HSBC
Annual Report 2017

Plain-text annual report

HSBC Holdings plc Annual Report and Accounts 2017 Connecting customers to opportunities HSBC aims to be where the growth is, enabling business to thrive and economies to prosper, and ultimately helping people to fulfil their hopes and realise their ambitions. Our cover image Guangzhou is one of China’s largest and most dynamic cities. It is the capital of Guangdong Province and lies at the heart of China’s Pearl River Delta (PRD), one of the country’s fastest growing economic regions. The PRD in recent years has transformed from being the exporting factory floor of the world into a global leader in digital commerce and innovation. HSBC has had a presence in China for more than 150 years. China is an important part of the Group’s strategy and we have branches across the PRD. In December 2017 HSBC Qianhai Securities Limited, the first joint venture securities company in mainland China to be majority-owned by a foreign bank, opened for business in the PRD. Inside front cover image Dubai financial district. Our photo competition winners This report showcases five images taken by our employees around the world. The images were selected from more than 2,100 submissions to a Group-wide photography competition. Launched in June 2017, HSBC NOW Photo is an ongoing project that encourages employees to capture and share the diverse world around them with a camera. Contents This Strategic Report was approved by the Board on 20 February 2018. Mark E Tucker Group Chairman 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. 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 22 How we do business 28 Risk overview 30 Remuneration t r o p e R c g e t a r t S i Our values Our values define who we are as an organisation and make us distinctive. Dependable We are dependable, standing firm for what is right and delivering on commitments. Open We are open to different ideas and cultures, and value diverse perspectives. Connected We are connected to our customers, communities, regulators and each other, caring about individuals and their progress. 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 32. 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. 32 Financial summary 46 Global businesses and geographical regions 63 Risk 117 Capital Corporate Governance Details of our Board of Directors and senior management, and our approach to corporate governance and remuneration. 121 Corporate Governance Report 122 Biographies of Directors and senior management 126 Board of Directors 127 Board committees 133 Internal control 134 Going concern and viability 135 Share capital and other disclosures 138 Employees 141 Directors’ Remuneration Report 165 Directors’ Responsibility Statement Financial Statements Our financial statements and related notes and reports. 166 Report of the Independent Auditors 175 Financial Statements 186 Notes on the Financial Statements 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. 262 Shareholder information 266 Forward-looking statements and Certain defined terms 268 Abbreviations 1 wHSBC Holdings plc Annual Report and Accounts 2017Financial ReviewCorporate GovernanceFinancial StatementsShareholder Information Strategic Report Highlights Our international network, universal banking model and capital strength deliver long-term value for customers and shareholders. For year ended 31 Dec 2017 Reported profit before tax ($bn) Adjusted profit before tax ($bn) Reported revenue ($bn) 2017 2016 2015 (2016: $7.1bn) $17.2bn At 31 Dec 2017 17.2 7.1 18.9 2017 2016 2015 (2016: $18.9bn) $21.0bn 21.0 18.9 18.8 2017 2016 2015 (2016: $48.0bn) $51.4bn Reported risk-weighted assets ($bn) Common equity tier 1 ratio (%) Total assets ($bn) 2017 2016 2015 (2016: $857bn) $871bn 871 857 1,103 2017 2016 2015 (2016: 13.6%) 14.5% 14.5 13.6 11.9 2017 2016 2015 (2016: $2,375bn) $2,522bn 51.4 48.0 59.8 2,522 2,375 2,410 Strategy execution – Delivered growth from our international network with a 6% increase in transaction banking product revenue and a 13% rise in revenue synergies between global businesses compared with 2016. – Achieved annualised run-rate savings of $6.1bn since our Investor Update in 2015, while continuing to invest in growth, and regulatory programmes and compliance; 2017 exit run-rate in line with 2014 cost base. – Exceeded our risk-weighted assets (‘RWAs’) reduction target; extracting a total of $338bn of RWAs from the business since the start of 2015. – Pivot to Asia generating returns and driving over 75% of Group reported and adjusted profit in 2017. – Delivered a return on equity of 5.9% in 2017, up from 0.8% in 2016. We will continue to invest for growth and manage our capital efficiently to achieve our medium-term ROE target of >10%. 2 Around Today, HSBC has around 38 million customers bank with us. 3,900 offices in 67 countries and territories worldwide. We employ We have 229,000 people around the world*. * Full-time equivalent staff 200,000 shareholders in 131 countries and territories. GroupAbout HSBCHSBC Holdings plc Annual Report and Accounts 2017Highlights Our operating model consists of four global businesses and a Corporate Centre, supported by HSBC Operations Services and Technology, and 11 global functions, including: risk, finance, financial crime risk, legal, marketing and human resources. Retail Banking and Wealth Management (‘RBWM’) 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. Commercial Banking (‘CMB’) Global Banking and Markets (‘GB&M’) We support approximately 1.7 million business customers in 53 countries and territories 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. Global Private Banking (‘GPB’) We help high net worth individuals and their families to grow, manage and preserve their wealth. Adjusted profit before tax (2016: $5.2bn) (2016: $5.9bn) (2016: $5.5bn) (2016: $0.3bn) $6.5bn $6.8bn $5.8bn $0.3bn Adjusted risk-weighted assets (31 Dec 2016: $114.7bn) (31 Dec 2016: $286.9bn) (31 Dec 2016: $307.7bn) (31 Dec 2016: $15.7bn) $121.5bn $301.0bn $299.3bn $16.0bn Our global businesses are presented on an adjusted basis, which is consistent with the way in which we assess the performance of our global businesses.  Return on equity 5.9% Adjusted jaws +1% For further details, see page 17. Dividends per ordinary share in respect of 2017 $0.51 3 Our global businessesDelivery against Group financial targetsHSBC Holdings plc Annual Report and Accounts 2017Strategic ReportFinancial ReviewCorporate GovernanceFinancial StatementsShareholder Information Strategic Report Group Chairman’s Statement With an international network covering 90% of global trade flows and a leading presence in the world’s fastest growing region, we are in a prime position to help our customers capitalise on broad-based global growth. Board changes As I start my first full year as Group Chairman, I am very grateful to my predecessor, Douglas Flint, and to Stuart Gulliver for ensuring a smooth handover. They steered HSBC through challenging waters during and after the global financial crisis, and renewed HSBC’s reputation as one of the world’s strongest and safest international banks. They have passed on a strong legacy. My first responsibility as Group Chairman was to appoint a successor to Stuart who would be capable of building on his achievements while further enhancing the qualities that make HSBC unique. With an exceptional record of managing a diverse range of international businesses and a deep understanding of HSBC’s heritage and culture, John Flint was clearly the outstanding candidate. The Board and I look forward to working closely with John and his management team. 2017 also saw other Board changes as we said goodbye to Rachel Lomax, Sam Laidlaw and Paul Walsh. All three provided valuable service and wise counsel to the Board and I thank them warmly for their advice and support. I am especially grateful to Rachel for her excellent work as the Senior Independent Director and to Sam for his thoughtful leadership of the Nomination Committee. Mark E Tucker Group Chairman Our 2017 results demonstrate both the strength and the potential of the Group. A large increase in reported profit before tax reflected both a healthy business and the non-recurrence of significant items from 2016. All of our global businesses grew adjusted profits and our three main global businesses generated improved adjusted revenue. Strong revenue growth more than covered the cost of business investment, and increased lending laid a foundation for future performance. Asia again contributed a substantial proportion of the Group’s profits, particularly in Commercial Banking and Retail Banking and Wealth Management. Together, this delivered an adjusted Group profit before tax of $21bn, up 11% on 2016. This performance has enabled us to approve an unchanged fourth interim dividend of $0.21. This brings the total dividend for 2017 to $0.51, representing a total shareholder return of 24% for 2017. 4 HSBC Holdings plc Annual Report and Accounts 2017Group Chairman’s Statement The year ahead The Board is focused on sustaining resilience by enhancing reputation and performance. We will further develop our strategy to deliver value to all of our stakeholders within a governance framework that provides stability, prudence and effective oversight. ‘As a well-diversified business underpinned by historically stable revenue generation and significant capital strength, HSBC is well equipped to manage the risks and uncertainty inherent in today’s world.’ We expect the world’s major economies to show reasonable growth in 2018, helped by relatively low unemployment, recovering consumer confidence and improving trade. Fears of a hard landing in China have receded, and markets across Asia look set for a strong year. The anticipated conclusion of large regional trade agreements in 2018, mostly involving Asian nations, also provides cause for optimism. With an international network covering 90% of global trade flows and a leading presence in the world’s fastest growing region, we are in a prime position to help our customers capitalise on this broad-based global growth. While we are optimistic about the prospects for the global economy, rising international tensions, the threat of protectionism and a lack of inclusive growth all have the potential to disrupt economic activity. We continue to model and anticipate a wide range of scenarios as part of our day-to-day risk management, to cover unlikely but not impossible events. As a well-diversified business underpinned by historically stable revenue generation and significant capital strength, HSBC is well equipped to manage the risks and uncertainty inherent in today’s world. 5 HSBC Holdings plc Annual Report and Accounts 2017Strategic ReportFinancial ReviewCorporate GovernanceFinancial StatementsShareholder InformationStrategic Report | Group Chairman’s Statement ‘It is important not just to achieve good results, but to do so in a way that treats all of our stakeholders in a fair and transparent way.’ Transparency and disclosure Last year, we published a range of environmental, social and governance (‘ESG’) metrics to enable investors and customers to assess our non- financial performance. The data we disclose will continue to evolve as we learn more about what our stakeholders find useful and improve our ability to collect the necessary information. We will publish our next ESG Update on our website in April 2018. We are also making our first disclosure under the terms of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures. This can be found on page 27. As one of the world’s largest international banks, we take seriously our responsibility to help develop a voluntary, consistent and comparable system of climate- related financial disclosure. We intend to continue to expand and improve the quality and specificity of these disclosures, and to encourage all those who work with us to do the same. Supporting our people It is important not just to achieve good results, but to do so in a way that treats all of our stakeholders – employees, customers, regulators and shareholders – in a fair and transparent way. We are committed to holding ourselves to account in meeting that aim, and to being accountable to our stakeholders for our actions. As part of this commitment, the Board and I are determined to ensure that HSBC remains a place where all our people have the opportunity to fulfil their potential in a nurturing environment that encourages the right behaviour. Our stakeholders expect honesty and integrity and we will continue to promote a culture in which people do the right thing. My special thanks are due on behalf of the Board to each of the 229,000 people who work for HSBC around the world. In my short time as Group Chairman I have been enormously impressed by the effort, energies and ability of our people in each country I have visited. These results are a testament to their hard work and dedication. Mark E Tucker Group Chairman 20 February 2018 6 HSBC Holdings plc Annual Report and Accounts 2017Group Chief Executive’s Review Group Chief Executive’s Review HSBC is simpler, stronger and more secure than it was in 2011, and better able to connect customers to opportunities in the world’s fastest growing regions. Stuart Gulliver Group Chief Executive 2017 was an important year for HSBC. We completed the transformation programme that we started in 2015, maximising the benefits of our network and increasing our competitive advantages. By the end of the year we had exceeded our risk-weighted asset and cost-saving targets, rebuilt our Mexico business, delivered revenue growth from our international network in excess of global economic growth, and accelerated investment in our operations in Asia. We also opened new businesses and launched products that considerably strengthen the service that we offer our international clients. These achievements, and the work that preceded them, were a critical factor in delivering a strong financial performance in 2017. The strength of our three main global businesses generated significant increases in both reported and adjusted Group profit before tax (‘PBT’), while reported PBT also benefited from the non-recurrence of a number of large significant items from 2016. Adjusted PBT and adjusted revenue were up in four out of five regions. We grew adjusted revenue faster than adjusted costs, and continued to increase our market share in strategic product areas. Business performance Retail Banking and Wealth Management had an excellent 2017, with strong adjusted revenue increases across a number of business lines. In Retail Banking, interest rate rises helped to grow revenue as our robust balance sheet and capital strength continued to attract deposits, particularly in Hong Kong. We continued to grow lending in our target markets, especially Hong Kong, the UK and Mexico. Wealth Management benefited from improving customer investment appetite, strong product sales across all categories and the impact of market movements on our life insurance manufacturing businesses. Commercial Banking adjusted revenue grew well on the back of an outstanding performance in Global Liquidity and Cash Management. Higher lending volumes helped Credit and Lending overcome the impact of narrower spreads. Global Trade and Receivables Finance revenue stabilised after a difficult 2016 and we increased our share of major markets, including trade finance in Hong Kong and receivables finance in the UK. HSBC was voted market leader for trade finance in Euromoney’s annual trade finance survey in January 2018. Global Banking and Markets grew adjusted revenue, driven particularly by strong growth in Global Liquidity and Cash Management, and Securities Services. Growth in the first three quarters of the year in Markets and Banking enabled both to withstand the effects of subdued market activity in the fourth quarter. Global Private Banking adjusted revenue reflected the impact of historical repositioning, but was stable over the course of 2017. The business grew adjusted revenue by 10% in its target markets. Our strong revenue generation meant that the Group achieved positive adjusted jaws in 2017. We accelerated investment to grow the business, particularly in Retail Banking and Wealth Management, which contributed to an increase in adjusted costs. Performance-related compensation also grew in line with profit before tax. 7 HSBC Holdings plc Annual Report and Accounts 2017Strategic ReportFinancial ReviewCorporate GovernanceFinancial StatementsShareholder InformationStrategic Report | Group Chief Executive's Review Adjusted loan impairment charges were significantly lower than 2016, mainly due to improved conditions in the oil and gas industry in North America. Our strong common equity tier one ratio of 14.5% included the effect of recent changes in US tax legislation, which reduced our capital position by 9 basis points. It also included the impact of our most recent $2bn share buy-back. In 2017, we returned a total of $3bn to shareholders through share buy-backs and paid more in dividends than any other European or American bank. We achieved this while maintaining one of the strongest capital ratios in the industry. ‘We have delivered excellent value to shareholders through a total shareholder return of 70.3% from 2011 to the end of 2017.’ Strategic actions The strength of our business is due in large part to the strategic actions that we first announced in June 2015. This programme concluded at the end of 2017 with eight out of ten actions completed on time and on target (see pages 12 to 13). HSBC is much more capital efficient and capable of producing stronger returns for investors as a consequence of these actions. Our cost-reduction programmes have enabled us to absorb the cost of growing the business and protecting HSBC from financial crime, while improving the efficiency and security of our processes. Our previously underperforming Mexico business is increasingly profitable and well positioned for further growth. Whilst our US business remains a work in progress, it is a valuable source of business for other regions and continues to make important progress. We also completed the run-off of our legacy US consumer and mortgage lending portfolio, bringing an end to a difficult chapter in HSBC’s recent history. Our international network is now much better able to connect customers to opportunities and delivering revenue growth above that of the global economy. 53% of client revenue now comes from international clients, up from 50% in 2015. Global Liquidity and Cash Management in particular is now a major component of the bank’s success, and Global Trade and Receivables Finance has extended its leadership of the global trade finance market. The Group’s business mix is more oriented towards Asia, improving our ability to channel the economic and social changes taking place within the world’s fastest growing region. Asia contributes a larger proportion of the Group’s profits than in 2015, reflecting regional investment in growing our loan book, building our insurance and asset management businesses, and connecting customers to opportunities within the region. We continued to expand our presence in mainland China with the launch of new retail banking products and increased lending in the Pearl River Delta. In December we launched HSBC Qianhai Securities, the first securities joint venture in mainland China to be majority-owned by an international bank. This allows us to offer our clients increased access to China’s rapidly expanding capital markets and provides an unprecedented opportunity to establish and grow a securities business in mainland China with strong international standards. This underlines our status as the leading international bank in mainland China. We won a number of significant new business mandates related to the China-led Belt and Road Initiative in 2017, and opened new China desks in Poland, Luxembourg, Thailand and Macau to capture further opportunities. We now have a total of 24 China desks aimed at supporting Chinese businesses with global outbound ambitions, 20 of which are along the ‘Belt and Road’ routes. In November we were named ‘Best Bank for Belt and Road’ at the FinanceAsia Achievement Awards 2017. 8 HSBC Holdings plc Annual Report and Accounts 2017Group Chief Executive's Review ‘My sincere thanks go to all of my HSBC colleagues around the world, past and present, whose hard work and commitment are the foundation of the bank’s success.’ Fighting financial crime For the past five years, we have been weaving Global Standards into the fabric of HSBC. The investment that we have made in our financial crime risk management capabilities has considerably strengthened our ability to protect the integrity of the financial system. We have assembled a highly expert team which is helping to shape the debate about our industry’s role in the fight against financial crime. We have made great strides in building a compliance function fit for the many evolving challenges we face, and built partnerships to combat financial crime with regulatory and law enforcement authorities around the world.  The expiration in December of the five-year deferred prosecution agreement that we entered into with the US Department of Justice in 2012 (‘AML DPA’) was an important milestone for HSBC. Nevertheless, exiting the AML DPA was a product rather than the focus of the essential work that we have done to transform our compliance capabilities and protect the financial system. This work will continue as we seek to ensure that the changes we have made are effective and sustainable. Combating financial crime is a never-ending exercise and will be a constant focus for the Group’s management. Thank you As I prepare to pass on the stewardship of HSBC to my successor, I am proud of our achievements of the last seven and a half years. After the most extensive transformation programme in HSBC’s 153 year history, HSBC is simpler, stronger and more secure than it was in 2011, and better able to connect customers to opportunities in the world’s fastest growing regions. We have also delivered excellent value to shareholders through a higher share price, $64.7bn in declared dividends and $5.5bn in share buy-backs, representing a total shareholder return of 70.3% from 2011 to the end of 2017. I am pleased to be handing over to such a capable successor as John Flint, whose intimate knowledge of HSBC and its culture will be a considerable asset to the bank and its clients. I am grateful to my colleagues on the Group Management Board for their support since 2011, and to Douglas Flint and Mark Tucker for their backing. Finally, my sincere thanks go to all of my HSBC colleagues around the world, past and present, whose hard work and commitment are the foundation of the bank’s success. It has been my privilege to work with them for the last 38 years. Stuart Gulliver Group Chief Executive 20 February 2018 9 HSBC Holdings plc Annual Report and Accounts 2017Strategic ReportFinancial ReviewCorporate GovernanceFinancial StatementsShareholder InformationStrategic Report Our strategy We have developed a long-term strategy that reflects our purpose and enables us to capture value from our international network. Two-pronged long-term strategy Develop our international network To serve enterprises across geographies and facilitate international trade and capital flows, thereby helping our clients to grow their business. 