit obligation relating to:
– actives
– deferreds
– pensioners
(6,310)
(7,919)
(13,446)
(5,350)
(2,239)
(3,062)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Other
plans
Principal
plan
$m
Other
plans
$m
$m
(14)
—
—
—
(1)
(8)
—
(8)
—
(1)
—
—
—
—
—
—
4,995
(1,911)
(70)
—
(70)
(235)
(40)
(275)
171
(44)
(437)
6,449
(7,029)
143
(843)
347
64
283
—
—
—
364
671
(160)
(147)
(125)
379
207
172
—
75
—
(24)
4,163
(1,537)
(17)
4,764
(2,019)
—
—
—
(2)
(30)
—
(30)
—
35
—
—
—
—
—
—
(129)
(53)
(182)
177
121
(1,521)
1,392
250
(261)
376
159
217
—
—
—
(268)
68
(200)
(51)
(85)
(394)
309
—
106
279
227
52
—
59
—
(14)
4,995
(1,911)
HSBC expects to make $425m of contributions to defined benefit pension plans during 2017. 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
The principal plan
Other plans
Footnote
1
1
2017
$m
917
427
2018
$m
948
468
2019
$m
979
489
2020
$m
1,012
505
2021
$m
1,045
536
2022-2026
$m
5,533
2,492
1
The duration of the defined benefit obligation is 19.0 years for the principal plan under the disclosure assumptions adopted (2015: 17.0 years) and 13.9 years for all other plans
combined (2015: 13.9 years).
210 HSBC Holdings plc Annual Report and Accounts 2016
Fair value of plan assets by asset classes
The principal plan
Fair value of plan assets
– equities
– bonds
– derivatives
– other
Other plans
Fair value of plan assets
– equities
– bonds
– derivatives
– other
31 Dec 2016
Quoted
market price
in active
market
No quoted
market price
in active
market
Thereof
HSBC1
$m
$m
$m
29,379
4,722
23,426
—
1,231
7,631
1,502
5,592
44
493
4,063
664
—
2,107
1,292
1,324
753
219
(133)
485
878
—
—
878
—
239
—
5
(85)
319
Value
$m
33,442
5,386
23,426
2,107
2,523
8,955
2,255
5,811
(89)
978
31 Dec 2015
Quoted
market price
in active
market
No quoted
market price
in active
market
$m
$m
29,370
4,990
22,704
—
1,676
7,882
1,900
5,458
—
524
3,300
740
—
1,011
1,549
872
534
261
7
70
Value
$m
32,670
5,730
22,704
1,011
3,225
8,754
2,434
5,719
7
594
Thereof
HSBC1
$m
513
—
—
513
—
148
1
2
1
144
1
The fair value of plan assets includes derivatives entered into with HSBC Bank plc as detailed in Note 36.
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 Dec 2016
At 31 Dec 2015
At 31 Dec 2014
Discount rate
Inflation rate
Rate of increase
for pensions
Rate of pay
increase
%
2.50
3.70
3.70
%
3.50
3.20
3.20
%
3.20
3.00
3.00
%
4.00
3.70
3.70
Mortality tables and average life expectancy at age 65 for the principal plan
UK
At 31 Dec 2016
At 31 Dec 2015
Mortality
table
Life expectancy at age 65 for
a male member currently:
Life expectancy at age 65 for
a female member currently:
Aged 65
Aged 45
Aged 65
Aged 45
SAPS S21
SAPS S12
22.4
23.6
24.1
25.0
24.7
24.9
26.6
26.7
1
2
Self-administered Pension Scheme (‘SAPS’) S2 table (Males: 'All Pensioners' version, Females: 'Normal Pensions' version) with a multiplier of 0.98 for both male and female
pensioners. Improvements are projected in accordance with the Continuous Mortality Investigation ('CMI) core projection model 2015 with a long-term rate of improvement of
1.25% per annum. Separate tables assuming lighter mortality have been applied to higher paid pensioners.
Self-administered Pension Scheme (‘SAPS’) Light table with a multiplier of 1.01 for male pensioners and 1.02 for female pensioners. Improvements are projected in accordance
with the Continuous Mortality Investigation (‘CMI’) core projection model 2015 with a long-term rate of improvement of 1.25% per annum.
The effect of changes in key assumptions on the principal plan
Discount rate – increase/decrease of 0.25%
Inflation rate – increase/decrease of 0.25%
Pension payments and deferred pensions – increase/decrease of 0.25%
Pay – increase/decrease of 0.25%
Change in mortality – increase of 1 year
Impact on HSBC Bank (UK) Pension Scheme Obligation
Financial impact of increase
Financial impact of decrease
2016
$m
(1,322)
735
1,305
143
1,326
2015
$m
(1,107)
747
990
119
670
2016
$m
1,419
(1,048)
(1,255)
(139)
n/a
2015
$m
1,180
(855)
(937)
(119)
n/a
HSBC Holdings plc Annual Report and Accounts 2016
211
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
HSBC Holdings
Employee compensation and benefit expense in respect of HSBC Holdings’ employees in 2016 amounted to $571m (2015: $908m).
The average number of persons employed during 2016 was 1,660 (2015: 2,656). Employees who are members of defined benefit
pension plans are principally members of either the HSBC Bank (UK) Pension Scheme or the HSBC International Staff Retirement
Benefits Scheme. HSBC Holdings pays contributions to such plans for its own employees in accordance with the schedules of
contributions determined by the trustees of the plans and recognises these contributions as an expense as they fall due.
From 1 July 2016 employment costs of most employees are recognised by the ServCo group and the ServCo group has started
providing services to HSBC Holdings. HSBC Holdings recognised a management charge of $406m for these services which is
included under ‘General and administrative expenses’.
Directors’ emoluments
Details of directors’ emoluments, pensions and their interests are disclosed in the Directors’ Remuneration Report on page 153.
6 Auditors’ remuneration
Audit fees payable to PwC/KPMG
Other audit fees payable
Year ended 31 Dec
Fees payable by HSBC to PwC/KPMG2
Fees for HSBC Holdings’ statutory audit
Fees for other services provided to HSBC
– audit of HSBC’s subsidiaries
– audit-related assurance services
– taxation-related services:
taxation compliance services
taxation advisory services
– other assurance services
– other non-audit services
Year ended 31 Dec
Footnotes
1, 2
Footnotes
3
4
5
6
6
2016
$m
65.7
1.6
67.3
2016
$m
14.0
97.1
51.7
20.6
1.9
0.4
4.5
18.0
111.1
2015
$m
62.0
1.2
63.2
2015
$m
13.1
85.1
48.9
16.6
1.0
0.9
2.8
14.9
98.2
2014
$m
40.6
1.2
41.8
2014
$m
13.4
62.5
27.2
22.6
1.5
0.8
0.7
9.7
75.9
No fees were payable by HSBC to PwC or KPMG as principal auditor for the following types of services: internal audit services and
services related to litigation, recruitment and remuneration.
Fees payable by HSBC’s associated pension schemes to PwC/KPMG2
Audit of HSBC’s associated pension schemes
Audit related assurance services
Year ended 31 Dec
2016
$000
208
4
212
2015
$000
352
5
357
2014
$000
322
5
327
1
2
3
4
5
6
Included within the 2016 audit fees payable is a final fee adjustment of $4.2m related to the prior year audit in respect of overruns.
PwC became the Group’s principal auditor in 2015. KPMG was the principal auditor during 2014.
Fees payable to PwC and 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.
Fees payable for the statutory audit of the financial statements of HSBC’s subsidiaries, including the 2016 changes in scope and additional procedures performed due to the
technology systems and data access controls matter as described on page 174.
Including services for assurance and other services that relate to statutory and regulatory filings, including comfort letters and interim reviews and work performed related to
the implementation of IFRS 9.
Including other permitted services relating to advisory, corporate finance transactions, etc.
No fees were payable by HSBC’s associated pension schemes to PwC or KPMG as principal auditor 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, the estimated fees paid to PwC by third parties other than HSBC amount to $4.3m (PwC 2015: $2.4m;
KPMG 2014: $3.6m). In these cases, HSBC is connected with the contracting party and may therefore be involved in appointing PwC.
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 for non-audit services for HSBC Holdings are not disclosed separately because such fees are disclosed on a
consolidated basis for the HSBC Group.
212 HSBC Holdings plc Annual Report and Accounts 2016
7
Tax
Tax expense
Current tax
– 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 Dec
Footnotes
1
2016
$m
3,669
3,525
144
(3)
(111)
(4)
112
2015
$m
3,797
3,882
(85)
(26)
(153)
110
17
2014
$m
3,950
4,477
(527)
25
(477)
83
419
3,666
3,771
3,975
1
Current tax included Hong Kong profits tax of $1,118m (2015: $1,294m; 2014: $1,135m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong
was 16.5% (2015: 16.5%; 2014: 16.5%).
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
Taxation at UK corporation tax rate of 20.0% (2015: 20.25%; 2014:
21.5%)
Impact of differently taxed overseas profits in overseas locations
Items increasing tax charge in 2016 not in 2015:
– non-deductible goodwill write-down
– non-deductible loss and taxes suffered on Brazil disposal
– UK tax losses not recognised
– adjustments in respect of prior period liabilities
– UK Banking Surcharge
– non-UK tax losses not recognised
Other items increasing tax charge in 2016:
– local taxes and overseas withholding taxes
– other permanent disallowables
– bank levy
– non-deductible UK customer compensation
– other items
– non-deductible regulatory settlements
Items reducing tax charge in 2016:
– non-taxable income and gains
– effect of profits in associates and joint ventures
– change in tax rates
Non-taxable income and gains - Industrial Bank
US deferred tax temporary differences previously not recognised
Other deferred tax temporary differences previously not recognised
2016
$m
7,112
1,422
43
648
464
305
256
199
147
434
438
170
162
—
20
(577)
(461)
(4)
—
—
—
%
20.0
0.6
9.1
6.5
4.3
3.6
2.8
2.1
6.1
6.2
2.4
2.3
—
0.3
(8.1)
(6.5)
(0.1)
—
—
—
2015
$m
18,867
3,821
71
—
—
—
(68)
—
—
416
421
286
87
(116)
184
(501)
(508)
110
(227)
(184)
(21)
Year ended 31 Dec
3,666
51.6
3,771
%
20.25
0.4
—
—
—
(0.4)
—
—
2.2
2.2
1.5
0.5
(0.6)
1.0
(2.7)
(2.7)
0.6
(1.2)
(1.0)
(0.1)
20.0
2014
$m
18,680
4,016
33
—
—
—
(108)
—
—
434
476
229
—
(22)
264
(668)
(547)
22
—
(154)
—
3,975
%
21.50
0.2
—
—
—
(0.6)
—
—
2.3
2.5
1.2
—
(0.1)
1.4
(3.5)
(2.9)
0.1
—
(0.8)
—
21.3
The Group’s profits are taxed at different rates depending on the country in which the profits arise. The key applicable tax rates
include Hong Kong (16.5%), USA (35%) and UK (20%). If the Group’s profits were taxed at the statutory rates of the countries in
which the profits arise then the tax rate for the year would have been 20.6% (2015: 20.65%). The effective tax rate for the year was
51.6% (2015: 20%) and was significantly higher than 2015 due to the non-deductible goodwill write-down and loss on disposal of
Brazil, tax losses not recognised, adjustments in respect of prior periods and the 8% UK banking surcharge, which became
applicable from 1 January 2016.
Accounting for taxes involves some estimation because the tax law is uncertain and its application requires a degree of judgement,
which authorities may dispute. Liabilities are recognised based on best estimates of the probable outcome, taking into account
external advice where appropriate. We do not expect significant liabilities to arise in excess of the amounts provided. HSBC only
recognises current and deferred tax assets where recovery is probable.
HSBC Holdings plc Annual Report and Accounts 2016
213
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
Movement of deferred tax assets and liabilities
Assets
Liabilities
At 1 Jan 2016
Income statement
Other comprehensive income
Equity
Foreign exchange and other adjustments
At 31 Dec 2016
Assets
Liabilities
Assets
Liabilities
At 1 Jan 2015
Income statement
Other comprehensive income
Reclassification to 'Assets held for sale'
Equity
Foreign exchange and other adjustments
At 31 Dec 2015
Assets
Liabilities
Footnotes
3
2
2
2
2
Loan
impairment
provisions
Unused tax
losses and
tax credits
Derivatives,
FVOD1
and other
investments
Insurance
business
Expense
provisions
$m
1,351
—
1,351
(279)
—
—
(122)
950
950
—
2,264
—
2,264
45
—
(673)
—
(285)
1,351
1,351
—
$m
1,388
—
1,388
876
—
—
(52)
2,212
2,212
—
1,332
—
1,332
379
—
(186)
—
(137)
1,388
1,388
—
$m
1,400
(230)
1,170
18
28
—
(49)
1,167
1,441
(274)
1,764
(233)
1,531
(557)
22
76
—
98
1,170
1,400
(230)
$m
—
(1,056)
(1,056)
(123)
—
—
9
(1,170)
—
(1,170)
—
(861)
(861)
(143)
—
87
—
(139)
(1,056)
—
(1,056)
$m
1,271
—
1,271
(370)
—
—
(8)
893
893
—
1,244
—
1,244
418
156
(386)
—
(161)
1,271
1,271
—
Other
$m
1,050
(883)
167
(314)
259
20
356
488
1,857
(1,369)
836
(759)
77
(116)
321
(136)
4
17
167
1,050
(883)
Total
$m
6,460
(2,169)
4,291
(192)
287
20
134
4,540
7,353
(2,813)
7,440
(1,853)
5,587
26
499
(1,218)
4
(607)
4,291
6,460
(2,169)
Fair value of own debt.
1
2 After netting off balances within countries, the balances as disclosed in the accounts are as follows: deferred tax assets $6,163m (2015: $6,051m); and deferred tax liabilities
$1,623m (2015: $1,760m).
Excludes a tax credit of $195m relating to deferred tax balances in Brazil, which were included within 'Assets held for sale' prior to disposal.
3
In applying judgement in recognising deferred tax assets, management has critically assessed all available information, including
future business profit projections and the track record of meeting forecasts.
The net deferred tax asset of $4.5bn (2015: $4.3bn) includes $4.8bn (2015: $4.5bn) deferred tax assets relating to the US, of which
$2bn deferred tax asset relates to US tax losses that expire in 16-20 years. Management expects the US deferred tax asset to be
substantially recovered in six to seven years, with the majority recovered in the first five years. The most recent financial forecasts
approved by management covers a five-year period and the forecasts have been extrapolated beyond five years by assuming that
performance remains constant after the fifth year. The forecasts also include additional tax losses in 2017 – these losses expire in
2037 and are expected to be utilised by 2023.
The US reported a loss for the current period, mainly due to the Household International class action litigation settlement. Excluding
the Household International class action settlement the US would have reported a profit for the current year. In addition, the US
reported a profit in 2014 and 2015. Management does not expect the current year loss to adversely impact future deferred tax asset
recovery to a significant extent.
The US deferred tax asset has been calculated using the current federal tax rate of 35%. Any possible future reduction of the US
federal tax rate from 35% would reduce the value of the US deferred tax assets and create a tax charge in the period in which any
change in the tax rate is enacted. This tax charge should be ultimately offset by the benefit of reduced US tax charges in future years.
Unrecognised deferred tax
The amount of gross temporary differences, unused tax losses and tax credits for which no deferred tax asset is recognised in the
balance sheet was $18.2bn (2015: $15.5bn). These amounts included unused state losses arising in the Group’s US operations of
$12.3bn (2015: $11.3bn). Of the total amounts unrecognised, $4.9bn (2015: $3.1bn) had no expiry date, $1.0bn (2015: $0.9bn) was
scheduled to expire within 10 years and the remaining balance is expected to expire after 10 years.
Deferred tax is not recognised in respect of the Group’s investments in subsidiaries and branches where HSBC is able to control the
timing of remittance or other realisation and where remittance or realisation is not probable in the foreseeable future. The aggregate
temporary differences relating to unrecognised deferred tax liabilities arising on investments in subsidiaries and branches is $10.6bn
(2015: $9.1bn) and the corresponding unrecognised deferred tax liability is $0.7bn (2015: $0.6bn).
214 HSBC Holdings plc Annual Report and Accounts 2016
8 Dividends
Dividends to shareholders of the parent company
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
2016
2015
2014
Per
share
$
Total
$m
Settled
in scrip
$m
Per
share
$
Total
$m
Settled
in scrip
$m
Per
share
$
Total
$m
Settled
in scrip
$m
0.21
4,137
408
0.20
3,845
2,011
0.19
3,582
1,827
0.10
0.10
0.10
1,981
1,991
1,990
703
994
935
0.51 10,099
3,040
0.10
0.10
0.10
0.50
1,951
1,956
1,958
9,710
231
160
760
3,162
0.10
0.10
0.10
0.49
1,906
1,914
1,918
9,320
284
372
226
2,709
Total dividends on preference shares classified as equity (paid
quarterly)
62.00
90
62.00
90
62.00
90
Total coupons on capital securities classified as equity
Perpetual subordinated capital securities
– $2,200m
– $3,800m
Perpetual subordinated contingent convertible securities
– $2,250m issued at 6.375%
– $1,500m issued at 5.625%
– €1,500m issued at 5.250%
– $2,450m issued at 6.375%
– €1,000m issued at 6.000%
– $2,000m issued at 6.875%
Total
2016
Footnotes
First call date
Per security
1, 3
2, 3
Apr 2013
Dec 2015
Sep 2024
Jan 2020
Sep 2022
Mar 2025
Sep 2023
Jun 2021
$2.032
$2.000
$63.750
$56.250
€52.500
$63.750
€60.000
$68.750
Total
$m
179
304
143
84
88
156
67
69
2015
Total
$m
179
304
143
70
86
78
—
—
2014
Total
$m
179
304
—
—
—
—
—
—
1,090
860
483
1 Discretionary coupons are paid quarterly on the perpetual subordinated capital securities, in denominations of $25 per security.
2 Discretionary coupons are paid semi-annually on the perpetual subordinated contingent convertible securities, in denominations of 1,000 per security.
3
Further details of these securities can be found in Note 32.
After the end of the year, the Directors declared a fourth interim dividend in respect of the financial year ended 31 December 2016 of
$0.21 per ordinary share, a distribution of approximately $4,172m. The fourth interim dividend will be payable on 6 April 2017 to
holders on the Principal Register in the UK, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register on
24 February 2017. No liability was recorded in the financial statements in respect of the fourth interim dividend for 2016.
On 17 January 2017, HSBC paid a coupon on its $2,200m subordinated capital securities of $0.508 per security, a distribution
of $45m. On 17 January 2017, HSBC paid a coupon on its $1,500m subordinated contingent convertible securities of $28.125 per
security, a distribution of $42m. No liability was recorded in the balance sheet at 31 December 2016 in respect of these coupon
payments.
HSBC Holdings plc Annual Report and Accounts 2016
215
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
9
Earnings per share
Basic earnings per ordinary share is calculated by dividing the profit attributable to ordinary shareholders of the parent company by
the weighted average number of ordinary shares outstanding, excluding own shares held. Diluted earnings per ordinary share is
calculated by dividing the basic earnings, which require no adjustment for the effects of dilutive potential ordinary shares, by the
weighted average number of ordinary shares outstanding, excluding own shares held, plus the weighted average number of ordinary
shares that would be issued on conversion of dilutive potential ordinary shares.
Profit attributable to the ordinary shareholders of the parent company
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 Dec
Basic and diluted earnings per share
2016
$m
2,479
(90)
(1,090)
1,299
2015
$m
13,522
(90)
(860)
12,572
2014
$m
13,688
(90)
(483)
13,115
2016
Profit
Number
of shares
Per
share
Profit
2015
Number
of shares
Footnote
$m (millions)
$
$m
(millions)
2014
Number
of shares
Profit
$m
(millions)
Per
share
$
Per
share
$
0.69
Basic
Effect of dilutive potential ordinary shares
Diluted
1
1
1,299
19,753
0.07
12,572
19,380
0.65
13,115
18,960
92
137
96
1,299
19,845
0.07
12,572
19,517
0.64
13,115
19,056
0.69
1 Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted).
The weighted average number of dilutive potential ordinary shares excludes 10m employee share options that were
(2015: 7m; 2014: 6m).
10 Trading assets
Treasury and other eligible bills
Debt securities
Equity securities
Trading securities
Loans and advances to banks
Loans and advances to customers
At 31 Dec
1
Loans and advances to banks and customers include settlement accounts, stock borrowing, reverse repos and other amounts.
Trading Securities1
US Treasury and US Government agencies
UK Government
Hong Kong Government
Other governments
Asset-backed securities
Corporate debt and other securities
Equity securities
At 31 Dec
Footnote
1
1
Footnotes
2
3
2016
$m
14,451
94,054
63,604
172,109
24,769
38,247
235,125
2016
$m
17,010
9,493
7,970
49,229
2,668
22,135
63,604
2015
$m
7,829
99,038
66,491
173,358
22,303
29,176
224,837
2015
$m
14,833
10,177
6,495
48,567
3,135
23,660
66,491
172,109
173,358
1
2
3
Included within these figures are debt securities issued by banks and other financial institutions of $14,630m (2015: $16,403m), of which $789m (2015: $1,034m) are
guaranteed by various governments.
Includes securities that are supported by an explicit guarantee issued by the US Government.
Excludes asset-backed securities included under US Treasury and US Government agencies.
216 HSBC Holdings plc Annual Report and Accounts 2016
11 Fair values of financial instruments carried at fair value
Control framework
Fair values are subject to a control framework designed to ensure that they are either determined or validated by a function
independent of the risk taker.
Where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price
determination or validation is used. For inactive markets, HSBC sources alternative market information, with greater weight given to
information that is considered to be more relevant and reliable. Examples of the factors considered are price observability, instrument
comparability, consistency of data sources, underlying data accuracy and timing of prices.
For fair values determined using valuation models, the control framework includes development or validation by independent support
functions of the model logic, inputs, model outputs and adjustments. Valuation models are subject to a process of due diligence
before becoming operational and are calibrated against external market data on an ongoing basis.
Changes in fair value are generally subject to a profit and loss analysis process and are disaggregated into high-level categories
including portfolio changes, market movements and other fair value adjustments.
The majority of financial instruments measured at fair value are in GB&M. GB&M’s fair value governance structure comprises its
Finance function, Valuation Committees and a Valuation Committee Review Group. Finance is responsible for establishing
procedures governing valuation and ensuring fair values are in compliance with accounting standards. The fair values are reviewed
by the Valuation Committees, which consist of independent support functions. These Committees are overseen by the Valuation
Committee Review Group, which considers all material subjective valuations.
Financial liabilities measured at fair value
In certain circumstances, HSBC records its own debt in issue at fair value, based on quoted prices in an active market for the specific
instrument. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for
which are either based on quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices
in an active market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread 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 instruments are included within trading liabilities and are measured at fair value.
The credit spread applied to these instruments is derived from the spreads at which HSBC issues structured notes.
Gains and losses arising from changes in the credit spread of liabilities issued by HSBC reverse over the contractual life of the debt,
provided that the debt is not repaid at a premium or a discount.
Fair value hierarchy
Fair values of financial assets and liabilities are determined according to the following hierarchy:
• Level 1 – valuation technique using quoted market price: 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.
Financial instruments carried at fair value and bases of valuation
2016
2015
Level 1
Level 2
Level 3
$m
$m
$m
Total
$m
Level 1
Level 2
Level 3
$m
$m
$m
Total
$m
Recurring fair value measurements
at 31 Dec
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
133,744
19,882
1,076
274,655
94,892
4,144
287,044
111,743
730
2,752
3,476
24,756
290,872
389,874
6,489
235,125
133,095
45,171
104,938
3,582
153,691
4,248
1,554
82,547
275,965
37
86,832
2,300
279,819
18,947
1,922
262,929
41,462
5,260
2,243
84,886
4,431
284,292
117,197
95,867
61,145
277,618
6,856
474
2,262
4,727
4,285
3
1,210
224,837
23,852
288,476
384,853
141,614
66,408
281,071
HSBC Holdings plc Annual Report and Accounts 2016
217
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
Transfers between Level 1 and Level 2 fair values
At 31 Dec 2016
Transfers from Level 1 to Level 2
Transfers from Level 2 to Level 1
At 31 Dec 2015
Transfers from Level 1 to Level 2
Transfers from Level 2 to Level 1
Assets
Liabilities
Available
for sale
Held for
trading
Designated
at fair value
Derivatives
Held for
trading
Designated
at fair value
Derivatives
$m
$m
162
1,314
1,614
—
—
—
67
487
$m
122
—
—
—
$m
465
—
56
2
$m
2,699
341
1,563
515
$m
—
—
857
2
$m
209
—
100
—
Transfers between levels of the fair value hierarchy are deemed to occur at the end of each semi-annual reporting period.
Fair value adjustments
Fair value adjustments are adopted when HSBC determines there are additional factors considered by market participants that are
not incorporated within the valuation model. Movements in the level of fair value adjustments do not necessarily result in the
recognition of profits or losses within the income statement, such as when models are enhanced and fair value adjustments may no
longer be required.
Global Banking and Markets fair value adjustments
Type of adjustment
Risk-related
– bid-offer
– uncertainty
– credit valuation adjustment (‘CVA’)
– debit valuation adjustment (‘DVA’)
– funding fair value adjustment (‘FFVA’)
– other
Model-related
– model limitation
– other
Inception profit (Day 1 P&L reserves) (Note 14)
At 31 Dec
2016
$m
2015
$m
1,131
1,402
416
87
633
(437)
429
3
14
14
—
99
477
95
853
(465)
442
—
97
92
5
97
1,244
1,596
Fair value adjustments declined by $352m during the year. The most significant movement was a decline of $220m in respect of the
credit valuation adjustment, driven by the disposal of Brazilian operations, refinements to modelling methodology and as a result of
tightening credit spreads.
Bid-offer
IFRS 13 ‘Fair value measurement’ 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 an adjustment may be necessary to reflect the likelihood that market participants would adopt more
conservative values for uncertain parameters and/or model assumptions than those used in HSBC’s valuation model.
Credit and debit valuation adjustments
The CVA is an adjustment to the valuation of over-the-counter (‘OTC’) derivative contracts to reflect the possibility that the
counterparty may default and that HSBC may not receive the full market value of the transactions.
The DVA is an adjustment to the valuation of OTC derivative contracts to reflect the possibility that HSBC may default, and that it
may not pay the full market value of the transactions.
HSBC calculates a separate CVA and DVA for each legal entity, and for each counterparty to which the entity has exposure. With the
exception of central clearing parties, all third-party counterparties are included in the CVA and DVA calculations, and these
adjustments are not netted across Group entities.
HSBC calculates the CVA by applying the probability of default (‘PD’) of the counterparty, conditional on the non-default of HSBC,
to HSBC’s expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default.
Conversely, HSBC calculates the DVA by applying the PD of HSBC, conditional on the non-default of the counterparty, to the
expected positive exposure of the counterparty to HSBC and multiplying the result by the loss expected in the event of default.
Both calculations are performed over the life of the potential exposure.
For most products HSBC uses a simulation methodology, which incorporates a range of potential exposures over the life of the
portfolio, to calculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such
as counterparty netting agreements and collateral agreements with the counterparty.
218 HSBC Holdings plc Annual Report and Accounts 2016
The methodologies do not, in general, account for ‘wrong-way risk’ which arises when the underlying value of the derivative prior to
any CVA is positively correlated to the PD of the counterparty. When there is significant wrong-way risk, a trade-specific approach is
applied to reflect this risk in the valuation.
Funding fair value adjustment
The FFVA is calculated by applying future market funding spreads to the expected future funding exposure of any uncollateralised
component of the OTC derivative portfolio. The expected future funding exposure is calculated by a simulation methodology, where
available, and is adjusted for events that may terminate the exposure, such as the default of HSBC or the counterparty. The FFVA and
DVA are calculated independently.
Model limitation
Models used for portfolio valuation purposes may be based upon a simplified set of assumptions that do not capture all current and
future material market characteristics. In these circumstances, model limitation adjustments are adopted.
Inception profit (Day 1 P&L reserves)
Inception profit adjustments are adopted when the fair value estimated by a valuation model is based on one or more significant
unobservable inputs. The accounting for inception profit adjustments is discussed in Note 1.
Fair value valuation bases
Financial instruments measured at fair value using a valuation technique with significant unobservable inputs – Level 3
Assets
Liabilities
Available
for sale
Held for
trading
Designated
at fair value Derivatives
Held for
trading
Designated
at fair value Derivatives
$m
$m
Private equity including strategic
investments
Asset-backed securities
Loans held for securitisation
Structured notes
Derivatives with monolines
Other derivatives
Other portfolios
At 31 Dec 2016
Private equity including strategic
investments
Asset-backed securities
Loans held for securitisation
Structured notes
Derivatives with monolines
Other derivatives
Other portfolios
At 31 Dec 2015
$m
2,435
761
—
—
—
—
$m
49
789
28
2
—
—
280
3,476
5,621
6,489
3,443
1,053
—
—
—
—
55
531
30
4
—
—
231
4,727
6,236
6,856
$m
712
—
—
—
—
—
18
730
453
—
—
—
—
—
21
474
$m
—
—
—
—
175
2,577
—
Total
$m
3,196
1,550
28
2
175
2,577
5,919
$m
25
—
—
3,557
—
—
—
2,752
13,447
3,582
—
—
—
—
196
2,066
—
3,951
1,584
30
4
196
2,066
6,488
35
—
—
4,250
—
—
—
2,262
14,319
4,285
Total
$m
25
—
—
3,557
—
—
—
—
—
—
2,300
2,300
—
37
2,300
5,919
—
—
—
—
—
1,210
—
1,210
35
—
—
4,250
—
1,210
3
5,498
—
—
—
—
—
—
37
37
—
—
—
—
—
—
3
3
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 ABSs are legacy positions. HSBC has the capability to hold these positions.
Private equity including strategic investments
The 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; 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 certain ABSs such as residential mortgage-backed securities, the valuation uses an industry standard model with
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.
Structured notes
The fair value of Level 3 structured notes 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. These structured notes comprise principally
equity-linked notes issued by HSBC which provide the counterparty with a return linked to the performance of equity securities and
other portfolios. Examples of the unobservable parameters include long-dated equity volatilities and correlations between equity
prices, and interest and foreign exchange rates.
Derivatives
OTC derivative valuation models calculate the present value of expected future cash flows, based upon ‘no-arbitrage’ principles. For
many vanilla derivative products, 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.
HSBC Holdings plc Annual Report and Accounts 2016
219
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
Reconciliation of fair value measurements in Level 3 of the fair value hierarchy
Movement in Level 3 financial instruments
Assets
Liabilities
Available
for sale
Held for
trading
Designated
at fair value Derivatives
Held for
trading
Designated
at fair value Derivatives
At 1 Jan 2016
Total gains/(losses) recognised in profit or loss
– trading income/(expense) 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 (‘LICs’)
Total gains/(losses) recognised in other
comprehensive income (‘OCI’)
– 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 Dec 2016
Unrealised gains/(losses) recognised in profit
or loss relating to assets and liabilities held at
31 Dec 2016
– trading income/(expense) 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 Jan 2015
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 (‘LICs’)
Total gains/(losses) recognised in other
comprehensive income (‘OCI’)
1
– 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 Dec 2015
Unrealised gains/(losses) recognised in profit or loss
relating to assets and liabilities held at 31 Dec 2015
– trading income/(expense) excluding net interest
income
– net income from other financial instruments
designated at fair value
– loan impairment charges and other credit risk
provisions
Footnote
$m
4,727
178
—
—
91
87
$m
6,856
31
31
—
—
—
1
(162)
(610)
123
—
(285)
350
—
—
—
(610)
823
—
(1,212)
(1,760)
(311)
(199)
1,659
6,489
(170)
(170)
—
—
6,468
109
109
—
—
—
(177)
(947)
719
3,476
87
—
—
87
4,988
(34)
—
—
(269)
235
226
393
—
(167)
594
—
(757)
(32)
(1,471)
1,231
4,727
235
—
—
235
$m
474
25
$m
2,262
1,107
$m
4,285
337
—
25
—
—
(8)
—
—
(8)
359
—
(7)
(113)
(2)
2
1,107
337
—
—
—
—
—
—
(335)
(130)
—
—
(335)
—
—
—
(107)
(187)
12
—
—
(130)
20
1,882
(40)
(1,907)
(920)
55
730
2,752
3,582
21
—
21
—
726
30
—
30
—
—
364
364
—
—
2,924
95
95
—
—
—
(143)
(143)
—
—
6,139
(573)
(573)
—
—
—
(192)
(11)
(126)
(118)
—
—
(192)
1,745
—
(1,206)
(146)
(206)
284
6,856
(9)
(9)
—
—
—
—
(11)
250
—
(50)
(135)
(336)
—
474
12
—
12
—
—
(4)
(122)
—
—
—
(38)
(1,015)
422
2,262
89
89
—
—
—
—
(118)
2
1,471
(66)
(1,260)
(1,743)
433
4,285
384
384
—
—
$m
3
(1)
—
(1)
—
—
(1)
—
—
(1)
6
—
(2)
—
—
32
37
1
—
1
—
—
(1)
—
(1)
—
—
(1)
—
—
(1)
9
—
(4)
—
—
—
3
(1)
—
(1)
—
$m
1,210
1,428
1,428
—
—
—
(240)
—
12
(252)
—
—
—
(239)
(229)
370
2,300
(335)
(335)
—
—
1,907
(209)
(209)
—
—
—
(64)
—
—
(64)
—
—
—
(241)
(283)
100
1,210
267
267
—
—
1
Included in ‘Available-for-sale investments: fair value gains/(losses)’ and ‘Exchange differences’ in the consolidated statement of comprehensive income.