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 select retail banking and wealth management markets. Value of the network and our strategy Access to global growth opportunities Our unparalleled network covers countries accounting for approximately 90% of global GDP, trade and capital flows. We have a leading presence in large and fast-growing economies. Our network covers all of the world’s 30 largest trade corridors forecast for 2030. These top 30 corridors are expected to have a compound annual growth rate well in excess of GDP growth expectations from 2016 to 2030. Lower risk profile and volatility from our geographically diversified universal banking model We operate a balanced universal banking model across both wholesale and retail businesses and we are geographically diversified. This has resulted in a lower risk profile and lower earnings volatility compared to our global peers. Our business model has remained resilient through business cycles, and it helps ensure stable funding and liquidity. Strong capital and funding base CET1 ratio of 14.5% 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 $65bn declared from 2011 to 2017 – as well as circa $5.5bn of share repurchases. 10 HSBC Holdings plc Annual Report and Accounts 2017Our strategy Long-term trends Our strategy positions us to capitalise on several long-term trends. Increasing connectivity and global flows of trade, finance and data are key drivers of GDP growth. Source: Global Insight’s Comparative World Overview. Emerging market economies are expected to be twice the size of developed economies by 2050. Source: United Nations Conference on Trade and Development. Global merchandise exports ($tn) 2030 forecast 2016 36.8 15.8 Shipping volumes, measured by weight of goods unloaded (million metric tonnes) 35% 67% 33% 2016 1990 Key Developed markets Emerging and transition markets 65% 10,282 4,126 The middle class is expected to grow by over two billion people from 2017 to 2030, driven by growth in Asia’s middle class. Source: Global Economy and Development at Brookings, The Unprecedented Expansion of the Middle Class (2017). Size of middle class population (bn) 35% 54% 46% 65% 5.4 3.0 2030 2015 Key Rest of the world Asia Climate change is accelerating and global temperatures are trending significantly higher. Investment in renewable energy capacity will be needed to limit the global temperature increase to 2°C. Renewables share of megawatts installed capacity for plants in operation in G20 countries (%) 2050 requirement 2016 Key 71 32 Source: OECD, Investing in Climate, Investing in Growth (2017). Required by 2050 as per IEA ‘66% 2°C’ scenario* Current (2016) *The scenario assumes a 66% probability of keeping the mean global surface temperature rise throughout the 21st century to below 2°C above pre-industrialised levels. Client examples Trina Solar (‘Trina’): China, renewable energy Exporter of solar panels globally. Trina’s aim is to bring China’s green energy solutions to countries along the Belt and Road Initiative route, and has thus stepped up its overseas investment, particularly in the ASEAN region. HSBC created a digital platform for Trina that gave its headquarters a transparent view of its ASEAN-region subsidiaries’ cash positions and set up a cash pool in Singapore to seamlessly connect Trina’s HSBC accounts globally. Reckitt Benckiser (‘RB’): UK, consumer goods Zhejiang Geely: China, automotive Global consumer health and hygiene company. HSBC acted as financial adviser and lead financier to Reckitt Benckiser on its $18bn acquisition of Mead Johnson Nutrition Company, a leader in infant and children’s nutrition. This acquisition marked one of the largest UK into US transactions and considerably strengthened RB’s presence in developing markets, particularly China. Leading automobile manufacturer. HSBC served as sole financial adviser for Zhejiang Geely on two interlinked China outbound investments, one in Malaysian carmaker Proton Holdings and the second in Lotus Advance Technologies, a subsidiary of Proton based in the UK. These transactions were enabled by collaboration between HSBC teams in mainland China, Hong Kong, Singapore, Malaysia and London. Morgan McKinley: Ireland, professional services Global recruitment agency with operations in Ireland, UK, EMEA and APAC. In 2017, Morgan McKinley expanded HSBC’s global mandate to include cross- border Global Trade and Receivables Finance (‘GTRF’) facilities and Global Liquidity and Cash Management (‘GLCM’) services in Canada and Japan. HSBC’s ‘one-team’ approach, not separated by product, was cited by the client as being a key driver in the decision to switch to HSBC. 11 HSBC Holdings plc Annual Report and Accounts 2017Strategic ReportFinancial ReviewCorporate GovernanceFinancial StatementsShareholder InformationStrategic Report Strategic actions We met eight out of ten targets from the strategic actions outlined in our Investor Update in June 2015. 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 focused on using our resources more efficiently and on investing for growth. Each action had targets defined to the end of 2017. The table opposite contains a summary of our progress with additional details provided below. Resizing and simplifying our business We passed several significant milestones in resizing and simplifying our business in 2017. Our management actions delivered a gross reduction of risk-weighted assets (‘RWAs’) by $338bn, exceeding our RWA reduction target from management initiatives by $60bn on an FX-adjusted basis. Among our NAFTA region Investor Update targets, we did not reach our US profit before tax (‘PBT’) target of $2bn. However, we have taken steps forward in, for example, our US Retail Banking and Wealth Management (‘RBWM’) business, where we increased PBT, revenues and deposits, and migrated over one million customers to our impending new core banking platform. We also completed the wind-down of our US consumer and mortgage lending (‘CML’) run-off portfolio. In Mexico, our adjusted PBT reached $440m, surpassing our Investor Update target on a local currency basis. We also grew adjusted revenue in Mexico by 11% compared with 2016, supported by increased loan balances from market share gains. We remain on course to complete the set-up of our UK ring-fenced bank (‘RFB’) ahead of the 1 January 2019 statutory deadline. In 2017, we received a restricted bank licence for the RFB and are working through an agreed mobilisation plan with the Prudential Regulatory Authority and Financial Conduct Authority to receive an unrestricted licence in 2018. We successfully concluded our cost- saving programme and realised $6.1bn of annual run-rate savings, over $1bn more than our Investor Update target. The programme enabled 2017 exit run-rate adjusted costs to be kept flat compared with the 2014 cost base. The savings offset increased costs from areas such as regulatory programmes and compliance, and investments to help facilitate further business growth. For example, in RBWM, we expanded the use of biometrics globally with over 1.5 million customers using voice recognition, and with fingerprint technology launched in nine of our markets. For our corporate customers, we improved our key digital channels with significant improvements to HSBCnet and HSBC Connect. Our costs-to-achieve transformation concluded with approximately $7bn spent since the start of the programme. Redeploying capital to grow our business Our international network remains core to our strategy, and we achieved our Investor Update target of revenue growth above GDP. In 2017, we grew our revenue from transaction banking products by 6%, including double-digit percentage growth in GLCM and HSBC Security Services (‘HSS’). We grew GTRF market share in key markets, in particular Hong Kong and receivables finance in the UK. Cross-border revenues from our priority corridors grew 10%, with double-digit percentage growth in four of our five largest priority corridors including our China-US corridor. We were named ‘Top Global Trade Finance Bank’ by our clients in the Euromoney Trade Finance Survey 2018. We delivered on our 2015 Investor Update commitment to prioritise and accelerate investments in Asia. In 2017, we grew our loan portfolio in the region by $53bn to $426bn. Our asset management and insurance businesses in Asia realised 17% and 8% growth in AUM and annualised new business premiums, respectively. In mainland China, we reached over 400,000 cards in circulation since launching credit cards at the end of 2016, and we grew our customer loans in the Pearl River Delta region by 23%. We launched HSBC Qianhai Securities, the first securities joint venture in mainland China to be majority-owned by an international bank. Revenue tied to renminbi (‘RMB’) internationalisation in 2017 of $1.2bn did not meet our Investor Update target of $2.0bn to $2.5bn. This was largely due to a decrease in overall market volumes. However, we continue to be recognised as the leading bank for international RMB products and services. We ranked first in Bloomberg’s offshore RMB bond underwriting league table in 2017 with 28% market share and first for the sixth year in a row in the Asiamoney Offshore RMB Poll 2017. We had the largest share, at 53%, of approved quota of RMB Qualified Foreign Institutional Investor (‘RQFII’) custodian business. Selected awards and recognition Euromoney Trade Finance Survey 2018 Top Global Trade Finance Bank Euromoney Awards for Excellence 2017 World’s Best Bank World’s Best Investment Bank in the Emerging Markets Asia’s Best Bank North America’s Best Bank for Transaction Services Euromoney Cash Management Survey 2017 Best Global Cash Manager for Corporates Best Global Cash Manager for Financial Institutions for all Transactions Asiamoney New Silk Road Finance Awards 2017 Best Overall International Bank for Belt and Road Initiative 12 HSBC Holdings plc Annual Report and Accounts 2017Strategic actions Progress against strategic actions Actions to resize and simplify the Group Strategic actions Target by the end of 2017 Progress in 2017 Outcomes Status Reduce Group risk-weighted assets by circa $290bn Optimise global network Rebuild NAFTA region profitability Set up UK ring-fenced bank – Group RWA reduction – Further reduction of $71bn from management $290bn actions in 2017, including $32bn in GB&M – RWA reduction from management actions: circa $338bn (>100% of the 2015–17 target) – Return GB&M to Group target profitability; <1/3 of Group RWAs – GB&M RWAs of $299bn – Reduced footprint – Progressing previously announced transactions – Present in 67 countries and territories at end of 2017 (73 at end of 2014) – US profit before tax circa $2bn – Mexico profit before tax circa $0.6bn – Completed wind-down of US consumer and mortgage lending run-off portfolio with asset sales of $7.0bn in 2017 – Achieved non-objection to US capital plan from CCAR; made first dividends to the Group since 2006 ($4.5bn) – US (excluding CML run-off portfolio) adjusted profit before tax: $920m (+138% on 2016) – Mexico adjusted profit before tax: $440m 1 – Mexico adjusted revenues +11% driven primarily by (+60% on 2016) growth in RBWM – Completed in 2018 – Received a restricted banking licence from regulators – Implementation in progress for UK ring-fenced bank – On track to have a fully functioning team in place for the opening of our new UK HQ in 1H18 Deliver $4.5– 5.0bn of cost savings – 2017 exit rate to equal 2014 adjusted operating expenses – $2.1bn of cost savings realised in 2017 – Positive adjusted jaws continued in 2017 at 1% – FTE reduction of approximately 6.5k in 2017 – 2017 exit run-rate adjusted costs flat vs. 2014 cost base – Annual run-rate savings of $6.1bn achieved since start of cost-saving programme Actions to redeploy capital and invest Deliver growth above GDP from international network Investments in Asia – prioritise and accelerate – Revenue growth of international network above GDP – Strong revenue growth in GLCM (+14%) and HSS (+12%) – Gained GTRF market share in key markets including – Transaction banking revenue: $15.2bn (+6% on 2016) Hong Kong and receivables finance in the UK – Revenue synergies: $11.8bn (+13% on 2016) – HSBC Tradeshift supply chain financing proposition designed, built and commercialised – Market share gains – Circa 10% growth per annum in assets under management in Asia – Launched HSBC Qianhai Securities, the first – Asia loan portfolio: $426bn securities joint venture in mainland China to be majority-owned by an international bank – Ranked first among foreign banks in 2017 in Panda bond underwriting league table (+14% on 2016 currency adjusted) – Guangdong loans: $6.2bn (+23% on 2016) – ASEAN region adjusted revenue: $2.9bn (-4% on 2016) – $290m Innovation Growth Fund to support leading names in the Pearl River Delta high-tech sector – Awarded ‘Best International Bank in China’ in the – Asset Management assets under management distributed in Asia: $172bn (+17% on 2016) – Insurance manufacturing annualised new Asiamoney Banking Awards 2017 – $2.0bn–2.5bn revenue – Obtained the first Panda bond licence to underwrite bonds for non-financial companies among foreign banks – Implementation completed – Appointed as one of first market makers for Bond Connect, a bond trading link between mainland China and Hong Kong – We have completed the introduction of the major compliance IT systems, put in place our AML and sanctions policy framework, and assessed our current financial crime risk management capabilities to identify any gaps and enable integration into our day-to-day operations. All of the actions that we committed to in 2013 as part of the Global Standards programme have been completed or superseded.  Further improvements are underway to make our reforms more effective and sustainable.  business premiums in Asia: $2.4bn (+8% on 2016) – RMB internationalisation revenue from offshore business partly or wholly denominated in RMB as well as selected products in mainland China: $1.2bn (-5% on 2016) – By end 2017: Introduction of major compliance IT systems; AML and sanctions policy framework in place; assessment against the capabilities of our Financial Crime Risk Framework to enable the capabilities to be fully integrated in our day-to-day operations. – Post 2017: Fully integrate the policy framework and associated operational processes into day-to-day financial crime risk management practices in an effective and sustainable way. Target end state, which has been agreed with the Financial Conduct Authority, to be achieved. Major IT systems continue to be fine-tuned and recommendations from the Monitor/ Skilled Person continue to be implemented.  * – Completed review by – Review completed end of 2015 – Decision announced February 2016 to keep London as global HQ location Grow business from renminbi international- isation Global Standards – safeguarding against financial crime2 Domicile Headquarters review *As set out under ‘Outcomes’. For footnotes, see page 62. 13 HSBC Holdings plc Annual Report and Accounts 2017Strategic ReportFinancial ReviewCorporate GovernanceFinancial StatementsShareholder InformationStrategic Report Financial overview Reported results This table shows our reported results for the last three years, ended 31 December 2017, 2016 and 2015. All commentary in this financial overview compares the 2017 results with 2016, unless otherwise stated. Reported profit before tax Reported profit before tax of $17.2bn was $10.1bn or 141% higher, mainly reflecting a net favourable movement of significant items of $8.5bn, which is described in more detail on page 32. Excluding significant items and an adverse effect of foreign currency translation of $0.5bn, profit before tax increased by $2.1bn or 11%. Reported revenue Reported revenue of $51.4bn was $3.5bn or 7% higher, partly reflecting a net favourable movement in significant items of $2.0bn, which included: – in 2016, unfavourable fair value movements on our own debt designated at fair value reflecting changes in our own credit spread of $1.8bn, which are now reported in other comprehensive income, following our partial early adoption of IFRS 9 ‘Financial Instruments’ on 1 January 2017; and – favourable fair value movements in 2017 of $0.1bn on non-qualifying hedges, compared with adverse movements of $0.7bn in 2016. Net favourable movements were partly offset by: – in 2016, a $0.7bn gain on the disposal of our membership interests in Visa Europe and Visa Inc. This compared with a $0.3bn gain on the disposal of our shares in Visa Inc. during 2017; – adverse debit value adjustments on derivative contracts in 2017 of $0.4bn, compared with minimal movements in 2016; and – in 2017, a $0.1bn provision related to customer redress programmes in the UK, and a $0.1bn charge arising from the opportunity to increase our investment in new businesses. 14 Reported results Net interest income Net fee income Net trading income Other income 2017 $m 28,176 12,811 7,719 2,739 2016 $m 29,813 12,777 9,452 (4,076) 2015 $m 32,531 14,705 8,723 3,841 Net operating income before loan impairment charges and other credit risk provisions (‘revenue’) 51,445 47,966 59,800 Loan impairment charges and other credit risk provisions (1,769) (3,400) (3,721) Net operating income Total operating expenses Operating profit Share of profit in associates and joint ventures Profit before tax 49,676 44,566 56,079 (34,884) (39,808) (39,768) 14,792 2,375 17,167 4,758 2,354 7,112 16,311 2,556 18,867 Significant items also included a loss of $1.7bn recognised in 2016 on the sale of operations in Brazil to Banco Bradesco S.A., which was completed on 1 July 2016. This loss was substantially offset by the reported revenue earned by the Brazil business during 2016 of $1.5bn. Excluding significant items, and an adverse effect of foreign currency translation of $0.7bn, revenue increased by $2.2bn or 5%, reflecting growth in Retail Banking and Wealth Management (‘RBWM’), Commercial Banking (‘CMB’) and Global Banking and Markets (‘GB&M’). Reported LICs Reported loan impairment charges and other credit risk provisions (‘LICs’) of $1.8bn were $1.6bn lower, in part reflecting the effect of significant items, which comprised the LICs incurred by our operations in Brazil in 2016 of $0.7bn. Excluding significant items and the adverse effect of foreign currency translation of $0.1bn, LICs decreased by $0.8bn or 32%. The reduction in LICs was primarily in CMB, RBWM and Corporate Centre. Reported operating expenses Reported operating expenses of $34.9bn were $4.9bn or 12% lower. This included a net decrease in significant items of $5.6bn, including: – a $3.2bn write-off of goodwill in our GPB business in Europe in 2016; – a net release of $0.4bn in settlements and provisions in connection with legal matters, compared with charges in 2016 of $0.7bn; – operating expenses of $1.1bn in 1H16 incurred by the operations in Brazil that we sold; and – costs to achieve of $3.0bn, compared with $3.1bn in 2016. Excluding significant items and a favourable effect of foreign currency translation of $0.3bn, operating expenses increased by $1.1bn. This increase mainly reflected increased investment in growth programmes, primarily in RBWM, where investments were partly funded by the proceeds from our disposal of Visa shares, and higher performance-related pay. HSBC Holdings plc Annual Report and Accounts 2017Financial overview Dividends On 20 February 2018, the Board announced a fourth interim dividend of $0.21 per ordinary share. 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 improve understanding of the underlying trends in the business. Reported results continued Reported income from associates and joint ventures Reported income from associates and joint ventures of $2.4bn increased by $21m. Adjusted performance Our reported results are prepared in accordance with IFRSs as detailed in the Financial Statements on page 186. We 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: Adjusted results This table shows our adjusted results for 2017 and 2016. These are discussed in more detail on the following pages. For reconciliations of our reported results to an adjusted basis, including lists of significant items, see page 48. Adjusted results Movements compared with 2016 2017 $m 2016 $m Adverse $m Favourable $m Net operating income before loan impairment charges and other credit risk provisions (adjusted revenue) 51,524 49,290 Loan impairment charges and other credit risk provisions (1,769) (2,594) 825 Total operating expenses Operating profit Share of profit in associates and joint ventures Profit before tax (31,140) (30,084) (1,056) 18,615 16,612 2,375 2,322 20,990 18,934 53 2,234 2,003 2,056 Adjusted profit before tax On an adjusted basis, profit before tax of $21.0bn was $2.1bn or 11% higher. This was driven by higher revenue (up $2.2bn), with growth in our three main global businesses, and a significant reduction in LICs (down $0.8bn), notably as 2016 included charges relating to exposures to the oil and gas, and mining sectors. These movements were partly offset by higher operating expenses (up $1.1bn), in part due to investment in growth initiatives. In 2017, we achieved positive adjusted jaws of 1.0%. (%) 5% 32% (4)% 12% 2% 11% 15 HSBC Holdings plc Annual Report and Accounts 2017Strategic ReportFinancial ReviewCorporate GovernanceFinancial StatementsShareholder Information Strategic Report | Financial overview Adjusted performance continued Movement in adjusted revenue compared with 2016 Retail Banking and Wealth Management 20,287 18,542 1,745 2017 $m 2016 $m Variance $m % 9% 5% 3% (3)% unsecured lending which resulted in an associated increase in delinquency rates. – LICs in GB&M of $0.5bn were broadly unchanged from the prior year. LICs in the current year related to two large corporate exposures in Europe. This compared with a small number of individually assessed LICs, notably on exposures in the oil and gas, and mining sectors in the US in 2016. 