220 HSBC Holdings plc Annual Report and Accounts 2016
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
Sensitivity of Level 3 fair values to reasonably possible alternative assumptions
2016
2015
Reflected in profit or loss
Reflected in OCI
Reflected in profit or loss
Reflected in OCI
Favourable
changes
Un-
favourable
changes
Favourable
changes
Un-
favourable
changes
Favourable
changes
Un-
favourable
changes
Favourable
changes
Un-
favourable
changes
Footnote
Derivatives, trading assets and
trading liabilities
1
Financial assets and liabilities
designated at fair value
Financial investments:
available for sale
At 31 Dec
$m
238
48
72
358
$m
$m
$m
(177)
(38)
(36)
(251)
—
—
170
170
—
—
(149)
(149)
$m
335
24
35
394
$m
(215)
(24)
(30)
(269)
$m
—
—
230
230
$m
—
—
(243)
(243)
1 Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these instruments are risk managed.
Sensitivity of Level 3 fair values to reasonably possible alternative assumptions by instrument type
2016
2015
Reflected in profit or loss
Reflected in OCI
Reflected in profit or loss
Reflected in OCI
Favourable
changes
Un-
favourable
changes
Favourable
changes
Un-
favourable
changes
Favourable
changes
Un-
favourable
changes
Favourable
changes
Un-
favourable
changes
$m
112
43
1
10
3
141
48
358
$m
(73)
(15)
(1)
(7)
(3)
(94)
(58)
(251)
$m
121
33
—
—
—
—
16
170
$m
$m
(106)
(27)
—
—
—
—
(16)
(149)
54
18
1
15
11
179
116
394
$m
(53)
(12)
(1)
(11)
(11)
(87)
(94)
$m
152
57
—
—
—
—
21
(269)
230
$m
(171)
(51)
—
—
—
—
(21)
(243)
Private equity including strategic
investments
Asset-backed securities
Loans held for securitisation
Structured notes
Derivatives with monolines
Other derivatives
Other portfolios
At 31 Dec
The sensitivity analysis aims to measure a range of fair values consistent with the application of a 95% confidence interval.
Methodologies take account of the nature of the valuation technique employed, as well as the availability and reliability of observable
proxy and historical data.
When the fair value of a financial instrument is affected by more than one unobservable assumption, the above table reflects the
most favourable or the most unfavourable change from varying the assumptions individually.
HSBC Holdings plc Annual Report and Accounts 2016
221
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
Key unobservable inputs to Level 3 financial instruments
Quantitative information about significant unobservable inputs in Level 3 valuations
Fair value
2016
2015
Assets Liabilities
Footnotes
$m
$m
Valuation
techniques
Key
unobservable
inputs
Full range
of inputs
Core range
of inputs1
Full range
of inputs
Core range
of inputs1
Lower Higher
Lower Higher
Lower Higher
Lower Higher
Private equity including
strategic investments
Asset-backed securities
2
3,196
1,550
25
—
See page
224
See page
224
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
– CLO/CDO
498
— Market proxy
Prepayment
rate
2%
7%
2%
7%
1%
6%
1%
6%
1,052
— Market proxy
Bid quotes
Market proxy
Bid quotes
0
0
101
96
42
57
94
90
3
0
147
147
54
44
117
109
28
—
2,577
2,300
– securitisation swaps
711
1,117
other ABSs
Loans held for
securitisation
Structured notes
– equity-linked notes
– fund-linked notes
– FX-linked notes
– other
Derivatives with
monolines
Other derivatives
Interest rate
– long-dated
swaptions
– other
FX derivatives:
– FX options
– other
Equity derivatives:
– long-dated single
stock options
– other
Credit derivatives:
– other
Other portfolios
– structured
certificates
– EM corporate debt
– other
3
2
—
—
—
—
2
175
240
4
103
55
24
5,919
4,446
124
1,349
2
165
388
47
37
—
3,557
3,090
Model –
Option model
Equity
volatility
Model –
Option model
Equity
correlation
300
Model –
Option model
9
Fund
volatility
11%
96%
16%
36% 12%
72% 19%
43%
33%
94%
46%
81% 35%
93% 43%
79%
6%
11%
6%
11%
6%
8%
6%
8%
87
71
—
Model –
Option model
FX volatility
3%
29%
5%
18%
5%
35%
5%
20%
Model –
Discounted
cash flow
Credit
spread
Model –
Discounted
cash flow
Prepayment
rate
2%
2%
2%
2%
4%
4%
4%
4%
0%
90%
8%
27%
0%
90% 14%
71%
1,236
204
109
108
Model –
Option model
Model –
IR volatility
8% 101%
21%
39%
3%
66% 20%
41%
364
Option model FX Volatility
0.6%
25%
7%
12% 0.5%
35%
5%
14%
Model –
Option model
Equity
volatility
11%
83%
16%
36%
8% 104% 18%
44%
Model –
Discounted
cash flow
Credit
volatility
— Market proxy
Bid quotes
37
3%
96
4%
3%
4%
144
113
113
2%
70
4%
2%
4%
124
100
123
At 31 Dec 2016
13,447
5,919
1
2
3
The core range of inputs is the estimated range within which 90% of the inputs fall.
Collateralised loan obligation/collateralised debt obligation.
'Other' includes a range of smaller asset holdings.
222 HSBC Holdings plc Annual Report and Accounts 2016
Private equity including strategic investments
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.
They vary according to the nature of the loan portfolio and expectations of future market conditions, and may be estimated using a
variety of evidence, such as prepayment rates implied from proxy observable security prices, current or historical prepayment rates
and macroeconomic modelling.
Market proxy
Market proxy pricing may be used for an instrument when specific market pricing is not available but there is evidence from
instruments with common characteristics. 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.
Volatility
Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by
strike and maturity of the option.
Certain volatilities, typically those of a longer-dated nature, are unobservable and are estimated from observable data. The range of
unobservable volatilities reflects the wide variation in volatility inputs by reference market price. The core range is significantly
narrower than the full range because these examples with extreme volatilities occur relatively rarely within the HSBC portfolio.
Correlation
Correlation is a measure of the inter-relationship between two market prices and is expressed as a number between minus one and
one. It is used to value more complex instruments where the payout is dependent upon more than one market price. There is a wide
range of instruments for which correlation is an input, and consequently a wide range of both same-asset correlations and cross-
asset correlations is used. In general, the range of same-asset correlations will be narrower than the range of cross-asset
correlations.
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.
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 and 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. Furthermore, the effect of changing market variables on the HSBC portfolio will depend on HSBC’s net risk position
in respect of each variable.
HSBC Holdings
Basis of valuing HSBC Holdings’ financial assets and liabilities measured at fair value
Valuation technique using observable inputs: Level 2
Assets at 31 Dec
– derivatives
– available for sale
Liabilities at 31 Dec
– designated at fair value
– derivatives
2016
$m
2,148
3,590
30,113
5,025
2015
$m
2,467
4,285
19,853
2,278
HSBC Holdings plc Annual Report and Accounts 2016
223
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
12 Fair values of financial instruments not carried at fair value
Fair values of financial instruments not carried at fair value and bases of valuation
At 31 Dec 2016
Assets
Loans and advances to banks
Loans and advances to customers
Reverse repurchase agreements – non-trading
Financial investments – debt securities
Liabilities
Deposits by banks
Customer accounts
Repurchase agreements – non-trading
Debt securities in issue
Subordinated liabilities
At 31 Dec 2015
Assets
Loans and advances to banks
Loans and advances to customers
Reverse repurchase agreements – non-trading
Financial investments – debt securities
Liabilities
Deposits by banks
Customer accounts
Repurchase agreements – non-trading
Debt securities in issue
Subordinated liabilities
Carrying
amount
$m
88,126
861,504
160,974
46,923
59,939
1,272,386
88,958
65,915
20,984
90,401
924,454
146,255
44,102
54,371
1,289,586
80,400
88,949
22,702
Fair value
Quoted market
price
Level 1
Observable
inputs
Level 2
Significant
unobservable
inputs
Level 3
$m
$m
$m
Total
$m
88,140
861,564
161,031
47,223
59,925
2,572
845,894
1,527
19
42
10,136
1,272,676
—
—
292
88,939
66,386
23,556
2,255
910,057
959
19
76
9,421
—
—
649
90,411
922,469
146,266
45,258
54,371
1,289,789
80,400
89,023
24,993
—
—
—
1,190
—
—
—
—
—
—
—
—
1,163
—
—
—
—
—
85,568
15,670
159,504
46,014
59,883
1,262,540
88,939
66,386
23,264
88,156
12,412
145,307
44,076
54,295
1,280,368
80,400
89,023
24,344
Fair values of selected financial instruments not carried at fair value and bases of valuation – assets and disposal groups held
for sale
At 31 Dec 2016
Loans and advances to customers
Customer accounts
At 31 Dec 2015
Loans and advances to customers
Customer accounts
Fair value
Quoted market
price
Level 1
Observable
inputs
Level 2
Significant
unobservable
inputs
Level 3
$m
$m
$m
—
—
—
—
241
2,713
4,068
15,578
3,306
—
16,884
1,104
Carrying
amount
$m
3,756
2,713
21,109
16,682
Total
$m
3,547
2,713
20,952
16,682
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. They include cash and balances at central banks,
items in the course of collection from and transmission to other banks, Hong Kong Government certificates of indebtedness and
Hong Kong currency notes in circulation, all of which are measured at amortised cost.
224 HSBC Holdings plc Annual Report and Accounts 2016
Carrying amount and fair value of loans and advances to customers by industry sector
Loans and advances to customers
– personal
– corporate and commercial
– financial
At 31 Dec 2016
Loans and advances to customers
– personal
– corporate and commercial
– financial
At 31 Dec 2015
Carrying amount
Not Impaired
Impaired
$m
$m
332,574
453,151
63,316
849,041
361,716
485,933
60,049
907,698
5,252
7,058
153
12,463
9,487
7,145
124
16,756
Total
$m
337,826
460,209
63,469
861,504
371,203
493,078
60,173
924,454
Fair value
Not Impaired
Impaired
$m
$m
330,167
456,816
63,411
850,394
359,559
487,196
59,941
906,696
4,597
6,393
180
11,170
9,024
6,592
157
15,773
Total
$m
334,764
463,209
63,591
861,564
368,583
493,788
60,098
922,469
Loans and advances to customers are classified as not impaired or impaired in accordance with the criteria described on page 90.
Valuation
Fair value is an 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 an instrument’s cash flow over its expected future life. Our valuation methodologies and assumptions in determining fair values
for which no observable market prices are available may differ from those of other companies.
Loans and advances to banks and customers
To determine the fair value of loans and advances to banks and customers, loans are segregated, as far as possible, into portfolios of
similar characteristics. Fair values are based on observable market transactions, when available. When they are unavailable, fair
values are estimated using valuation models incorporating a range of input assumptions. These assumptions may include: value
estimates from third-party brokers reflecting over-the-counter trading activity; forward-looking discounted cash flow models, taking
account of expected customer prepayment rates, using assumptions that HSBC believes are consistent with those that would be
used by market participants in valuing such loans; new business rates estimates for similar loans; and trading inputs from other
market participants including observed primary and secondary trades. From time to time, we may engage a third party valuation
specialist to measure the fair value of a pool of loans.
The fair value of loans reflects 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. For impaired
loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered.
Financial investments
The fair values of listed financial investments are determined using bid market prices. The fair values of unlisted financial investments
are determined using valuation techniques that incorporate the prices and future earnings streams of equivalent quoted securities.
Deposits by banks and customer accounts
The fair values of on demand deposits are approximated by their carrying value. For deposits with longer-term maturities, fair values
are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities.
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 approximate carrying amounts as 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 Dec
Loans and advances to HSBC undertakings
Liabilities at 31 Dec
Amounts owed to HSBC undertakings
Debt securities in issue
Subordinated liabilities
1
Fair values were determined using valuation techniques with observable inputs (Level 2).
2016
Carrying
amount
$m
Fair
value1
$m
2015
Carrying
amount
$m
Fair
value1
$m
77,421
79,985
44,350
45,180
2,157
21,805
15,189
2,156
23,147
17,715
2,152
960
15,895
2,152
1,224
18,297
HSBC Holdings plc Annual Report and Accounts 2016
225
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
13 Financial assets designated at fair value
Securities
– treasury and other eligible bills
– debt securities
– equity securities
Loans and advances to banks and customers
At 31 Dec
Securities1
US Treasury and US Government agencies
UK Government
Hong Kong Government
Other governments
Asset-backed securities
Corporate debt and other securities
Equities
At 31 Dec
2016
$m
24,677
204
4,189
20,284
79
24,756
2016
$m
104
41
16
747
20
3,465
20,284
24,677
2015
$m
23,732
396
4,341
18,995
120
23,852
2015
$m
145
103
33
1,020
25
3,411
18,995
23,732
Footnotes
2
3
1
2
3
Included within these figures are debt securities issued by banks and other financial institutions of $1,766m (2015: $1,536m), of which $19m (2015: $35m) are guaranteed by
various governments.
Includes securities that are supported by an explicit guarantee issued by the US Government.
Excludes asset-backed securities included under US Treasury and US Government agencies.
14 Derivatives
Notional contract amounts and fair values of derivatives by product contract type held by HSBC
Foreign exchange
Interest rate
Equities
Credit
Commodity and other
Notional contract amount
Fair value – Assets
Trading
Hedging
Trading
Hedging
$m
5,819,814
13,729,757
472,169
448,220
62,009
$m
26,281
215,006
—
—
—
$m
126,185
253,398
7,410
5,199
2,020
$m
1,228
1,987
—
—
—
Gross total fair values
20,531,969
241,287
394,212
3,215
Offset (Note 30)
At 31 Dec 2016
Foreign exchange
Interest rate
Equities
Credit
Commodity and other
Gross total fair values
Offset (Note 30)
At 31 Dec 2015
20,531,969
241,287
394,212
3,215
5,658,030
14,462,113
501,834
463,344
51,683
32,324
212,923
—
—
—
95,201
277,496
8,732
6,961
3,148
1,140
1,658
—
—
—
21,137,004
245,247
391,538
2,798
21,137,004
245,247
391,538
2,798
Total
$m
127,413
255,385
7,410
5,199
2,020
397,427
(106,555)
290,872
96,341
279,154
8,732
6,961
3,148
394,336
(105,860)
288,476
Fair value – Liabilities
Trading
Hedging
$m
118,813
245,941
9,240
5,767
1,564
$m
968
4,081
—
—
—
381,325
5,049
381,325
5,049
94,843
267,609
10,383
6,884
2,699
382,418
755
3,758
—
—
—
4,513
382,418
4,513
Total
$m
119,781
250,022
9,240
5,767
1,564
386,374
(106,555)
279,819
95,598
271,367
10,383
6,884
2,699
386,931
(105,860)
281,071
The notional contract amounts of derivatives held for trading purposes and derivatives designated in qualifying hedge accounting
indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.
Derivative assets increased during 2016, driven by changes in foreign exchange rates and yield curve movements.
226 HSBC Holdings plc Annual Report and Accounts 2016
Notional contract amounts and fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries
Notional contract amount
Fair value – Assets
Trading
Hedging
Trading
Hedging
$m
23,442
26,858
50,300
19,036
10,150
29,186
$m
1,120
24,356
25,476
1,120
5,132
6,252
$m
223
1,478
1,701
390
1,600
1,990
$m
—
447
447
—
477
477
Total
$m
223
1,925
2,148
390
2,077
2,467
Fair value – Liabilities
Trading
Hedging
$m
3,201
639
3,840
2,065
—
2,065
$m
239
946
1,185
213
—
213
Total
$m
3,440
1,585
5,025
2,278
—
2,278
Foreign exchange
Interest rate
At 31 Dec 2016
Foreign exchange
Interest rate
At 31 Dec 2015
Use of derivatives
For details regarding use of derivatives, see page 116 under ‘Market Risk’.
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.
Substantially all of HSBC Holdings’ derivatives entered into with subsidiaries are managed in conjunction with financial liabilities
designated at fair value.
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 Jan
Deferral on new transactions
Recognised in the income statement during the year:
– amortisation
– subsequent to unobservable inputs becoming observable
– maturity, termination or offsetting derivative
Exchange differences
Other
Unamortised balance at 31 Dec
1
This amount is yet to be recognised in the consolidated income statement.
Hedge accounting derivatives
Fair value hedges
Footnote
1
2016
$m
97
156
(140)
(70)
(5)
(65)
(13)
(1)
99
2015
$m
114
196
(207)
(121)
(2)
(84)
(6)
—
97
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.
Notional contract amounts and fair values of derivatives designated as fair value hedges by product type
HSBC
Foreign exchange
Interest rate
At 31 Dec
HSBC Holdings
Foreign exchange
Interest rate
At 31 Dec
Notional
$m
618
124,361
124,979
1,120
24,356
25,476
2016
Assets
$m
10
1,078
1,088
—
447
447
Liabilities
$m
22
3,726
3,748
239
946
1,185
Notional
$m
196
105,127
105,323
1,120
5,132
6,252
2015
Assets
$m
2
672
674
—
477
477
Liabilities
$m
—
3,395
3,395
213
—
213
HSBC Holdings plc Annual Report and Accounts 2016
227
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
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 Dec
HSBC Holdings
Gains/(losses):
– on hedging instruments
– on the hedged items attributable to the hedged risk
Year ended 31 Dec
Cash flow hedges
2016
$m
(439)
462
23
(909)
926
17
2015
$m
40
(51)
(11)
(4)
6
2
2014
$m
(2,542)
2,561
19
423
(422)
1
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.
Notional contract amounts and fair values of derivatives designated as cash flow hedges by product held by HSBC
Foreign Exchange
Interest rate
At 31 Dec
Notional
$m
25,663
90,645
116,308
2016
Assets
Liabilities
$m
1,081
909
1,990
$m
939
355
1,294
Notional
$m
32,128
107,796
139,924
2015
Assets
Liabilities
$m
1,027
986
2,013
$m
748
363
1,111
Forecast principal balances on which interest cash flows are expected to arise
Net cash inflows/(outflows) exposure
Assets
Liabilities
At 31 Dec 2016
Net cash inflows/(outflows) exposure
Assets
Liabilities
At 31 Dec 2015
3 months
More than 3 months
5 years or less
More than
or less
but less than 1 year
but more than 1 year
$m
$m
$m
83,472
(13,169)
70,303
94,256
(16,241)
78,015
79,749
(12,977)
66,772
93,528
(17,179)
76,349
57,553
(11,761)
45,792
62,664
(11,681)
50,983
5 years
$m
2,750
(1,502)
1,248
971
(3,326)
(2,355)
This table reflects the interest rate repricing profile of the underlying hedged items. During the year to 31 December 2016 a loss of
$5m (2015: gain of $15m; 2014: gain of $34m) was recognised due to hedge ineffectiveness. A gain of $129m was recognised in
respect of amounts reclassified from other comprehensive income to the income statement for partially discontinued macro cash
flow hedges, where the hedged forecast transactions are no longer expected to occur (2015: nil; 2014: nil).
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 foreign currency borrowings. At 31 December 2016, the fair values of outstanding financial
instruments designated as hedges of net investments in foreign operations were assets of $137m (2015: $111m), liabilities of $7m
(2015: $12m) and notional contract values of $3,544m (2015: $4,210m). Ineffectiveness recognised in ‘Net trading income’ in the
year ended 31 December 2016 was nil (2015: nil; 2014: nil).
228 HSBC Holdings plc Annual Report and Accounts 2016
15 Financial investments
Carrying amount of financial investments
Available for sale securities at fair value
– treasury and other eligible bills
– debt securities
– equity securities
Held to maturity securities at amortised cost
– debt securities
At 31 Dec
1
Fair value $47.2bn (2015: $45.3bn).
Financial investments at amortised cost and fair value
US Treasury
US Government agencies
US Government sponsored entities
UK Government
Hong Kong Government
Other governments
Asset-backed securities
Corporate debt and other securities
Equities
At 31 Dec
Footnote
1
2016
$m
389,874
99,226
285,981
4,667
46,923
46,923
436,797
2015
$m
384,853
104,551
274,467
5,835
44,102
44,102
428,955
Footnotes
2
2
3
2016
2015
Amortised cost
Fair value1
Amortised cost
Fair value1
$m
57,135
15,790
14,397
27,506
62,500
140,943
10,246
100,180
3,042
431,739
$m
56,625
15,682
14,442
28,480
62,475
142,594
9,392
102,741
4,667
437,098
$m
61,585
22,910
10,365
27,250
53,676
141,329
14,239
89,860
4,057
425,271
$m
61,779
22,843
10,627
27,316
53,674
143,370
13,375
91,292
5,835
430,111
1
2
3
Included within ‘Fair value’ figures are debt securities issued by banks and other financial institutions of $69bn (2015: $61bn), of which $20bn (2015: $18bn) are guaranteed by
various governments.
Includes securities that are supported by an explicit guarantee issued by the US Government.
Excludes asset-backed securities included under US Government agencies and sponsored entities.
Maturities of investments in debt securities at their carrying amount
Available for sale
Held to maturity
At 31 Dec 2016
Available for sale
Held to maturity
At 31 Dec 2015
1 year or less
5 years or less
but over
1 year
10 years or less
but over
5 years
Over 10 years
$m
64,155
2,502
66,657
61,664
2,428
64,092
$m
142,700
10,210
152,910
131,023
10,242
141,265
$m
45,385
10,348
55,733
42,140
8,881
51,021
$m
33,741
23,863
57,604
39,640
22,551
62,191
Total
$m
285,981
46,923
332,904
274,467
44,102
318,569
HSBC Holdings plc Annual Report and Accounts 2016
229
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
Contractual maturities and weighted average yields of investment debt securities
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 Dec 2016
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 Dec 2016
Total carrying value
1 year or less
5 years or less
but over
1 year
10 years or less
but over
5 years
Over 10 years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
$m
%
$m
%
$m
%
$m
Yield
%
5,896
2
200
2,913
357
42,513
41
11,641
63,563
64,155
22
—
—
26
41
—
2,413
2,502
2,502
1.0
9.5
3.3
1.3
0.7
1.8
1.8
2.0
4.8
—
—
0.3
5.6
—
3.2
22,807
118
3,138
6,742
1,143
61,734
837
43,936
140,455
142,700
61
6
299
18
318
—
9,508
10,210
10,210
1.5
3.3
2.8
0.9
1.2
2.4
1.2
1.6
4.8
1.8
2.2
3.0
4.0
—
3.6
19,063
95
1,173
10,132
—
8,151
1,196
4,524
44,334
45,385
46
36
393
23
169
—
9,681
10,348
10,348
1.9
2.5
2.4
1.2
—
3.0
1.6
3.7
5.0
3.3
2.8
1.5
3.9
—
3.4
4,024
6,844
5,829
547
—
1,480
8,166
7,316
34,206
33,741
124
8,690
3,364
7
805
5
10,868
23,863
23,863
3.0
2.2
2.3
3.4
—
6.5
2.1
4.2
4.2
2.3
2.9
1.4
4.3
7.0
3.9
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 2016 by
the book amount of available-for-sale debt securities at that date. The yields do not include the effect of related derivatives.
16 Assets pledged, collateral received and assets transferred
Assets pledged
Financial assets pledged as collateral
Treasury bills and other eligible securities
Loans and advances to banks
Loans and advances to customers
Debt securities
Equity securities
Other
Assets pledged at 31 Dec
2016
$m
7,151
17,444
74,109
80,063
2,655
1,838
2015
$m
5,941
15,582
88,927
69,470
4,644
213
183,260
184,777
Assets pledged as collateral include all assets categorised as encumbered in the disclosure on page 76.
The amount of assets pledged to secure liabilities may be greater than the book value of assets utilised as collateral. For example, in
the case of securitisations and covered bonds, the amount of liabilities issued plus mandatory over-collateralisation is less than the
book value of the pool of assets available for use as collateral. This is also the case where assets are placed with a custodian or a
settlement agent which has a floating charge over all the assets placed to secure any liabilities under settlement accounts.
These transactions are conducted under terms that are usual and customary to collateralised transactions including, where relevant,
standard securities lending and borrowing, repurchase agreements and derivative margining. HSBC places both cash and non-cash
collateral in relation to derivative transactions.
Financial assets pledged as collateral which the counterparty has the right to sell or repledge
Trading assets
Financial investments
At 31 Dec
2016
$m
37,141
4,044
41,185
2015
$m
32,633
8,050
40,683
230 HSBC Holdings plc Annual Report and Accounts 2016
Collateral received
The fair value of assets accepted as collateral, relating primarily to standard securities lending, reverse repurchase agreements and
derivative margining, that HSBC is permitted to sell or repledge in the absence of default was $250,919m (2015: $222,065m). The fair
value of any such collateral sold or repledged was $149,185m (2015: $139,532m).
HSBC is obliged to return equivalent securities. These transactions are conducted under terms that are usual and customary to
standard securities lending, reverse repurchase agreements and derivative margining.
Assets transferred
The assets pledged include transfers to third parties that do not qualify for derecognition, notably secured borrowings such as debt
securities held by counterparties as collateral under repurchase agreements and equity securities lent under securities lending
agreements. The transferred asset collateral continues to be recognised in full and a related liability, reflecting the Group’s obligation
to repurchase the assets for a fixed price at a future date is also recognised on the balance sheet. The Group is unable to use, sell or
pledge the transferred assets for the duration of the transaction, and remains exposed to interest rate risk and credit risk on these
pledged assets. With the exception of ‘Other sales’ in the table below, the counterparty’s recourse is not limited to the transferred
assets.
Transferred financial assets not qualifying for full derecognition and associated financial liabilities
At 31 Dec 2016
Repurchase agreements
Securities lending agreements
Other sales (recourse to transferred assets only)
At 31 Dec 2015
Repurchase agreements
Securities lending agreements
Other sales (recourse to transferred assets only)
Carrying amount of:
Fair value of:
Transferred
assets
Associated
liabilities
Transferred
assets
Associated
liabilities
$m
$m
$m
$m
Net
position
$m
40,364
3,324
2,441
36,153
5,275
2,717
39,568
2,655
2,466
35,913
5,704
2,768
2,455
2,458
(3)
2,720
2,726
(6)
17
Interests in associates and joint ventures
Associates
At 31 December 2016, the carrying amount of HSBC’s interests in associates was $19,874m (2015: $18,900m).
Principal associates of HSBC
Bank of Communications Co., Limited
The Saudi British Bank
At 31 Dec
2016
2015
Carrying
amount
$m
15,765
3,280
19,045
Fair
value1
$m
10,207
3,999
14,206
Carrying
amount
$m
15,344
3,021
18,365
1
The fair values are based on the quoted market prices of the shares held (Level 1 in the fair value hierarchy).
At 31 Dec 2016
Footnote
1
Country of
incorporation and
principal place of
business
Principal
activity
PRC
Banking services
Saudi Arabia
Banking services
Bank of Communications Co., Limited
The Saudi British Bank
1
People’s Republic of China.
A list of all associates and joint ventures is set out on page 271.
Bank of Communications Co., Limited
Fair
value1
$m
9,940
3,957
13,897
HSBC’s
interest
%
19.03
40.00
The Group’s significant influence in Bank of Communications Co., Limited (‘BoCom’) was established via representation on BoCom’s
board of directors and a technical cooperation and exchange programme (‘TCEP’). Under the TCEP, a number of HSBC staff have
been seconded to assist in the maintenance of BoCom’s financial and operating policies.
HSBC Holdings plc Annual Report and Accounts 2016
231
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
Impairment testing
At 31 December 2016, the fair value of HSBC’s investment in BoCom had been below the carrying amount for approximately 56
months. As a result, the Group performed an impairment test on the carrying amount of the investment in BoCom, which confirmed
there was no impairment at 31 December 2016.
Bank of Communications Co., Limited
Basis of recoverable amount
At 31 Dec 2016
At 31 Dec 2015
VIU
$bn
16.1
Carrying
value
$bn
15.8
Fair
value
$bn
10.2
VIU
$bn
17.0
Carrying
value
$bn
15.3
Fair
value
$bn
9.9
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 extrapolated in perpetuity using a long-term growth rate. An imputed
capital maintenance charge (‘CMC’) is calculated to reflect expected regulatory capital requirements, and is deducted 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 value in use calculation
The assumptions we used in our VIU calculation were:
• Long-term profit growth rate 5% (2015: 5%) for periods after 2019, which does not exceed forecast GDP growth in mainland
China.
• Long-term asset growth rate: 4% (2015: 4%) for periods after 2019, which is the rate that assets are expected to grow to achieve
long-term profit growth of 5%.
• Discount rate: 13% (2015: 13%), which is derived from a range of values obtained by applying a capital asset pricing model
(‘CAPM’) calculation for BoCom, using market data. Management also compares rates derived from the CAPM with discount rates
from external sources, and HSBC’s discount rate for evaluating investments in mainland China. The discount rate used was within
the range of 10.2% to 15.0% (2015: 10.1% to 14.2%) indicated by the CAPM and external sources.
• Loan impairment charge as a percentage of customer advances: a range from 0.72% to 0.87% (2015: 0.71% to 0.78%) in the short
to medium term, based on forecasts disclosed by external analysts. For periods after 2019, the ratio is 0.70% (2015: 0.70%),
slightly higher than the historical average.
• Risk-weighted assets as a percentage of total assets: 62% for all forecast periods (2015: 67%). This is consistent with the medium-
term forecasts disclosed by external analysts.
• Cost-income ratio: 40% (2015: 41%) in the short to medium term. The ratios were consistent with the short- to medium-term
range forecasts of 39.9% to 40.2% (2015: 40.3% to 40.7%) disclosed by external analysts.
The following table shows the change to each key assumption in the VIU calculation that on its own would reduce the headroom
to nil.
Key assumption
• Long-term profit growth rate
• Long-term asset 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 13 basis points
•
•
•
•
•
Increase by 14 basis points
Increase by 17 basis points
Increase by 3 basis points
Increase by 95 basis points
Increase by 60 basis points
232 HSBC Holdings plc Annual Report and Accounts 2016
The following table illustrates the effect on VIU of reasonably possible changes to key assumptions. This reflects the sensitivity of the
VIU to each key assumption on its own, and it is possible that more than one favourable and/or unfavourable change will occur at the
same time.
Sensitivity of VIU to reasonably possible changes in key assumptions
At 31 Dec 2016
Long-term profit growth rate
Long-term asset 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
At 31 Dec 2015
Long-term profit growth rate
Long-term asset 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
Favourable change
Unfavourable change
Increase
in VIU
bps
$bn
—
(80)
(100)
—
(30)
(170)
100
(50)
(150)
70
throughout
(350)
(250)
—
1.8
2.3
—
0.1
0.9
3.2
1.2
4.2
0.1
1.2
1.5
VIU
$bn
16.1
17.8
18.4
16.1
16.2
17.0
20.3
18.2
21.2
17.2
18.2
18.5
Decrease
In VIU
bps
$bn
(150)
(3.3)
—
—
2016-19: 0.93%
2020 onwards: 0.80%
170
250
(210)
100
110
2015-18: 0.85%
2019 onwards: 0.75%
10
120
—
—
(1.1)
(0.6)
(1.4)
(4.7)
(2.8)
(2.1)
(0.7)
—
(0.7)
VIU
$bn
12.8
16.1
16.1
15.0
15.5
14.7
12.3
14.3
14.9
16.4
17
16.4
Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible
range of VIU is $10.8bn to $19.0bn.
Selected financial information of BoCom
The statutory accounting reference date of BoCom is 31 December. For the year ended 31 December 2016, HSBC included the
associate’s results on the basis of financial statements for the 12 months ended 30 September 2016, taking into account changes in
the subsequent period from 1 October 2016 to 31 December 2016 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
At 30 Sep
2016
$m
137,844
101,436
566,126
311,207
48,922
2015
$m
144,702
110,915
560,503
244,722
49,246
1,165,535
1,110,088
297,442
680,915
69,954
27,860
1,076,171
89,364
261,211
691,959
46,932
29,329
1,029,431
80,657
Reconciliation of BoCom’s total shareholders’ equity to the carrying amount in HSBC’s consolidated financial statements
HSBC’s share of total shareholders’ equity
Add: Goodwill and other intangible assets
Carrying amount
At 30 Sep
2016
$m
15,285
480
15,765
2015
$m
14,824
520
15,344
HSBC Holdings plc Annual Report and Accounts 2016
233
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
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 for all associates excluding BoCom
Carrying amount
HSBC’s share of:
– total assets
– total liabilities
– revenues
– profit or loss from continuing operations
Joint ventures
For the 12 months ended 30 Sep
2016
$m
20,614
5,493
(4,284)
(1,216)
(2,800)
10,151
875
11,026
580
2016
$m
4,109
20,757
16,661
923
454
2015
$m
22,397
5,432
(3,772)
(1,012)
(2,976)
10,634
377
11,011
624
2015
$m
3,556
21,645
18,166
821
508
At 31 December 2016, the carrying amount of HSBC’s interests in joint ventures was $155m (2015: $239m).
Associates and joint ventures
For the year ended 31 December 2016, HSBC’s share of associates’ and joint ventures’ tax on profit was $542m (2015: $575m). This
is included within ‘Share of profit in associates and joint ventures’ in the ‘Consolidated income statement’.
Movements in interests in associates and joint ventures
At 1 Jan
Additions
Disposals
Share of results
Dividends
Exchange differences
Share of other comprehensive income of associates and joint ventures
Other movements
At 31 Dec
1
Includes goodwill of $488m (2015: $593m).
Footnote
2016
$m
19,139
76
(25)
2,354
(751)
(1,115)
54
297
2015
$m
18,181
3
(8)
2,556
(879)
(718)
(9)
13
1
20,029
19,139
234 HSBC Holdings plc Annual Report and Accounts 2016
18
Investments in subsidiaries
Principal subsidiaries of HSBC Holdings
Europe
HSBC Bank plc
HSBC France
HSBC Assurances Vie (France)
HSBC Private Banking Holdings (Suisse) SA
HSBC Trinkaus & Burkhardt AG
Asia
Hang Seng Bank Limited
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
HSBC Bank (Singapore) 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 Securities (USA) Inc.
Latin America
At 31 Dec 2016
Country of
incorporation or
registration
HSBC’s
interest % Share class
England and
Wales
France
France
Switzerland
Germany
100
£1 Ordinary and Preferred Ordinary, $0.01
Non-cumulative third Dollar Preference Shares
99.99
€5 Actions
100
100
287.50 EUR Ordinary shares
CHF1,000 Ordinary
80.65
Stückaktien no par value
Hong Kong
62.14 HK$5 Ordinary
Australia
PRC4
Malaysia
Taiwan
Bermuda
Hong Kong
Singapore
United Arab
Emirates
Egypt
Canada
USA
USA
100 Ordinary no par value
100
100
100
CNY1 Ordinary
RM0.50 Ordinary
TWD10 Ordinary
100 HK$1 Ordinary
100 HK$2.50 Ordinary$1 CIP1, CRP2 and NIP3
100
SGD100 Ordinary
100
$1 Ordinary and $1 CRP2
94.53
EGP84 Ordinary
100
100
100
Common no par value and Preference no par
value
$100 Common and $0.01 Preference
$0.05 Common
HSBC Mexico, S.A., Institución de Banca Múltiple, Grupo Financiero
HSBC
Mexico
99.99 MXN2 Ordinary
Cumulative Irredeemable Preference shares.
1
2
Cumulative Redeemable Preference shares.
3 Non-cumulative Irredeemable Preference shares.
4
People’s Republic of China.
Details of the debt, subordinated debt and preference shares issued by the principal subsidiaries to parties external to the Group are
included in Notes 25 ‘Debt securities in issue’, 28 ‘Subordinated liabilities’ and 31 ‘Non-controlling interests’, respectively.
A list of all related undertakings is set out on pages 265 to 271. 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. HSBC’s capital management process is incorporated in the Annual Operating 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 this, there is no current or foreseen impediment to HSBC Holdings’ ability to
provide funding for such investments. During 2016, consistent with the Group's capital plan, the Group’s subsidiaries did not
experience any significant restrictions on paying dividends or repaying loans and advances. Also, there are no foreseen restrictions
envisaged with regard to planned dividends or payments. However, 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, exchange
controls, statutory reserves, and financial and operating performance.
The amount of guarantees by HSBC Holdings in favour of other HSBC Group entities is set out in Note 33.
Information on structured entities consolidated by HSBC where HSBC owns less than 50% of the voting rights is included in Note 19
‘Structured entities’. In each of these 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.
HSBC Holdings plc Annual Report and Accounts 2016
235
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
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
19 Structured entities
2016
2015
37.86%
37.86%
Hong Kong
Hong Kong
$m
814
5,792
811
175,242
159,035
3,937
2,148
2,044
$m
1,364
5,866
523
169,813
153,458
5,411
3,604
1,636
HSBC is mainly involved with both consolidated and unconsolidated structured entities through the securitisation of financial assets,
conduits and investment funds, established either by HSBC or a third party.
Consolidated structured entities
Total assets of HSBC’s consolidated structured entities, split by entity type
At 31 Dec 2016
At 31 Dec 2015
Conduits
Conduits
Securitisations
HSBC
managed funds
$bn
15.8
25.9
$bn
5.7
5.6
$bn
4.8
8.2
Other
$bn
3.7
5.7
Total
$bn
30.0
45.4
HSBC has established and manages two types of conduits: securities investment conduits (‘SICs’) and multi-seller conduits.
Securities investment conduits
The SICs purchase highly rated ABSs to facilitate tailored investment opportunities.
• Solitaire – At 31 December 2016, Solitaire, HSBC’s principal SIC held $4.7bn of ABSs (2015: $6.2bn). These are included within
the disclosures of ABSs on page 105. It 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 as long as HSBC purchases its issued CP, which HSBC
intends to do for the foreseeable future. At 31 December 2016, HSBC held $6.1bn of CP (2015: $8.0bn).
• Mazarin, Barion and Malachite – All three SICs are predominantly funded by repurchase agreements and medium-term notes.
HSBC is exposed to the par value of Mazarin assets through the provision of a liquidity facility equal to the lesser of the amortised
cost of issued debt and the amortised cost of non-defaulted assets. At 31 December 2016, this amounted to $1.0bn (2015:
$1.8bn). HSBC’s primary exposure to Barion and Malachite is represented by the amortised cost of the debt required to support
the non-cash assets of the vehicles. At 31 December 2016, this amounted to $0.8bn (2015: $1.4bn). For all three SICs first loss
protection is provided through the capital notes issued by these vehicles, which are held substantially by third parties. At
31 December 2016, HSBC held 12.2% of the capital notes (2015: 7.2%) issued by these vehicles with a par value of $69.5m
(2015: $55.2m) and a carrying amount of $27.9m (2015: $24.7m).
Multi-seller conduit
HSBC’s multi-seller conduit was established to provide access to flexible market-based sources of finance for its clients. Currently,
HSBC bears risk equal to the transaction-specific liquidity facility offered to the multi-seller conduit, amounting to $10.2bn at
31 December 2016 (2015: $19.8bn). 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 it originates 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 these funds.
236 HSBC Holdings plc Annual Report and Accounts 2016
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 not controlled by HSBC. The Group enters into
transactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for
specific investment opportunities.
Nature and risks associated with HSBC interests in unconsolidated structured entities
Securitisations
HSBC
managed funds
Non-HSBC
managed funds
Total assets of the entities
Total assets in relation to HSBC’s interests in the unconsolidated
structured entities
– trading assets
– financial assets designated at fair value
– derivatives
– loans and advances to banks
– loans and advances to customers
– financial investments
– other assets
Total liabilities in relation to HSBC’s interests in the
unconsolidated structured entities
– derivatives
– other liabilities
HSBC’s maximum exposure at 31 Dec 2016
Total assets of the entities
Total assets in relation to HSBC’s interests in the unconsolidated
structured entities
– trading assets
– financial assets designated at fair value
– derivatives
– loans and advances to banks
– loans and advances to customers
– financial investments
– other assets
Total liabilities in relation to HSBC’s interests in the
unconsolidated structured entities
– other liabilities
HSBC’s maximum exposure at 31 Dec 2015
$bn
14.4
2.4
—
—
—
—
2.4
—
—
—
—
—
2.4
12.9
1.4
—
—
—
—
1.1
0.3
—
—
—
3.5
$bn
200.6
$bn
2,016.5
7.1
0.4
5.9
—
—
—
0.8
—
—
—
—
7.1
8.3
0.1
7.5
—
—
—
0.7
—
—
—
—
11
Other
$bn
106.3
10.1
2.1
—
3.9
0.4
3.2
0.2
0.3
0.3
0.1
0.2
13.5
Total
$bn
2,337.8
27.9
2.6
13.4
3.9
0.4
5.6
1.7
0.3
0.3
0.1
0.2
34
227.9
2,003.1
139.9
2,383.8
5.6
0.1
5.3
—
—
—
0.2
—
—
—
5.6
8.0
0.2
6.6
—
—
0.1
1.1
—
—
—
8.0
9.8
2.6
—
3.8
0.1
2.9
0.2
0.2
0.1
0.1
24.8
2.9
11.9
3.8
0.1
4.1
1.8
0.2
0.1
0.1
14.6
31.7
The maximum exposure to loss from HSBC’s interests in unconsolidated structured entities represents the maximum loss it could
incur as a result of its involvement with these entities regardless of the probability of the loss being incurred.
• For commitments, 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 ABSs issued by third party structured entities as set out on page 105.
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 61.
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 business and meet customer needs. In addition,
HSBC enters into derivative contracts to facilitate risk management solutions for non-HSBC managed funds. Note 14 provides
information on derivatives entered into by HSBC.
HSBC Holdings plc Annual Report and Accounts 2016
237
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
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
The amount of assets transferred to and income received from such sponsored entities during 2016 and 2015 were not significant.
20 Goodwill and intangible assets
Goodwill
Present value of in-force long-term insurance business
Other intangible assets
At 31 Dec
1
Included within other intangible assets is internally generated software with a net carrying value of $1,982m (2015: $1,934m).
Movement analysis of goodwill
Gross amount
At 1 Jan
Exchange differences
Reclassified to held for sale
Other
At 31 Dec
Accumulated impairment losses
At 1 Jan
Impairment losses
Other
At 31 Dec
Net carrying amount at 31 Dec
Impairment testing
Footnote
1
2016
$m
12,330
6,502
2,514
21,346
2016
$m
22,187
(562)
(183)
3
21,445
(5,893)
(3,240)
18
(9,115)
12,330
2015
$m
16,294
5,685
2,626
24,605
2015
$m
25,092
(1,610)
(1,319)
24
22,187
(5,923)
—
30
(5,893)
16,294
The Group’s impairment test in respect of goodwill allocated to each cash generating unit (CGU) is performed as at 1 July each year.
A review for indicators of impairment is undertaken at each subsequent quarter-end and as at 31 December 2016. Subsequent to the
1 July 2016 annual test the CGU for Global Banking and Markets was amended from a regional to a global basis. This change is
discussed further below.
30 June and 31 December 2016 impairment indicators review
At 30 June 2016, we reviewed the inputs used in our 2015 impairment tests in the light of current economic and market conditions.
As a result, impairment tests were performed for Global Private Banking – Europe and Global Banking and Markets – Europe.
Following these tests an impairment of $0.8bn was recognised in respect of the Global Private Banking – Europe.
At 31 December 2016, we reviewed the inputs used in our 1 July 2016 impairment test and identified that indicators of impairment
existed within the Global Private Banking – Europe CGU. There were no indicators of impairment in respect of our other CGUs at this
time. Refreshed cash flow projections that became available for Global Private Banking – Europe were significantly adverse when
compared to those used in the 1 July 2016 impairment test. The reduction in cash flow forecasts is driven by the continuing
repositioning of the business and lower net new money and associated return on asset expectations. As a result, an impairment test
was performed resulting in an impairment of $2.4bn.
The assumptions and results of the Global Private Banking – Europe tests are presented below:
Carrying
amount
of which
goodwill
Value in use
Impairment
$bn
4.4
3.5
$bn
3.3
2.4
$bn
3.6
1.1
$bn
(0.8)
(2.4)
(3.2)
Nominal
growth rate
beyond initial
cash flow
projections
%
2.8
2.8
Discount
rate
%
9.7
9.7
30 Jun 2016
31 Dec 2016
2016 impairment recognised
Basis of the recoverable amount
The recoverable amount of all CGUs to which goodwill has been allocated was equal to its value in use (VIU) at each respective
testing date for 2015 and 2016. For each CGU, the VIU is calculated by discounting management’s cash flow projections for the
CGU. The key assumptions used in the VIU calculation for each significant CGU are discussed below.
238 HSBC Holdings plc Annual Report and Accounts 2016
Key assumptions in VIU calculation
Goodwill at
1 Jul 2016
Discount
rate
Nominal
growth rate
beyond initial
cash flow
projections
Goodwill at
1 Jul 2015
Goodwill at
31 Dec 2015
Footnote
$m
%
%
$m
$m
3,446
2,520
2,517
918
584
8.9
10.7
9.7
10.0
11.0
3.6
3.8
3.8
4.6
7.4
3,562
2,690
2,603
929
792
1
931
Nominal
growth rate
beyond initial
cash flow
projections
%
3.3
3.5
3.6
4.3
6.9
Discount
rate
%
6.9
9.9
9.0
10.0
11.0
Cash-generating unit
Europe
RBWM
GB&M
CMB
North America
GB&M
Latin America
RBWM
1 GB&M North America comparative discount rate and nominal growth rate beyond initial cash flow project rates are as at 31 December 2015.
At 1 July 2016, aggregate goodwill of $3,025m (1 July 2015: $2,787m) 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.
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. For the goodwill impairment test conducted at 1 July 2016, management’s cash flow projections until the end
of 2020 were used.
Discount rate: The rate used to discount the cash flows is based on the cost of capital assigned to each CGU, which is derived
using a capital asset pricing model (‘CAPM’). CAPM depends on a number of inputs reflecting 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. The discount rates for each CGU are refined to
reflect the rates of inflation for the countries within which the CGU operate. 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 for businesses operating in similar markets. For the purpose of goodwill
testing as at 1 July 2016, all European CGUs include a 100bps uplift to reflect the increased risk in European markets following the
UK referendum on membership of the EU.
Nominal long-term growth rate: The long-term growth rate is used to extrapolate the cash flows in perpetuity because of the
perspective within the Group of business units making up the CGUs. These growth rates reflect GDP and inflation for the
countries within which the CGU operates or derives revenue from.
Global Banking and Markets CGU basis
As described on page 44, the Group has changed its operating segments from a geographical region to a global businesses basis,
and this change prompted a review of the goodwill allocation. Following this review it has been determined that Global Banking and
Markets should be assessed as a single CGU rather than on a regional basis reflecting the global management and customer base of
this business. An analysis was performed and Global Banking and Markets is considered to have significant headroom to support its
goodwill. All other CGUs remain unchanged.
Sensitivities of key assumptions in calculating VIU
At 1 July 2016, Retail Banking and Wealth Management – Europe was sensitive to reasonably possible adverse changes in the
discount rate, growth rate or management’s projections of cash flows assumptions supporting the recoverable amount. Changes in
one or more of these assumptions could cause an impairment to be recognised. In making an estimate of reasonably possible
changes to assumptions, management considers the available evidence in respect of each input to the model such as the external
range of discount rates observable, historical performance against forecast and risks attaching to the key assumptions underlying
cash flow projections.
The following table presents a summary of the key assumptions underlying the most sensitive inputs to the model for this CGU; the
key risks attached; and details of a reasonably possible change to assumptions where, in the opinion of management, these could
result in an impairment.
HSBC Holdings plc Annual Report and Accounts 2016
239
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
Reasonably possible changes in key assumptions
Input
Key assumptions
Associated risks
Reasonably possible change
Cash-generating unit
RBWM – Europe
Cash flow
projections
• Level of interest rates and
• Uncertain regulatory
yield curves.
environment.
• Competitors’ position within
• Customer remediation and
the market.
regulatory actions.
• Cash flow projections decrease
by 10%. This does not result in
an impairment.
Discount
rate
• Level and change in
unemployment rates.
• Discount rate used is a
reasonable estimate of a
suitable market rate for the
profile of the business.
• External evidence suggests
that the rate used is not
appropriate to the business.
• Discount rate increases by
100bps.
Long-term
growth rates
• Business growth will reflect
• Growth does not match GDP
GDP growth rates in the long
term.
or there is a fall in GDP
forecasts.
• Real GDP growth does not
occur or is not reflected in
performance.
Sensitivity of VIU to reasonably possible changes in key assumptions and changes to current assumptions to achieve nil headroom
At 1 Jul 2016
In $ billions (unless otherwise stated)
Carrying amount
VIU
Reasonably possible change in key assumption
Discount rate – bps
Cash flows – %
Long-term growth rates – bps
Impact on VIU
Discount rate
Cash flows
Long-term growth rates
Cumulative impact of all changes
Changes to current assumptions to achieve nil headroom
Discount rate – bps
Cash flows – %
Long-term growth rates – bps
RBWM – Europe
$bn
16.6
19.7
100
(10)
(162)
(3.1)
(2.0)
(3.9)
(7.3)
102
(15.8)
(122)
Present value of in-force long-term insurance business
When calculating the present value of in-force insurance business (‘PVIF’), 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. Variations in actual experience and
changes to assumptions can contribute to volatility in the results of the insurance business.
Actuarial Control Committees of each key insurance entity meet on a quarterly basis to review and approve PVIF assumptions. All
changes to non-economic assumptions, economic assumptions that are not observable and model methodology must be approved
by the Actuarial Control Committee.
Movements in PVIF
PVIF at 1 Jan
Change in PVIF of long-term insurance business
– value of new business written during the year
– expected return
– assumption changes and experience variances (see below)
– other adjustments
Transfer of assets classified as held for sale
Exchange differences and other
PVIF at 31 Dec
Footnotes
1
2
2016
$m
5,685
902
900
(532)
513
21
(45)
(40)
2015
$m
5,307
799
809
(552)
504
38
(219)
(202)
6,502
5,685
1
2
‘Expected return’ represents the unwinding of the discount rate and reversal of expected cash flows for the period.
Relates to the Brazilian insurance operations which were classified as held for sale in 2015.
Assumption changes and experience adjustments
Included within this line item are:
• $279m (2015: $114m), directly offsetting interest rate-driven changes to liabilities under insurance contracts.
• $301m (2015: $209m), reflecting the future sharing of returns with policyholders on contracts with discretionary participation
features (‘DPF’), to the extent this sharing is not already included in liabilities under insurance contracts.
• $(67)m (2015: $181m), driven by other changes in assumptions and experience variances to projected future profits.
240 HSBC Holdings plc Annual Report and Accounts 2016
Key assumptions used in the computation of PVIF for main life insurance operations
Economic assumptions are set in a way that is consistent with observable market values. The valuation of PVIF 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
2016
2015
Hong Kong
France1
Hong Kong
France1
%
2.09
6.34
3.00
%
0.99
1.84
1.66
%
1.82
6.81
3.00
%
1.57
2.55
1.70
1
For 2016, the calculation of France’s PVIF assumes a risk discount rate of 1.84% (2015: 2.55%) plus a risk margin of $101m (2015: $51m).
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 the insurance operations 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 123 for further details of these guarantees and the
impact of changes in economic assumptions on our insurance manufacturing subsidiaries.
Sensitivity to changes in non-economic assumptions
Policyholder liabilities and PVIF are determined by reference to non-economic assumptions including mortality and/or morbidity,
lapse rates and expense rates. See page 125 for further details on the impact of changes in non-economic assumptions on our
insurance manufacturing operations.
21 Prepayments, accrued income and other assets
Prepayments and accrued income
Bullion
Endorsements and acceptances
Reinsurers’ share of liabilities under insurance contracts (Note 3)
Employee benefit assets (Note 5)
Other accounts
Property, plant and equipment
At 31 Dec
2016
$m
7,335
15,406
8,574
1,820
4,714
12,298
9,373
59,520
2015
$m
7,765
11,501
9,149
1,378
5,272
9,410
9,923
54,398
Prepayments, accrued income and other assets include $26,927 (2015: $25,310m) of financial assets, the majority of which are
measured at amortised cost.
22 Assets held for sale and liabilities of disposal groups held for sale
Assets held for sale and liabilities of disposal groups held for sale
Held for sale at 31 Dec
Disposal groups
Non-current assets held for sale
Total assets
Liabilities of disposal groups
Disposal groups
Brazil
2016
$m
1,882
2,507
4,389
2,790
2015
$m
41,715
2,185
43,900
36,840
On 1 July 2016, we completed the sale of our operations in Brazil to Banco Bradesco S.A. for a cash consideration of $4.8bn. This
resulted in a loss on disposal of $1.7bn which includes the reclassification of cumulative foreign exchange differences of $1.9bn.
HSBC Holdings plc Annual Report and Accounts 2016
241
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
23 Trading liabilities
Deposits by banks
Customer accounts
Other debt securities in issue (Note 25)
Other liabilities – net short positions in securities
At 31 Dec
Footnotes
1
1, 2
3
2016
$m
24,827
45,085
32,656
51,123
2015
$m
27,054
40,208
30,525
43,827
153,691
141,614
1
2
3
‘Deposits by banks’ and ‘Customer accounts’ include repos, settlement accounts, stock lending and other amounts.
Structured deposits placed at HSBC Bank USA and HSBC Trust Company (Delaware) National Association are insured by the Federal Deposit Insurance Corporation, a US
government agency, up to $250,000 per depositor.
‘Other debt securities in issue’ comprises structured notes issued by HSBC for which market risks are actively managed as part of trading portfolios.
At 31 December 2016, the cumulative amount of change in fair value attributable to changes in HSBC’s credit risk was a gain of $2m
(2015: gain of $122m).
24 Financial liabilities designated at fair value
HSBC
Deposits by banks and customer accounts
Liabilities to customers under investment contracts
Debt securities in issue (Note 25)
Subordinated liabilities (Note 28)
Preferred securities (Note 28)
At 31 Dec
2016
$m
135
6,002
57,112
23,172
411
86,832
The carrying amount of financial liabilities designated at fair value was $4,413m more than the contractual amount at maturity
(2015: $4,147m more). The cumulative own credit loss recognised was $1,672m (2015: gain of $158m).
HSBC Holdings
Debt securities in issue (Note 25)
Subordinated liabilities (Note 28)
At 31 Dec
2016
$m
16,766
13,347
30,113
The carrying amount of financial liabilities designated at fair value was $2,681m more than the contractual amount at maturity
(2015: $2,127m more). The cumulative amount of change in fair value attributable to changes in credit risk was a loss of
$1,202m (2015: loss of $172m).
25 Debt securities in issue
HSBC
Bonds and medium-term notes
Other debt securities in issue
Total debt securities in issue
Included within:
– trading liabilities (Note 23)
– financial liabilities designated at fair value (Note 24)
At 31 Dec
HSBC Holdings
Debt securities
Included within:
– financial liabilities designated at fair value (Note 24)
At 31 Dec
242 HSBC Holdings plc Annual Report and Accounts 2016
2016
$m
133,721
21,962
155,683
(32,656)
(57,112)
65,915
2016
$m
38,571
(16,766)
21,805
2015
$m
193
6,027
37,678
21,168
1,342
66,408
2015
$m
7,897
11,956
19,853
2015
$m
128,348
28,804
157,152
(30,525)
(37,678)
88,949
2015
$m
8,857
(7,897)
960
26 Accruals, deferred income and other liabilities
Accruals and deferred income
Endorsements and acceptances
Employee benefit liabilities (Note 5)
Other liabilities
At 31 Dec
2016
$m
10,770
8,567
2,681
19,483
41,501
2015
$m
11,129
9,135
2,809
15,043
38,116
Accruals, deferred income and other liabilities include $30,932m (2015: $29,358m) of financial liabilities, the majority of which are
measured at amortised cost.
27 Provisions
At 1 Jan 2016
Additions
Amounts utilised
Unused amounts reversed
Unwinding of discounts
Exchange and other movements
At 31 Dec 2016
At 1 Jan 2015
Additions
Amounts utilised
Unused amounts reversed
Unwinding of discounts
Exchange and other movements
At 31 Dec 2015
Restructuring
costs
Contractual
commitments
Legal proceedings
and regulatory
matters
Customer
remediation
Other
provisions
$m
463
415
(168)
(115)
—
(44)
551
197
430
(95)
(29)
—
(40)
463
$m
240
141
(1)
(97)
—
15
298
234
120
(2)
(15)
—
(97)
240
$m
3,174
1,258
(1,831)
(165)
—
—
2,436
2,184
2,153
(619)
(95)
40
(489)
3,174
$m
1,340
762
(680)
(94)
—
(204)
1,124
1,831
765
(856)
(170)
6
(236)
1,340
$m
335
208
(118)
(96)
6
29
364
552
138
(159)
(133)
—
(63)
335
Total
$m
5,552
2,784
(2,798)
(567)
6
(204)
4,773
4,998
3,606
(1,731)
(442)
46
(925)
5,552
Further details of ‘Legal proceedings and regulatory matters’ are set out in Note 35. Legal proceedings include: civil court, arbitration
or tribunal proceedings brought against HSBC companies (whether by way of claim or counterclaim); or civil disputes that may, if not
settled, result in court, arbitration or tribunal proceedings. Regulatory matters refers to investigations, reviews and other actions
carried out by, or in response to the actions of, regulators or law enforcement agencies in connection with alleged wrongdoing by
HSBC.
Customer remediation refers to HSBC’s activities to compensate customers for losses or damages associated with a failure to
comply with regulations or to treat customers fairly. Customer remediation is often initiated by HSBC in response to customer
complaints and/or industry developments in sales practices, and is not necessarily initiated by regulatory action. Further details of
customer remediation are set out in this note.
Payment protection insurance
At 31 December 2016, a provision of $919m (2015: $1,039m) 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. Cumulative provisions made since the Judicial
Review ruling in the first half of 2011 amount to $5.1bn, of which $4.1bn has been paid as at 31 December 2016.
An increase in provisions of $492m was recognised during the year, primarily reflecting a delay to the inception of the expected time
bar on inbound complaints; and an anticipated adjustment to the redress parameters surrounding ‘Plevin’ (a 2014 decision of the UK
Supreme Court which held that, judged on its own facts, non-disclosure of the amounts of commissions payable in connection with
the sale of PPI to a customer created an unfair relationship under the provisions of the UK Consumer Credit Act).
The estimated liability for redress is calculated on the basis of the total premiums paid by the customer plus simple interest of 8% per
annum (or the rate inherent in the related loan product where higher). The basis for calculating the redress liability is the same for
single premium and regular premium policies. Future estimated redress levels are based on the historically observed redress per
policy.
A total of 5.4 million PPI policies have been sold since 2000, generating estimated revenues of $3.5bn at 2016 average exchange
rates. The gross written premiums on these policies were approximately $4.6bn.
At 31 December 2016, the estimated total complaints expected to be received were 2.0 million, representing 37% of total policies
sold. It is estimated that contact will be made with regard to 2.4 million policies, representing 45% of total policies sold. This
estimate includes inbound complaints as well as the group's proactive contact exercise on certain policies (‘outbound contact’).
The following table details the cumulative number of complaints received at 31 December 2016 and the number of claims expected
in the future:
HSBC Holdings plc Annual Report and Accounts 2016
243
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
Cumulative PPI complaints received to 31 December 2016 and future claims expected
Inbound complaints (000s of policies)
Outbound contact (000s of policies)
Response rate to outbound contact
Average uphold rate per claim
Average redress per claim ($)
Complaints to Financial Ombudsman Service (000s of policies)
Average uphold rate per Financial Ombudsman Service claim
1
2
Excludes invalid claims for which no PPI policy exists.
Claims include inbound and responses to outbound contact.
Footnotes
Cumulative
actual to
31 Dec 2016
Future
expected
1
2
1,363
725
42%
76%
2,670
138
41%
320
—
n/a
84%
2,702
47
55%
A 100,000 increase/decrease in the total inbound complaints would increase/decrease the redress provision by approximately $203m
at 2016 average exchange rates.
Each 1% increase/decrease in the response rate to our outbound contact exercise would increase/decrease the redress provision by
approximately $12m.
28 Subordinated liabilities
HSBC
At amortised cost
– subordinated liabilities
– preferred securities
Designated at fair value (Note 24)
– subordinated liabilities
– preferred securities
At 31 Dec
Issued by HSBC subsidiaries
Issued by HSBC Holdings
HSBC’s subordinated liabilities
2016
$m
20,984
19,230
1,754
23,583
23,172
411
44,567
16,860
27,707
2015
$m
22,702
20,773
1,929
22,510
21,168
1,342
45,212
19,150
26,062
Subordinated liabilities rank behind senior obligations and generally count towards the capital base of HSBC. 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.
On capital securities other than floating rate notes, 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.
244 HSBC Holdings plc Annual Report and Accounts 2016
HSBC’s subordinated liabilities in issue
Additional tier 1 capital securities guaranteed by HSBC Holdings plc
€750m
$900m
5.13% non-cumulative step-up perpetual preferred securities
10.176% non-cumulative step-up perpetual preferred securities, series 2
Additional tier 1 capital securities guaranteed by HSBC Bank plc
£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
£350m
£300m
£350m
£500m
£225m
£600m
$300m
$750m
$500m
$300m
5.00% callable subordinated notes
6.50% subordinated notes
5.375% callable subordinated step-up notes
5.375% subordinated notes
6.25% subordinated notes
4.75% subordinated notes
7.65% subordinated notes
Undated floating rate primary capital notes
Undated floating rate primary capital notes
Undated floating rate primary capital notes, series 3
Tier 2 securities issued by The Hongkong and Shanghai Banking Corporation Ltd
$400m
$400m
Primary capital undated floating rate notes
Primary capital undated floating rate notes (third series)
Tier 2 securities issued by HSBC Bank Malaysia Berhad
MYR500m
4.35% subordinated bonds
MYR500m
5.05% subordinated bonds
Tier 2 securities issued by HSBC USA Inc.
$750m
$250m
5.00% subordinated notes
7.20% subordinated debentures
Other subordinated liabilities each less than $150m
Tier 2 securities issued by HSBC Bank USA, N.A.
$500m
$1,250m
$1,000m
$750m
$700m
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
$2,939m
6.676% senior subordinated notes
Tier 2 securities issued by HSBC Bank Canada
CAD400m
4.80% subordinated debentures
CAD200m
4.94% subordinated debentures
Other subordinated liabilities each less than $150m
Securities issued by HSBC Mexico, S.A.