13,223 15,091 1,703 1,220 12,619 14,715 1,748 1,666 604 376 (45) (446) (27)% 51,524 49,290 2,234 5% Adjusted operating expenses – In GPB, revenue was $45m or 3% lower, reflecting the impact of our customer repositioning actions. This was partly offset by increased revenue in the markets that we have targeted for growth, notably Hong Kong, due to higher investment revenue reflecting increased client activity and growth in deposit revenue as we benefited from wider spreads. – In Corporate Centre, revenue decreased by $0.4bn, with reductions in the US run-off portfolio (down $0.7bn), following the disposal of the remaining portfolio during 2017, and in Central Treasury (down $0.1bn). These decreases were partly offset in other income (up $0.4bn), which included revaluation gains on investment properties. Adjusted LICs Adjusted LICs of $1.8bn were $0.8bn lower, reflecting reductions in: – CMB ($0.5bn lower), notably in the UK and North America, primarily as 2016 included charges against exposures in the oil and gas sector. In addition, there were reductions in France, Spain and Singapore as we incurred individually assessed LICs against a small number of corporate exposures in 2016. – RBWM ($0.2bn lower), primarily in Turkey and the US, reflecting improved credit quality, partly offset by increases in Mexico, notably from growth in Adjusted operating expenses of $31.1bn were $1.1bn or 4% higher. This reflected investments in business growth programmes ($0.6bn), primarily in RBWM where investments were partly funded by the proceeds from the disposal of our shares in Visa, as well as an increase in performance-related pay (up $0.4bn). Compared with 2016, our UK bank levy charge was broadly unchanged, at $916m. The impact of our cost-saving initiatives broadly offset inflation and continued investment in our regulatory programmes and compliance. Our total investment in regulatory programmes and compliance was $3.0bn, up $0.2bn or 7%. This notably reflected the continued implementation of our Global Standards programme to enhance financial crime risk controls and capabilities. The number of employees expressed in full-time equivalent staff at 31 December 2017 was 228,687, a decrease of 6,488 from 31 December 2016. This reflected reductions resulting from our transformation programmes and the completion of these programmes, partly offset by increases from our investments in Global Standards and in our business growth programmes. Adjusted income from associates and joint ventures Adjusted income from associates and joint ventures of $2.4bn increased by $0.1bn. Adjusted operating expenses by quarter year ($bn) 2016 $30.1bn 2017 $31.1bn (0.1) 7.3 7.3 7.2 1.0 7.6 7.5 7.5 7.8 0.9 7.9 Adjusted operating expenses by year ($bn) $30.1bn $31.1bn Key 0.9 29.2 0.9 30.2 UK bank levy Adjusted operating expenses (excluding UK bank levy) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 2016 2017 Commercial Banking Global Banking and Markets Global Private Banking Corporate Centre Total Adjusted revenue Adjusted revenue of $51.5bn was $2.2bn or 5% higher, as growth in our three main global businesses was partly offset by reductions in GPB and Corporate Centre. – In RBWM, revenue increased by $1.7bn or 9%, driven by growth in Retail Banking from current accounts, savings and deposits, reflecting balance growth and wider spreads primarily in Hong Kong, and also in the US and Mexico, partly offset by lower personal lending revenue. Revenue also increased in Wealth Management, mainly in insurance manufacturing driven by favourable market impacts compared with adverse market impacts in 2016, notably in Asia. In addition, investment distribution income increased, reflecting increased investor confidence in Hong Kong. – In CMB, revenue increased by $0.6bn or 5%, driven by growth in Global Liquidity and Cash Management (‘GLCM’), notably in Asia. This primarily reflected wider spreads and increased average deposit balances. Revenue in Credit and Lending (‘C&L’) increased as we grew lending balances in key markets, while revenue in Global Trade and Receivables Finance (‘GTRF’) fell marginally, due to managed client exits in MENA despite balance sheet growth in Asia and the UK. – In GB&M, revenue increased by $0.4bn or 3%, mainly in GLCM and Securities Services. In Global Markets, revenue was marginally higher as growth in Equities, reflecting increased market share in Prime Financing, was partly offset by lower revenue in Fixed Income, Currencies and Commodities that reflected lower market volatility, as well as a net adverse movement on credit and funding valuations adjustments. These increases were partly offset: 16 HSBC Holdings plc Annual Report and Accounts 2017 Financial overview Balance sheet and capital Balance sheet strength Capital strength Implementation of IFRS 9 Total reported assets were $2.5tn, 6% higher than at 31 December 2016 on a reported basis, and 1% higher on a constant currency basis. We have maintained the strength of our balance sheet, as we continued our targeted asset growth, notably in Asia. Distributable reserves The distributable reserves of HSBC Holdings at 31 December 2017 were $38bn, compared with $42bn at 31 December 2016. The decrease was driven by distributions to shareholders of $8.3bn, which were higher than profits generated of $5.5bn, as well as fair value losses net of tax due to movements in our own credit risk of $0.8bn. 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. Details of these risks are included on page 117. Our CET1 ratio at 31 December 2017 was 14.5%, up from 13.6% at 31 December 2016. IFRS 9 ‘Financial Instruments’ was adopted on 1 January 2018. The adoption of IFRS 9 will reduce the Group’s net assets at 1 January 2018 by $1.0bn. We do not expect this to have a significant impact on our regulatory capital position. Further explanation of the expected impact of the implementation of IFRS 9 is provided in Note 1 on the Financial Statements on page 186. Delivery against Group financial targets Return on equity (%) 2017 2016 2015 Return on equity 5.9 0.8 7.2 Our medium-term target is to achieve a return on equity (‘RoE’) of more than 10%. In 2017, we achieved an RoE of 5.9% compared with 0.8% in 2016. In 2016, significant items, which included a write-off of goodwill in GPB in Europe, costs to achieve and adverse fair value movements arising from changes in credit spread on our own debt designated at fair value, had a significant effect on our reported RoE. Adjusted revenue up 5% Adjusted costs up 4% Adjusted jaws 1% Adjusted jaws Jaws measures the difference between the rates of change for revenue and costs. Positive jaws occurs when the figure for the annual percentage change in revenue is higher than, or less negative than, the corresponding rate for costs. We calculate adjusted jaws using adjusted revenue and costs. Our target is to maintain positive adjusted jaws. In 2017, adjusted revenue increased by 5% and our adjusted operating expenses increased by 4%. Adjusted jaws was therefore positive 1%. Total dividends declared in respect of the year ($bn) 2017 2016 2015 Dividends 10.2 10.1 10.0 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 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. 17 HSBC Holdings plc Annual Report and Accounts 2017Strategic ReportFinancial ReviewCorporate GovernanceFinancial StatementsShareholder InformationStrategic Report Global businesses We manage our products and services globally through our global businesses. Retail Banking and Wealth Management (‘RBWM’) RBWM serves close to 37 million customers worldwide through four main businesses: Retail Banking, Wealth Management, Asset Management and Insurance. Our HSBC Premier and Advance propositions are aimed at mass affluent and emerging affluent customers who value international connectivity and benefit from our global reach and scale. For customers with simpler banking needs, RBWM offers a full range of products and services reflecting local requirements. Key events – Significant investment in digital transformation across our six core markets, reshaping the branch network and sales force, and improving customer engagement, including the launch of a payment app in Hong Kong (PayMe) and voice biometrics in the UK. – Continued to attract customer deposits (up 5%), providing the potential to benefit from future interest rate rises; lending balances increased by 7%. – Strong growth in sales of investment products, notably equities (up 45%) and mutual funds (up 22%), and growth in insurance annualised new business premiums (up 7%), primarily in Asia. Financial performance Adjusted profit before tax of $6.5bn was $1.2bn or 24% higher, reflecting strong revenue growth from deposits and Wealth Management, as well as lower LICs, partly offset by higher operating expenses. We achieved positive adjusted jaws of 4.0%. Adjusted revenue of $20.3bn was $1.7bn or 9% higher, reflecting: Higher revenue in Retail Banking (up $0.8bn or 6%): – Growth in revenue from current accounts, savings and deposits (up $1.1bn) due to wider spreads and higher balances primarily in Hong Kong, and also in the US and Mexico. This was partly offset by: 18 Management view of adjusted revenue 2017 $m 2016 $m 2015 $m $m % 2017 vs 2016 Net operating income3 Retail Banking 13,495 12,695 12,508 800 – current accounts, savings 6,344 5,213 4,814 and deposits – personal lending mortgages credit cards other personal lending4 Wealth Management – investment distribution5 – life insurance manufacturing – asset management Other 6 Year ended 31 Dec Adjusted RoRWA (%)7 For footnotes, see page 62. 1,131 (331) (209) (135) 13 932 372 492 68 13 6% 22% (4)% (8)% (4)% 1% 18% 13% 35% 7% 2% 9% 7,151 2,337 2,899 1,915 6,224 3,276 1,893 1,055 568 7,482 2,546 3,034 1,902 5,292 2,904 1,401 987 555 7,694 2,648 3,218 1,828 5,748 3,230 1,544 974 582 20,287 18,542 18,838 1,745 5.5 4.6 4.8 – Lower personal lending revenue (down $0.3bn), reflecting mortgage spread compression, primarily in Hong Kong, mainland China and the US. This was partly offset by lending growth of $22.2bn, notably driven by mortgages in the UK and Hong Kong, where we grew our market share. Higher revenue in Wealth Management (up $0.9bn or 18%): – Growth in life insurance manufacturing revenue (up $0.5bn) including favourable movements in market impacts of $0.3bn in 2017 compared with adverse movements of $0.4bn in 2016, due to interest rate and equity market movements, notably in Asia and France, and to a lesser extent higher insurance sales in Asia. – Higher investment distribution revenue (up $0.4bn), primarily from higher sales of mutual funds and retail securities in Hong Kong, reflecting increased investor confidence. Adjusted LICs of $1.0bn were $0.2bn or 14% lower, reflecting reductions in Turkey of $85m and in the US of $44m, as credit quality improved. This was partly offset in Mexico where higher LICs ($24m) reflected targeted growth in unsecured lending and associated higher delinquency rates. In the UK LICs of $132m were marginally higher, but remained at very low levels (10bps of the portfolio) as higher LICs relating to mortgages and unsecured lending were partly offset by a release from the sale of a loan portfolio. Adjusted operating expenses of $12.8bn were $0.7bn or 5% higher, mainly due to investment in growth initiatives, notably in retail business banking, in our international proposition as we introduced new products and services, and in mainland China. Transformational and other cost savings partly offset inflation and higher performance-related pay. Adjusted profit before tax ($bn) 2017 2016 2015 6.5 5.2 5.5 Change in adjusted profit before tax +24% HSBC Holdings plc Annual Report and Accounts 2017Global businesses The ‘Management view of adjusted revenue’ tables provide a breakdown of revenue by major products, and reflect the basis on which each business is assessed and managed. The comparative period has been restated to reflect changes to reportable segments, as described on page 46. Commentary is on an adjusted basis, which is consistent with how we assess the performance of our global businesses. Commercial Banking (‘CMB’) CMB serves approximately 1.7 million customers in 53 countries and territories. Our customers range from small enterprises focused primarily on their domestic markets to corporates operating globally. We support customers with tailored financial products and services to allow them to operate efficiently and grow. Services provided include working capital, term loans, payment services and international trade facilitation, as well as expertise in mergers and acquisitions, and access to financial markets. Key events – Corporate customer value from our international subsidiary banking proposition grew 19%* compared with 2016, continuing to demonstrate the value of our global network. – In GLCM we launched a number of mobile solutions, including the government sponsored Unified Payments Interface in India, and Omni-Channel mobile collections in China. We also rolled out Voice and Touch ID in 37 markets and launched the next generation of HSBCnet. – HSBC was named the world’s Best Trade Finance Bank and Most Innovative Bank by Global Trade Review magazine. We also announced a strategic partnership with Tradeshift, the world’s largest business commerce platform, which will enable companies of all sizes to manage their global supply chains and working capital requirements from one simple online platform, from any device. Financial performance Adjusted profit before tax of $6.8bn was $0.9bn or 15% higher, reflecting higher revenue and lower LICs. This was partly offset by an increase in operating expenses. We achieved positive adjusted jaws of 1.3%. Adjusted revenue of $13.2bn was $0.6bn or 5% higher, as strong growth in GLCM and increased revenue in C&L Management view of adjusted revenue 2017 $m 2016 $m 2015 $m $m % 2017 vs 2016 Net operating income3 Global Trade and Receivables Finance Credit and Lending Global Liquidity and Cash Management Markets products, Insurance and Investments and Other8 Year ended 31 Dec Adjusted RoRWA (%)7 For footnotes, see page 62. 1,817 5,061 4,783 1,838 5,009 4,247 2,039 4,934 4,077 (21) 52 (1)% 1% 536 13% 1,562 1,525 1,457 37 2% 13,223 12,619 12,507 604 5% 2.3 2.1 1.9 were partly offset by a reduction in GTRF revenue. – In GLCM, revenue increased by $536m or 13%, notably in Hong Kong and mainland China, reflecting wider spreads. Average balances grew 5%, reflecting customer deposit retention and new customer acquisitions. In the UK, average balance sheet growth of 10% was more than offset by narrower spreads due to the impact of the base rate reduction in 2016. – In C&L, revenue increased by $52m or 1%. In the UK, revenue increased as lending growth more than offset narrower spreads. By contrast, revenue in Asia was lower, as balance growth in Hong Kong was more than offset by the effects of spread compression in Hong Kong and mainland China, in part reflecting competitive pressures. Revenue in the US was lower, as we reposition the portfolio towards higher returns. – In GTRF, revenue was $21m or 1% lower, representing a stabilisation in performance following a challenging 2016. Notably, revenue increased in both Asia and the UK, reflecting balance sheet growth. However, this was more than offset by a reduction in revenue in the Middle East and North Africa (‘MENA’), reflecting the effect of managed customer exits in the UAE. Adjusted LICs of $0.5bn were $0.5bn or 49% lower, notably in North America and the UK, primarily related to exposures in the oil and gas sector, and were also lower in France and Spain. In Asia, lower LICs in Singapore and mainland China were largely offset by higher LICs in Hong Kong, across various sectors. Adjusted operating expenses were $0.2bn or 3% higher. This reflected our continued investment in Global Standards and digital capabilities, as well as inflation. This was partly offset by a reduction from our cost-saving initiatives. Adjusted RWAs increased by 5% to $301bn reflecting growth in lending, mainly in Asia and Europe, in part funded through management initiatives which reduced RWAs by $14bn. Adjusted profit before tax ($bn) 2017 2016 2015 6.8 5.9 5.2 Change in adjusted profit before tax +15% *Analysis relates to corporate client income which includes total income from GB&M synergy products, including Foreign Exchange and Debt Capital Markets. This measure differs from reported revenue in that it excludes Business Banking and Other and internal cost of funds. 19 HSBC Holdings plc Annual Report and Accounts 2017Strategic ReportFinancial ReviewCorporate GovernanceFinancial StatementsShareholder InformationStrategic Report | Global businesses Global Banking and Markets (‘GB&M’) – The first foreign bank with a majority- Global Banking 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. Key events owned securities joint venture in China, Qianhai Securities Limited, which will allow us to provide GB&M and CMB clients with a broad spectrum of investment banking and markets services in China. – Issued the world’s first corporate sustainable development bond. Financial performance Adjusted profit before tax of $5.8bn was $0.3bn or 5% higher, reflecting a strong revenue performance, partly offset by higher operating expenses, while achieving positive adjusted jaws of 1.3%. Adjusted revenue of $15.1bn was $0.4bn or 3% higher, with growth in all of our businesses. The increase included a net adverse movement of $0.2bn on credit and funding valuation adjustments. Excluding these movements, adjusted revenue increased by $0.6bn or 4%. The increase in revenue primarily reflected the following: – Revenue growth in all of our transaction banking products, notably GLCM (up $0.3bn) and Securities Services (up $0.2bn). These increases reflected continued momentum as we won and retained client mandates, and benefited from higher interest rates, particularly in Asia and the US. – Global Markets revenue was resilient (up $33m), despite lower volatility in 2017, compared with more robust trading conditions in 2016. In Equities revenue increased by $0.3bn, as we continued to capture market share from Prime Financing products. This was largely offset by Fixed Income, Currencies and Commodities, where revenue decreased by $0.2bn, reflecting subdued trading conditions. 20 Management view of adjusted revenue 2017 $m 2016 $m 2015 $m $m % 2017 vs 2016 Net operating income3 Global Markets Foreign Exchange Rates Credit – FICC – Equities Global Liquidity and Cash Management Securities Services Global Trade and Receivables Finance Principal Investments Credit and funding valuation adjustments9 Other10 Year ended 31 Dec Adjusted RoRWA (%)7 For footnotes, see page 62. 6,689 2,568 1,970 900 5,438 1,251 3,807 2,197 6,656 2,764 2,120 781 5,665 991 3,791 1,885 6,010 2,658 1,404 606 4,668 1,342 3,757 1,744 1,746 1,561 1,600 700 318 (262) 689 226 (51) 682 226 186 33 (196) (150) 119 (227) 260 16 312 185 11 92 —% (7)% (7)% 15% (4)% 26% —% 17% 12% 2% 41% (211) (414)% (104) (42) 73 (62) (148)% 15,091 14,715 14,278 376 3% 1.9 1.7 1.5 We have exceeded the RWA reduction target set in our Investor Update in June 2015, with a cumulative reduction in RWAs from management initiatives of $128bn. This includes a further RWA reduction of $32bn in 2017. Our adjusted RoRWA improved to 1.9% from 1.7% in 2016. Adjusted profit before tax ($bn) 2017 2016 2015 5.8 5.5 5.3 Change in adjusted profit before tax +5% – Global Banking revenue was marginally higher than 2016 (up $16m), reflecting growth in lending balances and continued momentum in investment banking products, which broadly offset the effects of tightening spreads on lending in Asia. Adjusted LICs of $0.5bn were broadly unchanged from the prior year. LICs in 2017 related to two large corporate exposures in Europe, compared with 2016, which included a small number of individually assessed LICs, notably on exposures in the oil and gas, and mining sectors in the US. Adjusted operating expenses increased by $0.1bn or 1%, reflecting higher performance-related pay, pension and severance costs. Our continued cost management and efficiency improvements, and saves from technology investments, broadly offset the effects of inflation. HSBC Holdings plc Annual Report and Accounts 2017Global businesses Global Private Banking (‘GPB’) GPB serves high net worth individuals and families, including those with international banking needs. We provide a full range of private banking services, including Investment Management, which includes advisory and brokerage services, and Private Wealth Solutions, which comprises trusts and estate planning, to protect and preserve wealth for future generations. Key events – Net new money inflows of $15bn in key markets targeted for growth, especially in Hong Kong. – Significant progress made with repositioning, with outflows of over $15bn in 2017. – Positive momentum with significant growth in discretionary and advisory mandates in 2017. Financial performance Adjusted profit before tax of $296m was $24m or 9% higher as a reduction in operating expenses was partly offset by lower revenue. We achieved positive adjusted jaws of 3.2%. Corporate Centre Corporate Centre comprises Central Treasury, including Balance Sheet Management (‘BSM’), our legacy businesses, interests in our associates and joint ventures, central stewardship costs and the UK bank levy. Financial performance Adjusted profit before tax of $1.7bn was $0.4bn or 17% lower, reflecting lower revenue and higher operating expenses, partly offset by a fall in LICs. Adjusted revenue fell by $0.4bn or 27%, mainly due to a decrease of $0.7bn related to the US run-off portfolio with respect to the disposal of the remaining loan portfolio during 2017. In Central Treasury revenue also decreased (down $0.1bn), due to: – higher interest on our debt (up $0.3bn), mainly from higher costs of debt issued to meet regulatory requirements; and – a reduction in revenue in BSM (down $0.3bn) reflecting lower yield rates and increased utilisation of the Group’s surplus liquidity by the global businesses; partly offset by: Management view of adjusted revenue Net operating income3 Investment revenue Lending Deposit Other Year ended 31 Dec Adjusted RoRWA (%)7 For footnotes, see page 62. 2017 $m 693 387 401 222 1,703 1.8 2016 $m 733 411 342 262 1,748 1.6 2017 vs 2016 $m % (40) (24) 59 (40) (45) (5)% (6)% 17% (15)% (3)% 2015 $m 902 411 354 299 1,966 2.1 Adjusted revenue of $1.7bn was $45m or 3% lower, reflecting the continued impact of client repositioning. Revenue from the markets that we have targeted for growth increased by 10%. This was mainly in Hong Kong, due to growth in investment revenue reflecting increased client activity, and higher deposit income from wider spreads. Adjusted LICs of $16m in 2017 primarily related to a single client in the UK. Adjusted operating expenses of $1.4bn were $85m or 6% lower, mainly as a result of a managed reduction in FTEs and the impact of our cost- saving initiatives. Adjusted profit before tax ($bn) 2017 2016 2015 0.3 0.3 0.4 Change in adjusted profit before tax +9% Management view of adjusted revenue 2017 $m 2016 $m 2015 $m $m % 2017 vs 2016 Net operating income3 Central Treasury11 Legacy portfolios – US run-off portfolio – Legacy credit Other12 Year ended 31 Dec 1,340 1,454 8 40 (32) (128) 1,220 724 692 32 (512) 1,666 1,760 1,233 1,165 68 (160) 2,833 (114) (716) (652) (8)% (99)% (94)% (64) (200)% 384 (446) (75)% (27)% For footnotes, see page 62. – favourable fair value movements relating to the economic hedging of interest and exchange rate risk on our long-term debt with long-term derivatives of $0.1bn, compared with adverse movements of $0.3bn in 2016. Other income increased by $0.4bn, which included revaluation gains on investment properties. Net loan impairment releases of $182m compared with adjusted LICs of $22m in 2016. This reflected lower LICs in the US run-off portfolio, and higher net releases related to our legacy credit portfolio. Adjusted operating expenses of $2.1bn were $0.2bn or 8% higher due to investment in regulatory programmes and compliance, partly offset by lower US run-off portfolio costs. Adjusted income from associates rose by $55m or 2%. 21 HSBC Holdings plc Annual Report and Accounts 2017Strategic ReportFinancial ReviewCorporate GovernanceFinancial StatementsShareholder InformationStrategic Report How we do business Supporting sustainable growth We conduct our business intent on supporting the sustained success of our customers, people and communities. Customers We aim to be the world’s leading international bank and strive for excellence. Our customers are at the heart of everything we do and we are working to make life simpler, faster and better for them. Understanding our customers In this section we focus on our global business with the largest amount of customers. We also measure and report on customer data for Retail Banking and Wealth Management (‘RBWM’) and Commercial Banking in another eight markets within our Environmental, Social and Governance (‘ESG’) Update. Our largest global business RBWM Supports approximately 37 million customers worldwide Our largest markets Taking responsibility for the service we provide Customer recommendation† RBWM Operating with high standards of conduct is central to our long-term success and ability to serve customers, and we have clear policies, frameworks and governance in place to support our delivery of that commitment. These cover the way we behave, design products and services, train and incentivise employees, and interact with customers and each other. Our Conduct Framework guides activities to strengthen our business and increases our understanding of how the decisions we make affect customers and other stakeholders. Details on our Conduct Framework are available at www.hsbc.com and for further information on conduct, see pages 61 and 77. Senior leaders have ultimate responsibility for customer service standards and monitor these through key metrics aligned to performance objectives. These include: United Kingdom 2017 2016 61% 50% Hong Kong 2017 2016 61% 39% †Percentage of customers providing an 8 or above score out of 10. In Hong Kong the survey methodology changed in 2017, with surveys migrated from telephone to online. This may affect the comparison with prior year figures. Complaints resolution Time taken to resolve complaints (excluding PPI complaints) RBWM CMB 16% XX% 13% XX% Key 2017* 2016 15% XX% XX% 14% 71% XX% 2016 2015 XX% 71% Same day or next working day Between 2-5 days Longer than 5 days *2017 figures do not include First Direct UK complaint volumes, which were not available at time of publication. They are not expected to materially impact results. United Kingdom More than $401bn in customer accounts – How customers feel about recommending us; and Hong Kong More than $477bn in customer accounts – The speed and quality of complaint handling. The targets for each of these metrics are carefully set and managed to instil the right behaviours among our employees. For more information about what we have done, see our ESG reporting available on www.hsbc.com/our-approach/ measuring-our-impact. 