$300m
Non-convertible subordinated obligations
Other subordinated liabilities each less than $150m
Securities issued by other HSBC subsidiaries
Other subordinated liabilities each less than $200m
Subordinated liabilities issued by HSBC subsidiaries at 31 Dec
1
2
1
3
4
5
6
7
5
First call
Maturity
Footnotes
date
date
Mar 2016
Jun 2030
Apr 2020
Nov 2031
Mar 2018
Mar 2023
—
Jul 2023
Nov 2025
Nov 2030
— Aug 2033
—
Jan 2041
— Mar 2046
— May 2025
Jun 1990
Sep 1990
Jun 1992
Aug 1990
Jul 1991
Jun 2017
Jun 2022
Nov 2022
Nov 2027
— Sep 2020
—
Jul 2097
— Aug 2017
— Aug 2020
— Nov 2034
— Aug 2035
—
Jan 2039
2016
$m
—
891
891
411
863
1,274
466
369
489
750
276
731
372
750
500
300
2015
$m
856
891
1,747
488
1,038
1,526
562
444
569
846
332
879
386
750
500
300
5,003
5,568
—
400
400
112
112
224
748
220
284
401
400
801
116
116
232
747
220
299
1,252
1,266
498
1,257
1,137
862
701
4,455
502
1,258
1,142
850
691
4,443
—
Jan 2021
2,192
2,188
Apr 2017
Apr 2022
Mar 2016
Mar 2021
Oct 1996
Nov 2083
8, 9
Jun 2014
Jun 2019
8
6
299
—
29
328
240
198
438
298
144
29
471
240
236
476
403
16,860
432
19,150
See paragraph below, ‘Guaranteed by HSBC Holdings or HSBC Bank plc’.
In February 2016, HSBC gave notice that it will call and redeem the €750m 5.13% non-cumulative step-up perpetual preferred securities.
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 percentage points.
The interest rate payable after November 2025 is the sum of the three-month sterling Libor plus 1.50 percentage points.
In January 2016, HSBC called and redeemed $400m Primary capital undated floating rate notes and CAD200m 4.94% subordinated debentures.
Some securities included here are ineligible for inclusion in the capital base of HSBC in accordance with CRD IV rules.
1
2
3
4
5
6
7 Approximately $731m of the senior subordinated notes are held by HSBC Holdings.
8
9 Approximately $60m of the subordinated obligations are held by HSBC Holdings.
These securities are ineligible for inclusion in the capital base of HSBC in accordance with CRD IV rules.
HSBC Holdings plc Annual Report and Accounts 2016
245
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
HSBC Holdings
At amortised cost
Designated at fair value (Note 24)
At 31 Dec
HSBC Holdings’ subordinated liabilities
Tier 2 securities issued by HSBC Holdings plc
Amounts owed to third parties
$488m
$222m
$2,000m
$2,500m
$1,500m
$2,000m
$1,500m
$1,500m
$1,500m
£900m
£650m
£650m
£750m
£900m
€1,600m
€1,750m
€1,500m
€1,500m
€1,500m
7.625% subordinated notes
7.35% subordinated notes
6.5% subordinated notes
6.5% subordinated notes
6.8% subordinated notes
4.25% subordinated notes
5.25% subordinated notes
4.25% subordinated notes
4.375% subordinated notes
6.375% callable subordinated notes
5.75% subordinated notes
6.75% subordinated notes
7.0% subordinated notes
6.0% subordinated notes
6.25% subordinated notes
6.0% subordinated notes
3.0% subordinated notes
3.125% subordinated notes
3.375% subordinated notes
Amounts owed to HSBC undertakings
Footnotes
First call
date
Maturity
date
1
1
1
1
1
2,4
2,4
2
2
1,3
2
2
2
2
2
2
2
2
—
—
—
—
—
—
—
—
—
Oct 2017
—
—
—
—
—
—
—
—
2,4
Jan 2019
May 2032
Nov 2032
May 2036
Sep 2037
Jun 2038
Mar 2024
Mar 2044
Jun 2025
Nov 2026
Oct 2022
Dec 2027
Sep 2028
Apr 2038
Mar 2040
Mar 2018
Jun 2019
Jun 2025
Jun 2028
Jan 2024
5.13% fixed/floating subordinated notes
10.176% subordinated step-up cumulative notes
Mar 2016
Jun 2030
Dec 2044
Jun 2040
€750m
$900m
At 31 Dec
2016
$m
15,189
13,347
28,536
2016
$m
528
278
2,029
3,170
1,487
2,060
1,747
1,539
1,520
1,163
932
793
971
1,086
1,693
2,168
1,716
1,139
1,626
27,645
—
891
891
28,536
2015
$m
15,895
11,956
27,851
2015
$m
531
278
2,029
3,085
1,487
2,078
1,735
1,529
—
1,432
1,079
955
1,159
1,310
1,748
2,284
1,691
—
1,694
26,104
856
891
1,747
27,851
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
2
3
4
rules.
These securities are included in the capital base of HSBC as fully CRD IV compliant tier 2 securities on an end point basis.
The interest rate payable after October 2017 is the sum of the three-month sterling Libor plus 1.3 percentage points.
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.
Additional tier 1 capital securities
Additional tier 1 capital securities are perpetual subordinated securities on which coupon payments may be deferred or cancelled at
the discretion of HSBC Holdings. The securities presented in this Note are accounted for as liabilities because HSBC has an
obligation to pay dividends in perpetuity. See Note 35 for additional tier 1 capital securities accounted for as equity.
The additional tier 1 securities presented in this section do not meet the identifying criteria in full for recognition as tier 1 capital
under CRD IV but are eligible as regulatory capital subject to grandfathering limits and progressive phase-out.
Guaranteed by HSBC Holdings or HSBC Bank plc
These capital securities were issued by the Jersey limited partnerships and proceeds lent to the respective guarantors by the limited
partnerships in the form of subordinated notes. They qualify as additional tier 1 capital for HSBC under CRD IV by virtue of the
application of grandfathering provisions, and the two capital securities guaranteed by HSBC Bank plc (‘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 the same grandfathering
process.
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 has 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 repurchase
or redeem their ordinary shares, until the distribution on the preferred securities has been paid in full.
Preference shares of HSBC Holdings that have economic terms equal in all material respects to the preferred securities and their
guarantee together will be substituted for the preferred securities guaranteed by HSBC Holdings if the total capital ratio of HSBC
Holdings falls below the regulatory minimum required, or the Directors expect it to in the near term.
246 HSBC Holdings plc Annual Report and Accounts 2016
Preference shares of HSBC Bank that have economic terms equal in all material respects to the preferred securities and their
guarantee together will be substituted for the preferred securities guaranteed by HSBC Bank if any of the two issues of preferred
securities are outstanding in April 2049 or November 2048, respectively; or the total capital ratio of HSBC Bank on a solo and
consolidated basis falls below the regulatory minimum required, or the Directors expect it to in the near term.
Tier 2 capital securities
These capital securities are included within HSBC’s regulatory capital base as tier 2 capital under CRD IV by virtue of the 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.
29 Maturity analysis of assets, liabilities and off-balance sheet commitments
The table on page 248 provides an analysis of consolidated total assets, liabilities and off-balance sheet commitments by residual
contractual maturity at the balance sheet date. These balances are included in the maturity analysis as follows:
• Trading assets and liabilities (including trading derivatives but excluding reverse repos, repos and debt securities in issue) are
included in the ‘Due not more than 1 month’ time bucket, 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 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.
• 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 included in the ‘Due over 5 years’
time bucket, however, such contracts are subject to surrender and transfer options by the policyholders.
• Loan and other credit-related commitments are classified on the basis of the earliest date they can be drawn down.
HSBC Holdings plc Annual Report and Accounts 2016
247
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
HSBC
Maturity analysis of assets, liabilities and off-balance sheet commitments
Due not
more than
1 month
Due over
1 month
but not
more than
3 months
Due over
3 months
but not
more than
6 months
Due over
6 months
but not
more than
9 months
Due over
9 months
but not
more than
1 year
Due over
1 year
but not
more than
2 years
Due over
2 years
but not
more than
5 years
Due over
5 years
$m
$m
$m
$m
$m
$m
$m
$m
Financial assets
Cash and balances at central banks
128,009
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
– personal
– corporate and commercial
– financial
Reverse repurchase agreements
– non-trading
Financial investments
Assets held for sale
Accrued income and other financial
assets
Financial assets at 31 Dec 2016
Off-balance sheet commitments
received
Loan and other credit-related
commitments
Financial liabilities
Hong Kong currency notes in circulation
Deposits by banks
Customer accounts1
– personal
– corporate and commercial
– financial
Repurchase agreements
– non-trading
Items in the course of transmission to
other banks
—
—
—
758
182
149
—
—
—
230
75
207
—
—
—
415
178
96
13,404
61,693
7,812
48,333
5,548
4,494
47,664
6,723
35,180
5,761
2,375
30,115
5,928
21,317
2,870
—
—
—
1,172
363
110
1,765
30,362
6,799
19,573
3,990
5,003
31,228
232,550
176
287,749
59,636
167,531
39,295
108,906
19,330
Total
$m
128,009
5,003
31,228
235,125
—
—
—
—
—
—
—
—
—
—
—
—
749
704
2,879
85,144
22,664
54,739
7,741
2,486
1,056
2,298
20,547
24,756
801
290,872
1,275
88,126
192,787
246,208
861,504
53,620
194,985
337,826
126,890
45,271
460,209
12,277
5,952
63,469
115,942
25,525
10,378
5,220
2,350
479
1,080
—
160,974
36,932
893
59,826
1,663
120
15,992
6,387
1,617
30,403
16,800
19,564
50,255
104,933
118,084
436,797
64
343
64
398
205
216
682
351
283
3,974
1,624
26,928
1,081,641
169,587
95,188
55,606
56,148
140,631
305,673
388,822 2,293,296
2,050
—
—
110
2,813
31,228
46,306
1,180,641
590,654
436,666
153,321
—
—
4,075
45,245
22,222
17,460
5,563
—
2,085
19,187
12,024
6,178
985
82,330
2,707
2,871
5,977
—
—
—
665
10,277
5,823
3,951
503
50
—
—
489
8,325
4,786
3,082
457
—
—
—
422
4,709
3,484
1,200
25
—
—
—
—
4,842
3,500
2,483
967
50
1,000
—
—
—
1,055
4,973
31,228
59,939
502 1,272,386
121
360
21
—
—
641,597
469,864
160,925
88,958
5,977
Non-financial assets
—
—
—
—
—
—
—
81,690
81,690
Total assets at 31 Dec 2016
1,081,641
169,587
95,188
55,606
56,148
140,631
305,673
470,512 2,374,986
Trading liabilities
121,707
2,053
1,423
1,845
3,013
6,219
9,010
8,421
153,691
Financial liabilities designated at
fair value
– debt securities in issue: covered bonds
– debt securities in issue: unsecured
– subordinated liabilities and preferred
securities
– other
Derivatives
Debt securities in issue
– covered bonds
– otherwise secured
– unsecured
Liabilities of disposal groups held for sale
Accruals and other financial liabilities
Subordinated liabilities
Total financial liabilities at
31 Dec 2016
1,659
1,587
25
—
47
274,965
958
—
15
—
943
39
1,396
303
1,091
—
2
39
4,708
8,598
8,280
—
3,207
1,501
2,472
16,580
12
—
823
7,775
107
8,065
—
1
893
7,386
113
2,279
143
3
—
3
—
—
112
5,996
71
114
1,701
—
1,700
—
1
273
4,610
1
329
5,811
4,280
36
797
61
34
485
497
5,046
207
4,839
—
—
506
10,953
3
1,882
9,068
7
878
1,788
17,989
58,080
86,832
1,348
2,558
14,056
29,380
6,003
51,109
2,578
21,005
23,583
7
1,471
19,432
24
2,680
16,728
21
1,278
5,056
5,137
2,414
3,338
26
1,181
2,131
—
568
13,427
6,137
279,819
65,915
126
11,109
54,680
2,790
30,930
20,984
1,768,585
71,847
37,816
19,842
19,427
30,528
63,599
87,805 2,099,449
Non-financial liabilities
—
—
—
—
—
—
—
92,959
92,959
Total liabilities at 31 Dec 2016
1,768,585
71,847
37,816
19,842
19,427
30,528
63,599
180,764 2,192,408
Off-balance sheet commitments
given
Loan and other credit-related
– personal
– corporate and commercial
– financial
466,780
158,054
259,231
49,495
39,922
4,932
33,421
1,569
14,909
12,537
5,297
9,248
364
287
11,592
658
36,281
4,063
26,829
5,389
11,241
45,778
28,395
655,843
1,129
7,242
2,870
788
9,260
183,810
40,740
15,173
403,476
4,250
3,962
68,557
248 HSBC Holdings plc Annual Report and Accounts 2016
Maturity analysis of assets, liabilities and off-balance sheet commitments (continued)
Due not
more than
1 month
Due over
1 month
but not
more than
3 months
Due over
3 months
but not
more than
6 months
Due over
6 months
but not
more than
9 months
Due over
9 months
but not
more than
1 year
Due over
1 year
but not
more than
2 years
Due over
2 years
but not
more than
5 years
Due over
5 years
$m
$m
$m
$m
$m
$m
$m
$m
Financial assets
Cash and balances at central banks
Items in the course of collection from other
banks
Hong Kong Government certificates
of indebtedness
Trading assets
Financial assets designated at fair value
Derivatives
Loans and advances to banks
Loans and advances to customers
– personal
– corporate and commercial
– financial
Reverse repurchase agreements
– non-trading
Financial investments
Assets held for sale
Accrued income and other financial assets
98,934
5,768
28,410
224,691
429
285,797
57,296
176,862
39,191
123,901
13,770
110,478
35,104
15,816
12,732
—
—
—
34
194
215
14,530
69,638
8,328
54,711
6,599
21,978
59,098
2,628
6,682
—
—
—
—
222
223
4,063
54,730
8,510
40,489
5,731
7,220
36,897
2,544
1,995
—
—
—
—
83
198
1,964
33,095
7,457
21,081
4,557
2,786
19,102
1,218
483
—
—
—
—
390
33
2,499
34,774
9,350
21,811
3,613
580
17,293
2,611
395
—
—
—
112
896
499
5,134
81,560
22,438
50,355
8,767
2,985
48,634
4,675
463
Total
$m
98,934
5,768
28,410
—
—
—
—
—
—
—
— 224,837
2,603
19,035
23,852
841
3,274
670
288,476
1,641
90,401
201,253
272,542
924,454
57,283
218,646
371,203
131,166
49,564
493,078
12,804
4,332
60,173
228
— 146,255
94,549
118,278
428,955
6,365
445
4,422
2,115
40,279
25,310
Financial assets at 31 Dec 2015
1,052,317
174,997
107,894
58,929
58,575
144,958
309,558
418,703 2,325,931
Non-financial assets
—
—
—
—
—
—
—
83,725
83,725
Total assets at 31 Dec 2015
1,052,317
174,997
107,894
58,929
58,575
144,958
309,558
502,428 2,409,656
Off-balance sheet commitments received
Loan and other credit-related commitments
3,472
Financial liabilities
Hong Kong currency notes in circulation
Deposits by banks
Customer accounts1
– personal
– corporate and commercial
– financial
Repurchase agreements – non-trading
Items in the course of transmission to other
banks
Trading liabilities
Financial liabilities designated at
fair value
– debt securities in issue: covered bonds
– debt securities in issue: unsecured
– subordinated liabilities and preferred
securities
– other
Derivatives
Debt securities in issue
– covered bonds
– otherwise secured
– unsecured
Liabilities of disposal groups held
for sale
Accruals and other financial liabilities
Subordinated liabilities
28,410
46,693
1,185,091
574,468
459,813
150,810
73,478
5,638
111,691
2,036
—
1,972
—
64
276,765
16,536
—
8,436
8,100
20,350
14,802
—
—
—
2,225
50,831
27,646
18,802
4,383
3,788
—
1,471
1,822
—
973
848
1
34
2,149
—
1,049
21,397
13,032
7,314
1,051
1,816
—
1,529
2,943
—
2,926
—
17
251
9,326
16,295
—
173
1
195
9,153
16,099
—
—
325
10,421
7,371
2,479
571
164
—
882
342
—
342
—
—
213
5,542
—
206
5,336
—
—
116
10,869
7,990
2,495
384
154
—
2,184
1,900
—
1,786
—
114
52
111
—
712
6,596
3,566
2,926
104
—
—
—
—
3,182
3,852
2,920
828
104
500
—
—
—
69
5,732
28,410
54,371
529 1,289,586
354
156
19
500
637,347
494,813
157,426
80,400
—
5,638
4,344
10,105
9,408
141,614
4,930
2,012
2,918
—
—
524
14,316
38,119
66,408
1,608
9,819
2,577
10,745
6,197
31,481
2,773
18,889
22,510
116
1,063
17
4,354
18,495
1,484
1,454
4,579
5,908
2,169
6,265
33
1,118
5,114
115
665
17,038
6,220
281,071
88,949
135
16,737
72,077
32,553
29,358
22,702
1,365
10,754
22,866
1
173
1,191
83
2,082
8,589
1,416
7,965
401
1,548
2,467
—
1,344
1,246
5,050
659
—
421
34
925
650
Total financial liabilities at 31 Dec 2015
1,781,490
79,279
49,295
19,892
18,341
34,485
63,401
74,877 2,121,060
Non-financial liabilities
—
—
—
—
—
—
—
91,078
91,078
Total liabilities at 31 Dec 2015
1,781,490
79,279
49,295
19,892
18,341
34,485
63,401
165,955 2,212,138
Off-balance sheet commitments given
Loan and other credit-related commitments
– personal
– corporate and commercial
– financial
472,277
161,843
272,044
38,390
45,792
11,547
32,764
1,481
16,271
6,333
9,126
812
9,798
963
8,372
463
47,122
19,607
23,984
3,531
11,325
48,756
15,089
666,430
1,207
8,227
1,891
425
1,018
202,943
38,838
12,558
405,913
9,493
1,513
57,574
1
‘Customer accounts’ includes $343,782m (2015: $342,908m) insured by guarantee schemes.
HSBC Holdings plc Annual Report and Accounts 2016
249
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
HSBC Holdings
Maturity analysis of assets, liabilities and off-balance sheet commitments
Due not
more than
1 month
Due over
1 month
but not
more than
3 months
Due over
3 months
but not
more than
6 months
Due over
6 months
but not
more than
9 months
Due over
9 months
but not
more than
1 year
Due over
1 year
but not
more than
2 years
Due over
2 years
but not
more than
5 years
Due over
5 years
$m
$m
$m
$m
$m
$m
$m
$m
Total
$m
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
93
—
353
247
2,148
167
14,204
46,678
77,421
—
—
167
—
167
838
2,710
3,590
—
107
119
15,135
49,848
83,525
—
97,273
97,273
15,135
147,121
180,798
—
105
—
2,157
2,167
—
2,167
—
953
—
1,693
5,845
5,845
22,101
30,113
10,921
16,766
11,180
13,347
—
592
592
4,822
16,030
—
—
—
13,496
5,025
21,805
1,507
15,189
4,813
11,364
52,219
75,796
—
—
144
144
4,813
11,364
52,363
75,940
—
—
—
—
Financial assets
Cash at bank and in hand:
– balances with HSBC undertakings
Derivatives
Loans and advances to HSBC
undertakings
Financial investments in HSBC
undertakings
Accrued income and other financial
assets
Total financial assets at
31 Dec 2016
Non-financial assets
Total assets at 31 Dec 2016
Financial liabilities
247
1,702
16,372
40
12
18,373
—
18,373
Amounts owed to HSBC undertakings
2,052
Financial liabilities designated at
fair value
– debt securities in issue
– subordinated liabilities and preferred
securities
Derivatives
Debt securities in issue
Accruals and other financial liabilities
Subordinated liabilities
Total financial liabilities at
31 Dec 2016
Non-financial liabilities
—
—
—
3,841
—
75
—
—
—
—
2
—
2
—
2
—
—
—
—
—
—
1,268
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
142
—
142
—
142
—
—
—
—
—
—
—
—
—
—
—
—
—
—
22
—
22
—
22
5,968
1,268
—
—
Total liabilities at 31 Dec 2016
5,968
1,268
Off-balance sheet commitments given
Undrawn formal standby facilities,
credit lines and other commitments
to lend
—
—
—
—
250 HSBC Holdings plc Annual Report and Accounts 2016
Maturity analysis of assets, liabilities and off-balance sheet commitments (continued)
Due not
more than
1 month
Due over
1 month
but not
more than
3 months
Due over
3 months
but not
more than
6 months
Due over
6 months
but not
more than
9 months
Due over
9 months
but not
more than
1 year
Due over
1 year
but not
more than
2 years
Due over
2 years
but not
more than
5 years
Due over
5 years
$m
$m
$m
$m
$m
$m
$m
$m
Total
$m
Amounts owed to HSBC undertakings
1,629
Financial assets
Cash at bank and in hand:
– balances with HSBC undertakings
Derivatives
Loans and advances to HSBC
undertakings
Financial investments in HSBC
undertakings
Accrued income and other financial
assets
Total financial assets at 31 Dec 2015
Non-financial assets
Total assets at 31 Dec 2015
Financial liabilities
Financial liabilities designated at fair
value
– debt securities in issue
– subordinated liabilities and preferred
securities
Derivatives
Debt securities in issue
Accruals and other financial liabilities
Subordinated liabilities
Total financial liabilities at 31 Dec 2015
Non-financial liabilities
Total liabilities at 31 Dec 2015
Off-balance sheet commitments given
Undrawn formal standby facilities,
credit lines and other commitments
to lend
242
1,990
—
—
—
—
7,805
2,629
4,618
40
7
10,084
—
10,084
—
—
—
2,065
—
1,231
—
4,928
—
4,925
6
—
2,635
—
2,635
—
960
—
—
—
—
195
—
1,155
—
1,155
—
—
4,618
—
4,618
—
—
—
—
—
—
132
—
132
—
132
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
20
—
20
—
20
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
415
—
—
—
—
—
—
—
415
—
415
—
109
—
—
—
109
—
109
—
—
368
242
2,467
29,298
44,350
4,239
4,285
109
34,014
98,734
116
51,460
98,734
132,748
150,194
108
2,152
2,285
—
16,608
6,937
19,853
7,897
2,285
9,671
11,956
213
—
—
1,749
4,247
—
4,247
—
960
—
14,146
31,822
64
2,278
960
1,578
15,895
42,716
64
31,886
42,780
—
—
—
—
HSBC Holdings plc Annual Report and Accounts 2016
251
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
30 Offsetting of financial assets and financial liabilities
The ‘Amounts not set off in the balance sheet’ include transactions where:
•
•
the counterparty has an offsetting exposure with HSBC and a master netting or similar arrangement is in place with a right to set
off only in the event of default, insolvency or bankruptcy, or the offset criteria are otherwise not satisfied; and
in the case of derivatives and reverse repurchase/repurchase, stock borrowing/lending and similar agreements, cash and non-
cash collateral has been received/pledged.
For risk management purposes, the net amounts of loans and advances to customers are subject to limits, which are monitored and
the relevant customer agreements are subject to review and updated, as necessary, to ensure that the legal right to set off remains
appropriate.
Amounts subject to enforceable netting arrangements
Amounts not set off in the
balance sheet
Gross
amounts
Amounts
offset
Net
amounts
in the
balance
sheet
Financial
instruments
Non-cash
collateral
Cash
collateral
Net
amount
Amounts not
subject to
enforceable
netting
arrangements5
Footnotes
$m
$m
$m
$m
$m
$m
$m
$m
Total
$m
Financial assets
Derivatives (Note 14)
Reverse repos, stock
borrowing and similar
agreements classified as:
– trading assets
– non-trading assets
Loans and advances to
customers
At 31 Dec 2016
Derivatives (Note 14)
Reverse repos, stock
borrowing and similar
agreements classified as:
– trading assets
– non-trading assets
Loans and advances to
customers
At 31 Dec 2015
Financial liabilities
Derivatives (Note 14)
Repos, stock lending and
similar agreements
classified as:
– trading liabilities
– non-trading liabilities
Customer accounts
At 31 Dec 2016
Derivatives (Note 14)
Repos, stock lending and
similar agreements
classified as:
– trading liabilities
– non-trading liabilities
Customer accounts
At 31 Dec 2015
1
2
3
1
2
3
1
2
4
1
2
4
387,999
(106,555)
281,444
(210,067)
(11,647)
(40,188)
19,542
9,428 290,872
9,859
—
9,859
(475)
(9,383)
222,485
(87,929)
134,556
(4,779)
(129,373)
—
(215)
1
189
348
10,207
26,418 160,974
46,296
(14,602)
31,694
(24,459)
—
(248)
6,987
743
32,437
666,639
(209,086)
457,553
(239,780)
(150,403)
(40,651)
26,719
36,937 494,490
385,682
(105,860)
279,822
(215,531)
(8,621)
(34,040)
21,630
8,654
288,476
7,496
—
7,496
—
(7,495)
200,921
(77,925)
122,996
(544)
(121,981)
—
(270)
1
201
60
7,556
23,259
146,255
77,547
(31,643)
45,904
(40,790)
—
—
5,114
1,487
47,391
671,646
(215,428)
456,218
(256,865)
(138,097)
(34,310)
26,946
33,460
489,678
378,571
(106,555)
272,016
(210,035)
(15,512)
(33,754)
12,715
7,803 279,819
5,034
—
148,443
(87,929)
45,422
(14,602)
5,034
60,514
30,820
(475)
(4,515)
(6,202)
(54,126)
(24,459)
—
—
(146)
(248)
44
40
6,113
37
5,071
28,444
88,958
228
31,048
577,470
(209,086)
368,384
(241,171)
(74,153)
(34,148)
18,912
36,512 404,896
377,930
(105,860)
272,070
(215,508)
(13,629)
(30,063)
12,870
9,001
281,071
9,300
126,740
83,085
—
(77,925)
(31,643)
9,300
48,815
51,442
—
(9,299)
(2,034)
(46,731)
(40,790)
—
—
(26)
(1)
597,055
(215,428)
381,627
(258,332)
(69,659)
(30,090)
1
24
10,651
23,546
1
31,585
729
9,301
80,400
52,171
41,316
422,943
1 At 31 December 2016, the amount of cash margin received that had been offset against the gross derivatives assets was $3,720m (2015: $4,135m). The amount of cash margin
2
paid that had been offset against the gross derivatives liabilities was $5,862m (2015: $4,224m).
For the amount of repos, reverse repos, stock lending, stock borrowing and similar agreements recognised on the balance sheet within 'Trading assets' $10,207m (2015:
$7,556m) and 'Trading liabilities' $5,071m (2015: $9,301m), see the ‘Funding sources and uses’ table on page 107.
3 At 31 December 2016, the total amount of 'Loans and advances to customers' was $861,504m (2015: $924,454m) of which $31,694m (2015: $45,904m) was subject to
offsetting.
4 At 31 December 2016, the total amount of 'Customer accounts' was $1,272,386m (2015: $1,289,586m) of which $30,820m (2015: $51,442m) was subject to offsetting.
5
These exposures continue to be secured by financial collateral, but we may not have sought or been able to obtain a legal opinion evidencing enforceability of the right of offset.
252 HSBC Holdings plc Annual Report and Accounts 2016
31 Non-controlling interests
Non-controlling interests attributable to holders of ordinary shares in subsidiaries
Preferred securities issued by subsidiaries
At 31 Dec
2016
$m
6,932
260
7,192
2015
$m
6,981
2,077
9,058
Hang Seng Bank Limited is the only subsidiary in the Group that gives rise to significant non-controlling interest. For summarised
financial information of Hang Seng Bank Limited see Note 18 ‘Investment in subsidiaries’.
Preferred securities issued by subsidiaries
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.
All non-cumulative preferred securities are classified as additional tier 1 capital.
Preferred securities issued by HSBC’s subsidiaries
HSBC USA Inc.
$518m
$374m
$374m
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
$575m
6.36% non-cumulative preferred stock, series B
HSBC Bank Canada
C$175m
C$175m
At 31 Dec
Non-cumulative redeemable class 1 preferred shares, series C
Non-cumulative class 1 preferred shares, series D
1
2
In June 2016, HSBC redeemed its floating non-cumulative preferred stock, series F and G for $892m.
In June 2016, HSBC redeemed its non-cumulated preferred stock, series H and B, for $949m.
32 Called up share capital and other equity instruments
Called up share capital and share premium
HSBC Holdings ordinary shares of $0.50 each, issued and fully paid
Footnotes
First call
date
1
1
2
2
Apr 2010
Jan 2011
Jul 2011
Jun 2010
Jun 2010
Dec 2010
2016
$m
—
—
—
—
130
130
260
At 1 Jan
Shares issued under HSBC employee share plans
Shares issued in lieu of dividends
At 31 Dec
2016
2015
Footnote
Number
$m
Number
19,685,096,934
9,842
19,217,874,260
69,187,052
437,302,228
35
219
91,265,909
375,956,765
1
20,191,586,214
10,096
19,685,096,934
HSBC Holdings non-cumulative preference shares of $0.01 each
At 1 Jan and 31 Dec
HSBC Holdings share premium
At 31 Dec
Total called up share capital and share premium
At 31 Dec
Footnote
2
2016
Number
1,450,000
$m
—
2015
Number
1,450,000
2016
$m
12,619
2016
$m
22,715
2015
$m
518
374
374
559
126
126
2,077
$m
9,609
45
188
9,842
$m
—
2015
$m
12,421
2015
$m
22,263
1 All HSBC Holdings ordinary shares in issue, excluding 325,273,407 shares held in treasury, 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.
HSBC Holdings plc Annual Report and Accounts 2016
253
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
HSBC Holdings non-cumulative preference shares of $0.01
HSBC Holdings pays dividends on non-cumulative preference shares of $0.01 each (‘dollar preference shares’) quarterly, at the sole
and absolute discretion of the Board. The Board will not declare a dividend on them if this would stop the company from meeting the
PRA’s capital adequacy requirements, or if profit available for distribution as dividends is insufficient to also pay dividends on other
shares that are equally entitled and scheduled on the same date.
HSBC Holdings may not declare or pay dividends on shares ranking lower in the right to dividends than dollar preference shares, or
redeem or purchase any of its other shares ranking equal or lower than dollar preference shares, unless it has fully paid, or set aside
an amount to fully pay, 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. Holders of dollar preference shares are only entitled
to attend and vote at shareholder meetings if dividends on these shares have not been paid in full on four consecutive dividend
payment dates. In such circumstances, holders of these shares are entitled to vote at shareholder meetings until HSBC Holdings has
paid a full dividend on them. Since 16 December 2010, HSBC Holdings has been able to redeem dollar preference shares at any time,
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 (‘sterling preference share’) has been in issue since 29 December 2010
and is held by a subsidiary of HSBC Holdings. Dividends 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
shareholder meetings of HSBC Holdings. HSBC Holdings may redeem it at any time.
Other equity instruments
HSBC Holdings includes three types of additional tier 1 capital securities in its tier 1 capital. Two are presented in this Note and are
accounted for as equity because HSBC does not have an obligation to transfer cash or a variable number of its own ordinary shares
to holders under any circumstances outside its control. See Note 28 for additional tier 1 securities accounted for as liabilities.
Additional tier 1 capital securities
Additional tier 1 capital securities are perpetual subordinated securities on which coupon payments may be deferred at HSBC
Holdings’ discretion. While any coupon payments are unpaid or deferred, HSBC Holdings will not declare or pay dividends or make
distributions or similar periodic payments in respect of any securities of lower or equal rank, or repurchase or redeem them. 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. They do not meet the identifying criteria in full for recognition as tier 1 capital under CRD IV but are eligible as regulatory
capital subject to grandfathering limits and progressive phase-out.
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 $0.01 per share and a premium
of $24.99 per share, with both 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
$2,200m
$3,800m
At 31 Dec
8.125% perpetual subordinated capital securities
8.00% perpetual subordinated capital securities, Series 2
Additional tier 1 capital – contingent convertible securities
First call
date
Apr 2013
Dec 2015
2016
$m
2,133
3,718
5,851
2015
$m
2,133
3,718
5,851
During 2016, HSBC continued to issue 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 to meet requirements under CRD IV. These securities bear a fixed rate
of interest until their initial call dates. After the initial call dates, if they are not redeemed, the securities will bear interest at rates
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 to cancel for any
reason (in whole or in part) any interest payment that would otherwise be payable on any payment date. Distributions will not be paid
if they are prohibited under UK banking regulations or if the company has insufficient reserves or fails to meet the solvency
conditions 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 this 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 fully paid
ordinary shares of HSBC at a pre-determined price, should HSBC’s consolidated end point CET1 ratio fall below 7.0%. Therefore, in
accordance with the terms of the securities, if the end point CET1 ratio breaches the 7.0% trigger, the securities will convert into
ordinary shares at fixed contractual conversion prices in the issuance currencies of the relevant securities, equivalent to £2.70 at the
prevailing rate of exchange on the issuance date, subject to certain anti-dilution adjustments.
254 HSBC Holdings plc Annual Report and Accounts 2016
HSBC’s additional tier 1 capital – contingent convertible securities in issue which are accounted for in equity
$2,250m
$1,500m
€1,500m
$2,450m
€1,000m
$2,000m
At 31 Dec
6.375% perpetual subordinated contingent convertible securities
5.625% perpetual subordinated contingent convertible securities
5.25% perpetual subordinated contingent convertible securities
6.375% perpetual subordinated contingent convertible securities
6.000% perpetual subordinated contingent convertible securities
6.875% perpetual subordinated contingent convertible securities
Shares under option
First call
date
Sep 2024
Jan 2020
Sep 2022
Mar 2025
Sep 2023
Jun 2021
2016
$m
2,244
1,494
1,943
2,459
1,121
1,998
11,259
2015
$m
2,244
1,494
1,943
2,459
1,121
—
9,261
For details of the options outstanding to subscribe for HSBC Holdings ordinary shares under the HSBC Holdings savings-related
share option plans, see Note 5.
Aggregate options outstanding under these plans
31 Dec 2016
31 Dec 2015
Number of
HSBC Holdings
ordinary shares
Period of exercise
Exercise price
69,217,725
2016 to 2022 £4.0472–5.4738
504,467
86,916
217,738
2016 to 2018 HK$55.4701–63.9864
2016 to 2018 €5.3532–5.7974
2016 to 2018 $7.1456–8.2094
Number of
HSBC Holdings
ordinary shares
72,840,810
1,114,830
153,610
665,445
Period of exercise
Exercise price
2015 to 2021
£4.0472–5.4738
2015 to 2018
HK$55.4701–63.9864
2015 to 2018
2015 to 2018
€5.3532–6.0657
$7.1456–8.2094
Maximum obligation to deliver HSBC Holdings ordinary shares
At 31 December 2016, the maximum obligation to deliver HSBC Holdings ordinary shares under all of the above option arrangements
and the HSBC International Employee Share Purchase Plan, together with GPSP awards and restricted share awards granted under
the HSBC Share Plan and/or the HSBC Share Plan 2011, was 198,483,750 (2015: 193,178,906). The total number of shares at
31 December 2016 held by employee benefit trusts that may be used to satisfy such obligations to deliver HSBC Holdings ordinary
shares was 3,997,619 (2015: 4,753,747).
33 Contingent liabilities, contractual commitments and guarantees
Guarantees and other contingent liabilities:
– financial guarantees and similar contracts
– other guarantees
– other contingent liabilities
At 31 Dec
Commitments:
– documentary credits and short-term trade-related transactions
– forward asset purchases and forward deposits placed
– standby facilities, credit lines and other commitments to lend
At 31 Dec
1 Guarantees by HSBC Holdings are all in favour of other Group entities.
HSBC
2016
$m
37,072
44,394
553
82,019
9,190
5,386
641,267
655,843
2015
$m
46,116
39,739
490
86,345
10,168
981
655,281
666,430
HSBC Holdings1
2016
$m
2015
$m
7,619
68,333
—
—
—
—
7,619
68,333
—
—
—
—
—
—
—
—
The above table discloses the nominal principal amounts, which represents the maximum 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.
Approximately half the guarantees have a term of less than one year, while guarantees with terms of more than one year are subject
to HSBC’s annual credit review process.
Contingent liabilities arising from legal proceedings, regulatory and other matters against Group companies are disclosed in Notes 27
and 35.
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 HM Treasury, which at
31 December 2016 stood at approximately £15.7bn ($19.3bn). The Group could be liable to pay a proportion of the outstanding
amount that the FSCS has borrowed from HM Treasury. 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.
Associates
HSBC’s share of associates’ contingent liabilities amounted to $35.3bn at 31 December 2016 (2015: $39.2bn). No matters arose
where HSBC was severally liable.
HSBC Holdings plc Annual Report and Accounts 2016
255
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
34 Lease commitments
Operating lease commitments
At 31 December 2016, future minimum lease payments under non-cancellable operating leases for land, buildings and equipment
were $3,893m (2015: $5,333m).
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.
Lease receivables:
No later than one year
Later than one year and no later than five years
Later than five years
At 31 Dec
Total future
minimum
payments
2016
Unearned
finance
income
$m
$m
3,248
6,563
4,548
(330)
(702)
(633)
Present
value
$m
2,918
5,861
3,915
14,359
(1,665)
12,694
Total future
minimum
payments
2015
Unearned
finance
income
$m
$m
3,382
7,219
4,897
15,498
(332)
(837)
(702)
(1,871)
Present
value
$m
3,050
6,382
4,195
13,627
35 Legal proceedings and regulatory matters
HSBC is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations.
Apart from the matters described below, HSBC considers that none of these matters are material. The recognition of provisions is
determined in accordance with the accounting policies set out in Note 1. 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 2016 (see Note 27). Where an individual provision is material, the fact that a
provision has been made is stated and quantified, except to the extent doing so would be seriously prejudicial. Any provision
recognised does not constitute an admission of wrongdoing or legal liability. It is not practicable to provide an aggregate estimate
of potential liability for our legal proceedings and regulatory matters as a class of contingent liabilities.
Securities litigation
Household International, Inc. (‘Household International’) and certain former officers were named as defendants in a securities class
action lawsuit, Jaffe v. Household International, Inc., et al., filed in the US District Court for the Northern District of Illinois (the
‘Illinois District Court’) in August 2002. 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 (some of which ultimately led to a 2002 settlement with 46 states and the District of Columbia) and
certain accounting practices, as evidenced by an August 2002 restatement of previously reported consolidated financial statements.
A class was certified on behalf of all persons who acquired and disposed of Household International common stock between July
1999 and October 2002. In April 2009, a jury trial was decided partly in favour of the plaintiffs and, in October 2013, the Illinois
District Court entered a partial final judgment against the defendants in the amount of approximately $2.5bn (including pre-judgment
interest). The defendants appealed the partial final judgment and, in May 2015, the US Court of Appeals for the Seventh Circuit
reversed the partial final judgment of the Illinois District Court and remanded the case for a new trial on loss causation.
In June 2016, HSBC reached an agreement to pay $1.6bn to settle all claims. Final court approval of the settlement and a final court
order of dismissal with prejudice was granted in November 2016.
Bernard L. Madoff Investment Securities LLC
Bernard L. Madoff (‘Madoff’) was arrested in December 2008 and later pleaded guilty to running a Ponzi scheme. His firm, Bernard L.
Madoff Investment Securities LLC (‘Madoff Securities’), is being liquidated in the US by a trustee (the ‘Trustee’).
Various non-US HSBC companies provided custodial, administration and similar services to a number of funds incorporated outside
the US whose assets were invested with Madoff Securities. Based on information provided by Madoff Securities, as at 30 November
2008, the purported aggregate value of these funds was $8.4bn, including fictitious profits reported by Madoff.
Based on information available to HSBC, the funds’ actual transfers to Madoff Securities minus their actual withdrawals from Madoff
Securities during the time HSBC serviced the funds are estimated to have totalled approximately $4bn. Various HSBC companies
have been named as defendants in lawsuits arising out of Madoff Securities’ fraud.
US/UK litigation: The Trustee has brought lawsuits against various HSBC companies in the US Bankruptcy Court and in the English
High Court, seeking recovery of transfers from Madoff Securities to HSBC in an amount not yet pleaded or determined. HSBC and
other parties to the action have moved to dismiss the Trustee’s US actions. The US Bankruptcy Court granted HSBC’s motion to
dismiss with respect to certain of the Trustee’s claims in November 2016, though this ruling is subject to appeal.
The deadline by which the Trustee must serve HSBC with his English action has been extended to September 2017 for UK-based
defendants and November 2017 for all other defendants.
Alpha Prime Fund Ltd (‘Alpha Prime’) and Senator Fund SPC (‘Senator’), co-defendants in one of the Trustee’s US actions, have each
brought cross-claims against certain HSBC defendants. In December 2016, the US Bankruptcy Court granted HSBC’s motion to
dismiss the cross-claims and Alpha Prime and Senator’s failure to appeal renders the court’s ruling final.
Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (together, ‘Fairfield’) (in liquidation since July 2009)
have brought lawsuits in the US and the British Virgin Islands (‘BVI’) against fund shareholders, including HSBC companies that
256 HSBC Holdings plc Annual Report and Accounts 2016
acted as nominees for clients, seeking restitution of redemption payments. In October 2016, the liquidators for Fairfield ('Fairfield
Liquidators') filed a motion seeking leave to amend their complaints in the US Bankruptcy Court. Briefing on the defendants'
opposition to the Liquidators' motion and the defendants' own motion to dismiss is underway. In January 2017, the defendants filed
their consolidated motion to dismiss and opposition to the Fairfield Liquidators’ motion seeking leave to amend.
In December 2014, three additional actions were filed in the US. A purported class of direct investors in Madoff Securities asserted
common law claims against various HSBC companies in the United States District Court for the Southern District of New York (the
‘New York District Court’). In September 2016, the New York District Court granted HSBC’s motion to dismiss this action and the
plaintiffs’ failure to appeal renders the court’s ruling final. Two investors in Hermes International Fund Limited (‘Hermes’) also
asserted common law claims against various HSBC companies in the New York District Court. HSBC's motion to dismiss this action
remains pending. In addition, SPV Optimal SUS Ltd (‘SPV OSUS’), the purported assignee of the Madoff-invested company, Optimal
Strategic US Equity Ltd (‘Optimal’), filed a lawsuit in New York state court against various HSBC companies and others, seeking
damages on various alleged grounds, including breach of fiduciary duty and breach of trust. This action has been stayed pending the
issuance of a potentially dispositive decision in an action initiated by Optimal regarding the validity of the assignment of its claims to
SPV OSUS.
BVI litigation: Beginning in October 2009, the Fairfield Liquidators commenced lawsuits against fund shareholders, including HSBC
companies that acted as nominees for clients, seeking recovery of redemption payments. In March 2016, the BVI court denied a
motion brought by certain non-HSBC defendants challenging the Fairfield Liquidators’ authorisation to pursue their US claims, which
those defendants have appealed. In August 2016, the Fairfield Liquidators voluntarily discontinued their actions against the HSBC
defendants.
Bermuda litigation: In January 2009, Kingate Global Fund Limited and Kingate Euro Fund Limited (together, ‘Kingate’) brought an
action against HSBC Bank Bermuda Limited (‘HBBM’) for recovery of funds held in Kingate’s accounts, fees and dividends. This
action is pending, but is not expected to move forward until the resolution of the Trustee’s US actions against Kingate and HBBM.
Thema Fund Limited (‘Thema’) and Hermes each brought three actions in 2009. The first set of actions seeks recovery of funds in
frozen accounts held at HSBC Institutional Trust Services (Bermuda) Limited. 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 HBBM and HSBC Securities Services (Bermuda) Limited. The parties have agreed to
a standstill in respect of all three sets of actions.
Cayman Islands litigation: In February 2013, Primeo Fund Limited (‘Primeo’) (in liquidation since April 2009) brought an action
against HSBC Securities Services Luxembourg (‘HSSL’) and The Bank of Bermuda (Cayman), alleging breach of contract and breach
of fiduciary duty, and claiming damages and equitable compensation. Trial began in November 2016 and is scheduled to run until the
end of February 2017.
Luxembourg litigation: In April 2009, Herald Fund SPC (‘Herald’) (in liquidation since July 2013) brought an action against HSSL
before the Luxembourg District Court, seeking restitution of cash and securities Herald purportedly lost because of Madoff
Securities’ fraud, or money damages. The Luxembourg District Court dismissed Herald’s securities restitution claim, but reserved
Herald’s cash restitution claim and its claim for money damages. Herald has appealed this judgment to the Court of Appeal.
In March 2010, Herald (Lux) SICAV (‘Herald (Lux)’) (in 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. Herald (Lux) has also
requested the restitution of fees paid to HSSL.
In October 2009, Alpha Prime and, in December 2014, Senator, each brought an action against HSSL before the Luxembourg District
Court, seeking the restitution of securities, or the cash equivalent, or money damages. The action initiated by Senator has been
temporarily suspended at Senator's request. In April 2015, Senator commenced an action against the Luxembourg branch of HSBC
Bank plc asserting identical claims before the Luxembourg District Court.
HSSL has also been named as a defendant in various actions by shareholders in Primeo Select Fund, Herald, Herald (Lux), and
Hermes. Most of these actions have been dismissed, suspended or postponed.
Ireland litigation: In November 2013, Defender Limited brought an action against HSBC Institutional Trust Services (Ireland) Limited
(‘HTIE’) and others, alleging breach of contract and claiming damages and indemnification for fund losses. A trial date has not yet
been scheduled.
In May 2016, following a hearing on two preliminary issues, HTIE was successful in obtaining an order dismissing two remaining
claims by purported shareholders in Thema International Fund plc.
SPV OSUS’s action against HTIE and HSBC Securities Services (Ireland) Limited alleging breach of contract and claiming damages
and indemnification for fund losses was dismissed in October 2015. SPV OSUS’s appeal against this first instance decision was
heard in January 2017.
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. Based upon the information currently available, management’s estimate of possible aggregate damages that might arise as
a result of all claims in the various Madoff-related proceedings is up to or exceeding $800m, excluding costs and interest. Due to
uncertainties and limitations of this estimate, the ultimate damages could differ significantly from this amount.
US mortgage-related investigations
In April 2011, HSBC Bank USA N.A. (‘HSBC Bank USA’) entered into a consent order (the 'OCC Servicing Consent Order') with the
Office of the Comptroller of the Currency (‘OCC’), and HSBC Finance Corporation (‘HSBC Finance’) and HSBC North America
Holdings Inc. (‘HNAH’) entered into a similar consent order with the Federal Reserve Board (‘FRB’) (together with the OCC Servicing
Consent Order, the ‘Servicing Consent Orders’).
The Servicing Consent Orders required prescribed actions to address certain foreclosure practice deficiencies. The Servicing Consent
Orders also required an independent foreclosure review which, pursuant to amendments to the Servicing Consent Orders in February
2013, ceased and was replaced by a settlement under which HSBC and 12 other participating servicers agreed to provide cash
payments and other assistance to eligible borrowers. In June 2015, the OCC issued an amended OCC Servicing Consent Order citing
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Notes on the Financial Statements
the failure of HSBC Bank USA to be in compliance with all requirements of the OCC Servicing Consent Order and stating that the
failure to satisfy all requirements of the OCC Servicing Consent Order may result in a variety of regulatory consequences for HSBC
Bank USA, including the imposition of civil money penalties. In January 2017, the OCC terminated the OCC Servicing Consent Order,
together with its February 2013 and June 2015 amendments, after determining that HSBC Bank USA had satisfied the requirements
thereunder. In connection with the termination of the Servicing Consent Order, the OCC also assessed a civil money penalty against
HSBC Bank USA finding that HSBC Bank USA failed to correct deficiencies identified under the OCC Servicing Consent Order in a
timely fashion.
In February 2016, HSBC Bank USA, HSBC Finance, HSBC Mortgage Services Inc. and HNAH entered into an agreement with the
US Department of Justice (the ‘DoJ’), the US Department of Housing and Urban Development, the Consumer Financial Protection
Bureau, other federal agencies (the ‘Federal Parties’) and the Attorneys General of 49 states and the District of Columbia (the ‘State
Parties’) to resolve civil claims related to past residential mortgage loan origination and servicing practices (the ‘National Mortgage
Settlement Agreement’). In addition, in February 2016, the FRB announced the imposition against HSBC Finance and HNAH of a
$131m civil money penalty in connection with the FRB’s consent order of April 2011. Pursuant to the terms of the FRB’s civil money
penalty order, the penalty will be satisfied through the cash payments made to the Federal Parties and the consumer relief provided
under the National Mortgage Settlement Agreement.
The Servicing Consent Orders and the National Mortgage Settlement Agreement do not completely preclude other enforcement
actions by regulatory, governmental or law enforcement agencies related to foreclosure and other mortgage servicing practices,
including, but not limited to, matters relating to the securitisation of mortgages for investors, which could include the imposition of
civil money penalties, criminal fines or other sanctions. In addition, these practices have in the past resulted in private litigation, and
may result in further private litigation.
US mortgage securitisation activity and litigation
HSBC Bank USA was a sponsor or 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 approximately $24bn of such loans to HSI, which were
subsequently securitised and sold by HSI to third parties. The outstanding principal balance was approximately $4.6bn as at
31 December 2016. HSBC notes that the scale of its mortgage securitisation activities was more limited in relation to a number of
other banks in the industry. In addition, HSI served as an underwriter on securitisations issued by HSBC Finance or third parties, and
HSBC Bank USA served as trustee on behalf of various mortgage securitisation trusts.
Mortgage foreclosure and trustee matters: As the industry’s residential mortgage foreclosure issues continue, HSBC Bank USA
has taken title to a number of foreclosed homes as trustee on behalf of various mortgage 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 relating to property upkeep and tenants’ rights. While HSBC believes and continues to maintain that these obligations and any
related liabilities are 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’.
Beginning in June 2014, a number of lawsuits were filed in state and federal court in New York and Ohio against HSBC Bank USA as
trustee of over 320 mortgage securitisation trusts. These lawsuits are brought on behalf of the trusts by a putative class of investors
including, among others, BlackRock and PIMCO funds. The complaints allege that the trusts have sustained losses in collateral value
of approximately $38bn. The lawsuits seek unspecified damages resulting from alleged breaches of the US Trust Indenture Act,
breach of fiduciary duty, negligence, breach of contract and breach of the common law duty of trust. HSBC’s motions to dismiss in
several of these lawsuits were, for the most part, denied.
It is not practicable to estimate the possible financial impact of these matters, as there are many factors that may affect the range of
possible outcomes; however, the resulting financial impact could be significant.
Loan repurchase matters: HSBC Bank USA, HSBC Finance and Decision One Mortgage Company LLC (an indirect subsidiary of
HSBC Finance) (‘Decision One’) have been named as defendants in various mortgage loan repurchase actions brought by trustees of
mortgage securitisation trusts. In the aggregate, these actions seek to have the HSBC defendants repurchase mortgage loans, or pay
compensatory damages, totalling at least $1bn. In August 2016, HSBC reached an agreement in principle to settle one of the matters
and the other matters remain pending.
HSBC Mortgage Corporation (USA) Inc. and Decision One have also been named as defendants in two separate actions filed by
Residential Funding Company LLC (‘RFC’), a mortgage loan purchase counterparty, seeking unspecified damages in connection with
approximately 25,000 mortgage loans.
It is not practicable to estimate the possible financial impact of these matters, as there are many factors that may affect the range of
possible outcomes; however, the resulting financial impact could be significant.
FIRREA: Since 2010, various HSBC entities have received subpoenas and requests for information from the DoJ and the
Massachusetts state Attorney General seeking the production of documents and information regarding HSBC’s involvement in
certain RMBS transactions as an issuer, sponsor, underwriter, depositor, trustee, custodian or servicer. In November 2014, HNAH, on
behalf of itself and various subsidiaries including, but not limited to, HSBC Bank USA, HSI Asset Securitization Corp., HSI, HSBC
Mortgage Corporation (USA), HSBC Finance and Decision One, received a subpoena from the US Attorney’s Office for the District of
Colorado, pursuant to the Financial Industry Reform, Recovery and Enforcement Act (‘FIRREA’), concerning the origination,
financing, purchase, securitisation and servicing of subprime and non-subprime residential mortgages.
HSBC continues to cooperate with the DoJ’s investigation, which is at or nearing completion. In December 2016, HSBC had an initial
discussion with the DoJ, wherein the DoJ stated its preliminary view that HSBC is subject to liability under FIRREA in connection
with certain securitisations from 2005 to 2007 with respect to which HSBC Bank USA served as sponsor or seller of loans and HSI
served as underwriter. HSBC disagrees with the DoJ’s preliminary view, and the DoJ has offered HSBC an opportunity to respond.
There can be no assurance as to how or when this matter will be resolved, or whether this matter will be resolved prior to the
institution of formal legal proceedings by the DoJ. Moreover, it is possible that any such resolution could result in significant
penalties and other costs. To date, at least one bank has been sued by the DoJ and at least eight other banks have reported
settlements of mortgage-backed securities-related matters pursuant to FIRREA. The prior DoJ settlements provide no clear guidance
as to how those individual settlement amounts were calculated, and due to the high degree of uncertainty involved, it is not
practicable to estimate any possible financial effect of this matter, which could be significant.
258 HSBC Holdings plc Annual Report and Accounts 2016
HSBC expects the focus on mortgage securitisations to continue and may be subject to additional claims, litigation and
governmental or regulatory scrutiny relating to its participation in the US mortgage securitisation market.
Anti-money laundering and sanctions-related matters
In October 2010, HSBC Bank USA entered into a consent order with the OCC, and HNAH entered into a consent order with the
FRB (each an ‘Order’ and together, the ‘Orders’). These Orders required improvements to establish an effective compliance risk
management programme across HSBC’s US businesses, including risk management related to the Bank Secrecy Act (‘BSA’) and
AML compliance. HSBC Bank USA is not currently in compliance with the OCC Order. Steps are being taken to address the
requirements of the Orders.
In December 2012, 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, among others, the DoJ (the ‘US 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. HSBC
Holdings also entered into an agreement with the Office of Foreign Assets Control (‘OFAC’) regarding historical transactions involving
parties subject to OFAC sanctions, as well as an undertaking with the UK FCA to comply with certain forward-looking AML and
sanctions-related obligations. In addition, HSBC Bank USA entered into civil money penalty orders with the Financial Crimes
Enforcement Network of the US Treasury Department and the OCC.
Under these agreements, HSBC Holdings and HSBC Bank USA made payments totalling $1.9bn to US authorities and undertook
various further obligations, including, among others, to continue to cooperate fully with the DoJ in any and all investigations, not to
commit any crime under US federal law subsequent to the signing of the agreement, and to retain an independent compliance
monitor (the ‘Monitor’). In February 2017, the Monitor delivered his third annual follow-up review report.
Through his country-level reviews, the Monitor identified potential anti-money laundering and sanctions compliance issues that the
DoJ and HSBC are reviewing further. Additionally, as discussed elsewhere in this Note, HSBC is the subject of other ongoing
investigations and reviews by the DoJ. HSBC Bank plc is also the subject of an investigation by the FCA into its compliance with UK
money laundering regulations and financial crime systems and controls requirements. The potential consequences of breaching the
US DPA, as well as the role of the Monitor and his third annual review, are discussed on page 82.
HSBC Bank USA also entered into two consent orders with the OCC. These required HSBC Bank USA to correct the circumstances
noted in the OCC’s report and to adopt an enterprise-wide compliance programme, and imposed restrictions on acquiring control of,
or holding an interest in, any new financial subsidiary, or commencing a new activity in its existing financial subsidiary, without the
OCC’s prior approval.
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 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 November 2015, the New York state court granted the Nominal
Corporate Defendants’ motion to dismiss. The plaintiff has appealed that decision.
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 American Depositary Shares 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 indirect subsidiary, HSBC Bank Canada,
relating to HSBC’s compliance with BSA, AML, sanctions and other laws.
Since November 2014, four lawsuits have been filed in federal court in New York, Illinois and Texas, against various HSBC companies
and others, on behalf of plaintiffs who are, or are related to, victims of terrorist attacks in Iraq, Jordan and Mexico. In each case, it is
alleged that the defendants aided and abetted the unlawful conduct of various sanctioned parties in violation of the US Anti-Terrorism
Act. These actions 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 lawsuits, including
the timing or any possible impact on HSBC, which could be significant.
Tax-related investigations
Various tax administration, regulatory and law enforcement authorities around the world, including in the US, France, Belgium,
Argentina and India, are conducting investigations and reviews of HSBC Private Bank (Suisse) SA (‘HSBC Swiss Private Bank’) and
other HSBC companies in connection with allegations of tax evasion or tax fraud, money laundering and unlawful cross-border
banking solicitation.
HSBC continues to cooperate in ongoing investigations by the DoJ and the US Internal Revenue Service regarding whether certain
HSBC companies and employees, including those associated with HSBC Swiss Private Bank and an HSBC company in India, acted
appropriately in relation to certain customers who had US tax reporting obligations. In connection with these investigations, 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.
In November 2014, HSBC Swiss Private Bank was placed under formal criminal examination in Belgium for alleged tax-related
offences. In November 2014, HSBC Swiss Private Bank was also placed under formal criminal examination in France for alleged tax-
related offences in 2006 and 2007 and required to pay bail of €50m. In April 2015, HSBC Holdings was informed that it had been
placed under formal criminal examination in France in connection with the conduct of HSBC Swiss Private Bank, and a €1bn bail was
imposed. HSBC Holdings appealed the bail decision and, in June 2015, bail was reduced to €100m. The ultimate financial impact of
these matters could differ significantly, however, from the bail amounts of €150m. In March 2016, HSBC was informed that the
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Notes on the Financial Statements
French magistrates had completed their investigation with respect to HSBC Swiss Private Bank and HSBC Holdings, and have
referred the matter to the French public prosecutor for a recommendation on any potential charges. In October 2016, HSBC Swiss
Private Bank and HSBC Holdings received the French public prosecutor`s brief in which the prosecutor recommended the judge to
refer the cases to trial, and HSBC Swiss Private Bank and HSBC Holdings have responded to the prosecutor’s brief.
In November 2014, the Argentine tax authority initiated a criminal action against various individuals, including current and former
HSBC employees. The criminal action includes allegations of tax evasion, conspiracy to launder undeclared funds and an unlawful
association among HSBC Swiss Private Bank, HSBC Bank Argentina, HSBC Bank USA and certain HSBC employees, which allegedly
enabled numerous HSBC customers to evade their Argentine tax obligations.
In February 2015, the Indian tax authority issued a summons and request for information to an HSBC company in India. In August
2015 and November 2015, HSBC companies received notices issued by two offices of the Indian tax authority, alleging that the
Indian tax authority had sufficient evidence to initiate prosecution against HSBC Swiss Private Bank and an HSBC company in Dubai
for allegedly abetting tax evasion of four different Indian individuals and/or families and requesting that the HSBC companies show
why such prosecution should not be initiated. HSBC Swiss Private Bank and the HSBC company in Dubai have responded to the
show cause notices.
HSBC is cooperating with the relevant authorities. As at 31 December 2016, HSBC has recognised a provision for these various
matters in the amount of $773m. There are many factors that may affect the range of outcomes, and the resulting financial impact,
of these investigations and reviews. Due to uncertainties and limitations of these estimates, the ultimate penalties could differ
significantly from the amount provided.
In light of the 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.
Mossack Fonseca & Co.
HSBC has received requests for information from various regulatory and law enforcement authorities around the world concerning
persons and entities believed to be linked to Mossack Fonseca & Co., a service provider of personal investment companies. HSBC is
cooperating with the relevant authorities.
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, which could be significant.
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 and
Switzerland, 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 Libor, 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 2016, the European Commission (the ‘Commission’) issued a decision finding that HSBC, among other banks, engaged
in anti-competitive practices in connection with the pricing of euro interest rate derivatives in early 2007. The Commission
determined that the duration of HSBC’s infringement was 1 month and fined HSBC. HSBC has appealed the decision.
US dollar Libor: Beginning in 2011, HSBC and other panel banks have been named as defendants in a number of private lawsuits
filed in the US with respect to the setting of US dollar Libor. The complaints assert claims under various US laws, including US
antitrust and racketeering laws, the US Commodity Exchange Act (‘US CEA’), and state law. The lawsuits include individual and
putative class actions, most of which have been transferred and/or consolidated for pre-trial purposes before the New York District
Court.
The New York District Court has issued decisions dismissing certain of the claims in response to motions filed by the defendants.
Those decisions resulted in the dismissal of the plaintiffs’ federal and state antitrust claims, racketeering claims, and unjust
enrichment claims. Dismissal of certain of these claims was appealed to the US Court of Appeals for the Second Circuit, which
reversed the New York District Court’s dismissal of plaintiffs’ antitrust claims in May 2016. In July 2016, defendants filed a joint
motion to dismiss all antitrust claims and, in December 2016, the New York District Court granted in part and denied in part the
motion, leaving only certain antitrust claims to be litigated. Separately, in October 2016, the New York District Court granted a
motion to dismiss claims brought by an individual plaintiff for lack of personal jurisdiction, which dismissal is currently on appeal to
the Second Circuit. Finally, in January 2017, the District Court granted defendants’ motion to dismiss certain of the remaining
antitrust claims against defendants that did not serve on the US dollar Libor submission panel.
Euroyen Tokyo interbank offered rate (‘Tibor’) and/or Japanese yen Libor: In April 2012 and July 2015, HSBC and other panel
banks were named as defendants in putative class actions filed in the New York District Court on behalf of persons who transacted in
financial instruments allegedly related to the euroyen Tibor and/or Japanese yen Libor. The complaints allege, among 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 US CEA, and state law. In May 2016, HSBC reached an agreement in
principle with plaintiffs to resolve both of these actions, and the settlement was granted final court approval in November 2016.
Euribor: In November 2013, HSBC and other panel banks were 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 allegedly related to
Euribor. The complaint alleges, among other things, misconduct related to Euribor in violation of US antitrust laws, the US CEA and
state law. In May 2016, HSBC reached an agreement in principle with plaintiffs to resolve this action, subject to court approval.
Singapore Interbank Offered Rate (‘SIBOR’), Singapore Swap Offer Rate (‘SOR’) and Australia Bank Bill Swap Rate
('BBSW'): In July 2016 and August 2016, HSBC and other panel banks were named as defendants in two putative class actions filed
in the New York District Court on behalf of persons who transacted in products related to the SIBOR, SOR and BBSW benchmark
rates. The complaints allege, among other things, misconduct related to these benchmark rates in violation of US antitrust,
commodities and racketeering laws, and state law. These matters are at an early stage.
260 HSBC Holdings plc Annual Report and Accounts 2016
US dollar International Swaps and Derivatives Association fix (‘ISDAfix’): In September 2014, HSBC and other panel banks
were named as defendants in a number of putative class actions consolidated in the New York District Court on behalf of persons
who transacted in interest rate derivatives or purchased or sold financial instruments that were either tied to ISDAfix rates or were
executed shortly before, during, or after the time of the daily ISDAfix setting window. The consolidated complaint alleges, among
other things, misconduct related to these activities in violation of US antitrust laws, the US CEA and state law. HSBC’s motion to
dismiss the complaint was denied in March 2016.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be
significant.
Foreign exchange rate investigations and litigation
Various regulators and competition and law enforcement authorities around the world, including in the US, the EU, Switzerland,
Brazil, South Korea and South Africa are conducting investigations and reviews into trading by HSBC and others on the foreign
exchange markets. HSBC is cooperating with these investigations and reviews.
In May 2015, the DoJ resolved its investigations with respect to five non-HSBC financial institutions, four of whom agreed to plead
guilty to criminal charges of conspiring to manipulate prices in the foreign exchange spot market, and resulting in the imposition of
criminal fines in the aggregate of more than $2.5bn. Additional penalties were imposed at the same time by the FRB and other
banking regulators. HSBC was not a party to these resolutions. In August 2016, the DoJ indicted one current and one former HSBC
employee and charged them with wire fraud and conspiracy relating to a 2011 foreign exchange transaction. The trial is currently
scheduled to begin in September 2017. HSBC was not named as a defendant in the indictment, and investigations into HSBC by the
DoJ, FRB and others continue.