22 HSBC Holdings plc Annual Report and Accounts 2017Customers How we do business What customers are telling us In 2017, our CMB and RBWM customers told us there were three main issues that we needed to focus on to improve their experience of our products and services: What our customers are telling us Our response Accessibility Customers in all of our channels have provided feedback on length of queues in branches, call waiting and handling time in our contact centres, the length of appointments with our relationship managers, and the complexity of logging on to our online and mobile banking. – Increased capacity in our contact centres. – Introduced new multi-channel appointment booking tools. – Added biometrics to make it easier for customers to authenticate themselves using their unique voice and digital fingerprint. – Delivered training to 53,500 employees globally to use plain language in communicating with our customers. – For our commercial customers we have simplified options on their online platform, HSBCnet. – Introduced instantaneous text message notifications in Hong Kong to provide application status and account servicing updates. This has helped many customers to better manage their accounts and to avoid incurring charges. Complexity Customers told us our processes and procedures are too complicated which affects the quality and length of time required to service our customers day-to-day. Fees and charges Our industry can be complex, and our customers can find it difficult to understand when and why they will be charged for our services. A digital transformation Our customers are becoming increasingly digitally oriented in their everyday lives. This means their expectations of us are changing. Customers are now using branches less often. In the future, we will have fewer – but better – branches and our front-line employees will be using a greater range of technology to support all our customers’ needs. 23 HSBC Holdings plc Annual Report and Accounts 2017Strategic ReportFinancial ReviewCorporate GovernanceFinancial StatementsShareholder InformationStrategic Report | How we do business Our employees Our employees are key to our success. We are focused on creating a diverse and inclusive environment where people can speak up, build their skills and develop their careers. We want our employees to feel that they can contribute to our purpose and fulfil their potential with our support. Giving employees a voice Since 2012, we have been hosting HSBC Exchange to give employees a voice. Exchanges are meetings with no agendas, where managers and leaders simply listen and employees do the talking. It’s an innovative approach that provides a forum for people to share their views on any issue and talk about what matters most to them. Our monthly employee survey – Snapshot – tests the views of a representative sample of colleagues on topics such as our strategy, regulation, culture and customer experience. Results are presented to the Group Management Board and relevant executive committees of the global functions and businesses, regions and countries. Whilst 77% of employees feel able to speak up when they see behaviour which they think is wrong and 72% believe that HSBC is genuine in its commitment to encourage colleagues to speak up, a smaller proportion of employees – 61% – say that where they work people can state their opinions without fear of negative consequence. The insight from Snapshot surveys, Exchanges and other employee engagement initiatives, informs policy, process and strategy across the Group and helps leadership make decisions that take employees into account. 24 Creating a diverse and inclusive environment We believe that a diverse and inclusive workforce is critical to running a sustainable and successful business. Our approach aims to increase and leverage diversity of thought to drive greater innovation, better manage risks, enhance collaboration and improve workforce agility. Our commitment We are committed to enabling a thriving environment where people are valued, respected and supported. We create business value by drawing on the richness of ideas, backgrounds, styles and perspectives of our employees. Gender balance at senior leadership We focus on improving gender balance in senior leadership across the Group. Our objective was for the female share of our senior leadership** to be more than 26.3% by the end of 2017, and we achieved 26.8%. This is a 1.4 percentage point increase on our 2016 year-end position and is an improvement to the trend year on year. Employee networks Our seven global employee networks play a key role in building community, highlighting opportunities and achieving our diversity and inclusion ambitions. The networks focus on gender, age, ethnicity, LGBT+, faith, working parents and carers, and ability. Additionally we have common interest groups sharing experiences and engaging with others both internally and externally. Employees (FTEs) by region (%) 9.0 7.0 4.0 26.0 54.0 Key Asia Europe Middle East and North Africa North America Latin America Employee retention 85.7% (2016: 81.7%) Gender diversity statistics Holdings Board Group Management Board (GMB) 12 5 12 2 29% 14% Combined Executive Committee and direct reports* 135 45 25% 6,540 2,393 27% 112,390 122,239 48% 52% Senior leadership** All employees Key Male Female 71% 86% 75% 73% Female share of senior leadership** headcount (%) 27 26 25 24 23 22 21 2012 2013 2014 2015 2016 2017 *Combined Executive Committee and direct reports was reported as at 30 June 2017 to the UK’s Hampton Alexander Review and includes the Executive Directors, Group Managing Directors and their direct reports (excluding administrative staff). **Senior leadership refers to employees performing roles classified as 0, 1, 2 or 3 in our Global Career Band Structure. Whistleblowing We work hard to create an environment in which people feel able to speak up, but understand that employees may not always feel comfortable raising concerns through their regular escalation channels. There will also be some circumstances which require more discretion. We operate a global whistleblowing standard, HSBC Confidential, which allows individuals 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. All allegations of retaliation reported are escalated to senior management. HSBC Holdings plc Annual Report and Accounts 2017How we do business Our employees continued HSBC Confidential is overseen by our Conduct & Values Committee and Group Audit Committee. Investigations are carried out thoroughly and independently, drawing on the expertise of a variety of teams, including Regulatory Compliance, Human Resources, Legal, Financial Crime Risk, Information Security and Internal Audit. 1,585 Cases were raised during 2017 (2016: 1,102 cases). All cases are subject to investigation. In 30% of the closed cases in 2017 (2016: 34%), allegations were substantiated in whole or in part and appropriate remedial action taken. Common themes: – Allegations of internal fraud by staff. – Issues with staff behaviour and personal conduct. – Weaknesses in adherence to information security protocols. Other HSBC’s purpose is to connect people with opportunities. With this purpose comes the responsibility to protect our customers, our communities and the integrity of the financial system. Non-financial risks We use a range of tools to monitor and manage our non-financial risks including our risk appetite, risk map, top and emerging risks and stress testing processes. In 2017, HSBC completed a multi-year Operational Risk Transformation Programme, the purpose of which was to make it easier to manage operational risk consistently in HSBC. This included the implementation of a new operational risk management framework (‘ORMF’) and system of record. The new ORMF provides an end-to-end view of non-financial risks, enhancing focus on associated controls and the capital we hold. It provides a platform to drive forward-looking risk awareness and assist management focus. Further details may be found in the Risk section on page 63 and page 77. Financial crime compliance HSBC operates in many countries around the world. As part of financial crime risk management, we have built a strong financial crime compliance system with a global footprint, and have a dedicated Financial Crime Risk team. We have invested heavily in training and communication for all employees. Our risk appetite has been set formally. Further details may be found in the Risk section on page 63. Anti-bribery and corruption As part of financial crime risk management, we have a global anti- bribery and corruption policy. The policy gives practical effect to global initiatives such as the Organisation of Economic Co-operation and Development (‘OECD’) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and Principle 10 of the United Nations Global Compact. We continue to invest in technology and training; in 2017 98% of our workforce was trained via a mandatory e-learning course ‘My Financial Crime Risk Responsibilities’. Tax Taxes paid by region ($bn) 0.5 0.3 0.4 2.7 $6.8bn 2.3 0.6 Key UK Rest of Europe Asia Middle East and North Africa North America Latin America We apply the letter and the spirit of the law in all territories where we operate. We have adopted the UK tax authority’s Code of Practice on Taxation for 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. Human rights Our statement on modern slavery can be found on www.hsbc.com/ our-approach/measuring-our-impact. Our supplier code of conduct takes into account legislation on modern slavery and human rights; over 4,000 of our largest suppliers have signed the code. Supporting sustainable growth In 2017 we launched our strategy to support sustainable growth, which focuses on three main areas: sustainable finance; sustainable networks and entrepreneurship; and future skills. Full details are available in our ESG Supplement released in November 2017. This year we contributed $136m to charitable programmes and our employees volunteered 272,000 hours to community activities during the working day. We continue our flagship environmental partnership, the HSBC Water Programme. For more information about what we have done, see our ESG reporting available on www.hsbc.com/our-approach/ measuring-our-impact. 25 HSBC Holdings plc Annual Report and Accounts 2017Strategic ReportFinancial ReviewCorporate GovernanceFinancial StatementsShareholder InformationStrategic Report | How we do business Sustainable finance Each and every one of us has a stake in developing a sustainable economic system. It is the combined responsibility of all players in society to respond to climate change, rapid technological evolution and continuing globalisation to secure a prosperous future. Since its foundation in 1865, HSBC has adapted to and helped serve the needs of a changing world. It has financed economic growth, fostered international trade and overcome events such as economic crises. We recognise that governments, corporations, the financial system and civil society are all stakeholders in mitigating the effects of climate change and meeting sustainability challenges. Now more than ever, there is a need to develop the skills, business innovation and low-carbon solutions needed to secure long-term prosperity for all. For HSBC, these are the key elements of sustainable growth that HSBC can influence. Our network covers many of the world’s largest and fastest growing trade corridors and economic zones. As such, we are uniquely positioned to provide the connections needed to foster sustainable growth across borders and geographies. We have a proud record of supporting the communities and environments in which we operate and our global sustainability strategy builds on this legacy. HSBC’s sustainable finance commitments In our November Environmental, Social, Governance (‘ESG’) Update, we published our five sustainable finance commitments. In this section we summarise key aspects of each commitment we aim to fulfil. For our full commitments see our ESG Supplement released in November 2017. 26 1 Provide $100bn of sustainable financing and investment by 2025 We provide $100bn of financing and investments, including facilitation, to develop clean energy, lower-carbon technologies, and projects that contribute to the delivery of the Paris Agreement and the UN Sustainable Development Goals. $10.5bn Volume of green, social, sustainability bonds facilitated by HSBC in 2017* HSBC Asset Management launched three low-carbon funds in 2017. *Source: Dealogic HSBC portion of notional value. 2 Source 100% of our electricity from renewable sources by 2030, with an interim target of 90% by 2025 We source 100% renewable electricity via direct investment or purchases via power purchase agreements that directly help the financing of new renewable electricity assets. 27% of signed renewable power purchase agreements (2016: 23%). 3 Reduce our exposure to thermal coal and actively manage the transition path for other high-carbon sectors To reduce our exposure, we expect to discontinue the financing of: – new thermal coal mines or new customers dependent on thermal coal mining; and – new coal-fired power plants in developed countries. In addition we expect to: – routinely reinforce lending criteria in developing countries, taking into account the state of climate transition and access to alternative sources of energy in individual countries; and – actively engage with clients in high- carbon sectors to support and influence their transition strategies, review their approach to reduce greenhouse gas emissions and assess their exposure to potentially stranded assets. 4 Adopt the recommendations of the Task Force on Climate- related Financial Disclosures (‘TCFD’) to improve transparency The Financial Stability Board (‘FSB’) established the Task Force on Climate- related Financial Disclosures in 2015 to develop recommendations for more effective and efficient climate-related disclosures. This year, HSBC is reporting qualitatively on the governance, strategy and risk management components of the recommendations published in 2017. See our first TCFD disclosure on page 27. 5 Lead and shape the debate around sustainable finance and investment We aim to do this in two ways: – Establish a Centre of Sustainable Finance to provide thought leadership about climate change and the role of the financial services sector. – Drive the sustainable finance agenda by promoting the development of sector activities (such as industry-wide definitions, standards, tools and metrics) to improve market analysis of sustainability issues and impacts. 20 Number of Sustainability-focused industry forums of which HSBC is a member. For more information about what we have done, see our ESG reporting available on www.hsbc.com/our-approach/ measuring-our-impact. HSBC Holdings plc Annual Report and Accounts 2017 How we do business Task Force on Climate-related Financial Disclosures (‘TCFD’) Initial response to the Financial Stability Board Reducing global carbon dioxide emissions is a critical challenge for everyone. We recognise its importance and seek to be a leader in managing climate change risk while developing opportunities with – and for – our customers. We welcome the new disclosure recommendations from the FSB taskforce, which assist the understanding of climate-related risks, and we were a signatory to the June 2017 TCFD report. This represents our first disclosure under the framework. We recognise this will evolve and expand over time. Governance Sustainability is a key concern of the HSBC Group Management Board, with five presentations taking place during 2017. HSBC’s 2016 Statement on Climate Change may be found on our website at www.hsbc.com/our-approach/ measuring-our-impact. The site gives information on our approach to low/high carbon transition, managing our direct impact and partnerships. Our Climate Business Council (‘CBC’), established in 2010, is an internal strategic committee whose role is to coordinate across the bank, identifying and developing products and services to meet customers’ sustainable finance needs. There is also a group-wide ESG steering group, chaired by the Group Finance Director, leading our approach to ESG issues, including external disclosure and materiality considerations. Strategy HSBC’s strategy is to connect customers to opportunities across a diversified range of products and services. This, along with our geographical presence in developing markets, gives us a unique opportunity to engage with our customers and support their transition strategies. HSBC has committed to directing $100bn of financing and investment to the low-carbon economy by 2025. In order to facilitate the transition to the low-carbon economy for us and our clients, during 2017 we created a ‘Global Head of Sustainable Finance’ and an ‘HSBC Centre of Sustainable Finance’. Additionally, via training, we have expanded our in-house sustainability expertise to approximately 1,300 employees across the Group. We are committed to strengthening our role as a thought leader in the financial services industry. During 2017, HSBC’s Global Research Climate Change Centre was ranked number one by Extel and HSBC was the second-ranked bookrunner by Dealogic for green, social and sustainability bonds. We will work with our customers in all our businesses to develop sustainable products and support innovation. Risk Management Climate risk, both physical and transition, is an increasing risk. During 2017 the Executive Risk Management Committee approved a framework for measuring transition risks across our loan portfolio. We have identified the higher transition risk sectors as oil and gas, metals and mining, power and utilities, automobiles, building and construction, and chemicals. We actively engage with clients in these sectors to support their transition strategies. We monitor and report our exposure internally, and will do so externally in 2018. Over time we expect a reduction in the carbon intensity of our portfolio. Our Sustainability risk policies cover all our lending to sensitive sectors and we apply the Equator Principles to project finance. Details are available at www.hsbc.com/our-approach/measuring-our-impact. We also manage the physical risks to our global network relating to climate change by undertaking regular operational stress testing and contingency planning. Next steps The HSBC Centre of Sustainable Finance, Risk Management and Finance will work with external experts to develop climate-related scenario analysis and related disclosures. 27 HSBC Holdings plc Annual Report and Accounts 2017Strategic ReportFinancial ReviewCorporate GovernanceFinancial StatementsShareholder InformationStrategic Report 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 sustainable 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 governance and corresponding risk management tools. This framework is underpinned by our risk culture and reinforced by the HSBC Values. 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. It is articulated in our risk appetite statement, which is approved by the Board. Key elements include: analysis helps management understand the nature and extent of vulnerabilities to which the bank is exposed. – 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. Internal stress tests are an important element in our risk management and capital management frameworks. They include potential adverse macroeconomic, geopolitical and operational risk events, and other potential events that are specific to HSBC. The selection of scenarios reflects our top and emerging risks identification process and our risk appetite. Stress testing 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 stress tests. In 2017, the results for HSBC as published by the Bank of England ('BoE') showed that our capital ratios, after taking account of CRD IV restrictions and strategic management actions, exceeded the BoE’s requirements. This outcome reflected our strong capital position, conservative risk appetite and diversified geographical and business mix. It also reflected our ongoing strategic actions, including the sale of operations in Brazil, ongoing RWA reduction initiatives and continued sales from our US CML run-off portfolio. Our risk management framework and risks associated with our banking and insurance manufacturing operations are described on pages 66 and 78, respectively. Key risk appetite metrics Component Measure Risk appetite 2017 Returns Return on average ordinary shareholders’ equity ≥10.0% 5.9% Capital Common equity tier 1 ratio – CRD IV end point basis ≥11.5% 14.5% HSBC’s risk appetite defines our desired forward-looking risk profile, and informs the strategic and financial planning process. 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% Top and emerging risks 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 occurred, they could have a material effect on HSBC. During 2017, we made three changes to our top and emerging risks to reflect our assessment of their potential effect on HSBC. The thematic issue ‘Regulatory focus on conduct of business and financial crime’ was removed and ‘Financial crime risk environment’ was added to further emphasise the heightened focus on, and robust oversight, monitoring and active risk management of, financial crime risks. In addition, we removed the thematic issue ‘US DPA and Related Agreements and Consent Orders’ following the expiration in December 2017 of the AML DPA relating to past anti-money laundering and sanctions deficiencies. In addition, three thematic issues were renamed to better reflect the challenges facing the Group. We use the new name in the table opposite, which summarises our top and emerging risks. Our current top and emerging risks are summarised on the next page and discussed in more detail on page 63. Our approach to identifying and monitoring top and emerging risks is described on page 67. 