In December 2016, HSBC Bank plc entered into a settlement with Brazil’s Administrative Council of Economic Defense (‘CADE’) in
connection with its investigation into 15 banks, including HSBC Bank plc, as well as 30 individuals, relating to practices in the
offshore foreign exchange market. Under the terms of the settlement, HSBC Bank plc agreed to pay a financial penalty to CADE.
In February 2017, the Competition Commission of South Africa referred a complaint for proceedings before the South African
Competition Tribunal against 18 financial institutions, including HSBC Bank plc, for alleged misconduct related to the foreign
exchange market in violation of South African antitrust laws. These proceedings are at an early stage.
In late 2013 and early 2014, HSBC and other banks were named as defendants in various putative class actions consolidated in the
New York District Court. The consolidated complaint alleged, among other things, that the defendants conspired to manipulate the
WM/Reuters foreign exchange benchmark rates. In September 2015, HSBC reached an agreement with plaintiffs to resolve the
consolidated action, subject to court approval. In December 2015, the court granted preliminary approval of the settlement, and
HSBC made payment of the agreed settlement amount into an escrow account. The final settlement approval hearing is scheduled
for October 2017.
In June 2015, a putative class action was filed in the New York District Court making similar allegations on behalf of Employee
Retirement Income Security Act of 1974 (‘ERISA’) plan participants, and another complaint was filed in the US District Court for the
Northern District of California in May 2015. The court dismissed the claims in the ERISA action, and the plaintiffs have appealed to
the US Court of Appeals for the Second Circuit. HSBC filed a motion to transfer the California action to New York, which was granted
in November 2015. In September 2016, a putative class action making similar allegations on behalf of purported ‘indirect’ purchasers
of foreign exchange products was filed in New York. This action is at an early stage.
In September 2015, two additional putative class actions making similar allegations under Canadian law were issued in Canada
against various HSBC companies and other financial institutions.
As at 31 December 2016, HSBC has recognised a provision for these various matters in the amount of $1.2bn. There are many
factors that may affect the range of outcomes, and the resulting financial impact, of these matters. Due to uncertainties and
limitations of these estimates, the ultimate penalties could differ significantly from the amount provided.
Precious metals fix-related investigations and litigation
Various regulators and competition and law enforcement authorities, including in the US and the EU, are conducting investigations
and reviews relating to HSBC’s precious metals operations and trading. HSBC is cooperating with these investigations and reviews.
In November 2014, the Antitrust Division and Criminal Fraud Section of the DoJ issued a document request to HSBC Holdings,
seeking the voluntary production of certain documents in connection with a criminal investigation that the DoJ is conducting of
alleged anti-competitive and manipulative conduct in precious metals trading. In January 2016, the Antitrust Division of the DoJ
informed HSBC that it was closing its investigation; however, the Criminal Fraud Section’s investigation remains ongoing.
Gold: Beginning in March 2014, numerous putative class actions were filed in the New York District Court and the US District Courts
for the District of New Jersey and the Northern District of California, naming HSBC and other members of The London Gold Market
Fixing Limited as defendants. The complaints allege that, from January 2004 to the present, defendants conspired to manipulate the
price of gold and gold derivatives for their collective benefit in violation of US antitrust laws, the US CEA and New York state law. The
actions were consolidated in the New York District Court. Defendants' motion to dismiss the consolidated action was granted in part
and denied in part in October 2016.
In December 2015, a putative class action under Canadian law was filed in the Ontario Superior Court of Justice against various
HSBC companies and other financial institutions. Plaintiffs allege that, among other things, from January 2004 to March 2014,
defendants conspired to manipulate the price of gold and gold derivatives in violation of the Canadian Competition Act and common
law. This action is at an early stage.
Silver: Beginning in July 2014, numerous putative class actions were filed in the US District Courts for the Southern and Eastern
Districts of New York, naming HSBC and other members of The London Silver Market Fixing Ltd as defendants. The complaints
allege that, from January 1999 to the present, defendants conspired to manipulate the price of silver and silver derivatives for their
collective benefit in violation of US antitrust laws, the US CEA and New York state law. The actions were consolidated in the New
York District Court. Defendants’ motion to dismiss the consolidated action was granted in part and denied in part in October 2016.
In April 2016, two putative class actions under Canadian law were filed in the Ontario and Quebec Superior Courts of Justice against
various HSBC companies and other financial institutions. Plaintiffs in both actions allege that, from January 1999 to August 2014,
HSBC Holdings plc Annual Report and Accounts 2016
261
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
defendants conspired to manipulate the price of silver and silver derivatives in violation of the Canadian Competition Act and
common law. The Ontario action is at an early stage. The Quebec action has been temporarily stayed.
Platinum and palladium: Between late 2014 and early 2015, numerous putative class actions were filed in the New York District
Court, naming HSBC and other members of The London Platinum and Palladium Fixing Company Limited as defendants. The
complaints allege that, from January 2008 to the present, defendants conspired to manipulate the price of platinum group metals
(‘PGM’) and PGM-based financial products for their collective benefit in violation of US antitrust laws and the US CEA. Defendants
have moved to dismiss the action.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be
significant.
Credit default swap litigation
Various HSBC companies, among other financial institutions, ISDA, and Markit, were named as defendants in numerous putative
class actions filed in the New York District Court and the Illinois District Court. The actions alleged that the defendants violated
US antitrust laws by, among other things, conspiring to restrict access to credit default swap pricing exchanges and block new
entrants into the exchange market. The actions were subsequently consolidated in the New York District Court. In September 2015,
the HSBC defendants reached an agreement with the plaintiffs to resolve the consolidated action, and final court approval of that
settlement was granted in April 2016.
Treasury auctions
Beginning in July 2015, HSI, amongst other financial institutions, was named as a defendant in several putative class actions filed in
the New York District Court. The complaints generally allege that the defendants violated US antitrust laws and the US CEA by
colluding to manipulate prices of US Treasury securities sold at auction. The cases have been consolidated in the New York District
Court. This matter is at an early stage.
The DoJ has requested information from HSBC and reportedly other banks regarding US Treasury securities trading practices. HSBC
is cooperating with this ongoing investigation.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the
timing or any possible impact on HSBC, which could be significant.
Interest rate swap litigation
In February 2016, various HSBC companies, among others, were named as defendants in a putative class action filed in the New
York District Court. The complaint alleged that the defendants violated US antitrust laws by, among other things, conspiring to
boycott and eliminate various entities and practices that would have brought exchange trading to buy-side investors in the interest
rate swaps marketplace. In June 2016, this action along with other complaints filed in the New York District Court and the Illinois
District Court were consolidated in the New York District Court, and in January 2017, the defendants filed a motion to dismiss. This
matter is at an early stage.
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, which could be significant.
Fédération Internationale de Football Association (‘FIFA’) related investigations
HSBC has received inquiries from the DoJ regarding its banking relationships with certain individuals and entities that are or may be
associated with FIFA. The DoJ is investigating whether multiple financial institutions, including HSBC, permitted the processing of
suspicious or otherwise improper transactions, or failed to observe applicable AML laws and regulations. HSBC is cooperating with
the DoJ’s 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, which could be significant.
Hiring practices investigation
The US Securities and Exchange Commission (the ‘SEC’) is investigating multiple financial institutions, including HSBC, in relation to
hiring practices of candidates referred by or related to government officials or employees of state-owned enterprises in Asia-Pacific.
HSBC has received various requests for information and is cooperating with the SEC’s 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, which could be significant.
36 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 ('KMP') as defined by IAS 24, close family members of KMP and entities which are
controlled or jointly controlled by KMP or their close family members. KMP are defined as those persons having authority and
responsibility for planning, directing and controlling the activities of HSBC Holdings. These individuals also constitute 'senior
management' for the purposes of the Hong Kong Listing Rules. Following a review of the application of IAS 24, it was determined
that the roles of Chief Legal Officer, Group Head of Internal Audit and Group Head of Human Resources did not meet the criteria for
KMP as provided for in the standard.
Particulars of transactions with related parties are tabulated below. The disclosure of the year-end balance and the highest amounts
outstanding during the year is considered to be the most meaningful information to represent the amount of the transactions and
outstanding balances during the year.
Key Management Personnel
Details of Directors’ remuneration and interest in shares are disclosed in the Directors’ remuneration report on pages 153 to 170.
IAS 24 ‘Related party disclosures’ requires the following additional information for key management compensation.
262 HSBC Holdings plc Annual Report and Accounts 2016
Compensation of Key Management Personnel
Short-term employee benefits
Post-employment benefits
Other long-term employee benefits
Share-based payments
Year ended 31 Dec
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
At 31 Dec
Transactions and balances during the year with Key Management Personnel
2016
$m
41
—
5
37
83
2015
$m
40
1
9
51
101
2016
(000s)
18
22,283
22,301
2014
$m
41
1
7
54
103
2015
(000s)
29
18,961
18,990
Key Management Personnel
Advances and credits
Guarantees
Deposits
Footnote
1
2016
2015
Balance at
31 Dec
Highest amounts
outstanding
during year
Balance
at 31 Dec
Highest amounts
outstanding
during year
$m
215
55
229
$m
220
63
677
$m
218
67
387
$m
411
91
768
1 Advances and credits entered into by subsidiaries of HSBC Holdings during 2016 with Directors, disclosed pursuant to Section 413 of the Companies Act 2006, totalled $2m
(2015: $4m).
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.
Associates and joint ventures
The Group provides certain banking and financial services to associates and joint ventures including loans, overdrafts, interest and
non-interest bearing deposits and current accounts. Details of the interests in associates and joint ventures are given in Note 17.
Transactions and balances during the year with associates and joint ventures
Unsubordinated amounts due from joint ventures
Unsubordinated amounts due from associates
Amounts due to associates
Guarantees and commitments
2016
2015
Highest balance
during the year
Balance at
31 Dec
Highest balance
during the year
Balance at
31 Dec
$m
126
3,136
1,112
776
$m
113
2,881
576
594
$m
195
4,209
1,047
905
$m
151
2,035
92
904
The above outstanding balances arose in 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 2016, $4.4bn (2015: $4.3bn) of HSBC post-employment benefit plan assets were under management by
HSBC companies, earning management fees of $6m in 2016 (2015: $8m). At 31 December 2016 HSBC’s post-employment
benefit plans had placed deposits of $710m (2015: $811m) with its banking subsidiaries, earning interest payable to the schemes
of $1m (2015: nil). 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.
The HSBC Bank (UK) Pension Scheme and International Staff Retirement Benefit Scheme enter into swap transactions with HSBC to
manage inflation and interest rate sensitivity of its liabilities and selected assets. At 31 December 2016 the gross notional value of
the swaps with HSBC Bank (UK) Pension Scheme was $10.5bn (2015: $13.3bn); these swaps had a positive fair value to the scheme
of $0.9bn (2015: $0.5bn); and HSBC had delivered collateral of $0.9bn (2015: $1.1bn) to the scheme in respect of these
arrangements.
At 31 December 2016, the gross notional value of the swaps with the International Staff Retirement Benefit Scheme was
$1.2bn (2015: $1.7bn) and the swaps had a net negative fair value to the scheme of $85m (2015: $96m negative). All swaps were
executed at prevailing market rates and within standard market bid/offer spreads.
HSBC Holdings
HSBC Holdings plc Annual Report and Accounts 2016
263
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
Details of HSBC Holdings’ subsidiaries are shown in Note 38.
Transactions and balances during the year with subsidiaries
Assets
Cash at bank
Derivatives
Loans and advances
Financial investments
Investments in subsidiaries
Total related party assets at 31 Dec
Liabilities
Amounts owed to HSBC undertakings
Derivatives
Subordinated liabilities
Total related party liabilities at 31 Dec
Guarantees and commitments
2016
2015
Highest balance
during the year
Balance at
31 Dec
Highest balance
during the year
$m
$m
$m
997
4,494
77,732
4,314
97,827
247
2,148
77,421
3,590
95,850
620
3,409
47,229
4,427
97,770
Balance at
31 Dec
$m
242
2,466
44,350
4,285
97,770
185,364
179,256
153,455
149,113
3,823
5,025
1,749
10,597
63,719
2,157
5,025
891
8,073
7,619
2,892
2,459
2,652
8,003
68,349
2,152
2,277
1,746
6,175
68,333
The above outstanding balances arose in the ordinary course of business and 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 5.
37 Events after the balance sheet date
A fourth interim dividend for 2016 of $0.21 per ordinary share (a distribution of approximately $4,172m) was declared by the
Directors after 31 December 2016.
On 21 February 2017, the Board approved a share buy-back programme of up to $1.0bn.
These accounts were approved by the Board of Directors on 21 February 2017 and authorised for issue.
264 HSBC Holdings plc Annual Report and Accounts 2016
38 HSBC Holdings’ subsidiaries, joint ventures and associates
In accordance with Section 409 of the Companies Act 2006 a list of HSBC Holdings plc’s subsidiaries, joint ventures and associates,
the registered office address and the effective percentage of equity owned at 31 December 2016 is disclosed below.
Unless otherwise stated, the share capital comprises ordinary or common shares which are held by Group subsidiaries. The
ownership percentage is provided for each undertaking. The undertakings below are consolidated by HSBC unless otherwise
indicated.
Subsidiaries
Subsidiaries
ACN 087 652 113 Pty Limited
AEA Investors (Cayman) IA L.P.
Allblack Investments Limited
Almacenadora Banpacifico S.A.
AMP Client HSBC Custody Nominee (UK) Limited
Assetfinance December (F) Limited
Assetfinance December (H) Limited
Assetfinance December (M) Limited
Assetfinance December (P) Limited
Assetfinance December (R) Limited
Assetfinance December (W) Limited
Assetfinance June (A) Limited
Assetfinance June (D) Limited
Assetfinance June (E) Limited
Assetfinance Limited
Assetfinance March (B) Limited
Assetfinance March (D) Limited
Assetfinance March (F) Limited
Assetfinance September (F) Limited
Assetfinance September (G) Limited
B&Q Financial Services Limited
Banco Nominees (Guernsey) Limited
Banco Nominees 2 (Guernsey) Limited
Banco Nominees Limited
Bank of Bermuda (Cayman) Limited
Beau Soleil Limited Partnership
Beijing Miyun HSBC Rural Bank Company Limited
Beneficial Company LLC
Beneficial Consumer Discount Company
Beneficial Financial I Inc.
Beneficial Florida Inc.
Beneficial Homeowner Service Corporation
Beneficial Kentucky Inc.
Beneficial Loan & Thrift Co.
Beneficial Louisiana Inc.
Beneficial Maine Inc.
Beneficial Massachusetts Inc.
Beneficial Michigan Inc.
Beneficial New Hampshire Inc.
Beneficial Oregon Inc.
Beneficial Rhode Island Inc.
Beneficial South Dakota Inc.
Beneficial Tennessee Inc.
Beneficial West Virginia, Inc.
Beneficial Wyoming Inc.
BerCay Holdings Limited
Bermuda International Securities Limited
BFC Insurance Agency of Nevada
Billingsgate City Securities Limited
Billingsgate Nominees Limited
Cal-Pacific Services, Inc.
Canada Crescent Nominees (UK) Limited
Canada Square Nominees (UK) Limited
Canada Square Property Participations Limited
Canada Water Nominees (UK) Limited
Capco/Cove, Inc.
Group
interest % Footnotes
Subsidiaries
Group
interest % Footnotes
100.00
100.00
100.00
99.99
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
99.98
100.00
100.00
100.00
99.99
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
182
Card-Flo #1, Inc.
1,19, 130
16, 162
201
1, 94
94
94
94
94
94
94
94
94
94
94
84
94
94
94
94
131
1, 108
108
87
166
19, 27
22, 148
10, 127
135
142
127
127
127
127
127
127
127
127
127
127
127
127
141
143
136
166
87
61
94
94
142
1, 94
94
1, 94
1, 94
101
Card-Flo #3, Inc.
Cayman International Finance Limited
Cayman Nominees Limited
CBS/Holdings, Inc.
CC&H Holdings LLC
CCF & Partners Asset Management Limited
CCF Charterhouse GmbH
CCF Charterhouse GmbH & Co Asset Leasing KG
CCF Holding (LIBAN) S.A.L. (in liquidation)
Charterhouse Administrators ( D.T.) Limited
Charterhouse Development Limited
Charterhouse Management Services Limited
Charterhouse Pensions Limited
Chongqing Dazu HSBC Rural Bank Company Limited
Chongqing Fengdu HSBC Rural Bank Company
Limited
Chongqing Rongchang HSBC Rural Bank Company
Limited
CL Residential Limited
COIF Nominees Limited
Cordico Management AG
Corhold Limited
Dalian Pulandian HSBC Rural Bank Company Limited
Decision One Mortgage Company, LLC
Dem 5
Dem 9
Dempar 1
Dempar 4
Desarrollo Turistico, S.A. de C.V.
Eagle Rock Holdings, Inc.
Ellenville Holdings, Inc.
Elysees GmbH
Elysées Immo Invest
Emerging Growth Real Estate II GP Limited
EMTT Limited
Endeavour Personal Finance Limited
Equator Holdings Limited
Eton Corporate Services Limited
Far East Leasing SA
Fdm 5 SAS
FEPC Leasing Ltd.
Finanpar 2
Finanpar 7
First Corporate Director Inc.
First Direct Investments (UK) Limited
Flandres Contentieux S.A.
Foncière Elysées
Forward Trust Rail Services Limited
Fujian Yongan HSBC Rural Bank Company Limited
Fulcher Enterprises Company Limited
Fundacion HSBC, A.C.
G.M. Gilt-Edged Nominees Limited
Gesellschaft fur Industrielle Beteiligungen und
Finanzierung mbH
Gesico International SA
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
74.99
100.00
100.00
100.00
100.00
100.00
36
127
166
228
101
10, 133
94
4, 233
9, 233
1, 220
94
94
94
1, 94
22, 190
100.00
22, 191
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
62.14
60.00
100.00
100.00
100.00
22, 195
94
1, 8, 94
109
151
22, 147
10, 139
4, 74
4, 74
4, 29
4, 29
201
101
101
6, 233
4, 89
108
1, 94
153
94
200
1, 189
4, 74
16, 234
4, 89
4, 89
151
94
1, 4, 44
4, 29
16, 94
22, 192
96
1, 20, 201
1, 94
176
113
HSBC Holdings plc Annual Report and Accounts 2016
265
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
Subsidiaries
Giller Ltd.
GPIF Co-Investment, LLC
GPIF-I Equity Co., Ltd.
GPIF-I Finance Co., Ltd
Griffin International Limited
Grundstuecksgesellschaft Trinkausstrasse
Kommanditgesellschaft
Grupo Financiero HSBC, S. A. de C. V.
Guangdong Enping HSBC Rural Bank Company
Limited
GZ Trust Corporation
Hang Seng (Nominee) Limited
Hang Seng Bank (China) Limited
Hang Seng Bank (Trustee) Limited
Hang Seng Bank Limited
Hang Seng Bullion Company Limited
Hang Seng Credit Limited
Hang Seng Data Services Limited
Hang Seng Finance Limited
Hang Seng Financial Information Limited
Hang Seng Futures Limited
Hang Seng Indexes Company Limited
Hang Seng Insurance Company Limited
Hang Seng Investment Management Limited
Hang Seng Investment Services Limited
Hang Seng Life Limited
Hang Seng Real Estate Management Limited
Hang Seng Securities Limited
Hang Seng Security Management Limited
Haseba Investment Company Limited
HBL Nominees Limited
HDSAP GP Limited
HFC Bank Limited
HFC Company LLC
High Meadow Management, Inc.
High Time Investments Limited
HITG Administration GmbH
Honey Green Enterprises Ltd.
Hongkong International Trade Finance (Holdings)
Limited
Household Capital Markets LLC
Household Commercial Financial Services, Inc.
Household Finance Consumer Discount Company
Household Finance Corporation II
Household Finance Corporation III
Household Finance Corporation of Alabama
Household Finance Corporation of California
Household Finance Corporation of West Virginia
Household Finance Industrial Loan Company of Iowa
Household Finance Realty Corporation of Nevada
Household Finance Realty Corporation of New York
Household Financial Center Inc.
Household Industrial Finance Company
Household Industrial Loan Company of Kentucky
Household Insurance Group Holding Company
Household International Europe Limited
Household Pooling Corporation
Household Realty Corporation
HPUT A Limited
HPUT B Limited
HRMG Nominees Limited
HSBC (BGF) Investments Limited
HSBC (General Partner) Limited
HSBC (Kuala Lumpur) Nominees Sdn Bhd
HSBC (Malaysia) Trustee Berhad
HSBC (Singapore) Nominees Pte Ltd
Group
interest % Footnotes
Subsidiaries
Group
interest % Footnotes
100.00
80.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
62.14
62.14
62.14
62.14
62.14
62.14
62.14
62.14
62.14
62.14
62.14
62.14
62.14
62.14
62.14
62.14
62.14
62.14
62.14
100.00
100.00
100.00
100.00
100.00
62.14
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
101
HSBC Administradora de Inversiones S.A.
10, 127
1, 11, 118
1, 11, 118
HSBC AFS (USA) LLC
HSBC Agency (India) Private Limited
HSBC Alpha Funding (UK) Holdings
94
176
201
22, 196
151
96
22, 71
96
96
96
96
96
96
96
96
96
96
96
96
96
96
96
96
96
1, 94
108
94
HSBC Alternative Investments Limited
HSBC Amanah Malaysia Berhad
HSBC Americas Corporation (Delaware)
HSBC Argentina Holdings S.A.
HSBC Asia Holdings (UK) Limited
HSBC Asia Holdings B.V.
HSBC Asia Pacific Holdings (UK) Limited
HSBC Asset Finance (UK) Limited
HSBC Asset Finance Holdings Limited
HSBC Asset Finance M.O.G. Holdings (UK) Limited
HSBC Asset Management (India) Private Limited
HSBC Assurances Vie (France)
HSBC Australia Holdings Pty Limited
HSBC Bank (Chile)
HSBC Bank (China) Company Limited
HSBC Bank (General Partner) Limited
HSBC Bank (Mauritius) Limited
HSBC Bank (RR) (Limited Liability Company)
HSBC Bank (Singapore) Limited
HSBC Bank (Taiwan) Limited
HSBC Bank (Uruguay) S.A.
HSBC Bank (Vietnam) Ltd.
HSBC Bank A.S.
HSBC Bank Argentina S.A.
HSBC Bank Armenia cjsc
HSBC Bank Australia Limited
HSBC Bank Bermuda Limited
HSBC Bank Canada
HSBC Bank Capital Funding (Sterling 1) LP
10, 127
HSBC Bank Capital Funding (Sterling 2) LP
101
96
34
103
HSBC Bank Egypt S.A.E
HSBC Bank International Limited
HSBC Bank Malaysia Berhad
HSBC Bank Malta p.l.c.
HSBC Bank Middle East Limited
94
10, 127
HSBC Bank Middle East Limited, Representative
Office Morocco SARL
127
127
127
127
137
127
143
138
127
127
141
126
140
86
HSBC Bank Nominee (Jersey) Limited
HSBC Bank Oman S.A.O.G.
HSBC Bank Pension Trust (UK) Limited
HSBC Bank plc
HSBC Bank Polska S.A.
HSBC Bank USA, National Association
HSBC Branch Nominee (UK) Limited
HSBC Brasil Holding S.A.
HSBC BRASIL S.A. BANCO DE INVESTIMENTO
HSBC Broking Forex (Asia) Limited
HSBC Broking Futures (Asia) Limited
HSBC Broking Futures (Hong Kong) Limited
HSBC Broking Nominees (Asia) Limited
HSBC Broking Securities (Asia) Limited
16, 94
HSBC Broking Securities (Hong Kong) Limited
226
127
1,94
1,94
108
94
HSBC Broking Services (Asia) Limited
HSBC Canada Holdings (UK) Limited
HSBC Capital (Canada) Inc.
HSBC Capital (USA), Inc.
HSBC Capital Funding (Dollar 1) L.P.
HSBC Capital Limited
2, 163
HSBC Card Services Inc.
31
40
58
HSBC Casa de Bolsa, S.A. de C.V., Grupo Financiero
HSBC
HSBC Cayman Services Limited
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
72.96
100.00
100.00
100.00
100.00
100.00
100.00
99.99
70.00
100.00
100.00
100.00
100.00
100.00
94.53
100.00
100.00
70.03
100.00
100.00
100.00
51.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
111
10, 101
85
166
94
94
127
150
94
16,94
16,94
94
94
94
76
4, 44
16, 182
171
22, 157
163
91
23, 57
58
38
211
227
146
149
90
182
87
16, 98
19, 163
19, 163
69
162
31
35
16, 177
229
162
105
94
2, 16, 94
16, 214
16, 52
1, 94
216
216
27
14, 27
27
27
27
27
27
94
68
127
19,163
27
127
201
166
266 HSBC Holdings plc Annual Report and Accounts 2016
Subsidiaries
HSBC City Funding Holdings
HSBC Client Holdings Nominee (UK) Limited
HSBC Client Share Offer Nominee (UK) Limited
HSBC Columbia Funding, LLC
HSBC Consumer Lending (USA) Inc.
HSBC Corporate Advisory (Malaysia) Sdn Bhd
HSBC Corporate Finance (Hong Kong) Limited
HSBC Corporate Trustee Company (UK) Limited
HSBC Credit Center, Inc.
HSBC Custody Nominees (Australia) Limited
HSBC Custody Services (Guernsey) Limited
HSBC Daisy Investments (Mauritius) Limited
HSBC Electronic Data Processing (Guangdong)
Limited
HSBC Electronic Data Processing (Malaysia) Sdn Bhd
HSBC Electronic Data Processing (Philippines), Inc.
HSBC Electronic Data Processing India Private
Limited
HSBC Electronic Data Processing Lanka (Private)
Limited
HSBC Electronic Data Service Delivery (Egypt) S.A.E.
HSBC Enterprise Investment Company (UK) Limited
HSBC Epargne Entreprise (France)
HSBC Equator (UK) Limited
HSBC Equipment Finance (UK) Limited
HSBC Equities (Luxembourg) S.a r.l.
HSBC Equity (UK) Limited
HSBC Europe B.V.
HSBC European Clients Depositary Receipts Nominee
(UK) Limited
HSBC Executor & Trustee Company (UK) Limited
HSBC Factoring (France)
HSBC Finance (Brunei) Berhad
HSBC Finance (Netherlands)
HSBC Finance Corporation
HSBC Finance Limited
HSBC Finance Mortgages Inc.
HSBC Finance Transformation (UK) Limited
HSBC Financial Services (Middle East) Limited
HSBC Financial Services (Lebanon) s.a.l.
HSBC Financial Services (Uruguay) S.A.
HSBC Fondo 1, S.A. de C.V., Sociedad de Inversion de
Renta Variable
Group
interest % Footnotes
Subsidiaries
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
99.70
100.00
94
1, 94
1, 94
10, 127
127
31
27
94
127
182
108
123
HSBC Global Asset Management (Japan) K. K.
HSBC Global Asset Management (Malta) Limited
HSBC Global Asset Management (México), S.A. de
C.V., Sociedad Operadora de Fondos de Inversión,
Grupo Financiero HSBC
HSBC Global Asset Management (Oesterreich) GmbH
HSBC Global Asset Management (Singapore) Limited
HSBC Global Asset Management (Switzerland) AG
HSBC Global Asset Management (Taiwan) Limited
HSBC Global Asset Management (UK) Limited
HSBC Global Asset Management (USA) Inc.
HSBC Global Asset Management Holdings (Bahamas)
Limited
22, 77
HSBC Global Asset Management Limited
222
169
165
79
219
94
4,44
94
94
1,45
94
94
1, 94
94
4,29
230
2,94
HSBC Global Custody Nominee (UK) Limited
HSBC Global Custody Proprietary Nominee (UK)
Limited
HSBC Global Services (UK) Limited
HSBC Global Services Limited
HSBC Global Shared Services (India) Private Limited
HSBC Group Management Services Limited
HSBC Group Nominees UK Limited
HSBC Guyerzeller Trust Company
HSBC Holdings B.V.
HSBC Home Equity Loan Corporation II
HSBC IM Pension Trust Limited
HSBC Infrastructure Limited
HSBC INKA Investment-AG TGV
HSBC Inmobiliaria (Mexico), S.A. de C.V.
HSBC Institutional Trust Services (Asia) Limited
HSBC Institutional Trust Services (Bermuda) Limited
HSBC Institutional Trust Services (Ireland) DAC
HSBC Institutional Trust Services (Mauritius) Limited
HSBC Institutional Trust Services (Singapore) Limited
16, 127
HSBC Insurance (Asia) Limited
94
224
2, 94
158
158
237
HSBC Insurance (Asia-Pacific) Holdings Limited
HSBC Insurance (Bermuda) Limited
HSBC Insurance (Singapore) Pte. Limited
HSBC Insurance Agency (USA) Inc.
HSBC Insurance Brokers (Philippines) Inc
HSBC Insurance Brokers (Taiwan) Limited
HSBC Insurance Holdings Limited
100.00
1, 201
HSBC Insurance Management Services Limited
HSBC Fondo 3, S.A. de C.V., Sociedad de Inversion de
Renta Variable
100.00
1, 201
HSBC Insurance Services Holdings Limited
HSBC Insurance Services (Lebanon) S.A.L.
HSBC Fondo 4, S.A. de C.V., Sociedad de Inversion de
Renta Variable
HSBC Fondo 5, S.A. de C.V., Sociedad de Inversion de
Renta Variable
100.00
1, 201
HSBC International Financial Services (UK) Limited
HSBC International Finance Corporation (Delaware)
100.00
1, 201
HSBC International Nominees Limited
HSBC International Holdings (Jersey) Limited
HSBC Fondo 6, S.A. de C.V., Sociedad de Inversion de
Renta Variable
100.00
1, 201
HSBC International Trustee (BVI) Limited
HSBC International Trade Finance Limited
HSBC Fondo Global 1, S.A. de C.V., Sociedad de
Inversion de Renta Variable
HSBC France
HSBC Fund Administration (Jersey) Limited
HSBC Fund Services (Korea) Limited
HSBC Funding (UK) Holdings
HSBC Funds Nominee (Jersey) Limited
HSBC Germany Holdings GmbH
HSBC Gestion (Monaco) SA
HSBC Global Asset Management (Bermuda) Limited
HSBC Global Asset Management (Canada) Limited
HSBC Global Asset Management (Deutschland)
HSBC Global Asset Management (France)
HSBC Global Asset Management (Hong Kong)
Limited
HSBC Global Asset Management (International)
Limited
100.00
99.99
100.00
92.96
100.00
100.00
100.00
99.80
100.00
100.00
100.00
100.00
100.00
100.00
1, 201
24, 29
162
1, 178
94
162
176
48
16,87
64
176
4,170
27
168
HSBC International Trustee (Holdings) Pte. Limited
HSBC International Trustee Limited
HSBC Inversiones S.A.
HSBC Inversiones y Servicios Financieros Limitada
HSBC InvestDirect (India) Limited
HSBC InvestDirect Financial Services (India) Limited
HSBC InvestDirect Sales & Marketing (India) Limited
HSBC InvestDirect Securities (India) Private Limited
HSBC Investment Asia Holdings Limited
HSBC Investment Bank Holdings B.V.
HSBC Investment Bank Holdings Limited
HSBC Investment Company (Egypt) S.A.E
HSBC Investment Funds (Canada) Inc.
HSBC Investment Funds (Hong Kong) Limited
HSBC Investment Funds (Luxembourg) SA
HSBC Investment Holdings (Guernsey) Limited
HSBC Investment Services (Africa) (Pty) Limited
Group
interest % Footnotes
100.00
70.03
155
95
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
99.96
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
99.54
100.00
99.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
201
6, 152
58
4, 109
63
94
80
187
94
1, 94
1, 94
94
2, 94
1, 85
94
1, 2, 94
82
16, 94
127
1, 94
94
24, 112
201
27
87
26
160
58
53
16, 181
87
58
80
102
46
2,94
94
158
94
66
15, 94
162
1, 208
94
17, 235
58
208
171
171
100
100
85
16, 100
27
94
2, 94
1,65
16, 64
27
45
200
56
HSBC Holdings plc Annual Report and Accounts 2016
267
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
Subsidiaries
HSBC Investments (Bahamas) Limited
HSBC Invoice Finance (UK) Limited
HSBC Iris Investments (Mauritius) Ltd
HSBC Issuer Services Common Depositary Nominee
(UK) Limited
HSBC Issuer Services Depositary Nominee (UK)
Limited
HSBC Land Title Agency (USA) LLC
HSBC Latin America B.V.