28 HSBC Holdings plc Annual Report and Accounts 2017Risk overview Risk Trend Mitigants Externally driven Economic outlook and capital flows Geopolitical risk • The credit cycle We actively monitor our wholesale credit and trading portfolios, including undertaking stress tests, to identify sectors and clients that may come under stress due to economic conditions in the eurozone, mainland China and in the UK as negotiations to exit from the EU continue. We continually assess the impact of geopolitical events on our businesses and exposures, and take steps to mitigate them, where required, to help ensure we remain within our risk appetite. We have also strengthened physical security at our premises where the risk of terrorism is heightened. We continue to undertake detailed reviews of our portfolios and are proactively assessing customers and sectors likely to come under stress as a result of geopolitical or macroeconomic events, reducing limits where appropriate. Cyber threat and unauthorised access to systems We continue to strengthen our cyber control framework and implement initiatives to improve our resilience and cybersecurity capabilities, including threat detection and analysis, access control, payment systems controls, data protection and backup and recovery. • Regulatory, technological and sustainability developments including conduct, with adverse impact on business model and profitability Financial crime risk environment Internally driven IT systems infrastructure and resilience Impact of organisational change and regulatory demands on employees Execution risk We proactively engage with regulators wherever possible to help ensure new regulatory requirements are effectively implemented, and work with them in relation to their investigations into historical activities. We also engage with non-governmental organisations to help ensure our policies address environmental concerns. We continue to develop and enhance the Financial Crime Risk function and augment our risk management capabilities to further improve our financial crime detection and compliance capabilities. We will continue to take steps to enhance our defences against financial crime across our operations globally to help ensure our Global Standards are sustainable over the long term. We continue to monitor and improve service resilience across our technology infrastructure, enhancing our problem diagnosis/resolution and change execution capabilities, reducing service disruption to our customers. We continue to focus on resourcing and employee development to meet regulatory changes as well as to maintain and enhance our leadership succession strength. The Group Change Committee oversees the progress of the highest priority programmes, underpinning the implementation of our strategic actions to help ensure that we achieve a consistent on time, on budget and on quality delivery across these critical initiatives. • Risks arising from the receipt of services from third parties We have strengthened essential governance processes and relevant policies relating to how we identify, assess, mitigate and manage risks across the range of third parties with which we do business. This includes control monitoring and assurance throughout the third-party lifecycle. Enhanced model risk management expectations We have strengthened our model risk management framework by establishing an independent second line of defence Model Risk Management sub-function, and we continue to enhance our existing policy and standards in order to address evolving regulatory, external and internal requirements. Data management We continue to improve our insights, consistency of data aggregation, reporting and decisions through ongoing enhancement of our data governance, data quality and architecture framework. Risk heightened during 2017 Risk remained at the same level as 2016 Thematic risk renamed during 2017 • 29 HSBC Holdings plc Annual Report and Accounts 2017Strategic ReportFinancial ReviewCorporate GovernanceFinancial StatementsShareholder Information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. 30 Pay Outcomes Positive adjustments – Individuals who exhibit exceptional conduct and behaviours which go beyond the normal course of an employee’s responsibilities, and set an outstanding example of our Values-aligned behaviours and conduct expectations, are awarded positive variable pay adjustments during the year. Global consequence management policy – This provides a set of guidelines designed to align the handling of employee conduct breaches, and support line managers in delivering greater consistency of outcomes and messages. – Ensures clear messaging to employees on the impact of any inappropriate conduct as part of reward communications. Global recognition programme – Introduced from July 2015 as the Group’s global peer-to-peer recognition programme, designed to incentivise compliance by allowing colleagues to recognise and reward positive behaviours. – Includes communication of positive stories on our intranet (HSBC Now). 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 well-being. HSBC Holdings plc Annual Report and Accounts 2017Remuneration 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: Our variable pay pool is $3,303m, an increase of 8.8% compared with 2016. Performance and risk appetite statement Countercyclical funding methodology Distribution of profits Commerciality and affordability – Our variable pay pool takes into account our performance in the context of our risk appetite. – To dampen effects of economic cycles, the variable pay pool’s size has a floor and a ceiling, and we also limit the payout ratio as performance increases to prevent the risk of inappropriate behaviour. – Our funding methodology ensures that the distribution of post-tax profit between capital, shareholders and variable pay is appropriate, and that the majority of post-tax profit is allocated to capital and shareholders. – We face challenges arising from being headquartered in the UK, which has more stringent reward practices. We take into account these challenges in determining the size of the variable pay pool to ensure we can continue to attract and retain talent in key markets. Variable pay pool ($m) Group Of which Global Banking and Markets 2017 2016 2017 2016 1,063 954 3,303 3,035 Variable pay for our executive Directors Variable pay for our executive Directors is driven by scorecard achievement. Targets in the scorecard are set according to our key performance indicators to ensure linkages between our strategy and remuneration policies and outcome. See the Directors’ Remuneration Report on page 146 for further details. Remuneration for our executive Directors Our remuneration policy for executive Directors was approved in our 2016 Annual General Meeting (‘AGM’) and is intended to apply for three performance years until the AGM in 2019. Full details of our remuneration policy can be found online in our Directors’ Remuneration Policy Supplement 2017. The table below shows the amount our executive Directors earned in 2017. For details of Directors’ pay and performance for 2017, see the Directors’ Remuneration Report on page 141. (Audited) (in £000) Douglas Flint2 Stuart Gulliver3 Iain Mackay Marc Moses Base salary Fixed pay allowance Cash in lieu of pension Annual incentive LTI1 Sub-total Taxable benefits Non- taxable benefits Notional returns 2017 2016 2017 2016 2017 2016 2017 2016 1,125 1,500 1,250 1,250 700 700 700 700 — — 1,700 1,700 950 950 950 950 338 450 375 375 210 210 210 210 — — 2,127 1,695 1,334 987 1,358 1,005 — — — — — — — — 1,463 1,950 5,452 5,020 3,194 2,847 3,218 2,865 83 100 500 557 64 52 16 15 64 86 71 71 37 37 38 38 — — 63 27 42 17 42 18 Total 1,610 2,136 6,086 5,675 3,337 2,953 3,314 2,936 1 The first LTI award was made in February 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. 2 Douglas Flint stepped down from the Board on 30 September 2017 and his remuneration reflects time served as an executive Director. Details on retirement arrangements are provided on page 151. 3 To meet regulatory deferral requirements for 2017, 60% of the annual incentive award of Stuart Gulliver has been deferred in shares and will vest in five equal instalments between the third and seventh anniversary of the grant date. 31 HSBC Holdings plc Annual Report and Accounts 2017Strategic ReportFinancial ReviewCorporate GovernanceFinancial StatementsShareholder Information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 2017 Page 32 32 33 34 34 36 36 37 38 38 39 39 40 41 42 43 43 44 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 175. To measure our performance we also use non-GAAP financial measures, including those derived from our reported results that eliminate factors that distort year-on-year comparisons. The ‘adjusted performance’ measure used throughout this report is described below, and where others are used they are described. All non-GAAP financial measures are reconciled to the closest reported financial measure. The global business segmental results on pages 46 to 59 are presented on an adjusted basis in accordance with IFRS 8 ‘Operating Segments’ as detailed in ‘Basis of preparation’ on page 46. Adjusted performance Adjusted performance is computed by adjusting reported results for the effects of foreign currency translation differences and significant items, which both distort year-on-year comparisons. Foreign currency translation differences are described below. ‘Significant items’ refers collectively to the items that management and investors would ordinarily identify and consider separately to understand better the underlying trends in the business. We consider adjusted performance provides useful information for investors by aligning internal and external reporting, identifying and quantifying items management believes to be significant and providing insight into how management assesses year-on-year performance. Foreign currency translation differences Foreign currency translation differences reflect the movements of the US dollar against most major currencies during 2017. We exclude them to derive constant currency data, allowing us to assess balance sheet and income statement performance on a like-for-like basis and better understand the underlying trends in the business. 32 HSBC Holdings plc Annual Report and Accounts 2017 Foreign currency translation differences Foreign currency translation differences for 2017 are computed by retranslating into US dollars for non-US dollar branches, subsidiaries, joint ventures and associates: • the income statements for 2016 and 2015 at the average rates of exchange for 2017; and • the balance sheets at 31 December 2016 and 31 December 2015 at the prevailing rates of exchange on 31 December 2017. 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. Changes to presentation from 1 January 2017 Own credit spread ‘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. On 1 January 2017, HSBC adopted 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. These requirements were adopted in the separate financial statements of HSBC Holdings plc on 1 January 2016. Refer to ‘Compliance with International Financial Reporting Standards’ on page 186 for further detail. Adjusted performance – foreign currency translation of significant items The foreign currency translation differences related to significant items are presented as a separate component of significant items. This is considered a more meaningful presentation as it allows better comparison of year-on-year movements in performance. Significant items The tables on pages 49 to 51 and pages 55 to 57 detail the effects of significant items on each of our global business segments and geographical regions in 2017, 2016 and 2015. 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 190. • Deferred tax assets: The most significant judgements relate to those made in respect of expected future profitability. See Note 1.2(h) on page 194. • 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 189. • 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 194. • 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 188. • 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 188. 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 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 average risk-weighted assets Return on average ordinary shareholders’ equity Average foreign exchange translation rates to $: $1: £ $1: € 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. 2017 $m 28,176 12,811 7,719 3,698 1,150 106 9,779 337 63,776 (12,331) 51,445 (1,769) 49,676 (34,884) 14,792 2,375 17,167 (5,288) 11,879 9,683 90 1,025 1,081 11,879 2017 $ 0.48 0.48 0.51 % 106.3 0.5 2.0 5.9 0.777 0.887 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 10,355 1,055 71,092 2014 $m 34,705 15,957 6,760 2,473 1,335 311 11,921 1,131 74,593 2013 $m 35,539 16,434 8,690 768 2,012 322 11,940 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 12,572 13,115 15,631 90 860 1,574 15,096 90 483 1,017 14,705 90 483 1,596 17,800 2015 2014 2013 $ 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 0.654 0.902 0.607 0.754 0.639 0.753 Footnotes 13 14 15 For footnotes, see page 62. Unless stated otherwise, all tables in the Annual Report and Accounts 2017 are presented on a reported basis. For a summary of our financial performance in 2017, see page 14. For further financial performance data for each global business and geographical region, see pages 46 to 53 and 53 to 59, respectively. HSBC Holdings plc Annual Report and Accounts 2017 33 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 62. Footnotes 16 17 18 2017 $m 40,995 (12,819) 28,176 2016 $m 42,414 (12,601) 29,813 2015 $m 47,189 (14,658) 32,531 1,726,120 1,723,702 1,726,949 % 2.37 (0.88) 1.49 1.63 % 2.46 (0.87) 1.59 1.73 % 2.73 (1.00) 1.73 1.88 In July 2016, we completed the sale of operations in Brazil. During 2016, we earned net interest income of $0.9bn in Brazil from average interest earning assets of $25.8bn. In 2016, our net interest margin excluding Brazil was 1.70%. Summary of interest income by type of asset 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 62. 2017 2016 Average balance Interest income Yield Average balance Interest income Footnotes $m $m % $m $m 236,126 2,030 902,214 28,751 173,760 389,807 24,213 2,191 7,440 583 1,726,120 40,995 0.86 3.19 1.26 1.91 2.41 2.37 203,799 1,510 865,356 168,207 430,775 55,565 29,272 1,227 7,248 3,157 1,723,702 42,414 2015 Average balance Interest income $m $m 221,924 2,277 909,707 162,308 396,113 36,897 33,104 1,301 7,508 2,999 1,726,949 47,189 Yield % 1.03 3.64 0.80 1.90 8.13 2.73 Yield % 0.74 3.38 0.73 1.68 5.68 2.46 19, 20 186,673 4,245 2.27 179,780 3,897 2.17 195,285 4,626 2.37 (7,841) 616,688 (9,127) 653,115 (10,606) 682,143 2,521,640 45,240 1.79 2,547,470 46,311 1.82 2,593,771 51,815 2.00 Summary of interest expense by type of liability and equity Footnotes 21 22 23 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 Average balance $m 47,337 60,566 1,094,920 136,561 108,677 7,009 2017 Interest expense $m 451 1,261 5,405 1,665 3,130 Cost % 0.95 2.08 0.49 1.22 2.88 907 12.94 Average balance $m 49,782 62,042 1,074,661 118,789 114,343 22,387 2016 Interest expense $m 342 942 5,492 626 2,807 2,392 Total interest-bearing liabilities 1,455,070 12,819 0.88 1,442,004 12,601 Average balance $m 55,863 58,489 1,075,901 117,947 129,039 28,396 2015 Interest expense $m 378 717 7,401 355 3,521 2,286 1,465,635 14,658 Cost % 0.68 1.23 0.69 0.30 2.73 8.05 1.00 Cost % 0.69 1.52 0.51 0.53 2.45 10.68 0.87 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 62. 153,776 2,325 1.51 197,104 715,690 138,486 184,016 782,964 1,986 1.43 2,071 1.37 151,294 190,914 785,928 2,521,640 15,144 0.60 2,547,470 14,587 0.57 2,593,771 16,729 0.64 34 HSBC Holdings plc Annual Report and Accounts 2017 Significant items and currency translation Significant items – customer redress programmes – trading results from disposed-of operations in Brazil – currency translation on significant items Currency translation Year ended 31 Dec Net interest income of $28.2bn decreased by $1.6bn or 5% compared with 2016, including the effects of significant items and foreign currency translation totalling $1.7bn. Excluding the effects of significant items and foreign currency translation, our net interest income remained broadly unchanged from 2016. Net interest margin of 1.63% was 10 basis points (‘bps’) lower than in 2016, including the effects of the significant items and foreign currency translation, which decreased net interest margin by 7bps in total. Excluding these factors, net interest margin decreased by 3bps, mainly reflecting the run-off of our US CML portfolio, pressures on asset yields, notably in Europe and Asia, and higher cost of Group debt. These were partly offset by higher yields on surplus liquidity due to US dollar and Hong Kong dollar rate rises. Interest income Interest income decreased by $1.4bn compared with 2016, including the adverse effects of the significant items and foreign currency translation totalling $3.7bn. Excluding these, interest income increased by $2.3bn mainly driven by higher income on surplus liquidity and reverse repurchase agreements. Interest income on short-term funds and financial investments increased by $0.7bn compared with 2016, which included adverse effects of the disposal of our operations in Brazil and currency translation of $0.2bn. Excluding these, interest income on short- term funds and financial investments increased by $0.9bn, primarily in Asia and North America, reflecting the central bank rate rises. This was partly offset by a reduction in Europe, notably due to the base rate cut in the UK in 2016. Interest income on reverse repurchase agreements – non-trading was $1.0bn higher, driven by increased income in all regions, notably in Asia and North America, reflecting higher balances and increased market rates. This movement is in line with an increase in interest expense on repurchase agreements. Interest income on loans and advances to customers was marginally higher, excluding the adverse effects of the UK customer redress programme, our sale of operations in Brazil and foreign currency translation totalling $0.7bn, reflecting increases in: • Asia, mainly due to growth in term lending and mortgage balances, although term lending yields decreased as a result of competitive pressures; and • Latin America, notably in Mexico reflecting higher yields on mortgages and term lending driven by central bank rate rises, and growth in mortgage balances. 2017 $m (108) (108) — 2016 $m 1,110 2 949 159 524 (108) 1,634 These increases were partly offset by lower income in: • North America, primarily as a result of the continuing run-off of the higher-yielding CML portfolio in the US; and • Europe, as the effects of decreased lending yields more than offset balance growth in mortgages, term lending and overdrafts, resulting from lower central bank rates, negative interest rates in continental Europe, and market competition. Interest expense Reported interest expense increased by $0.2bn, including the effects of the disposal of our operations in Brazil in 2016 and foreign currency translation totalling $2.0bn. Excluding these impacts, interest expense was $2.2bn higher, primarily due to increases in interest expense on repurchase agreements and Group debt. Interest expense on repurchase agreements increased by $1.0bn, in line with the increase in interest income on reverse repurchase agreements, notably in North America reflecting increased balances and higher market rates, and in Europe reflecting increased balances. Interest expense on debt securities in issue and own debt at fair value was $0.6bn higher. The increase reflected a rise in the cost of funds, although average balances fell as an increase in debt issued by HSBC Holdings to meet regulatory requirements was more than offset by redemptions of senior debt across the Group. The increase in the cost of debt reflected both longer maturities and the structural subordination of our new issuances. Interest expense on customer accounts was $0.1bn higher, excluding the effects of our sale of operations in Brazil and foreign currency translation, reflecting average balance growth in most of our geographical regions. The net increase also reflects changes in interest rates in key markets, including: • rate rises in North America and Mexico; partly offset by, • the 2016 reduction in the UK base rate and negative interest rates in continental Europe on current and savings and deposit accounts; and • central bank rate reductions in Asia, notably in India and Australia, and a change in portfolio mix. HSBC Holdings plc Annual Report and Accounts 2017 35 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 Underwriting Remittances Imports/exports Global custody Insurance agency commission Other Fee income Less: fee expense Year ended 31 Dec Significant items and currency translation Significant items – trading results from disposed-of operations in Brazil – currency translation on significant items Currency translation Year ended 31 Dec Net fee income of $12.8bn was broadly unchanged compared with 2016 and included the disposal of our operations in Brazil which reduced net fee income by $0.2bn, notably fee income from account services and cards. It also included the adverse effects of currency translation of $0.1bn. Excluding the effects of our sale of operations in Brazil and currency translation, net fee income increased by $0.4bn, mainly due to higher fee income from broking and unit trusts in RBWM and higher fee income from corporate finance (disclosed within ‘Other’) and underwriting in GB&M. Fee income from Broking and Unit trusts increased by $0.3bn, largely due to a strong performance in Hong Kong as renewed investor confidence resulted in higher sales of mutual funds and retail securities compared to a weaker performance in 2016. Net trading income 2017 $m 2,244 2,188 1,994 1,718 1,191 1,010 829 759 736 692 410 2,082 15,853 (3,042) 12,811 2016 $m 2,417 2,076 1,970 1,795 1,060 863 705 766 820 662 419 2,116 15,669 (2,892) 12,777 2017 $m — — — 2015 $m 2,745 2,570 2,281 1,919 1,441 1,007 762 772 971 721 519 2,308 18,016 (3,311) 14,705 2016 $m 271 233 38 111 382 Fee income from corporate finance and underwriting increased by $0.2bn, reflecting continued momentum across our investment banking products, primarily in the UK, the US and Hong Kong. Fee income from funds under management rose by $0.1bn, notably in Hong Kong, reflecting higher turnover due to a more favourable equity market environment. These increases were partly offset by lower fee income from credit facilities, primarily due to lower commercial lending activity in the US in CMB. In addition, fee expense increased by $0.2bn, in part from cards due to increased customer activity in Hong Kong. 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 Fair value movement on non-qualifying hedges 24 Footnote Year ended 31 Dec For footnotes, see page 62. Significant items and currency translation Significant items – debit valuation adjustment on derivative contracts – fair value movement on non-qualifying hedges – trading results from disposed-of operations in Brazil – currency translation on significant items Currency translation Year ended 31 Dec For footnotes, see page 62. 36 HSBC Holdings plc Annual Report and Accounts 2017 2017 $m 5,990 1,621 3 (5) 4 106 7,719 Footnote 24 2016 $m 8,702 1,386 1 (5) 23 (655) 9,452 2017 $m (245) (373) 128 — (245) 2015 $m 7,285 1,775 (11) 15 (11) (330) 8,723 2016 $m (475) 26 (687) 179 7 219 (256) Net trading income of $7.7bn was $1.7bn lower than in 2016. The net favourable effects of $0.2bn of significant items was largely offset by the adverse effect of currency translation of $0.2bn summarised in the prior table. The decrease of $1.7bn, excluding the fair value movement on non-qualifying hedges, debit valuation adjustment on derivative contracts, the disposal of our operations in Brazil and currency translation, was primarily driven by: • adverse movements on assets held as economic hedges of foreign currency debt designated at fair value of $0.3bn in 2017 compared with favourable movements of $1.6bn in 2016. These movements were offset by favourable movements in foreign currency debt designated at fair value in ‘Net income/(expense) from financial instruments designated at fair value’; and • decreases in GB&M ($0.2bn), notably in Foreign Exchange and Rates, reflecting subdued trading activity in the fourth quarter, partly offset by Credit and Equities, where we gained market share in Prime Financing. We also recorded adverse movements of $262m in credit and funding valuation adjustments compared with adverse movements of $51m 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) 25 Footnote – other changes in fair value Other instruments designated at fair value and related derivatives Year ended 31 Dec For footnotes, see page 62. 2017 $m 3,211 (375) 672 — 672 190 3,698 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 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. These liabilities are discussed further on page 230. In accordance with IFRS 9 ‘Financial Instruments’, fair value movements attributable to changes in our own credit spread on our own debt designated at fair value are now reported in other comprehensive income; by contrast, 2016 included adverse movements of $1.8bn in the fair value of our long-term debt reflecting changes in credit spread. Significant items and currency translation Significant items – own credit spread – trading results from disposed-of operations in Brazil – currency translation on significant items Currency translation Year ended 31 Dec For footnotes, see page 62. Footnote 25 2017 $m — — — — 2016 $m (1,477) (1,792) 304 11 (186) (1,663) Net income from financial instruments designated at fair value was $3.7bn in 2017, compared with a net expense of $2.7bn in 2016. This included a net favourable movement in significant items and currency translation of $1.7bn, primarily due to the effects of adverse fair value movements attributable to changes in our own credit spread on our own debt designated at fair value of $1.8bn in 2016, now reported in other comprehensive income, as mentioned above. The remaining movement reflected an increase in ‘Other changes in fair value’ on our long-term debt and related derivatives, which included: • favourable movements of $0.3bn compared with adverse movements of $1.6bn in 2016 on foreign currency debt designated at fair value and issued as part of our overall funding strategy (offset in ‘Net trading income’ by assets held as economic hedges); and • favourable movements of $0.1bn compared with adverse movements of $0.3bn in 2016 relating to the economic hedging of interest and exchange rate risk on our long-term debt, reported in Corporate Centre. In addition, net income from financial assets and liabilities from insurance and investment contracts increased by $1.6bn, primarily due to improved equity market performance in Asia and Europe in 2017. 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 insurance claims and benefits paid and movement in liabilities to policyholders’. HSBC Holdings plc Annual Report and Accounts 2017 37 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review 2017 $m 1,248 403 838 7 (98) 1,150 2016 $m 1,421 357 1,058 6 (36) 1,385 2015 $m 2,179 345 1,829 5 (111) 2,068 2017 2016 $m 434 — 308 126 — 434 $m 648 584 116 — 1 (53) 70 718 In addition, the decrease in gains less losses from financial investments included higher impairments of AFS equity securities in GB&M. These decreases were partly offset by gains on disposal of debt securities, which included higher gains on disposal of AFS assets in BSM in Corporate Centre, notably in the UK and Hong Kong. 2017 $m 10,802 (1,023) 9,779 2016 $m 10,588 (637) 9,951 2017 $m — — — 2015 $m 11,012 (657) 10,355 2016 $m 420 362 58 (33) 387 • an increase in France, driven by higher volumes of unit-linked products. This was partly offset by: • lower sales through third-party channels in Singapore. Report of the Directors | Financial summary 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 disposal of our investment in Vietnam Technological and Commercial Joint Stock Bank – trading results from disposed-of operations in Brazil – currency translation on significant items Currency translation Year ended 31 Dec Gains less losses from financial investments of $1.2bn decreased by $0.2bn compared with 2016. This was largely due to a decrease in gains on the disposal of equity securities $0.2bn, notably the non-recurrence of the gain on disposal of our membership interest in Visa Europe of $0.6bn in 2016. This was partly offset by higher gains on disposal resulting from the sale of our shares in Visa Inc. of $0.3bn, compared with $0.1bn in 2016. We also recorded gains on disposal of our investment in Vietnam Technological and Commercial Joint Stock Bank (‘Techcombank’) of $0.1bn in 2017. Net insurance premium income Gross insurance premium income Reinsurance premiums Year ended 31 Dec Significant items and currency translation Significant items – trading results from disposed-of operations in Brazil – currency translation on significant items Currency translation Year ended 31 Dec Net insurance premium income was $0.2bn lower than in 2016, and included reductions due to the disposal of our operations in Brazil ($0.4bn) and minimal currency translation movements. Excluding these, net insurance premium income increased by $0.2bn due to the following: • growth in Hong Kong driven by increased gross premium income, partly offset by the effect of a new reinsurance agreement; 38 HSBC Holdings plc Annual Report and Accounts 2017 Other operating income Rent received Gains/(losses) recognised on assets held for sale Gains on investment properties Gain on disposal of property, plant and equipment, intangible assets and non-financial investments Change in present value of in-force long-term insurance business Other Year ended 31 Dec 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 – portfolio disposals – gain/(loss) and trading results from disposed-of operations in Brazil – investment in new businesses – other acquisitions, disposals and dilutions – currency translation on significant items Currency translation Year ended 31 Dec Other operating income was $0.3bn in 2017, compared with a net expense of $1.0bn in 2016. This was primarily due to net losses recognised on assets held for sale in 2016, most notably a loss of $1.8bn from the disposal of our operations in Brazil. This compared with gains of $0.2bn on assets held for sale in 2017, which included a gain on the sale of our holding in VocaLink in the UK, and a gain on the sale of our operations in Lebanon. This increase was partly offset by lower favourable movements of $0.9bn in the present value of in-force (‘PVIF’) long-term insurance business, of which $0.8bn related to ‘Assumption changes and experience variances’ (for further details, please see Note 20 on the Financial Statements). This reflected: 2017 $m 171 214 48 46 24 (166) 337 2017 $m 919 (599) (280) (16) 24 2016 $m 157 (1,949) 4 35 902 (120) (971) 2016 $m 900 (532) 513 21 902 2017 $m (160) (158) 19 (99) 78 2015 $m 171 (244) 61 53 799 215 1,055 2015 $m 809 (552) 504 38 799 2016 $m (1,928) (163) (1,763) — — (2) (14) (160) (1,942) • adverse movements in Hong Kong of $0.4bn, reflecting the future sharing of investment returns with policyholders; and • adverse movements in Hong Kong and Singapore of $0.4bn, reflecting adjustments offsetting the impact of regulatory- driven changes in the valuation of liabilities (the corresponding movement is recorded in ‘Net insurance claims and benefits paid and movement in liabilities to policyholders’). These adverse movements were partly offset by favourable movements in France, due to market-driven changes in interest rate assumptions. Net insurance claims and benefits paid and movement in liabilities to policyholders Gross Less reinsurers’ share Year ended 31 Dec Significant items and currency translation Significant items – trading results from disposed-of operations in Brazil – currency translation on significant items Currency translation Year ended 31 Dec 2017 $m 13,208 (877) 12,331 2016 $m 12,508 (638) 11,870 2017 $m — — — 2015 $m 11,872 (580) 11,292 2016 $m 627 538 89 (89) 538 HSBC Holdings plc Annual Report and Accounts 2017 39 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Financial summary Net insurance claims and benefits paid and movement in liabilities to policyholders were $0.5bn higher compared with 2016, and included reductions due to the disposal of our operations in Brazil ($0.5bn). These increases were partly offset by the impact of regulatory- driven changes in the valuation of liabilities in Hong Kong and Singapore (the corresponding movement is recorded in ‘Assumption changes and experience variances’ in PVIF). This increase was primarily due to improved returns on financial assets supporting contracts where the policyholder shares the investment risk, reflecting improved equity market performance in Hong Kong and France compared with 2016. 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 37. In addition, movements in liabilities to policyholders were higher due to increased premium income. 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 2017 $m 2,636 (644) 1,992 1,114 878 (190) (33) 1,769 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 Impairment charges on loans and advances to customers as a percentage of average gross loans and advances to customers 0.22% 0.39% 0.39% Significant items and currency translation Significant items – trading results from disposed-of operations in Brazil – currency translation on significant items Currency translation Year ended 31 Dec Loan impairment charges and other credit risk provisions (‘LICs’) of $1.8bn were $1.6bn or 48% lower compared with 2016. This reduction included the favourable effects of the disposal of our operations in Brazil ($0.9bn) in July 2016, which was partly offset by the impact of adverse foreign currency translation. Excluding these factors, LICs decreased by $0.8bn or 32%, driven by lower LICs in our CMB and RBWM businesses. Individually assessed LICs of $1.1bn were $0.7bn or 39% lower compared with 2016. This included a reduction of $0.2bn following our sale of operations in Brazil. The remaining variance arose: • • In CMB (down $0.5bn), notably in North America primarily against exposures in the oil and gas sector, as well as reductions in France, Spain and Singapore, as 2016 included a small number of specific charges in relation to corporate exposures. This was partly offset by higher individually assessed LICs in Hong Kong relating to a small number of customers across various sectors. In GB&M, individually assessed LICs were broadly unchanged, with LICs in 2017 primarily related to two large corporate exposures in Europe, partly offset by a net release of allowances in the US. In 2016, individually assessed LICs included charges in the US against exposures in the oil and gas sector, as well as a single mining-related corporate client. Collectively assessed LICs of $0.9bn were $0.6bn or 42% lower compared with 2016. This included a reduction of $0.6bn following the sale of operations in Brazil and the adverse effects of foreign currency translation of $48m. 2017 $m — — — 2016 $m 867 748 119 (61) 806 The remaining variance arose: • • In Corporate Centre (down $0.1bn), driven by the run-off of the CML portfolio in the US. In RBWM (down $0.1bn), notably in Turkey reflecting improved credit quality and lower lending balances, and in the US and Hong Kong from improvements in credit quality. These decreases were partly offset by increased collective allowances in Mexico, reflecting growth in unsecured lending balances and an increase in delinquencies. In addition, we increased collective allowances in the UK against our mortgages and cards exposures, in part offset by a release following the sale of a portfolio of loans. LICs in the UK remain at low levels, representing approximately 10bps of the overall portfolio. This was partly offset: • • In GB&M (up $0.1bn), notably in the UK, as 2016 included net releases of collective allowances. In CMB (up $38m), notably in Hong Kong in part due to asset growth and an increase in historical loss rates, partly offset by lower charges in the UK relating to reduced exposures in the oil and gas sector. In 2017, we recorded higher net releases of impairment allowances against available-for-sale debt securities ($0.2bn). These were primarily related to asset-backed securities in our legacy credit portfolio in Corporate Centre and reflected an improvement in collateral values. A net release of other credit risk provisions of $33m in 2017 largely related to oil and gas sector exposures in the US and the construction sector in Canada. This compared with a net charge in the prior year in these markets, also related to the oil and gas sector. 40 HSBC Holdings plc Annual Report and Accounts 2017 Operating expenses In addition to detailing operating expense items by category, as set out in the table below, we also categorise operating 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-as-usual 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. 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 2017 $m 17,315 3,530 12,177 33,022 1,166 696 — 34,884 2016 $m 18,089 3,758 12,715 34,562 1,229 777 3,240 39,808 2017 $m 14,254 12,974 2,996 916 3,744 2015 $m 19,900 3,830 13,832 37,562 1,269 937 — 39,768 2016 $m 13,240 13,003 2,919 922 9,393 331 34,884 39,808 2017 2016 2015 129,402 124,810 145,868 44,871 45,725 7,250 1,439 44,712 46,659 8,054 10,940 48,651 47,894 8,513 4,277 228,687 235,175 255,203 Reported operating expenses of $34.9bn were $4.9bn lower than in 2016. This reflected a reduction in significant items of $5.6bn which included: • a $3.2bn write-off of the goodwill in our GPB business in Europe in 2016 (please see Note 20 on the Financial Statements for further details); • a net release of $0.4bn in settlements and provisions in connection with legal matters, compared with charges in 2016 of $0.7bn; • the operating expenses incurred by our Brazil business of $1.1bn in 2016; and • costs to achieve of $3.0bn, compared with $3.1bn in 2016. The reduction in reported operating expenses also included the favourable effects of currency translation of $0.3bn. HSBC Holdings plc Annual Report and Accounts 2017 41 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review 2017 $m 3,744 53 28 3,002 392 655 (188) — 164 (362) — 3,744 2016 $m 9,393 28 — 3,118 223 559 — 3,240 344 681 1,059 141 331 9,724 • • • In global businesses, savings of $0.6bn reflected the impact of our branch optimisation programme enabled by our digital initiatives as well as transformation of online and mobile banking for corporates. In Operations and Technology, savings of $1.1bn reflected migrations to lower cost locations, automation, the simplification of our IT structure and the implementation of target operating models. In 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. The number of employees expressed in FTEs at 31 December 2017 was 228,687, a decrease of 6,488 since 31 December 2016. This included a 18,601 reduction realised across global businesses and global functions from our transformation programme, partly offset by investment in Global Standards of 3,016 FTEs and an increase of 9,097 FTEs, in part attributable to investment for growth. 2017 $m 2,349 1,863 422 64 26 2016 $m 2,326 1,892 415 19 28 2015 $m 2,518 2,011 462 45 38 2,375 2,354 2,556 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. Report of the Directors | Financial summary Significant items and currency translation Significant items – costs associated with portfolio disposals – costs associated with the UK’s exit from the EU – costs to achieve – costs to establish UK ring-fenced bank – customer redress programmes – gain on partial settlement of pension obligation – impairment of GPB – Europe goodwill – regulatory provisions in GPB – settlements and provisions in connection with legal matters – trading results from disposed-of operations in Brazil – currency translation on significant items Currency translation Year ended 31 Dec Excluding the significant items and currency translation tabulated above, operating expenses of $31.1bn were $1.1bn higher than in 2016. This increase reflected investments in business growth programmes (up $0.6bn), primarily in RBWM, where investments were partly funded by the proceeds from our disposal of Visa Inc. shares, as well as higher performance-related pay (up $0.4bn). The impact of our cost-saving initiatives more than offset inflation and continued investment in regulatory programmes and compliance. Our total investment in regulatory programmes and compliance was $3.0bn, up $0.2bn or 7% compared with 2016. This reflected the continued implementation of our Global Standards programme to enhance our financial crime risk controls and capabilities. In 2017, we realised $2.1bn of cost savings, and achieved annualised run-rate savings of $6.1bn since our Investor Update in June 2015. We have completed our ‘costs to achieve’ transformation programme, incurring a total cost of $7.0bn since 2015, and continue to realise the benefits of our cost-saving initiatives: 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 Our share of profit in associates and joint ventures was $2.4bn, an increase of $21m or 1% compared with 2016 and including the adverse effects of currency translation of $33m. Excluding the effects of currency translation, our share of profit in associates and joint ventures increased by $53m, compared with 2016. This mainly comprised gains from the sale of investments held by Business Growth Fund, a joint venture with other UK banks to support small- and medium-sized enterprises (‘SMEs’) in the UK. Our share of profit in our largest associate, BoCom, was $1.9bn. This was broadly unchanged from 2016 after excluding the effects of currency translation. At 31 December 2017, 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 17 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 2018 due to retained profits earned by BoCom. At the point where the carrying amount exceeds the value in use, HSBC will determine whether an impairment exists. If so, we would continue to recognise its share 42 HSBC Holdings plc Annual Report and Accounts 2017 Tax expense Profit before tax Tax expense Profit after tax for the year ended 31 Dec Effective tax rate 2017 $m 17,167 (5,288) 11,879 30.80% 2016 $m 7,112 (3,666) 3,446 2015 $m 18,867 (3,771) 15,096 51.55% 19.99% The effective tax rate for 2017 of 30.8% includes a charge of $1.3bn due to the remeasurement of US deferred tax balances to reflect the reduction in the US federal tax rate from 35% to 21% from 2018. This charge increased the 2017 effective tax rate by 7.5%. The effective tax rate in 2017 was lower than the 51.6% in 2016 as 2016 included the unfavourable impact of a non- deductible goodwill write-down and loss on disposal of operations in Brazil. Further detail is provided in Note 7 on the Financial Statements. 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 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 under insurance contracts Other liabilities Total liabilities at 31 Dec Equity Total shareholders’ equity Non-controlling interests Total equity at 31 Dec Footnote 26 2017 $m 180,624 287,995 29,464 219,818 90,393 962,964 201,553 389,076 159,884 2016 $m 128,009 235,125 24,756 290,872 88,126 861,504 160,974 436,797 148,823 2015 $m 98,934 224,837 23,852 288,476 90,401 924,454 146,255 428,955 183,492 2014 $m 129,957 304,193 29,037 345,008 112,149 974,660 161,713 415,467 161,955 2013 $m 166,599 303,192 38,430 282,265 120,046 992,089 179,690 425,925 163,082 2,521,771 2,374,986 2,409,656 2,634,139 2,671,318 69,922 59,939 54,371 77,426 86,507 1,364,462 1,272,386 1,289,586 1,350,642 1,361,297 130,002 184,361 94,429 216,821 64,546 85,667 113,690 88,958 153,691 86,832 279,819 65,915 75,273 109,595 80,400 141,614 66,408 281,071 88,949 69,938 139,801 107,432 190,572 76,153 340,669 95,947 73,861 121,459 164,220 207,025 89,084 274,284 104,080 74,181 120,181 2,323,900 2,192,408 2,212,138 2,434,161 2,480,859 190,250 7,621 197,871 175,386 7,192 182,578 188,460 9,058 197,518 190,447 9,531 199,978 181,871 8,588 190,459 Total liabilities and equity at 31 Dec 2,521,771 2,374,986 2,409,656 2,634,139 2,671,318 For footnotes, see page 62. A more detailed consolidated balance sheet is contained in the Financial Statements on page 178. Five-year selected financial information Called up share capital Capital resources Undated subordinated loan capital Preferred securities and dated subordinated loan capital Risk-weighted assets Financial statistics Loans and advances to customers as a percentage of customer accounts Average total shareholders’ equity to average total assets Net asset value per ordinary share at year-end ($) Number of $0.50 ordinary shares in issue (millions) Closing foreign exchange translation rates to $: Footnotes 27, 28 29 27 30 $1: £ $1: € For footnotes, see page 62. 2017 $m 10,160 182,383 1,969 42,147 2016 $m 10,096 172,358 1,967 42,600 2015 $m 9,842 189,833 2,368 42,844 2014 $m 9,609 190,730 2,773 47,208 2013 $m 9,415 194,009 2,777 48,114 871,337 857,181 1,102,995 1,219,765 1,092,653 70.6 7.33 8.35 67.7 7.37 7.91 71.7 7.31 8.73 72.2 7.01 9.28 72.9 6.55 9.27 20,321 20,192 19,685 19,218 18,830 0.740 0.834 0.811 0.949 0.675 0.919 0.642 0.823 0.605 0.726 HSBC Holdings plc Annual Report and Accounts 2017 43 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Financial summary Movement in 2017 Liabilities Customer accounts increased by $92bn on a reported basis, including a favourable foreign currency translation movement of $56bn. Excluding the effect of currency translation, customer accounts increased by $36bn, notably in RBWM which grew by $28bn. The increase was driven by Hong Kong (up $18bn), reflecting higher customer inflows from surplus liquidity in the region, and the UK (up $6bn), primarily in current accounts. We grew balances in GB&M in France ($5bn) and Germany ($2bn), from higher foreign currency corporate deposits, as we priced competitively to facilitate higher stable funding. In addition we grew CMB balances (up $8bn), notably in the UK, as we won new client mandates and increased balances with existing customers. These increases were partly offset by a reduction in GB&M in the UK, reflecting a large deposit from 2016 being withdrawn in 2017, as well as an increase in customers who settled their asset and liability balances net, resulting in lower lending and customer accounts. Deposit balances also fell in GPB (down $6bn), partly reflecting the customer repositioning during 2017, as well as active redeployment of clients’ deposits to maximise their returns. Repurchase agreements – non-trading increased by $41bn primarily in the UK and the US, mainly driven by an increased use of repurchase agreements for funding in our Markets business. Trading liabilities increased by $31bn, notably in the UK and France, the latter reflecting an increase in net short positions. Derivative liabilities decreased by $63bn, which is in line with the decrease in derivative assets because the underlying risk is broadly matched. Equity Total shareholders’ equity increased by $14.9bn or 8%. This was driven by the effects of profits generated in the period, a reduction in accumulated foreign exchange losses reflecting the appreciation of the euro and sterling against the US dollar during 2017, and the issue of convertible capital securities. These increases more than offset the effects of dividends paid to shareholders and the $3.0bn share buy-back completed during 2017. Risk-weighted assets Risk-weighted assets (‘RWAs’) were $871.3bn at 31 December 2017, an increase of $14.1bn compared with 31 December 2016. After foreign currency translation differences, RWAs reduced by $13.6bn in 2017. This reflected targeted RWA reduction initiatives of $70.8bn and improvement in asset quality of $4.6bn, less increases due to growth in asset size of $48.4bn, methodology and policy changes of $8.2bn and model updates of $6.2bn. The RWA initiatives included: • $21.3bn from the accelerated sell-down of our consumer mortgage portfolio in the US and our legacy credit book; and • $40.0bn from process improvements, exposure reductions, trade actions and refined calculations. Asset size movements principally represent: • $40.4bn lending growth, mainly in GB&M and CMB in Asia and Europe; and • new transactions and movements in market parameters increasing counterparty credit risk and market risk by $9.0bn. Total assets of $2.5tn were 6% higher than at 31 December 2016 on a reported basis, and 1% higher on a constant currency basis. We increased the strength of our balance sheet by targeting growth in lending, notably in Asia, where we increased balances by 14% on a constant currency basis, reflecting continued momentum from our initiatives to grow corporate lending in the region. During 2017 we also completed the run-off of our US CML portfolio. Our ratio of customer advances to customer accounts was 71%, up from 68% at 31 December 2016, reflecting our focus on lending growth. Loans and advances increased on a reported basis by $101bn or 12%, and customer accounts increased by $92bn or 7%. Assets Cash and balances at central banks increased by $53bn. This included higher euro-denominated balances in continental Europe, and higher sterling balances in the UK, as we deployed our commercial surplus to maximise returns. This increase was partly offset by a reduction in the US as we redeployed our surplus to maximise returns, notably to reverse repurchase agreements – non-trading. Trading assets increased by $53bn, notably equity securities, in the UK, reflecting higher client activity in our Equities business, and from increased debt securities in Asia. Reverse repurchase agreements – non-trading increased by $41bn, notably in Europe and the US, driven by customer demand in our Markets business. In the US, balances also increased as we redeployed our commercial surplus to maximise returns. Derivative assets decreased by $71bn, primarily reflecting revaluation movements, as a result of changes in yield curves and exchange rates, notably in the UK, Hong Kong and France. These movements were broadly offset by a reduction in derivative liabilities. Financial investments decreased by $48bn. In the UK this was due to our redeployment of available-for-sale investments into cash to manage our liquidity, as well as for risk management purposes, whereas in Hong Kong this primarily reflected a managed reduction in our commercial surplus. Loans and advances to customers increased by $101bn compared with 31 December 2016, notably in Asia and Europe. This included: • favourable currency translation of $45bn, primarily affecting Europe; partly offset by • the $5bn transfer to ‘Assets held for sale’, and subsequent disposal, of the US first lien mortgage balance in Corporate Centre. Excluding these factors, customer lending balances increased by $62bn or 7%. This growth was primarily in Asia, which contributed $53bn of this increase. In Asia, lending grew in GB&M (up $24bn) and CMB (up $16bn), particularly in Hong Kong, from increased term lending reflecting our continued focus on loan growth in the region and higher customer demand. Trade lending in Hong Kong contributed $3bn of the increase in CMB, reflecting increased market share, but it was broadly unchanged in GB&M. We also increased balances in RBWM in Asia by $11bn, primarily in mortgages in Hong Kong, where we grew our market share. In addition, we grew lending in Europe by $10bn, notably in UK mortgages (up $8bn), reflecting our focus on broker originated mortgages. We also grew balances in CMB by $9bn, driven by higher term lending, which more than offset an $8bn fall in GB&M, notably due to a reclassification of short-term balances to reverse repurchase agreements. Balances also decreased in our Global Banking business, as a small number of customers paid down large balances, as well as a reduction in short-term lending. 