HSBC Latin America Holdings (UK) Limited
HSBC Leasing (Asia) Limited
HSBC Leasing (France)
HSBC Life (International) Limited
HSBC Life (UK) Limited
HSBC Life Assurance (Malta) Limited
HSBC Life Insurance Company Limited
HSBC Lodge Funding (UK) Holdings
HSBC London Holdings Limited
HSBC LU Nominees Limited
HSBC Management (Guernsey) Limited
HSBC Markets (Asia) Limited (In Liquidation)
HSBC Markets (USA) Inc.
HSBC Marking Name Nominee (UK) Limited
HSBC Mexico, S.A., Institucion de Banca Multiple,
Grupo Financiero HSBC
HSBC Middle East Finance Company Limited
HSBC Middle East Holdings B.V.
HSBC Middle East Leasing Partnership
HSBC Middle East Securities L.L.C
HSBC Mortgage Corporation (Canada)
HSBC Mortgage Corporation (USA)
HSBC Mortgage Services Inc.
HSBC Nominees (Asing) Sdn Bhd
HSBC Nominees (Hong Kong) Limited
HSBC Nominees (New Zealand) Limited
HSBC Nominees (Tempatan) Sdn Bhd
HSBC North America Holdings Inc.
HSBC Odeme Sistemleri Bilgisayar Teknolojileri Basin
Yayin Ve Musteri Hizmetleri
HSBC Overseas Holdings (UK) Limited
HSBC Overseas Investments (UK) Limited
HSBC Overseas Investments Corporation (New York)
HSBC Overseas Nominee (UK) Limited
HSBC Participaciones (Argentina) S.A.
HSBC PB Corporate Services 1 Limited
HSBC PB Services (Suisse) SA
HSBC Pension Trust (Ireland) DAC
HSBC Pensiones, S.A.
HSBC PI Holdings (Mauritius) Limited
HSBC Portfoy Yonetimi A.S.
HSBC Preferential LP (UK)
HSBC Private Bank (C.I.) Limited
HSBC Private Bank (Luxembourg) S.A.
HSBC Private Bank (Monaco) SA
HSBC Private Bank (Suisse) SA
HSBC Private Bank (UK) Limited
HSBC Private Bank International
HSBC Private Banking Holdings (Suisse) SA
HSBC Private Banking Nominee 3 (Jersey) Limited
HSBC Private Equity Advisors LLC
HSBC Private Equity Investments (UK) Limited
HSBC Private Trustee (Hong Kong) Limited
HSBC Private Wealth Services (Canada) Inc.
HSBC Professional Services (India) Private Limited
HSBC Property (UK) Limited
HSBC Property Funds (Holding) Limited
HSBC Property Funds Investment Limited
Group
interest % Footnotes
Subsidiaries
Group
interest % Footnotes
100.00
100.00
100.00
188
59
123
HSBC Provident Fund Trustee (Hong Kong) Limited
HSBC Quest Trustee (UK) Limited
HSBC Rail (UK) Limited
HSBC Real Estate Leasing (France)
100.00
1, 94
HSBC Realty Credit Corporation (USA)
100.00
55.00
100.00
100.00
100.00
100.00
100.00
100.00
70.03
50.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
99.99
80.00
100.00
100.00
49.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
99.99
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
1, 94
10, 70
94
2, 94
27
4, 74
87
94
95
51
94
HSBC REIM (France)
HSBC Representative Office (Nigeria) Limited
HSBC Republic Management Services (Guernsey)
Limited
HSBC Retail Services Inc.
HSBC Retirement Benefits Trustee (UK) Limited
HSBC Saudi Arabia Limited
HSBC Savings Bank (Philippines) Inc.
HSBC Securities (Asia) Limited
HSBC Securities (B) Berhad
HSBC Securities (Canada) Inc.
HSBC Securities (Egypt) S.A.E.
1, 2, 94
HSBC Securities (Japan) Limited
94
108
25
127
HSBC Securities (Philippines) Inc.
HSBC Securities (Singapore) Pte Limited
HSBC Securities (South Africa) (Pty) Limited
HSBC Securities (Taiwan) Corporation Limited
1, 94
HSBC Securities (USA) Inc.
201
218
16, 94
19, 183
154
16, 98
127
127
31
27
164
31
HSBC Securities and Capital Markets (India) Private
Limited
HSBC Securities Asia International Nominees Limited
HSBC Securities Asia Nominees Limited
HSBC Securities Brokers (Asia) Limited
HSBC Securities Investments (Asia) Limited
HSBC Securities Services (Bermuda) Limited
HSBC Securities Services (Guernsey) Limited
HSBC Securities Services (Ireland) DAC
HSBC Securities Services (Luxembourg) S.A.
HSBC Securities Services (USA) Inc.
HSBC Securities Services Holding Limited
HSBC Securities Services Holdings (Ireland) DAC
16, 127
HSBC Seguros de Retiro (Argentina) S.A.
115
2, 94
2, 94
128
1, 94
150
167
210
26
202
160
114
94
200
45
4, 48
210
94
41
210
167
HSBC Seguros de Vida (Argentina) S.A.
HSBC Seguros, S.A de C.V., Grupo Financiero HSBC
HSBC Service Delivery (Polska) Sp. z o.o.
HSBC Services (France)
HSBC Services Japan Limited
HSBC Servicios Financieros, S.A. de C.V
HSBC Servicios, S.A. DE C.V., Grupo Financiero HSBC
HSBC SFH (France)
HSBC Software Development (Canada) Inc
HSBC Software Development (Guangdong) Limited
HSBC Software Development (India) Private Limited
HSBC Software Development (Malaysia) Sdn Bhd
HSBC South Point Investments (Barbados) LLP
HSBC Specialist Investments Limited
HSBC Stockbroker Services (Client Assets) Nominees
Limited
HSBC Stockbrokers Nominee (UK) Limited
HSBC Structured Funds (Asia) Limited
HSBC Taxpayer Financial Services Inc.
HSBC Technology & Services (China) Limited
HSBC Technology & Services (USA) Inc.
HSBC TFS I 2005 LLC
10, 127
HSBC TKM Limited
94
27
HSBC Transaction Services GmbH
HSBC Trinkaus & Burkhardt (International) S.A.
16, 64
HSBC Trinkaus & Burkhardt AG
85
94
94
153
HSBC Trinkaus & Burkhardt Gesellschaft fur
Bankbeteiligungen mbH
HSBC Trinkaus Consult GmbH
HSBC Trinkaus Europa Immobilien-Fonds Nr. 5 GmbH
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
69.40
100.00
100.00
100.00
100.00
94.53
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
80.65
80.65
80.65
80.65
80.65
80.65
27
1, 2, 94
94
4, 44
16, 127
4, 44
221
200
127
1, 2, 94
1, 156
231
14, 27
1, 161
93
69
94
1, 12, 92
12, 58
56
38
127
16, 85
199
27
27
27
87
108
26
45
134
208
26
150
150
202
174
4, 29
188
201
201
4,44
223
22, 215
159
222
19, 42
16, 94
1, 94
1, 94
27
127
22, 179
127
10, 36
1, 94
6, 238
1, 45
24, 176
176
176
176
268 HSBC Holdings plc Annual Report and Accounts 2016
Group
interest % Footnotes
Subsidiaries
Group
interest % Footnotes
Subsidiaries
HSBC Trinkaus Family Office GmbH
HSBC Trinkaus Immobilien Beteiligungs KG
HSBC Trinkaus Real Estate GmbH
HSBC Trust Company (BVI) Limited
HSBC Trust Company (Canada)
HSBC Trust Company (Delaware), National
Association
HSBC Trust Company (UK) Limited
HSBC Trust Company AG
HSBC Trustee (C.I.) Limited
HSBC Trustee (Cayman) Limited
HSBC Trustee (Guernsey) Limited
HSBC Trustee (Hong Kong) Limited
HSBC Trustee (Mauritius) Limited
HSBC Trustee (Singapore) Limited
HSBC UK RFB Limited
HSBC USA Inc.
HSBC Valores S.A.
HSBC Violet Investments (Mauritius) Limited
HSBC Wealth Advisory Israel Ltd
HSBC Wealth Client Nominee Limited
HSBC Yatirim Menkul Degerler A.S.
HSBC-D1, S.A. de C.V., Sociedad de Inversion en
Instrumentos de Deuda
HSBCD10, S. A. de C. V., Sociedad de Inversion en
Instrumentos de Deuda
HSBC-D2, S.A. de C.V., Sociedad de Inversion en
Instrumentos de Deuda
HSBC-D7, S.A. de C.V., Sociedad de Inversion en
Instrumentos de Deuda
HSBC-D9, S.A. de C.V., Sociedad de Inversion en
Instrumentos de Deuda
HSBC-DE, S.A. de C.V., Sociedad de Inversion en
Instrumentos de Deuda
HSBC-DG, S. A. de C. V., Sociedad de Inversion en
Instrumentos de Deuda
HSBC-DH, S. A. de C. V., Sociedad de Inversion en
Instrumentos de Deuda
80.65
80.65
80.65
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
6, 176
176
6, 176
151
98
James Capel (Custodian) Nominees Limited
James Capel (Nominees) Limited
James Capel (Second Nominees) Limited
James Capel (Taiwan) Nominees Limited
James Capel (Third Nominees) Limited
John Lewis Financial Services Limited
1,67
Katonah Close Corp.
94
109
167
207
200
27
122
58
1, 2, 94
16, 119
110
123
1, 107
1, 94
114
Keyser Ullmann Limited
Kings Meadow Nominees Limited
Legend Estates Limited
Lemasco Nominees Limited
Lion Corporate Services Limited
Lion International Corporate Services Limited
Lion International Management Limited
Lion Management (Hong Kong) Limited
Lyndholme Limited
MAGIM Client HSBC GIS Nominee (UK) Limited
Marks and Spencer Financial Services plc
Marks and Spencer Retail Financial Services Holdings
Limited
Marks and Spencer Savings and Investments Limited
Marks and Spencer Unit Trust Management Limited
100.00
1, 201
Mercantile Company Limited
Maxima S.A. AFJP
100.00
1, 201
Midcorp Limited
Mexicana de Fomento, S.A. de C.V.
100.00
1, 201
Midland Bank (Branch Nominees) Limited
Midland Australia Pty Limited
100.00
1, 201
Midland Nominees Limited
MIL (Cayman) Limited
MM Mooring #2 Corp.
100.00
1, 201
MW Gestion SA
Oakwood Holdings, Inc.
100.00
1, 201
Promocion en Bienes Raices, S.A. de C.V.
100.00
1, 201
Prudential Client HSBC GIS Nominee (UK) Limited
ProServe Bermuda Limited
100.00
1, 201
PT HSBC Securities Indonesia
PT Bank HSBC Indonesia
HSBC-DL, S. A. de C. V., Sociedad de Inversion en
Instrumentos de Deuda
100.00
1, 201
PTC New LLC
R/CLIP Corp.
HSBC-E2, S.A. de C. V., Sociedad de Inversion de
Renta Variable
HSBC-E3, S.A. de C.V., Sociedad de Inversion en
Instrumentos de Deuda
HSBC-FF, S.A. de C.V., Sociedad de Inversion de
Renta Variable
HSBC-V2, S.A. de C.V., Sociedad de Inversion de
Renta Variable
HSBC-V3, S.A. de C.V., Sociedad de Inversion de
Renta Variable
HSI Asset Securitization Corporation
HSI International Limited
HSIL Investments Limited
Hubei Macheng HSBC Rural Bank Company Limited
Hubei Suizhou Cengdu HSBC Rural Bank Company
Limited
Hubei Tianmen HSBC Rural Bank Company Limited
Hunan Pingjiang HSBC Rural Bank Company Limited
Imenson Limited
INKA Internationale Kapitalanlagegesellschaft mbH
Inmobiliaria Banci, S.A. de C.V.
Inmobiliaria Bisa, S.A. de C.V.
Inmobiliaria Grufin, S.A. de C.V.
Inmobiliaria Guatusi, S.A. de C.V.
IRERE Property Investments (French Offices) Sarl
James Capel & Co. Limited
James Capel (Channel Islands) Nominees Limited
Real Estate Collateral Management Company
100.00
1, 201
Republic Nominees Limited
100.00
1, 201
S.A.P.C. - Ufipro Recouvrement
Republic Overseas Capital Corporation
100.00
1, 201
100.00
1, 201
Saf Baiyun
Saf Chang Jiang
Saf Chang Jiang Shi Liu
Saf Chang Jiang Shi Wu
Saf Chang Jiang Shi'Er
100.00
100.00
62.14
100.00
100.00
100.00
100.00
100.00
62.14
80.65
99.99
99.99
99.99
99.99
100.00
100.00
100.00
1, 201
Saf Chang Jiang Shiyi
127
96
94
Saf Guangzhou
Saf Zhu Jiang
Saf Zhu Jiang Yi
22, 197
Saf Zhu Jiang Ba
22, 194
22, 99
22, 213
96
238
201
201
201
201
1, 88
94
168
Saf Zhu Jiang Er
Saf Zhu Jiang Jiu
Saf Zhu Jiang Liu
Saf Zhu Jiang Qi
Saf Zhu Jiang San
Saf Zhu Jiang Shi
Saf Zhu Jiang Shi Ba
Saf Zhu Jiang Shi Er
Saf Zhu Jiang Shi Jiu
Saf Zhu Jiang Shi Liu
Saf Zhu Jiang Shi Qi
Saf Zhu Jiang Shi Wu
Saf Zhu Jiang Shiyi
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
99.99
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
50.00
100.00
98.94
85.00
100.00
100.00
100.00
100.00
100.00
99.98
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
94
94
94
94
94
94
101
94
175
94
168
1, 27
208
208
1, 27
27
1, 94
175
175
175
175
150
14, 94
201
2, 16, 94
182
1, 94
1, 94
166
101
150
101
16, 201
125
1, 94
236
83
10, 127
127
127
200
80
20, 74
4, 89
4, 89
4, 89
1, 4, 89
4, 89
1, 4, 89
4, 89
4, 89
4, 89
4, 89
4, 89
4, 89
4, 89
4, 89
4, 89
4, 89
4, 89
4, 89
4, 89
4, 89
4, 89
4, 89
4, 89
HSBC Holdings plc Annual Report and Accounts 2016
269
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
Subsidiaries
Saf Zhu Jiang Wu
Samada Limited
Samuel Montagu & Co. Limited
SAS Bosquet -Audrain
SAS Cyatheas Pasteur
SAS Orona
SCI Hervet Mathurins
SCI HSBC Assurances Immo
Secondary Club Deal I GP Limited
Secondary Club Deal II GP Limited
SFSS Nominees (Pty) Limited
Shandong Rongcheng HSBC Rural Bank Company
Limited
Shenfield Nominees Limited
Sico Limited
SNC Dorique
SNC Kerouan
SNC Les Mercuriales
SNC Les Oliviers D'Antibes
SNC Makala
SNC Nuku-Hiva Bail
SNCB/M6 - 2008 A
SNCB/M6-2007 A
SNCB/M6-2007 B
Societe CCF Finance Moyen-Orient S.A.L. (in
liquidation)
Société Financière et Mobilière
Société Française et Suisse
Societe Immobiliere Atlas S.A.
Somers & Co
Somers Dublin DAC
Somers Nominees (Far East) Limited
Sopingest
South Yorkshire Light Rail Limited
SPE 1 2005 Manager Inc.
St Cross Trustees Limited
Sterling Credit Limited
Sun Hung Kai Development (Lujiazui III) Limited
Swan National Leasing (Commercials) Limited
Swan National Limited
Tasfiye Halinde HSBC Internet ve Telekomunikasyon
Hizmetleri Anonim Sirketi
Tayside Holdings Limited (In liquidation)
Group
interest % Footnotes
Subsidiaries
Group
interest % Footnotes
100.00
100.00
100.00
94.90
94.93
94.93
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
60.00
100.00
100.00
100.00
100.00
100.00
99.90
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
4, 89
167
1, 94
1, 4, 43
1, 4, 74
1,4,28
20,89
Tempus Management AG
Thasosfin
The Hongkong and Shanghai Banking Corporation
Limited
The Venture Catalysts Limited
Timberlink Settlement Services (USA) Inc.
TKM International Limited
1, 20, 44
Tooley Street View Limited
108
108
56
22, 198
1, 94
235
1, 20, 78
1, 20, 89
1, 20, 89
20, 89
1, 20, 89
1, 20, 89
1, 4, 89
1, 4, 89
1, 4, 89
1, 220
4, 29
4, 89
210
Tower Investment Management
Trinkaus Australien Immobilien Fonds Nr. 1 Brisbane
GmbH & Co. KG
Trinkaus Australien Immobilien-Fonds Nr. 1 Treuhand-
GmbH
Trinkaus Canada Immobilien-Fonds Nr. 1
Verwaltungs-GmbH
Trinkaus Europa Immobilien-Fonds Nr.3 Objekt
Utrecht Verwaltungs-GmbH
Trinkaus Immobilien-Fonds Geschaeftsfuehrungs-
GmbH
Trinkaus Immobilien-Fonds Verwaltungs-GmbH
Trinkaus Private Equity Management GmbH
Trinkaus Private Equity Verwaltungs GmbH
Tropical Nominees Limited
Trumball Management, Inc.
Turnsonic (Nominees) Limited
Vadep Holding AG
Valeurs Mobilières Elysées
Vintage 2016 HV GP Limited
Vintage 2016 KKR GP Limited
19, 121
Vintage 2017 Athyrium GP Limited
26
87
4, 89
1, 94
36
1, 94
131
Vintage I Secondary GP Limited
Vintage III Special Situations GP Limited
Wardley Limited
Wayfoong Credit Limited
Wayfoong Finance Limited
Wayfoong Nominees Limited
Wayhong (Bahamas) Limited
22, 212
Westminster House, LLC
94
94
Woodex Limited
Yan Nin Development Company Limited
96.00
12, 116
100.00
1, 12, 187
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
109
4, 44
13, 27
94
127
94
1, 94
32
80.65
176
80.65
6, 176
80.65
80.65
80.65
80.65
80.65
80.65
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
62.14
176
176
6, 176
6, 176
176
6, 176
166
101
1, 94
203
4, 30
108
108
1, 108
108
108
27
27
27
27
187
10, 127
87
96
270 HSBC Holdings plc Annual Report and Accounts 2016
Joint Ventures
Associates
The undertakings below are Joint Ventures and equity
accounted.
The undertakings below are associates and equity accounted.
Joint Ventures
GSI Retail Property Holdings Limited
HCM Holdings Limited
HOUSe Network Sdn Bhd
HSBC Jintrust Fund Management Company
Limited
HSBC Kingdom Africa Investments (Cayman)
Limited
Vaultex UK Limited
Vaultex Isle of Man Insurance Limited
Group
interest %
50.00
51.00
25.00
Footnotes
1, 217
153
1, 225
49.00
1, 22, 50
50.00
50.00
50.00
1, 186
60
55
Associates
AREIT Management Ltd
Ashwood Energy Limited
Bank of Communications Co., Ltd.
Barrowgate Limited
Business Growth Fund plc
Canara HSBC Oriental Bank of Commerce Life
Insurance Company Limited
CFAC Payment Scheme Limited
Chemi & Cotex (Rwanda) Limited
Chemi & Cotex Kenya Limited
Chemi and Cotex Industries Limited
Electronic Payment Services Company
(Hong Kong) Limited
EPS Company (Hong Kong) Limited
GIE GNIFI
GZHS Research Co Ltd
Hang Seng Qianhai Fund Management
Company Limited
HSBC Amanah Takaful (Malaysia) Berhad
HSBC Middle East Securities L.L.C
HSBC Mortgage LLP
HSBC TFS II 2005 LLC
Icon Brickell LLC
Intercede Holdco Limited
Jeppe Star Limited
MENA Infrastructure Fund (GP) Ltd
NAS Holding Limited
NAS United Healthcare Services LLC
Northstar Trade Finance Inc.
Novo Star Limited
SABB Takaful
SCI Karuvefa
sino AG
The Headland Asian Ventures Fund 3 Limited
The London Gold Market Fixing Limited
The Saudi British Bank
Trinkaus Europa Immobilien-Fonds Nr. 7
Frankfurt Mertonviertel KG
Group
interest %
Footnotes
41.90
25.00
19.03
15.31
24.31
26.00
33.33
33.33
34.00
34.00
19.33
38.66
25.00
20.51
43.50
49.00
49.00
33.30
20.00
24.90
29.92
34.00
33.33
22.13
22.13
17.89
34.00
45.50
33.33
20.16
32.59
25.00
40.00
1, 206
1, 129
193
81
37
232
1, 21, 47
173
185
1, 204
1, 27
1, 27
1, 7, 73
1, 10, 33
22, 62
31
154
1, 19, 72
10, 36
1, 10, 117
1, 106
1, 129
1, 180
1, 129
1, 10, 39
97
1, 172
209
1, 20, 184
5, 145
1, 16, 166
1, 8, 120
104
33.22
1, 9, 176
HSBC Holdings plc Annual Report and Accounts 2016
271
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
Footnotes for Note 38
1 Management has determined that these undertakings are excluded from consolidation in the
Group accounts as these entities do not meet the definition of subsidiaries in accordance
with IFRSs. HSBC’s consolidation policy is described in Note 1.2(a).
2 Directly held by HSBC Holdings plc
3 Entity is incorporated in The Netherlands
Description of shares
4 Actions shares
5 Aktiengesellschaft (AG) shares
6 GmbH Anteil
7 Groupement D'intérêt Economique shares
8 Guarantee shares
9 Kommanditgesellschaft (KG) shares
10
11
Limited Liability Company – no shares
Liquidating shares
12 Nominal shares
13 Ordinary and Cumulative Irredeemable and Non-cumulative Irredeemable Preference shares
14 Ordinary and Deferred shares
15 Ordinary and Non-Voting Redeemable shares
16 Ordinary and Preference shares
17 Ordinary Non-Participating, Non Voting shares
18 Ordinary Redeemable Non Participating shares
19 Partnership shares
20 Parts shares
21 Preference shares
22 Registered Capital shares
23 Russian limited liability company shares
24 Stückaktien
Registered Offices
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
(Liquidator's address) 62/F One Island East 18 Westlands Road, Island East Hong Kong
1 Grand Canal Square, Grand Canal Harbour, Dublin 2, D02 P820, Ireland
1 Queen's Road Central, Hong Kong
10, Rue Jean Jaurès BP Q5 Noumea 98845 Nouvelle Calédonie
103, Avenue des Champs-Elysées, 75008, Paris, France
109, Avenue des Champs-Elysees, 75008, Paris, France
10th Floor, North Tower 2, Leboh Ampang 50100, Kuala Lumpur, Malaysia
11 Dr. Roy’s Drive PO Box 694GT Grand Cayman KY1-1107 Cayman Islands
1101-J46, 11/F, Nansha Financial Building 171 Haibin Road, Nansha District Guangzhou
China
11-17, Ludwig-Erhard-Str., 20459, Hamburg, Germany
116 Archbishop Street Valletta Malta
1209 Orange Street, Wilmington, Delaware 19899, United States
13-15 York Buildings, London, Great Britain, WC2N 6JU, United Kingdom
13F-14F, 333 Keelung Road, Sec.1 Taipei 110 Taiwan, Province of China
13th Floor, Lulu Center Building, Salam Street, PO Box 44505, Abu Dhabi, United Arab
Emirates
13th Floor, South Tower 2, Leboh Ampang, 50100 Kuala Lumpur, Malaysia
1441 Brickell Avenue, Miami FL 33131, United States
15 Canada Square, London E14 5GL, United Kingdom
15 Rue Guynemer BP 412 Noumea 98845 Nouvelle Calédonie
15, Rue Vernet, 75008, Paris France
16 Boulevard d'Avranches, L-1160, Luxembourg
16F, 369 Zhongxiao East Road, Section 7 Nangang District, Taipei 115, Taiwan
17 Rochester Row, London SW1P 1QT, United Kingdom
17, Avenue d'Ostende, 98000, Monaco
171, Old Bakery Street, Valletta VLT 1455, Malta
17F, HSBC Building, Shanghai IFC, 8 Century Avenue, Pudong, Shanghai, China
18/F, HSBC Building, 8 Century Avenue, China (Shanghai) Pilot Free Trade Zone, 200120,
China
1800 Tysons Boulevard, Suite 50, McLean, Virginia 22102, United States
18th Floor, Tower 1, HSBC Centre, 1 Sham Mong Road, Kowloon, Hong Kong
192 Old Bakery Street, Valletta, Malta
1st Floor Rose House, 51-59 Circular Road, Douglas IM1 1RE, Isle of Man
2 Exchange Square, 85 Maude Street, Sandown, Sandton 2196, South Africa
2 Paveletskaya square, building 2, 115054 Moscow, Russia
21 Collyer Quay, #13-02, HSBC Building, 49320, Singapore
21 Farncombe Road, Worthing, Sussex BN11 2BW, England
21, Garlick Hill, London, EC4V 2AU, United Kingdom
2156 Horse Prairie Drive, Henderson, NV 89052, United States
272 HSBC Holdings plc Annual Report and Accounts 2016
2-3/F, Unit 21A, Qianhai Enterprise Dream Park, No. 63 Qian Wan Yi Road, Qianhai
Shenzhen-Hongkong Cooperation Zone, Shenzhen China
24th Fl., 99, Sec.2, Tunhwa S. Rd., Taipei, Taiwan, R.O.C.