44 HSBC Holdings plc Annual Report and Accounts 2017 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 2017 $m 505,182 401,733 45,833 17,355 7,936 32,325 657,395 477,104 45,991 41,144 20,212 14,027 13,459 13,228 4,211 28,019 34,658 16,602 3,772 3,912 10,372 143,432 89,887 45,510 8,035 23,795 17,809 5,986 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 1,364,462 1,272,386 HSBC Holdings plc Annual Report and Accounts 2017 45 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Global businesses Global businesses and geographical regions Analysis of adjusted results by global business Reconciliation of reported and adjusted items Reconciliation of reported and adjusted items – global businesses Supplementary tables for RBWM and GPB Analysis of reported results by geographical regions Reconciliation of reported and adjusted items – geographical regions Analysis of reported results by country Page 46 48 49 52 53 55 58 Summary The Group Chief Executive and the rest of the Group Management Board (‘GMB’) review operating activity on a number of bases, including by global business and geographical region. Global businesses are our reportable segments under IFRS 8 ‘Operating segments’. Basis of preparation The Group Chief Executive, supported by the rest of the GMB, is considered the Chief Operating Decision Maker (‘CODM’) for the purposes of identifying the Group’s reportable segments. 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. Analysis of adjusted results by global business HSBC adjusted profit before tax and balance sheet data 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 2016 and 2015 adjusted performance information is presented on a constant currency basis as described on page 32. As required by IFRS 8, reconciliations of the total adjusted global business results to the Group reported results are presented on page 46. Supplementary reconciliations from reported to adjusted results by global business are presented on pages 49 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. Geographical information is classified by the location of the principal operations of the subsidiary or, for The Hongkong and Shanghai Banking Corporation, HSBC Bank plc, HSBC Bank Middle East and HSBC Bank USA, by the location of the branch responsible for reporting the results or providing funding. A description of the global businesses is provided in the Strategic Report, pages 3 and 18 to 21. 2017 Retail Banking and Wealth Management Commercial Banking Global Banking and Markets Global Private Banking Corporate Centre Footnotes 31 33 3 Net interest income/(expense) 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)/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 34 $m 13,959 5,156 453 719 20,287 17,040 3,247 (980) 19,307 (12,847) 6,460 18 6,478 % 30.9 63.3 $m $m 9,062 3,518 539 104 13,223 13,383 (160) (496) 12,727 (5,947) 6,780 — 6,780 % 32.3 45.0 $m $m 4,886 3,489 5,995 721 15,091 16,378 (1,287) (459) 14,632 (8,858) 5,774 — 5,774 % 27.5 58.7 $m $m 816 704 170 13 1,703 1,438 265 (16) 1,687 (1,391) 296 — 296 % 1.4 81.7 $m 346,148 316,533 252,474 40,326 366 468,281 639,592 121,466 — 348,243 362,908 300,995 — 980,485 283,943 299,272 — 45,745 66,512 16,036 46 HSBC Holdings plc Annual Report and Accounts 2017 $m (439) (56) 807 908 1,220 3,285 (2,065) 182 1,402 (2,097) (695) 2,357 1,662 % 7.9 171.9 $m 7,483 22,378 Total $m 28,284 12,811 7,964 2,465 51,524 51,524 — (1,769) 49,755 (31,140) 18,615 2,375 20,990 % 100.0 60.4 $m 962,964 22,744 679,017 2,521,771 11,507 1,364,462 130,848 868,617 HSBC adjusted profit before tax and balance sheet data (continued) 2016 Retail Banking and Wealth Management Commercial Banking Global Banking and Markets Global Private Banking Corporate Centre 31 33 3 34 31 33 3 Net interest income Net fee income/(expense) Net trading income Other income/(expense) 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/(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 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/(loss) Share of profit/(loss) 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 34 For footnotes, see page 62. $m 12,919 4,756 426 441 18,542 16,052 2,490 (1,142) 17,400 (12,184) 5,216 20 5,236 % 27.7 65.7 $m $m 8,491 3,559 442 127 12,619 12,641 (22) (969) 11,650 (5,746) 5,904 — 5,904 % 31.2 45.5 $m $m 4,798 3,394 6,231 292 14,715 17,412 (2,697) (461) 14,254 (8,745) 5,509 — 5,509 % 29.1 59.4 $m 323,986 294,952 237,655 394 435,839 611,846 114,683 — 320,173 356,885 286,912 — 981,893 272,159 307,736 12,299 5,446 427 666 18,838 16,451 2,387 (1,023) 17,815 (12,332) 5,483 23 5,506 % 29.3 65.5 $m 8,287 3,672 460 88 12,507 12,585 (78) (1,447) 11,060 (5,826) 5,234 — 5,234 % 27.8 46.6 $m 2015 4,422 3,514 5,960 382 14,278 16,633 (2,355) (71) 14,207 (8,903) 5,304 (1) 5,303 % 28.2 62.4 $m 313,927 281,826 243,662 391 422,322 569,183 116,047 — 309,266 341,717 282,149 — 886,750 256,374 318,818 $m 801 749 183 15 1,748 1,487 261 — 1,748 (1,476) 272 — 272 % 1.4 84.4 $m 36,972 — 43,234 72,730 15,649 819 939 206 2 1,966 1,689 277 (11) 1,955 (1,582) 373 — 373 % 2.0 80.5 $m 42,592 — 51,190 80,442 17,661 $m 1,170 (63) 2,426 (1,867) 1,666 1,698 (32) (22) 1,644 (1,933) (289) 2,302 2,013 % 10.6 116.0 $m Total $m 28,179 12,395 9,708 (992) 49,290 49,290 — (2,594) 46,696 (30,084) 16,612 2,322 18,934 % 100.0 61.0 $m 12,494 20,340 708,320 15,037 153,324 906,059 20,734 2,489,459 1,328,657 878,304 2,167 (121) 721 66 2,833 3,064 (231) (27) 2,806 (2,814) (8) 2,387 2,379 % 12.7 99.3 $m 27,994 13,450 7,774 1,204 50,422 50,422 — (2,579) 47,843 (31,457) 16,386 2,409 18,795 % 100.0 62.4 $m 23,690 18,673 651,847 13,956 313,100 905,697 19,064 2,321,378 1,261,672 1,047,775 HSBC Holdings plc Annual Report and Accounts 2017 47 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Global businesses Reconciliation of reported and adjusted items (Audited) Adjusted results reconciliation 2017 Significant Adjusted items Reported Adjusted 2016 2015 Currency translation Significant items Reported Adjusted Currency translation Significant items Reported Revenue LICs Footnote $m $m $m $m 3 51,524 (1,769) (79) 51,445 49,290 — (1,769) (2,594) $m 736 61 $m $m $m (2,060) 47,966 50,422 (867) (3,400) (2,579) $m 3,727 (127) $m $m 5,651 59,800 (1,015) (3,721) Operating expenses (31,140) (3,744) (34,884) (30,084) (331) (9,393) (39,808) (31,457) (2,434) (5,877) (39,768) Share of profit in associates and joint ventures 2,375 — 2,375 2,322 Profit/(loss) before tax 20,990 (3,823) 17,167 18,934 33 499 (1) 2,354 2,409 (12,321) 7,112 18,795 149 1,315 (2) 2,556 (1,243) 18,867 Adjusted balance sheet reconciliation 2017 Reported and Adjusted $m Adjusted $m 2016 Currency translation Reported Adjusted 2015 Currency translation Brazil operations1 $m $m $m $m 962,964 906,059 (44,555) 861,504 905,697 18,757 $m — — 49,114 — 2016 $m 18,934 (12,321) 2 26 (687) — 584 116 — (2,081) — — (1,792) (163) (28) — 75 39,164 27,914 2017 $m 20,990 (3,823) (108) (373) 128 126 — 308 — 19 (99) 78 — (158) (53) (28) (3,002) (3,118) (392) (655) 188 — (164) — 362 (223) (559) — (3,240) (344) — (681) (133) 499 17,167 7,112 Reported $m 924,454 19,139 2,409,656 1,289,586 2015 $m 18,795 (1,243) (10) 230 (327) — — — 1,372 (13) — — 1,002 (214) — — (908) (89) (541) — — (172) (117) (1,649) 193 1,315 18,867 Loans and advances to customers (net) Interests in associates and joint ventures 22,744 20,734 (705) 20,029 19,064 Total external assets Customer accounts 2,521,771 1,364,462 2,489,459 1,328,657 (114,473) (56,271) 2,374,986 1,272,386 2,321,378 1,261,672 1 Includes effects of foreign currency translation. Adjusted profit reconciliation For the year ended 31 Dec Adjusted profit before tax Significant items – customer redress programmes (revenue) – DVA on derivative contracts – fair value movements on non-qualifying hedges – gain on disposal of our investment in Vietnam Technological and Commercial Joint Stock Bank – 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 – gain/(loss) and trading results from disposed-of operations in Brazil – investment in new businesses – other acquisitions, disposals and dilutions – own credit spread – portfolio disposals – costs associated with portfolio disposals – costs associated with the UK’s exit from the EU – costs to achieve – costs to establish UK ring-fenced bank – customer redress programmes (operating expenses) – gain on partial settlement of pension obligation – impairment of GPB – Europe goodwill – regulatory provisions in GPB – restructuring and other related costs – settlements and provisions in connection with legal matters – currency translation on significant items Currency translation Reported profit before tax For footnotes, see page 62. Footnotes 32 25 48 HSBC Holdings plc Annual Report and Accounts 2017 Reconciliation of reported and adjusted items – global businesses Supplementary unaudited analysis of significant items by global business is presented below. Reconciliation of reported and adjusted items 2017 Retail Banking and Wealth Management Commercial Banking Global Banking and Markets Global Private Banking Corporate Centre $m $m $m $m $m Total $m Footnotes 3 Revenue Reported Significant items – customer redress programmes – DVA on derivative contracts – fair value movements on non-qualifying hedges 32 – gain on disposal of our investment in Vietnam Technological and Commercial Joint Stock Bank – gain on disposal of our membership interest in Visa – US – investment in new businesses – portfolio disposals – gain on disposal of operations in Brazil – other acquisitions, disposal and dilutions Adjusted Loan impairment charge and other credit risk provisions (‘LICs’) Reported Adjusted Operating expenses Reported Significant items – costs associated with portfolio disposals – costs associated with the UK’s exit from the EU – costs to achieve – costs to establish UK ring-fenced bank – customer redress programmes – gain on partial settlement of pension obligation – regulatory provisions in GPB – settlements and provisions in connection with legal matters Adjusted Share of profit in associates and joint ventures Reported Adjusted Profit/(loss) before tax Reported Significant items – revenue – operating expenses Adjusted 20,519 (232) 3 — — — (308) — 73 — — 13,120 14,617 103 103 — — — — — — — — 474 2 373 — — — 99 — — — 1,723 (20) — — — — — — (20) — — 1,466 51,445 (246) — — 79 108 373 (128) (128) (126) — — 105 (19) (78) (126) (308) 99 158 (19) (78) 20,287 13,223 15,091 1,703 1,220 51,524 (980) (980) (496) (496) (13,734) (6,001) 887 — — 270 6 637 (26) — — 54 — 1 44 2 16 (9) — — (12,847) (5,947) 18 18 5,823 655 (232) 887 6,478 — — 6,623 157 103 54 6,780 (459) (459) (8,723) (135) — 8 240 — 2 (9) — (376) (8,858) — — 5,435 339 474 (135) 5,774 (16) (16) 182 182 (1,769) (1,769) (1,586) (4,840) (34,884) 195 31 — 3 — — (3) 164 — 2,743 3,744 22 19 53 28 2,445 3,002 384 — (141) — 14 392 655 (188) 164 (362) (1,391) (2,097) (31,140) — — 121 175 (20) 195 296 2,357 2,357 2,375 2,375 (835) 17,167 2,497 (246) 2,743 1,662 3,823 79 3,744 20,990 HSBC Holdings plc Annual Report and Accounts 2017 49 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Global businesses Reconciliation of reported and adjusted items (continued) Revenue Reported Currency translation Significant items – customer redress programmes – 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 – loss and trading results from disposed-of operations in Brazil – currency translation on significant items Footnotes 3 32 25 Adjusted LICs Reported Currency translation Significant items – trading results from disposed-of operations in Brazil – currency translation on significant items Adjusted Operating expenses Reported Currency translation Significant items – costs associated with portfolio disposals – costs to achieve – costs to establish UK ring-fenced bank – customer redress programmes – impairment of GPB – Europe goodwill – regulatory provisions in GPB – settlements and provisions in connection with legal matters – trading results from disposed-of operations in Brazil – currency translation on significant items Adjusted Share of profit in associates and joint ventures Reported Currency translation Significant items – trading results from disposed-of operations in Brazil – currency translation on significant items Adjusted Profit/(loss) before tax Reported Currency translation Significant items – revenue – LICs – operating expenses – share of profit in associates and joint ventures Adjusted 50 HSBC Holdings plc Annual Report and Accounts 2017 2016 Retail Banking and Wealth Management Commercial Banking Global Banking and Markets $m $m $m Global Private Banking $m Corporate Centre $m Total $m 13,405 15,213 1,745 (2,735) 47,966 20,338 (257) (1,539) — — — (354) (72) — — (987) (126) (242) (544) — — — (230) — — — (288) (26) (182) (316) — (26) — — — — — (268) (22) (7) 10 (2) — — — — — 26 (12) (2) 18,542 12,619 14,715 1,748 (1,633) (1,272) (471) (45) 536 462 74 (1,142) (12) 315 272 43 (969) (6) 16 14 2 (461) (14,138) (6,087) (9,302) 133 1,821 — 393 2 497 — — — 805 124 69 272 — 62 1 34 — — — 155 20 125 432 — 233 — 28 — — 94 82 (5) 1 (1) — — — — (5,074) (8) 3,606 10 6 — — 3,240 341 — 8 1 (48) 4,449 — — 687 — (44) 1,792 137 1,828 49 1,666 (736) 2,060 (2) (26) 687 (584) (116) 1,792 163 273 (127) 49,290 (25) (3,400) 3 — — — (61) 867 748 119 (22) (2,594) (5,207) (39,808) 12 3,262 18 2,424 220 — — 3 587 9 1 331 9,393 28 3,118 223 559 3,240 344 681 1,059 141 (12,184) (5,746) (8,745) (1,476) (1,933) (30,084) 20 — — — — 20 4,587 (169) 818 (1,539) 536 1,821 — 5,236 — — — — — — 6,046 (185) 43 (544) 315 272 — 5,904 — — — — — — 5,440 (63) 132 (316) 16 432 — 5,509 — — — — — — (3,328) (16) 3,616 10 — 3,606 — 272 2,334 (33) 2,354 (33) 1 1 — 1 1 — 2,302 2,322 (5,633) (66) 7,712 4,449 — 3,262 1 7,112 (499) 12,321 2,060 867 9,393 1 2,013 18,934 Reconciliation of reported and adjusted items (continued) Footnotes 3 32 25 Revenue Reported Currency translation Significant items – customer redress programmes – 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 – trading results from disposed-of operations in Brazil – currency translation on significant items Adjusted LICs Reported Currency translation Significant items – trading results from disposed-of operations in Brazil – currency translation on significant items Adjusted Operating expenses Reported Currency translation Significant items – costs to achieve – costs to establish UK ring-fenced bank – customer redress programmes – regulatory provisions in GPB – restructuring and other related costs – settlements and provisions in connection with legal matters – trading results from disposed-of operations in Brazil – currency translation on significant items Adjusted Share of profit in associates and joint ventures Reported Currency translation Significant items – trading results from disposed-of operations in Brazil – currency translation on significant items 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 62. 2015 Retail Banking and Wealth Management Commercial Banking Global Banking and Markets $m $m $m Global Private Banking $m Corporate Centre $m Total $m 59,800 (3,727) (5,651) 10 (230) 327 (1,372) (1,002) 214 (3,532) (66) 22,624 (1,486) (2,300) 22 — — — — — (2,239) (83) 18,838 14,198 15,972 2,076 (969) (722) 18 — — — — — (712) (28) (984) (710) — (230) — — — — (483) 3 (55) (55) (30) — — — — — (29) 4 4,930 (233) (1,864) — — 327 (1,372) (1,002) 214 (69) 38 12,507 14,278 1,966 2,833 50,422 (1,878) (1,761) 82 773 731 42 40 274 262 12 (1,023) (1,447) (47) 8 (32) (28) (4) (71) (13) 2 — — — (22) (5) — — — (3,721) 127 1,015 965 50 (11) (27) (2,579) (15,970) (6,852) (10,767) (1,840) (4,339) (39,768) 1,119 2,519 153 — 541 — 9 — 1,822 (6) (12,332) 23 — — — — 23 4,799 (285) 992 (2,300) 773 2,519 — 5,506 403 623 163 — 18 — 5 — 434 3 (5,826) — — — — — — 5,585 (526) 175 (722) 274 623 — 5,234 768 1,096 69 — (19) — 22 949 222 (147) (8,903) — (1) — — — (1) 5,158 (209) 354 (710) (32) 1,096 — 5,303 29 229 16 — — 171 18 — 23 1 115 1,410 507 89 1 1 63 700 78 (29) 2,434 5,877 908 89 541 172 117 1,649 2,579 (178) (1,582) (2,814) (31,457) — — — — — — 223 (24) 174 (55) — 229 — 373 2,533 (148) 2,556 (149) 2 1 1 2 1 1 2,387 2,409 3,102 18,867 (271) (452) (1,864) — 1,410 2 (1,315) 1,243 (5,651) 1,015 5,877 2 2,379 18,795 HSBC Holdings plc Annual Report and Accounts 2017 51 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Global businesses | Geographical regions Reconciliation of reported and adjusted risk-weighted assets Risk-weighted assets Reported Disposals – Brazil operations – Lebanon operations Adjusted Risk-weighted assets Reported Currency translation Disposals – Brazil operations – Lebanon operations Adjusted Risk-weighted assets Reported Currency translation Disposals – Brazil operations – Lebanon operations Adjusted At 31 Dec 2017 Retail Banking and Wealth Management Commercial Banking Global Banking and Markets Global Private Banking Corporate Centre $bn $bn $bn $bn $bn Total $bn 121.5 301.0 299.3 16.0 133.5 871.3 — — — — — — — — — — — — (2.7) (2.6) (0.1) (2.7) (2.6) (0.1) 121.5 301.0 299.3 16.0 130.8 868.6 At 31 Dec 2016 115.1 3.0 (3.4) (3.2) (0.2) 275.9 12.4 (1.4) (1.0) (0.4) 300.4 8.0 (0.7) (0.7) — 15.3 0.4 — — — 150.5 3.5 (0.7) (0.2) (0.5) 857.2 27.3 (6.2) (5.1) (1.1) 114.7 286.9 307.7 15.7 153.3 878.3 At 31 Dec 2015 130.7 (1.0) (13.7) (13.5) (0.2) 116.0 302.2 (3.5) (16.5) (16.1) (0.4) 282.2 330.3 1.4 (12.9) (12.9) — 318.8 18.0 (0.1) (0.2) (0.2) — 17.7 321.8 1,103.0 (5.0) (3.7) (3.1) (0.6) (8.2) (47.0) (45.8) (1.2) 313.1 1,047.8 Supplementary tables for RBWM and GPB A breakdown of RBWM by business unit is presented below to reflect the basis of how the revenue performance of the business units is assessed and managed. For GPB, a key measure of business performance is client assets, which is presented below. RBWM – adjusted profit before tax data Year ended 31 Dec 2017 Net operating income before loan impairment charges and other credit risk provisions – net interest income – net fee income/(expense) – other income LICs Net operating income Total operating expenses Operating profit Income from associates Profit before tax Year ended 31 Dec 2016 Net operating income before loan impairment charges and other credit risk provisions – net interest income – net fee income/(expense) – other income LICs Net operating income Total operating expenses Operating profit Income from associates Profit before tax For footnote, see page 62. 