2910 Virtual Way, Vancouver BC, V5M 0B2, Canada
3, Aboul Feda Street, Zamalek, Cairo Egypt
300 Delaware Avenue, Suite 1400, Wilmington, DE 19801, United States
300 Delaware Avenue, Suite 1401, Wilmington, DE 19801, United States
300, 885 West Georgia Street Vancouver BC V6C 3E9 Canada
306 Corniche El Nil Maadi, Cairo 11728, Egypt
3303 Express Drive North Islandia NY 11749 United States
34/F and 36/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road 27/F, Shanghai Stock
Exchange Bldg, 528 Pudong South Road Shanghai 200120 China
35 Great St Helens, London EC3A 6AP, United Kingdom
37 Avenue Henri Lafleur Nouméa, BP K3 98849, New Caledonia
39, Rue de Bassano, 75008, Paris, France
3rd Floor, HSBC Bank Middle East Limited Building Al Souq Road, Bur Dubai PO Box 4604,
Dubai United Arab Emirates
3rd Floor, Merchantile Bank Chamber 16, Veer Nariman Road Fort Mumbai Maharashtra
400001 India
4-17/F, Office Tower 2 TaiKoo Hui, No. 381 Tian He Road, Tian He District Guangzhou
Guangdong China
43, Rue de Paris, Saint Denis 97400, Reunion
439, Sri Jayawardenapura Mawatha Welikada, Rajagiriya, Colombo, Sri Lanka
452 Fifth Avenue, New York, NY10018, United States
49/F, The Lee Gardens, 33 Hysan Avenue Hong Kong
4th Floor, Harbour Place 103 South Church Street George Town Grand Cayman KY1-1002
Cayman Islands
4th Floor, World Trade Center, J1, Jend. Sudirman Kav. 29-31 Jakarta 12920 Indonesia
5 Donegal Square South Belfast BT1 5JP Northern Ireland
52/60, M G Road Fort, Mumbai, Maharashtra 400 001 India
545 Washington Blvd., 11th Floor Jersey City NJ 07310 United States
6 Front Street, Hamilton HM 11, Bermuda
6, Rue Adolphe Grand-Duchy of Luxembourg L-1116 Luxembourg
64, Rue Galilée, 75008, Paris, France
66 Teryan street Yerevan 9 Armenia
6th Floor, HSBC Centre, 18, Cybercity, Ebene Mauritius
7/F The Enterprise Centre - Tower I, 6766 Ayala Avenue corner Paseo De Roxas, Makati City,
Philippines
70 York Street, 7th Floor, Toronto ON, M5J 1S9 Canada
8 Canada Square, London E14 5HQ, United Kingdom
80, Mill Street, Qormi, QRM 3101, Malta
83 Des Voeux Road, Central, Hong Kong SAR
833 Three Bentall Centre, 595 Burrard Street, Vancouver BC V7X 1C4, Canada
885 West Georgia Street, Suite 300, Vancouver BC, V6C 3E9, Canada
89 Jingling Hongjian Avenue Tianmen Hubei Province 431700 China
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
9-11 Floors, NESCO IT Park Building No. 3, Western Express Highway, Goregaon (East),
Mumbai, Maharashtra 400063, India
101
95 Washington Street, Buffalo NY, 14203, United States
102
9th Floor, HSBC Centre 3058 Fifth Avenue West, Bonifacio Global City Taguig City Philippines
103 Akara Bldg. 24 De Castro Street Wickhams Cay I, Road Town Tortola Virgin Islands, British
104 Al Amir Abdulaziz Ibn Mossaad Ibn Jalawi Street Riyadh Saudi Arabia
105 Al Khuwair Office PO Box 1727 PC111 CPO Seeb Muscat Oman
106
Alderflat Drive, Newstead Industrial Estate, Trentham Stoke on Trent, ST4 8HX, United
Kingdom
107 Amot Atrium Tower, 30th Floor, 2 Jabotinsky St,. Ramat Gan 5250501, Israel
108 Arnold House, St Julians Avenue, St Peter Port, GY1 3NF, Guernsey
109 Bederstrasse 49, CH-8002, Zurich, Switzerland
110 Bouchard 680, 11° Ciudad de Buenos Aires 1106 Argentina
111 Bouchard 680, 9° Ciudad de Buenos Aires 1106 Argentina
112 Breite Str. 29/31 40213 Düsseldorf Germany
113 Bufete Tapia, PO Box 7412 Panama 5 Panama
114 Büyükdere Cad. No.128 D Blok Esentepe, Sisli Istanbul, Turkey
115 Büyükdere Cad. No:124 B Blok Kat 9 Oda:1, Esentepe, Sisli, I Turkey
116 Buyukdere Cad. No:124 B Blok Kat 9 Oda:2 34394 , Sisli / Ese Turkey
117 C T Corporation System 1200 South Pine Island Road Plantation FL 33324 United States
118
119
C/O Bank of Bermuda (Cayman) Limited, PO Box 513, HSBC House, 68 West Bay Road,
Grand Cayman KY1-1106, Cayman Islands
C/O Corporation Trust Incorporated, 351 West Camden Street, Baltimore MD 21201, United
States
120 C/O Hackwood Secretaries Limited, One Silk Street, London EC2Y 8HQ, United Kingdom
121 C/O HSBC AFS (USA) LLC, 452 Fifth Avenue, New York, NY 10018, United States
122 C/O HSBC Bank (Mauritius) Limited 6th Floor, HSBC Centre, 18 Cyber City, Ebene, Mauritius
123
C/O Kross Border Trust Services Limited, St. Louis Business Centre, Cnr Desroches & St
Louis Streets, Port Louis, Mauritius
124
125
126
127
128
C/O Morrison & Foerster (UK) LLP, City Point, 1 Ropemake Street, London EC2Y 9AW,
United Kingdom
C/O MUFG Fund Services (Bermuda) Limited The Belvedere Building 69 Pitts Bay Road
Pembroke HM08 Bermuda
C/O The Corporation Trust Company 100 S. 5th Street-Suite 1075 Minneapolis MN 55401
United States
C/O The Corporation Trust Company, 1209 Orange Street, Wilmington DE 19801, United
States
C/O The Corporation Trust Incorporated 351 West Camden Street Baltimore MD 21201
United States
129 C/O Trident Trust Company, Trident Chambers, PO Box 146, Tortola, British Virgin Islands
130
C/O Walkers SPV Limited, Walker House 87 Mary Street, PO Box 908GT George Town Grand
Cayman Cayman Islands
131 Camden House West, The Parade, Birmingham, B1 3PY, United Kingdom
132 City Gate House 22 Southwark Bridge Road London SE1 9HB
133
Corporation Service Company 2711 Centerville Road Suite 400 Wilmington DE 19808 United
States
134 Corporation Service Company 830 Bear Tavern Road West Trenton NJ 08628 United States
135
CT Corporation System 1515 Market Street Registered Office Philadelphia PA 19102 United
States
136 CT Corporation System 1720 Carey Avenue Cheyenne WY 82001 United States
137
CT Corporation System 2 North Jackson Street Suite 605 Montgomery AL 36104 United
States
138 CT Corporation System 2222 Grand Avenue Des Moines IA 50312 United States
139 CT Corporation System 225 Hillsborough Street Raleigh NC 27603 United States
140 CT Corporation System Kentucky Home Life Building Louisville KY 40202 United States
141 CT Corporation System, 530 Gay Street, Knoxville, TN 37902, United States
142 CT Corporation System, 800 S. Figueroa, Los Angeles, California 90017, United States
143
144
CT Corporation System, Secretary of State, 707 Virginia Street, East Charleston, WV 25301,
United States
Drake House, Three Rivers Court, Homestead Road, Rickmansworth, Hertfordshire, WD3
1FX, United Kingdom
145 Ernst-Schneider-Platz 1 40212 Duesseldorf Germany
146 Esentepe Mah. Büyükdere Caddesi No.128 Istanbul 34394 Turkey
147
First & Second Floor, No.3 Nanshan Road, Pulandian Dalian Liaoning Province China
148
First Floor, Xinhua Bookstore Xindong Road (SE of roundabout) Miyun District Beijing China
149
Florida 201 10°, Ciudad de Buenos Aires C1005AAE Argentina
150
Florida 229, 10° Ciudad de Buenos Aires, C1005AAE, Argentina
151
Harneys Corporate Services Limited, Craigmuir Chambers, PO Box 71, Road Town, Tortola,
British Virgin Islands
152 Herrengasse 1-3 1010 Wien Austria
153 Hill House, 1 Little New Street, London EC4A 3TR, United Kingdom
154
HSBC Bank Middle East Building - level 5, building 5, Emaar Dubai 502601 United Arab
Emirates
155 HSBC Building 11-1, Nihonbashi 3-Chome Chuo-ku Tokyo 103-0027 Japan
156 HSBC Building 7267 Olaya - Al Murrooj Riyadh 12283 - 2255 Saudi Arabia
157 HSBC Building Shanghai IFC 8 Century Avenue, Pudong Shanghai 200120 China
158 HSBC Building, Minet El Hosn, Riad el Solh Beirut 1107-2080, PO Box 11-1380, Lebanon
159
HSBC Centre River Side, West Avenue, 25B Raheja woods Kalyaninagar Pune Maharashtra
411006 India
160 HSBC Centre, Eighteen Cybercity Ebene, Mauritius
161
HSBC Chambers, Corner of Jalan Sultan and Jalan Pemancha Bandar Seri Begawan BS8811
Brunei Darussalam
162 HSBC House Esplanade, St. Helier, JE1 1HS, Jersey
163 HSBC House Esplanade, St. Helier, JE4 8UB, Jersey
164 HSBC House, Level 9, One Queen Street, Auckland 1010, New Zealand
165
166
HSBC House Plot No.8, Survey No.64 (Part) Hightec City Layout Madhapur Hyderabad
Andhra Pradesh 500081 India
HSBC House, 68 West Bay Road, PO Box 1109, George Town, Grand Cayman KY1-1102,
Cayman Islands
167 HSBC House, Esplanade, St. Helier, JE1 1GT, Jersey
168 HSBC House, Esplanade, St. Helier, JE4 8WP, Jersey
HSBC, Filinvest One Bldg, Northgate Cyberzone, Filinvest Corporate City Alabang,
Muntinlupa City Philippines
Immeuble Coeur Défense 110, Esplanade du Général de Gaulle- La Défense 4 92400
Courbevoie France
169
170
171
Isidora Goyenechea 2800, 23rd Floor, Las Condes, Santiago 7550647, Chile
172
Jayla Place Wickhams Cay I PO Box 3190 Road Town Tortola British Virgin Islands
173 Kacyiru BP 3094 Kigali Rwanda
174 Kapelanka 42A 30-347 Krakow Poland
Level 36, Tower 1, International Towers Sydney, 100 Barangaroo Avenue, Sydney, NSW
2000, Australia
Level 4, Building 4, The Gate Dubai International Financial Centre PO Box 506553 Dubai
United Arab Emirates
182
183
184
Lot n°5, la Rocade , Grand Camp LES ABYMES 97142 Guadeloupe
185
LR No. 1758/13 Grevella Grove Road Kalamu House PO Box 47323-00100 Nairobi Kenya
186
Maples Corporate Services Limited, PO Box 309, Ugland House, South Church Street,
George Town, Grand Cayaman, KY1-1104, Cayman Islands
187 Mareva House, 4 George Street, Nassau, Bahamas
MB&H Corporate Services Ltd, Mareva House, 4 George Street, Nassau, New Providence,
Bahamas
188
189 MMG Tower, 23 Floor Ave. Paseo del Mar Urbanizacion Costa del Este Panama
190 No 1, Bei Huan East Road Dazu County Chongqing China
191 No 107, Ping Du Avenue (E), Sanhe Town, Fengdu County Chongqing China
192 No. 1 1211 Yanjiang Zhong Road Yongan Fujian China
193 No. 188 Yincheng Zhong Lu, Pudong New District Shanghai 200120 China
194 No. 205, Lie Shan Road Suizhou Hubei China
195 No. 3, 5, 7, Haitang Erzhi Road Changyuan, Rongchang Chongqing 402460 China
196 No. 44, Xin Ping Road Central, Encheng, Enping Guangdong 529400 China
197 No. 56, Yu Rong Street Macheng Hubei Province 438300 China
198 No.198-2, Chengshan Avenue (E) Rongcheng Shangdong 264300 China
199 Palm Grove House PO Box 438 Road Town Tortola British Virgin Islands
200 Park Place, Park Street, St Peter Port, GY1 1EE, Guernsey
201 Paseo de la Reforma 347, Col. Cuauhtemoc, 6500, Mexico
202 Paseo de la Reforma 359, 6th Floor, D.F. 6500, Mexico
203 Philippe Kaiser Baarerstrasse 8 6300 Zug Switzerland
204
Plot No. 89-90 Mbezi Industrial Area Box 347 Dar es Salaam City United Republic of
Tanzania
205 PO Box 1109, HSBC House 68 West Bay Road Grand Cayman KY1-1102 Cayman Islands
206
207
PO Box 309 Ugland House, South Church Street George Town Grand Cayman KY1 - 1104
Cayman Islands
PO Box 484, Ground Floor, HSBC House 68 West Bay Road Grand Cayman, KY1-1106
Cayman Islands
208 PO Box 71, Craigmuir Chambers, Road Town, Tortola, British Virgin Islands
209 PO Box 9086 Riyadh 11413 Saudi Arabia
210 Quai des Bergues 9-17, 1201, Geneva, Switzerland
211 Rincon 391 Montevideo 11000 Uruguay
212
213
RM 2112, HSBC Building, Shanghai IFC No. 8 Century Road, Pudong Shanghai 200120
China
RM101, 102 & 106 Sunshine Fairview, Sunshine Garden Pedestrian Walkway Pingjiang
Hunan China
214 Rondo ONZ 1 00-124 Warsaw Poland
215 Room 305 No.886 Tianhe Bei Road, Tianhe District, Guangzhou Guangdong China
216
Rua Funchal, nº 160, SP Corporate Towers, Torre Norte, 19° Andar, cj 191A - Parte, São
Paulo 04551-060, Brazil
217 Second Floor, St Peters House, Le Bordage, St Peter Port, GY1 1B, Guernsey
218
Shop 4 & 5 Ground Floor & Mezzanine, Bldg. of Hilal Salim Bin Tarraf Al Wasel Area, Sheikh
Zayed Road PO Box 1956 Dubai United Arab Emirates
219 Smart Village 28th Km Cairo- Alexandria Desert Road Building Cairo Egypt
220
Solidere - Rue Saad Zaghloul Immeuble - 170 Marfaa, PO Box 17, 5476 Mar Michael,
11042040 Beyrouth, Lebanon
221 St Nicholas House, 10th Floor Catholic Mission St Lagos Nigeria
222
Suite 1005, 10th Floor, Wisma Hamzah Kwong Hing No. 1, Leboh Ampang 50100, Kuala
Lumpur, Malaysia
223 Suite 2400, 745 Thurlow Street, Vancouver BC V6E 0C5 Canada
224 Suite 300, 3381 Steeles Avenue East Toronto ON M2H 3S7 Canada
225
226
Suite 8-3A, Menara RA, No. 18, Jalan Dataran SD2, Dataran SD, PJU 9, Bandar Sri
Damansara 52200 Wilayah Persekutuan Malaysia
The Corporation Trust Company of Nevada 311 S. Division Street Carson City NV 89703
United States
227
The Metropolitan 235 Dong Khoi Street District 1, Ho Chi Minh City Viet Nam
228
The R&H Trust Co. Ltd. Windward 1, Regatta Office Park PO Box 897 Grand Cayman
KY1-1103 Cayman Islands
229
Tour Crystal 1 10EME Etage BD Al Mohades 20000 Casablanca, ANFA Morocco
230
231
232
Unit 04A-04B, 1F, Bangunan Gadong Properties Jalan Gadong Bandar Seri Begawan BE4119
Brunei Darussalam
Unit 1 GF The Commercial Complex Madrigal Avenue Ayala Alabang Village Muntinlupa City
1770 Philippines
Unit No. 208, 2nd Floor, Kanchenjunga Building, 18 Barakhamba Road, New Delhi - 110001,
India
175 Kings Meadow, Chester Business Park, Chester, Cheshire CH99 9FB, United Kingdom
233 Unsoeldstrasse 2, 80538, Munich, Germany
176 Königsallee 21/23, 40212, Düsseldorf Germany
177
Level 1, Building No. 8, Gate Village Dubai International Financial Centre PO Box 502601
United Arab Emirates
178
Level 12, HSBC Building 37, Chilpae-ro Jung-gu Seoul Korea, Republic of
179
Level 19, HSBC Building, Shanghai IFC 8 Century Avenue Pudong Shanghai China
180
Level 3 Building 4, Gate District Dubai International Financial Centre Dubai MENA United
Arab Emirates
181
Level 32, HSBC Main Building 1 Queen's Road Central Hong Kong SAR Hong Kong
234
Walkers Corporate Services Limited, Walker House, 87 Mary Street, George Town, Grand
Cayman KY1-9005, Cayman Islands
235 Woodbourne Hall, Road Town, PO Box 916, Tortola, British Virgin Islands
236
237
World Trade Center 1, Floor 8-9 Jalan Jenderal Sudirman Kavling 29 - 31 Jakarta 12920
Indonesia
World Trade Center Montevideo Avenida Luis Alberto de Herrera 1248 Torre 1, Piso 15,
Oficina 1502 Montevideo CP 11300 Uruguay
238
Yorckstraße 21 - 23, 40476, Duesseldorf, Germany
HSBC Holdings plc Annual Report and Accounts 2016
273
Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Shareholder information
Shareholder information
Fourth interim dividend for 2016
Interim dividends for 2017
2016 Annual General Meeting
Earnings Releases and Interim Results
Shareholder enquiries and communications
Stock symbols
Investor relations
Where more information about HSBC is available
Taxation of shares and dividends
Cautionary statement regarding forward-looking statements
Certain defined terms
Abbreviations
Page
274
274
274
274
275
276
276
276
277
279
279
280
A glossary of terms used in this Annual Report and Accounts can be found in the Investor Relations section of www.hsbc.com
Fourth interim dividend for 2016
The Directors have declared a fourth interim dividend for 2016 of $0.21 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 8 March
2017. The timetable for the dividend is:
Announcement
American Depositary Shares (‘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, Bermuda
Mailing of Annual Report and Accounts 2016 and/or Strategic Report 2016 and dividend 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.
Footnote
21 February 2017
22 February 2017
23 February 2017
1
24 February 2017
8 March 2017
23 March 2017
27 March 2017
6 April 2017
Interim dividends for 2017
The Board has adopted a policy of paying quarterly interim dividends on 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 2017 will be $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.
2016 Annual General Meeting
All resolutions considered at the 2016 Annual General Meeting held at 11.00am on 22 April 2016 at the Queen Elizabeth II
Conference Centre, London SW1P 3EE were passed on a poll.
Earnings Releases and Interim Results
Earnings Releases are expected to be issued on or around 4 May 2017 and 30 October 2017. The Interim Results for the six months
to 30 June 2017 are expected to be issued on 31 July 2017.
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HSBC Holdings plc Annual Report and Accounts 2016
Shareholder enquiries and communications
Enquiries
Any enquiries relating to shareholdings on the share register (for example, transfers of shares, changes 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
Computershare Hong Kong Investor
Investors Relations Team
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
United Kingdom
Telephone: +44 (0) 370 702 0137
Services Limited
Rooms 1712-1716, 17th Floor
Hopewell Centre
183 Queen’s Road East
Hong Kong SAR
HSBC Bank Bermuda Limited
6 Front Street
Hamilton HM 11
Bermuda
Telephone: +1 441 299 6737
Email via website:
Telephone: +852 2862 8555
Email: hbbm.shareholder.services@hsbc.bm
www.investorcentre.co.uk/contactus
Email: hsbc.ecom@computershare.com.hk
Investor Centre:
www.investorcentre.co.uk
Investor Centre:
Investor Centre:
www.investorcentre.com/hk
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 30170
College Station, TX 77842-3170
USA
Telephone (US): +1 877 283 5786
Telephone (International): +1 201 680 6825
Email: shrrelations@bnymellon.com
Website: www.computershare.com/us/contact/Pages/default.aspx
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
Website: www.hsbc.fr
If you have elected 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 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 of it) must continue to be directed to your existing contact at your investment manager or custodian or broker.
HSBC Holdings cannot guarantee dealing with matters directed to it in error.
Further copies of this Annual Report and Accounts 2016 may be obtained by writing to the following departments:
For those in Europe, the Middle East
and Africa:
For those in Asia:
For those in the Americas:
External Affairs
HSBC Holdings plc
8 Canada Square
London E14 5HQ
United Kingdom
Electronic communications
Communications (Asia)
The Hongkong and Shanghai Banking
Corporation Limited
1 Queen’s Road Central
Hong Kong
US Communications
HSBC Bank USA, N.A.
1 West 39th Street, 9th Floor
New York, NY 10018
USA
Shareholders may at any time choose to receive corporate communications in printed form or to receive notifications of their
availability on HSBC’s website. To receive notifications of the availability of a corporate communication on HSBC’s website by email,
or 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.
HSBC Holdings plc Annual Report and Accounts 2016
275
Strategic ReportFinancial Review Corporate Governance Financial Statements Shareholder Information Shareholder information
Chinese translation
A Chinese translation of this Annual Report and Accounts 2016 will be available upon request after 8 March 2017 from the Registrars:
Computershare Hong Kong Investor Services Limited
Computershare Investor Services PLC
Rooms 1712-1716, 17th Floor
Hopewell Centre
183 Queen’s Road East
Hong Kong
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 them in future.
Stock symbols
HSBC Holdings ordinary shares trade under the following stock symbols:
London Stock Exchange
Hong Kong Stock Exchange
New York Stock Exchange (ADS)
Investor relations
HSBA
5
HSBC
Euronext Paris
Bermuda Stock Exchange
HSB
HSBC.BH
Enquiries relating to HSBC’s strategy or operations may be directed to:
Richard O’Connor, Global Head of Investor Relations
Hugh Pye, Head of Investor Relations Asia-Pacific
HSBC Holdings plc
8 Canada Square
London E14 5HQ
United Kingdom
Email: investorrelations@hsbc.com
The Hongkong and Shanghai Banking
Corporation Limited
1 Queen’s Road Central
Hong Kong
Telephone: 852 2822 4908
Where more information about HSBC is available
This Annual Report and Accounts 2016, 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 20549-0213 or by emailing PublicInfo@sec.gov.
Investors should call the Commission at (1) 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. The legislation requires HSBC Holdings to publish additional information in respect of the year ended
31 December 2016 by 31 December 2017. This information will be available on HSBC’s website: www.hsbc.com/tax.
276
HSBC Holdings plc Annual Report and Accounts 2016
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 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.
UK resident individuals
With effect for the tax year beginning 6 April 2016, UK resident
individuals are given an annual tax-free allowance of £5,000 on
dividend income. To the extent that dividend income received by
an individual in the relevant tax year does not exceed the
allowance, a nil tax rate will apply. Dividend income in excess of
this allowance will be taxed at 7.5% for basic rate taxpayers,
32.5% for higher rate taxpayers and 38.1% for additional rate
taxpayers.
UK resident companies
Shareholders that are within the charge to UK corporation
tax should generally be entitled to an exemption from UK
corporation tax on any dividends received from HSBC Holdings.
However, the exemptions are not comprehensive and are
subject to anti-avoidance rules.
If the conditions for exemption are not met or cease to be
satisfied, or a shareholder within the charge to UK corporation
tax elects for an otherwise exempt dividend to be taxable, the
shareholder will be subject to UK corporation tax on dividends
received from HSBC Holdings at the rate of corporation tax
applicable to that shareholder.
Scrip dividends
Information on the taxation consequences of the HSBC
Holdings scrip dividends offered in lieu of the 2015 fourth
interim dividend and the first, second and third interim
dividends for 2016 was set out in the Secretary’s letters to
shareholders of 18 March, 3 June, 25 August and 3 November
2016. In no case was the difference between the cash dividend
forgone and the market value of the scrip dividend in excess of
15% of the market value. Accordingly, for individual
shareholders, 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
forgone.
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 (rounded up to the next £5),
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 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
HSBC Holdings plc Annual Report and Accounts 2016
277
Strategic ReportFinancial Review Corporate Governance Financial Statements Shareholder Information No stamp duty will be payable on the transfer of, or agreement
to transfer, an ADS, provided that the ADR and any separate
instrument of transfer or written agreement to transfer remain
at all times outside the UK, and provided further that any such
transfer or written agreement to transfer is not executed in the
UK. No stamp duty reserve tax will be payable on a transfer of,
or agreement to transfer, an ADS effected by the transfer of an
ADR.
US backup withholding tax and information reporting
Distributions made on shares or ADSs and proceeds from the
sale of shares or ADSs that are paid within the US, or through
certain financial intermediaries to US holders, are subject to
information reporting and may be subject to a US ‘backup’
withholding tax unless, in general, the US holder complies with
certain certification procedures or is a corporation or other
person exempt from such withholding. Holders that are not US
persons generally are not subject to information reporting or
backup withholding tax, but may be required to comply with
applicable certification procedures to establish that they are not
US persons in order to avoid the application of such information
reporting requirements or backup withholding tax to payments
received within the US or through certain financial
intermediaries.
Shareholder information
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) are part of the business property of a
UK permanent establishment of an enterprise, or (iii) pertain 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.
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HSBC Holdings plc Annual Report and Accounts 2016
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.
• Factors specific to HSBC, including our success in
adequately identifying the risks we face, such as the
incidence of loan losses or delinquency, and managing
those risks (through account management, hedging and
other techniques). Effective risk management depends on,
among other things, our ability through stress testing and
other techniques to prepare for events that cannot be
captured by the statistical models it uses; and our success in
addressing operational, legal and regulatory, and litigation
challenges, notably compliance with the US DPA; and other
risks and uncertainties we identify in ‘top and emerging
risks’ on pages 64 and 67.
Certain defined terms
Unless the context requires otherwise, ‘HSBC Holdings’ means
HSBC Holdings plc and ‘HSBC’, the ‘Group’, ‘we’, ‘us’ and ‘our’
refer to HSBC Holdings together with its subsidiaries. Within
this document the Hong Kong Special Administrative Region of
the People’s Republic of China is referred to as ‘Hong Kong’.
When used in the terms ‘shareholders’ equity’ and ‘total
shareholders’ equity’, ‘shareholders’ means holders of HSBC
Holdings ordinary shares and those preference shares and
capital securities issued by HSBC Holdings classified as equity.
The abbreviations ‘$m’, ‘$bn’ and ‘$tn’ represent millions,
billions (thousands of millions) and trillions of US dollars,
respectively.
Cautionary statement regarding
forward-looking statements
The Annual Report and Accounts 2016 contains certain forward-
looking statements with respect to HSBC’s financial condition,
results of operations and business.
Statements that are not historical facts, including statements
about HSBC’s beliefs and expectations, are forward-looking
statements. Words such as ‘expects’, ‘targets’, ‘anticipates’,
‘intends’, ‘plans’, ‘believes’, ‘seeks’, ‘estimates’, ‘potential’ and
‘reasonably possible’, variations of these words and similar
expressions are intended to identify forward-looking statements.
These statements are based on current plans, 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
HSBC Holdings plc Annual Report and Accounts 2016
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Strategic ReportFinancial Review Corporate Governance Financial Statements Shareholder Information
Other Information
Abbreviations
Currencies
CA$
EGP
€
HK$
MXN
RMB
S$
$
A
ABS1
ADR
ADS
AFS
AGM
AIEA
ALCM
ALCO
AML
ARM1
ARS
AT1
B
Barion
Basel
Basel II1
Basel III1
BBA
BEPS
BoCom
BoE
Bps1
BSA
BSM
BVI
C
Capm
CCAR
CDOs
CDS1
CEA
CET11
CGUs
CIUs
CMB
CMC
CML1
COSO
CP1
CRD1
CRR1
CRR/CRD IV
CSA
CVA1
CVC
D
Canadian dollar
Egyptian pound
Euro
Hong Kong dollar
Mexican peso
Chinese renminbi
Singapore dollar
United States dollar
Asset-backed security
American Depositary Receipt
American Depositary Share
Available for sale
Annual General Meeting
Average interest-earning assets
Asset, Liability and Capital Management
Asset and Liability Management Committee
Anti-money laundering
Adjustable-rate mortgage
Argentine peso
Additional tier 1
Barion Funding Limited, a term-funding vehicle
Basel Committee on Banking Supervision
2006 Basel Capital Accord
Basel Committee’s reforms to strengthen global capital
and liquidity rules
British Bankers’ Association
The OECD Base Erosion and Profit Shifting initiative
Bank of Communications Co., Limited, one of China’s
largest banks
Bank of England
Basis points. One basis point is equal to
one-hundredth of a percentage point
Bank Secrecy Act (US)
Balance Sheet Management
British Virgin Islands
Capital asset pricing model
Federal Reserve Comprehensive Capital Analysis and
Review
Collaterised debt obligations
Credit default swap
Commodities Exchange Act (US)
Common equity tier 1
Cash-generating units
Collective investment undertakings
Commercial Banking, a global business
Capital maintenance charge
Consumer and Mortgage Lending (US)
2013 Committee of the Sponsors of the Treadway
Commission (US)
Commercial paper
Capital Requirements Directive
Customer risk rating
Capital Requirements Regulation and Directive
Credit Support Annex
Credit valuation adjustment
Conduct & Values Committee
Decision One
Decision One Mortgage Company LLC
Deferred Shares Awards of deferred 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
280
HSBC Holdings plc Annual Report and Accounts 2016
Dodd-Frank
Dodd-Frank Wall Street Reform and Consumer Protection
Act (US)
DoJ
DPA
DPF
DVA1
E
EBA
EC
ECB
ECL
EL1
EU
Department of Justice (US)
Deferred Prosecution Agreement (US)
Discretionary participation feature of insurance and
investment contracts
Debit valuation adjustment
European Banking Authority
European Commission
European Central Bank
Expected credit losses
Expected loss
European Union
Euribor
Euro interbank offered rate
EVE
F
FCA
FCR
FFVA
Economic value of equity
Financial Conduct Authority (UK)
Financial Crime Risk function
Funding fair value adjustment estimation methodology on
derivative contracts
Fintech
Financial technology
FRB
FSCS
FSVC
FTE
FTSE
FuM
FOVCI
FVPL
G
GAAP
GAC
GB&M
GCC
GDP
GLCM
Federal Reserve Board (US)
Financial Services Compensation Scheme
Financial System Vulnerabilities Committee
Full-time equivalent staff
Financial Times – Stock Exchange index
Funds under management
Fair value through other comprehensive income
Fair value through profit or loss
Generally accepted accounting principles
Group Audit Committee
Global Banking and Markets, a global business
The Group Change Committee
Gross domestic product
Global Liquidity and Cash Management
Global Markets
HSBC’s capital markets services in Global Banking and
Markets
GMB
GPB
GPSP
GRC
Group
G-SIB1
GSM
GTRF
H
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
The Group’s Global Standards Manual
Global Trade and Receivables Finance
Hang Seng Bank Hang Seng Bank Limited, one of Hong Kong’s largest
HKEx
HKMA
HMRC
HNAH
banks
The Stock Exchange of Hong Kong Limited
Hong Kong Monetary Authority
HM Revenue and Customs
HSBC North America Holdings Inc.
Holdings ALCO
HSBC Holdings Asset and Liability Management
Committee
Hong Kong
Hong Kong Special Administrative Region of the People’s
Republic of China
HQLA
HSBC
HSBC Bank
HSBC Bank
Middle East
High-quality liquid assets
HSBC Holdings together with its subsidiary undertakings
HSBC Bank plc
HSBC Bank Middle East Limited
HSBC Bank USA HSBC Bank USA, N.A., HSBC’s retail bank
in the US
HSBC Canada
The sub-group, HSBC Bank Canada, HSBC Trust
Company Canada, HSBC Mortgage Corporation Canada
and HSBC Securities Canada, consolidated for liquidity
purposes
HSBC Colombia HSBC Bank (Colombia) S.A.
HSBC Finance
HSBC Finance Corporation, the US consumer finance
company (formerly Household International, Inc.)
HSBC France
HSBC’s French banking subsidiary, formerly CCF S.A.
HSBC Holdings
HSBC Holdings plc, the parent company of HSBC
HSBC Private
Bank (Suisse)
HSBC Private Bank (Suisse) SA, HSBC’s private bank in
Switzerland
HSBC USA
The sub-group, HSBC USA Inc (the holding company of
HSBC Bank USA) and HSBC Bank USA, consolidated for
liquidity purposes
HSI
HSSL
HTIE
HTM
I
IAS
IASB
ICAAP
IFRSs
ILAA
ILR
HSBC Securities (USA) Inc.
HSBC Securities Services (Luxembourg)
HSBC International Trust Services (Ireland) Limited
Held to maturity
International Accounting Standards
International Accounting Standards Board
Internal capital adequacy assessment process
International Financial Reporting Standards
Individual liquidity adequacy assessment
Inherent liquidity risk
Industrial Bank
Industrial Bank Co. Limited, a national joint-stock bank in
mainland China in which Hang Seng Bank Limited has a
shareholding
Investor Update
IRB1
IRRBB
The Investor Update in June 2015
Internal ratings-based
Interest rate risk in the banking book
ISDA
K
KPMG
L
LCR
LFRF
LGBT+
LGD1
Libor
LICs
LTI
LTV1
M
International Swaps and Derivatives Association
KPMG Audit Plc and its affiliates
Liquidity coverage ratio
Liquidity and funding risk management framework
Lesbian, gay, bisexual and transgender. The plus sign
denotes other non-mainstream groups on the spectrums
of sexual orientation and gender identity
Loss given default
London interbank offered rate
Loan impairment charges and other credit risk provisions
Long-term incentive
Loan-to-value ratio
Madoff
Bernard L. Madoff Investment Securities LLC
Mainland China
People’s Republic of China excluding Hong Kong
Malachite
Mazarin
MBS
MENA
MOCs
Malachite Funding Limited, a term-funding vehicle
Mazarin Funding Limited, an asset-backed CP conduit
US mortgage-backed security
Middle East and North Africa
Model Oversight Committees
Monoline
Monoline insurance company
MRT
N
NII
NSFR
NYSE
O
OCC
OCI
ORMF
OTC1
P
PD1
Material risk taker
Net interest income
Net stable funding ratio
New York Stock Exchange
Office of the Comptroller of the Currency (US)
Other comprehensive income
Operational risk management framework
Over-the-counter
Probability of default
Performance
shares1
Awards of HSBC Holdings ordinary shares under
employee share plans that are subject to corporate
performance conditions
Ping An
PPI
PRA
PRC
Ping An Insurance (Group) Company of China, Ltd, the
second-largest life insurer in the PRC
Payment protection insurance
Prudential Regulation Authority (UK)
People’s Republic of China
Principal plan
HSBC Bank (UK) Pension Scheme
PVIF
PwC
R
RAS
RBWM
RC
Repo1
Reverse repo
RMBS
RMM
RNIV
RoE
Present value of in-force long-term insurance business
and long-term investment contracts
with DPF
The member firms of the PwC network, including
PricewaterhouseCoopers LLP
Risk appetite statement
Retail Banking and Wealth Management, a global
business
The Regulatory Compliance sub-function
Sale and repurchase transaction
Security purchased under commitments to sell
Residential mortgage-backed securities
Risk Management Meeting of the Group Management
Board
Risk not in VaR
Return on equity
RoRWA
Return on risk-weighted assets
RQFII
RRCS
RWA1
S
SE1
SEC
Renminbi qualified foreign institutional investor
Reputational Risk and Client Selection team
Risk-weighted asset
Structured entity
Securities and Exchange Commission (US)
ServCo group
Separately incorporated group of service companies
planned in response to UK ring-fencing proposals
SIC
SID
SME
Solitaire
SPE1
T
T1
T2
TLAC1
TSR
U
UAE
UK
US
US DPA
US run-off
portfolio
V
VaR1
VIU
Securities investment conduit
Senior Independent Director
Small and medium-sized enterprise
Solitaire Funding Limited, a special purpose entity
managed by HSBC
Special purpose entity
Tier 1
Tier 2
Total loss-absorbing capacity
Total shareholder return
United Arab Emirates
United Kingdom
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
Value in use
1 A full definition is included in the glossary to the Annual Report and Accounts
2016 which is available at www.hsbc.com/investor-relations.
HSBC Holdings plc Annual Report and Accounts 2016
281
Strategic ReportFinancial Review Corporate Governance Financial Statements Shareholder Information ADR Depositary
The Bank of New York Mellon
Depositary Receipts
PO Box 30170
College Station, TX 77842-3170
USA
Telephone (US): 1 877 283 5786
Telephone (International): 1 201 680 6825
Email: shrrelations@bnymellon.com
Web: www.computershare.com/us/contact/ Pages/
default.aspx
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
Other Information
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 0370 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
282
HSBC Holdings plc Annual Report and Accounts 2016
Photography
Cover: courtesy of Dragages-China
Harbour-VSL JV
Inside front cover: Huynh Nguyen
Minh Thu, HSBC Bank (Vietnam) Ltd
Pages 2–3, 10–11, 12–13, 18–19,
20–21, 26–27: Getty Images
Pages 4 (Group Chairman),
7 (Group Chief Executive),
22–23: Charles Best
Pages 133–137: Directors by
Charles Best, except Laura Cha
and Paul Walsh by Patrick Leung
Inside back cover: Nurwata Yuda
Pradana, The Hongkong and
Shanghai Banking Corporation
Limited, Indonesia
© Copyright HSBC Holdings plc 2017
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 Global Finance, HSBC
Holdings plc, London
Designed by Addison Group, London
(Strategic Report) and by Global
Finance with Addison Group (rest
of Annual Report and Accounts)
Printed by Park Communications
Limited, London, on Revive 100
Offset board and paper using
vegetable oil-based inks. Made in
Austria, the stocks comprise 100%
de-inked post-consumer waste. Pulps
used are totally chlorine-free.
The FSC® logo identifies products
which contain wood from well-
managed forests certified in
accordance with the rules of the
Forest Stewardship Council®.
HSBC Holdings plc
8 Canada Square
London E14 5HQ
United Kingdom
Telephone: 44 020 7991 8888
www.hsbc.com