52 HSBC Holdings plc Annual Report and Accounts 2017 Footnote 3 3 Total RBWM $m 20,287 13,959 5,156 1,172 (980) 19,307 (12,847) 6,460 18 6,478 18,542 12,919 4,755 868 (1,142) 17,400 (12,181) 5,219 20 5,239 Consists of Banking operations Insurance manufacturing Asset management $m $m $m 17,235 11,947 4,642 646 (980) 16,255 (11,748) 4,507 7 4,514 16,029 11,015 4,361 653 (1,142) 14,887 (11,147) 3,740 — 3,740 1,997 2,012 (494) 479 — 1,997 (408) 1,589 11 1,600 1,526 1,895 (538) 169 — 1,526 (374) 1,152 20 1,172 1,055 — 1,008 47 — 1,055 (691) 364 — 364 987 9 932 46 — 987 (660) 327 — 327 Insurance manufacturing RBWM insurance manufacturing performance reported above excludes insurance manufacturing related adjusted net operating income of $202m (2016: $167m) and adjusted profit before tax of $145m (2016: $117m) contributed by other global businesses. Of the total RBWM insurance manufacturing adjusted revenue of $1,997m, $1,893m was disclosed within Wealth Management (2016: $1,401m) and $104m within Other (2016: $125m) in the Management view of adjusted revenue on page 18. Annualised new business premiums of $2,805m (2016: $2,626m) were generated in Insurance manufacturing, of which $2,730m (2016: $2,557m) related to RBWM. Distribution of insurance products by HSBC channels contributed $1,035m of net fee income (2016: $1,034m) of which RBWM channels earned $911m (2016: $909m). Of this total income, $629m was in respect of HSBC manufactured products (2016: $612m) and a corresponding fee expense is therefore recognised within insurance manufacturing. GPB – reported client assets35 At 1 Jan Net new money – of which: areas targeted for growth Value change Disposals Exchange and other At 31 Dec GPB – reported client assets by geography Europe Asia North America Latin America Middle East At 31 Dec For footnote, see page 62. Analysis of reported results by geographical regions HSBC reported profit/(loss) before tax and balance sheet data 2017 $bn 298 — 15 21 (10) 21 330 2016 $bn 349 (17) 2 (1) (24) (9) 298 2015 $bn 365 1 14 1 — (18) 349 Footnote 36 2017 2016 2015 $bn 162 129 39 — — 330 $bn 147 108 40 3 — 298 $bn 168 112 61 8 — 349 Net interest income Net fee income Net trading income Other income 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 Loans and advances to customers (net) Total assets Customer accounts Risk-weighted assets Europe $m 6,970 4,161 3,425 2,864 Asia $m 14,153 5,631 2,944 3,078 MENA $m 1,752 619 180 109 2017 North America $m 3,441 1,880 527 865 Latin America Intra-HSBC items $m 2,098 520 405 202 $m (238) — 238 (4,379) Total $m 28,176 12,811 7,719 2,739 17,420 25,806 2,660 6,713 3,225 (4,379) 51,445 Footnotes 33 3 (658) (570) 16,762 25,236 (18,665) (11,790) (1,903) 39 (1,864) % (10.8) 107.1 $m 13,446 1,883 15,329 % 89.3 45.7 $m 381,547 425,971 1,169,515 1,008,498 505,182 311,612 657,395 357,808 37 (207) 2,453 (1,394) 1,059 442 1,501 % 8.7 52.4 $m 28,050 57,469 34,658 59,196 189 6,902 (5,305) 1,597 4 1,601 % 9.3 79.0 $m 107,607 391,292 143,432 131,276 (523) 2,702 (2,109) — (4,379) 4,379 (1,769) 49,676 (34,884) 14,792 2,375 17,167 % 100.0 67.8 $m 962,964 — — — $m — (153,416) 2,521,771 — — 1,364,462 871,337 593 7 600 % 3.5 65.4 $m 19,789 48,413 23,795 36,372 HSBC Holdings plc Annual Report and Accounts 2017 53 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Geographical regions HSBC reported profit/(loss) before tax and balance sheet data (continued) Loans and advances to customers (net) 336,670 365,430 30,740 111,710 16,954 Net interest income Net fee income Net trading income 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 – reported in held for sale Total assets Customer accounts – reported in held for sale Risk-weighted assets Net interest income Net fee income Net trading income Other income Net operating income before loan impairment Loan impairment charges and other credit Net operating income Total operating expenses Operating profit Share of profit/(loss) in associates and joint Profit before tax Share of HSBC’s profit before tax Cost efficiency ratio Balance sheet data Europe $m 8,346 4,247 4,949 (2,026) Asia $m 12,490 5,200 3,127 2,503 MENA $m 1,831 709 385 44 2016 North America $m 4,220 1,898 462 485 Latin America Intra-HSBC items $m 3,006 723 449 $m (80) — 80 (1,492) (3,590) Total $m 29,813 12,777 9,452 (4,076) 15,516 23,320 2,969 7,065 2,686 (3,590) 47,966 Footnotes 33 3 (446) 15,070 (21,845) (6,775) 1 (6,774) % (95.2) 140.8 $m (677) 22,643 (10,785) 11,858 1,921 13,779 % 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 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 — 37 298,384 333,987 59,065 150,714 34,341 9,686 4,702 3,968 2,116 20,472 (519) 19,953 (19,274) 679 9 688 3.6 94.1 $m % 33 3 38 12,184 6,032 3,090 3,997 25,303 (693) 24,610 (10,889) 13,721 2,042 15,763 1,849 822 418 90 3,179 (470) 2,709 (1,721) 988 504 1,492 % % % 83.5 43.0 $m 7.9 54.1 $m 2015 4,532 2,018 545 562 7,657 (544) 7,113 (6,501) 612 2 614 3.3 84.9 $m % 4,318 1,131 664 479 6,592 (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 — (3,590) 3,590 — — — $m — — (171,820) — — — (38) — 38 (3,403) (3,403) — (3,403) 3,403 — — — $m — — (151,871) — — — (3,400) 44,566 (39,808) 4,758 2,354 7,112 % 100.0 83.0 $m 861,504 3,623 2,374,986 1,272,386 2,713 857,181 32,531 14,705 8,723 3,841 59,800 (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 assets Customer accounts – reported in held for sale Risk-weighted assets For footnotes, see page 62. — 1,121,401 491,520 — — 889,747 598,620 — — 70,157 42,824 — 2,020 393,960 135,152 1,588 37 327,219 459,680 70,585 191,611 54 HSBC Holdings plc Annual Report and Accounts 2017 Reconciliation of reported and adjusted items – geographical regions Reconciliation of reported and adjusted items Revenue Reported Significant items – customer redress programmes – DVA on derivative contracts Footnotes 3 39 – fair value movements on non-qualifying hedges 32 – gain on disposal of our investment in Vietnam Technological and Commercial Joint Stock Bank – gain on disposal of our membership interest in Visa – US – investment in new businesses – portfolio disposals – gain on disposal of operations in Brazil – other acquisitions, disposals and dilutions Adjusted LICs Reported Adjusted Operating expenses Reported Significant items – costs associated with portfolio disposals – costs associated with the UK’s exit from the EU – costs to achieve – costs to establish UK ring-fenced bank – customer redress programmes – gain on partial settlement of pension obligation – regulatory provisions in GPB – settlements and provisions in connection with legal matters Adjusted Share of profit in associates and joint ventures Reported Adjusted Profit/(loss) before tax Reported Significant items – revenue – operating expenses Adjusted Europe $m Asia $m MENA $m 2017 North America* Latin America† $m $m Total $m UK $m Hong Kong $m 17,420 25,806 2,660 6,713 3,225 51,445 12,922 16,117 64 108 211 (157) — — — (20) — (78) 121 — 123 25 (126) — 99 — — — 1 — 1 — — — — — — — (93) (14) — 34 3 — (308) — 178 — — — 4 1 — — — — (19) — 79 108 373 54 108 179 (128) (155) (126) (308) 99 158 (19) (78) — — — — — (78) (51) — 43 32 (126) — — — — — 39 17,484 25,927 2,661 6,620 3,211 51,524 12,976 16,066 (658) (658) (570) (570) (207) (207) 189 189 (523) (523) (1,769) (1,769) (492) (492) (396) (396) 39 (18,665) (11,790) (1,394) (5,305) (2,109) (34,884) (15,086) (6,131) 2,804 36 28 1,908 392 655 — 147 (362) 640 — — 623 — — — 17 — 34 — — 34 — — — — — 200 17 — 371 — — (188) — — 66 — — 66 — — — — — 3,744 2,469 53 28 — 18 3,002 1,766 392 655 (188) 164 392 655 — — (362) (362) 308 — — 291 — — — 17 — 39 (15,861) (11,150) (1,360) (5,105) (2,043) (31,140) (12,617) (5,823) 39 39 1,883 1,883 442 442 4 4 7 7 2,375 2,375 38 38 (1,864) 15,329 1,501 1,601 2,868 64 2,804 1,004 761 121 640 35 1 34 107 (93) 200 16,090 1,536 1,708 600 52 (14) 66 652 17,167 3,823 79 3,744 20,990 40 (2,618) 2,523 54 2,469 (95) 9,855 8 8 9,598 257 (51) 308 * Of which US Principal: adjusted revenue $4,737m (RBWM: $1,194m; CMB: $947m; GB&M $1,951m; GPB: $317m); adjusted LICs $118m; adjusted operating expenses $(3,936)m; adjusted PBT $920m (RBWM: $(58)m; CMB: $432m; GB&M $527m; GPB: $64m); adjusted RWAs (RBWM: $11.0bn; CMB: $25.1bn; GB&M $45.2bn; GPB: $4.2bn; Corporate Centre: $10.0bn). † Of which Mexico: adjusted revenue $2,164m (RBWM: $1,442m; CMB: $350m; GB&M $284m); adjusted LICs $(473)m; adjusted operating expenses $(1,251)m; adjusted PBT $440m (RBWM: $147m; CMB: $105m; GB&M $162m); adjusted RWAs (RBWM: $6.9bn; CMB: $5.9bn; GB&M $8.3bn; Corporate Centre: $2.8bn). HSBC Holdings plc Annual Report and Accounts 2017 55 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Geographical regions Reconciliation of reported and adjusted items (continued) Revenue Reported Currency translation Significant items – customer redress programmes – DVA on derivative contracts Footnotes 3 39 39 – fair value movements on non-qualifying hedges 32 Europe $m Asia $m MENA $m 2016 North America* Latin America† $m $m 15,516 23,320 (545) 1,848 (2) (56) 563 (573) — 1,782 26 — 108 8 (7) — (15) 17 — — (8) — — (1) 2,969 (363) (9) — — — (11) — — — — 2 7,065 32 155 — 9 107 — (116) 18 137 — — 2,686 130 73 — 36 — — — — — 273 (236) Total $m UK $m Hong Kong $m 47,966 10,893 14,014 (736) 2,060 (2) (26) 687 (668) 1,898 (2) (63) 532 (584) (441) (116) 1,792 163 273 (127) — 1,769 — — 103 (53) (1) — (22) 26 — — (5) — — — 25 39 16,819 23,321 2,597 7,252 2,889 49,290 12,123 13,960 (446) (677) (316) (732) (1,229) (3,400) (245) (321) 27 — — — (3) — — — 27 — — — 1 — — — (113) 867 748 119 (61) 867 748 119 33 — — — 1 — — — (419) (680) (289) (731) (475) (2,594) (212) (320) 39 39 (21,845) (10,785) (1,584) (6,147) (3,037) (39,808) (14,562) (5,646) 300 6,611 28 2,098 223 559 3,240 390 94 — (21) 11 434 — 476 — — — (46) — — 4 143 90 — 103 — — — — — — (13) (21) 991 — 402 — — — — 587 — 2 (100) 1,267 — 39 — — — — — 1,059 169 331 9,393 28 3,118 223 559 3,240 344 681 1,059 141 367 2,642 — 1,838 223 559 — — 50 — (28) 22 182 — 229 — — — (46) — — (1) 39 (14,934) (10,340) (1,351) (5,177) (1,870) (30,084) (11,553) (5,442) 1 1 — — — 2 1,921 434 (34) — — — — — — — 1,887 434 (1) — — — — (1) (1) — 1 1 — — (6,774) (217) 8,459 1,848 — 6,611 — 13,779 (18) 427 (7) — 434 — 1,503 (193) 185 12 (1,581) (83) 81 (9) — 90 — 1,146 2,208 12,321 155 — 991 — 73 867 1,267 1 544 2,060 867 9,393 1 18,934 2,354 (33) 1 1 — 2,322 7,112 (499) 1 1 — — — 2 (3,913) (267) 4,540 1,898 — 2,642 — 360 22 (1) — — — 21 8,069 (31) 181 (1) — 182 — 8,219 – gain on the disposal of our membership interest in Visa – Europe – gain on disposal of our membership interest in Visa – US – own credit spread – portfolio disposals – loss and trading results from disposed-of operations in Brazil – currency translation on significant items Adjusted LICs Reported Currency translation Significant items – trading results from disposed-of operations in Brazil – currency translation on significant items Adjusted Operating expenses Reported Currency translation Significant items – costs associated with portfolio disposals – costs to achieve – costs to establish UK ring-fenced bank – customer redress programmes – impairment of GPB – Europe goodwill – regulatory provisions in GPB – settlements and provisions in connection with legal matters – trading results from disposed-of operations in Brazil – currency translation on significant items Adjusted Share of profit in associates and joint ventures Reported Currency translation Significant items – trading results from disposed-of operations in Brazil – currency translation on significant items Adjusted Profit/(loss) before tax Reported Currency translation Significant items – revenue – LICs – operating expenses – share of profit in associates and joint ventures Adjusted 1,468 14,188 1,391 1,343 * Of which US Principal: adjusted revenue $4,698m (RBWM: $1,161m; CMB: $981m; GB&M $1,979m; GPB: $303m); adjusted LICs $(503)m; adjusted operating expenses $(3,808)m; adjusted PBT $387m (RBWM: $(81)m; CMB: $341m; GB&M $100m; GPB: $67m); adjusted RWAs (RBWM: $11.0bn; CMB: $26.8bn; GB&M $48.3bn; GPB: $4.1bn; Corporate Centre: $13.6bn). † Of which Mexico: adjusted revenue $1,949m (RBWM: $1,285m; CMB: $336m; GB&M $217m; GPB: $13m); adjusted LICs $(450)m; adjusted operating expenses $(1,225)m; adjusted PBT $274m (RBWM: $100m; CMB: $83m; GB&M $79m; GPB: $5m); adjusted RWAs (RBWM: $6.4bn; CMB: $6.3bn; GB&M $6.7bn; Corporate Centre: $1.7bn). 56 HSBC Holdings plc Annual Report and Accounts 2017 Reconciliation of reported and adjusted items (continued) Revenue Reported Currency translation Significant items – customer redress programmes – 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 – trading results from disposed-of operations in Brazil – currency translation on significant items Footnotes 3 39 39 32 25 Europe $m 20,472 (2,263) (611) 10 (95) 200 — (771) — — 45 Asia $m MENA $m 2015 North America Latin America $m $m 25,303 (330) (1,425) — (58) 2 (1,372) (3) — — 6 3,179 (497) (10) — (1) — — (9) — — — 7,657 (30) 98 — (21) 124 — (219) 214 — — 6,592 (685) (3,703) — (55) 1 — — — (117) 2,204 Total $m 59,800 (3,727) (5,651) 10 (230) 327 (1,372) (1,002) 214 (66) UK $m 15,493 (2,298) (546) 10 (78) 204 — (731) — — 49 Hong Kong $m 15,616 (74) (1,378) — (13) 6 (1,372) (4) — — 5 (3,532) (3,532) Adjusted LICs Reported Currency translation Significant items – trading results from disposed-of operations in Brazil – currency translation on significant items Adjusted Operating expenses Reported Currency translation Significant items – costs to achieve – costs to establish the UK ring-fenced bank – customer redress programmes – regulatory provisions in GPB – restructuring and other related costs – settlements and provisions in connection with legal matters – trading results from disposed-of operations in Brazil – currency translation on significant items 39 17,598 23,548 2,672 7,725 50,422 12,649 14,164 (519) (693) (470) (544) (1,495) (3,721) (248) (155) 24 — — — 11 — — — 47 — — — (5) — — — (495) (682) (423) (549) 50 1,015 965 50 (430) 127 1,015 965 50 34 — — — 1 — — — (2,579) (214) (154) 39 39 (19,274) (10,889) (1,721) (6,501) (4,786) (39,768) (15,555) (5,686) 1,668 2,115 600 89 541 172 68 935 — (290) 191 131 122 — — — 8 — — 1 223 14 14 — — — 1 — — (1) 13 851 103 — — — 34 714 — — 417 2,766 69 — — — 6 — 2,579 112 2,434 5,877 908 89 541 172 117 1,649 2,579 (178) 1,698 1,858 536 89 541 — 50 935 — (293) 30 48 43 — — — 6 — — (1) Adjusted 39 (15,491) (10,567) (1,484) (5,637) (1,603) (31,457) (11,999) (5,608) Share of profit in associates and joint ventures Reported Currency translation Significant items – trading results from disposed-of operations in Brazil – currency translation on significant items 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 62. 9 — — — — 9 688 (571) 1,504 (611) — 2,115 — 2,042 (149) — — — 504 — — — — 1,893 504 15,763 (277) (1,294) (1,425) — 131 — 1,492 (227) 4 (10) — 14 — 2 — — — — 2 614 (22) 949 98 — 851 — 1,621 14,192 1,269 1,541 (1) — 2 1 1 1 310 (218) 80 (3,703) 1,015 2,766 2 172 2,556 (149) 2 1 1 2,409 18,867 (1,315) 1,243 (5,651) 1,015 5,877 2 18,795 10 (1) — — — 9 (300) (567) 1,312 (546) — 1,858 — 445 31 — — — — 31 9,806 (43) (1,330) (1,378) — 48 — 8,433 HSBC Holdings plc Annual Report and Accounts 2017 57 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Geographical regions 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 Global Private Banking Corporate Centre Europe – UK of which: HSBC Holdings 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 $m (159) (177) (658) (12) 21 (2) 11 5,372 5,039 122 21 (24) (44) 85 69 43 61 144 26 110 — 8 305 166 61 78 161 139 22 $m 1,899 1,539 (372) 204 61 7 88 3,394 2,460 101 159 76 161 50 94 10 283 199 69 53 — 77 932 435 453 44 199 105 94 $m 777 192 (739) 228 141 1 215 3,135 1,357 108 362 98 387 162 202 107 352 593 164 268 — 161 671 494 132 45 259 158 101 $m (231) (23) (89) 5 9 (192) (30) 285 257 (1) — — (4) — 34 (1) — — — — — — 67 66 — 1 — — — $m (4,150) (4,149) (3,308) (156) 39 2 114 3,143 485 35 374 30 Total $m (1,864) (2,618) (5,166) 269 271 (184) 398 15,329 9,598 365 916 180 1,988 2,488 28 64 40 99 565 46 48 441 30 (374) (444) 43 27 (19) (12) (7) 325 463 199 795 1,501 305 479 441 276 1,601 717 689 195 600 390 210 Year ended 31 Dec 2017 5,823 6,623 5,435 121 (835) 17,167 Europe – UK of which: HSBC Holdings 41, 42 – 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 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 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 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 (3,695) 86 (63) 9 7 (493) (3,304) 268 221 — 10 — (3) — 42 (1) (1) — — — — — 90 67 — 23 9 5 4 4 5,440 (3,328) (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) (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 58 HSBC Holdings plc Annual Report and Accounts 2017 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 41, 42 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 2015 For footnotes, see page 62. $m 914 560 (530) 357 23 — (26) 4,154 3,811 60 (25) (6) 32 118 105 10 49 (1) 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 17 251 188 92 (24) — 120 445 194 240 11 156 (8) 164 13 4,799 5,585 $m 122 (361) (274) 84 137 — 262 3,653 1,629 232 321 76 574 196 193 113 319 610 179 270 — 161 444 319 101 24 329 (70) 399 341 5,158 $m (93) 126 (91) 14 20 (267) 14 252 177 — 14 — (3) — 65 — (1) 2 — — — 2 59 64 — (5) 3 (2) 5 6 223 $m (2,208) (2,347) (2,892) 54 (7) 43 49 4,861 1,872 30 217 51 2,360 50 63 15 203 693 89 36 498 70 (311) (424) 87 26 67 42 25 (11) 3,102 Total $m 688 (300) (4,186) 639 239 (216) 326 15,763 9,806 373 606 (7) 3,060 442 507 155 821 1,492 410 367 500 215 614 41 485 88 310 32 278 5 18,867 HSBC Holdings plc Annual Report and Accounts 2017 59 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Other information Other information Taxes paid by region and country Funds under management and assets held in custody Taxes paid by region and country Conduct-related matters Carbon dioxide emissions Page 60 60 61 61 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. 2017 $m 3,340 2,654 1,078 530 140 (67) 83 2,277 1,043 142 227 297 84 81 64 42 297 419 170 101 58 90 317 134 182 1 443 129 314 36 2016 $m 3,151 2,385 1,253 553 124 34 55 2,755 1,488 147 241 315 46 99 85 35 299 293 60 89 97 47 276 135 141 — 965 79 886 658 6,796 7,440 2015 $m 3,644 2,526 1,348 620 108 92 298 2,780 1,415 173 277 285 70 92 80 53 335 449 151 120 136 42 353 127 226 — 1,184 91 1,093 735 8,410 Funds under management and assets held in custody Taxes paid by country Europe – UK of which: HSBC Holdings Footnote 44 – France – Germany – Switzerland – other Asia – Hong Kong – Australia – mainland China – India – Indonesia – Malaysia – Singapore – Taiwan – other Middle East and North Africa – Saudi Arabia – UAE – Egypt – other North America – US – Canada – other Latin America – Mexico – other of which: Brazil Year ended 31 Dec For footnote, see page 62. Funds under management Funds under management 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 62. 2017 $bn 2016 $bn Footnote 43 831 2 77 33 0 943 462 258 4 219 943 896 (8) 25 (40) (42) 831 410 222 2 197 831 Funds under management (‘FuM’) represents assets managed, either actively or passively, on behalf of our customers. At 31 December 2017, FuM amounted to $943bn, an increase of 13% as a result of favourable market performance and favourable foreign currency movements. Global Asset Management FuM increased by 13% to $462bn compared with 31 December 2016. Excluding foreign currency movements, FuM increased by 6% primarily as a result of positive market performance, with net new money from our retail and institutional customers mainly from fixed income and multi asset products in Asia and money market solutions in North America, partly offset by net outflows from our customers in Europe. GPB FuM increased by 16% to $258bn compared with 31 December 2016. Excluding currency translation, FuM increased by 6%, reflecting the market performance and the positive net new money in areas targeted for growth, mainly Hong Kong. This was partly offset by the ongoing repositioning of our client base. Other FuM, of which the main element is a corporate trust business in Asia, increased by 11% to $219bn. Assets held in custody43 and under administration Custody is the safekeeping and servicing of securities and other financial assets on behalf of clients. At 31 December 2017, we held assets as custodian of $7.7tn, 24% higher than the $6.3tn held at 31 December 2016. The increase was mainly driven by net asset inflows and favourable foreign exchange movements in Asia and Europe, together with the onboarding of new clients in North America and Asia. 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 2017, the value of assets held under administration by the Group amounted to $3.6tn. This was 19% higher than the $3.0tn held at 31 December 2016. The increase was mainly driven by net asset inflows in Europe and Asia together with favourable foreign exchange movements in Europe. 60 HSBC Holdings plc Annual Report and Accounts 2017 Conduct-related matters Conduct-related costs included in significant items Income statement Net interest income/(expense) – customer redress programmes Operating expenses Comprising: Legal proceedings and regulatory matters – regulatory provisions in GPB – settlements and provisions in connection with legal matters Customer redress programmes Total operating expenses Total charge for the year relating to significant items – 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 redress programmes Accruals, deferred income and other liabilities The table above provides a summary of conduct-related costs incurred and included within significant items (see pages 35 and 42). 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 131 to 133. The management of business conduct and the steps taken to raise standards are described on page 77 under ‘Regulatory compliance risk management’. Provisions relating to significant items raised for conduct costs in 2017 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 $(0.2)bn and customer remediation costs of $0.7bn. This included the release of provisions recognised in prior years in relation to the regulatory investigations into HSBC’s historical foreign exchange activities giving rise to a civil money penalty order in September 2017 with the Federal Reserve Board, and the three-year deferred prosecution agreement with the US Department of Justice in January 2018. For further details on payment protection insurance and legal proceedings and regulatory matters, see Notes 26 and 34 on the Financial Statements, respectively. Carbon dioxide emissions We report our carbon emissions with reference to the GHG Protocol including the amendments to Scope 2 Guidance which incorporate market-based emission methodology. We report carbon dioxide emissions resulting from energy use in our buildings and employees’ business travel. In 2017, we collected data on energy use and business travel for our operations in 28 countries, which accounted for approximately 93% of our full-time employees (‘FTEs’). To estimate the emissions of our operations in countries where we have operational control 2017 $m (108) (108) (198) 164 (362) 655 457 565 565 1,136 2,595 1,248 1,347 20 2016 $m 2 2 1,025 344 681 559 1,584 1,582 1,584 2,265 3,056 2,060 996 106 2015 $m (10) (10) 1,821 172 1,649 541 2,362 2,372 2,362 1,021 3,926 2,729 1,197 168 and a small presence, we scale up the emissions data from 93% to 100%. 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. Carbon dioxide emissions in tonnes Total From energy From travel 2017 580,000 473,000 107,000 Carbon dioxide emissions in tonnes per FTE Total From energy From travel 2017 2.49 2.03 0.46 2016 617,000 529,000 88,000 2016 2.63 2.25 0.38 The reduction in our carbon emissions continues to be driven by energy efficiency initiatives, as well as our procurement of electricity from renewable sources under Power Purchase Agreements. Travel emissions increased after a record low in 2016. Our greenhouse gas reporting year runs from October to September. For the year from 1 October 2016 to 30 September 2017, carbon dioxide emissions from our global operations were 580,000 tonnes. Independent assurance of our carbon dioxide emissions will be available in the first half of 2018 on our website. HSBC Holdings plc Annual Report and Accounts 2017 61 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 ‘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. From 1 January 2017, HSBC adopted, in its consolidated 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, changes in fair value attributable to changes in own credit risk are presented in other comprehensive income with the remainder of the effect presented in profit and loss. Net of impairment allowances. On 1 January 2014, CRD IV came into force and the calculation of capital resources and RWAs for 2014 to 2017 are calculated and presented on this basis. 2013 comparative is on a Basel 2.5 basis. Capital resources are regulatory capital, the calculation of which is set out on page 117. Including perpetual preferred securities, details of which can be found in Note 27 on the Financial Statements. 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. Net trading income includes interest expense relating to the internal funding of trading assets, in GB&M. In the statutory presentation, internal funding in GB&M net trading income is eliminated through Corporate Centre, and in our other global businesses it is eliminated within net interest income. Excludes items where there are substantial offsets in the income statement for the same year. ‘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. Adjusted risk-weighted assets are calculated using reported risk-weighted assets adjusted for the effects of currency translation differences and significant items. ‘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 ($258bn at 31 December 2017) which were not reported on the Group’s balance sheet, and customer deposits ($72bn at 31 December 2017), of which $67bn was reported on the Group’s balance sheet and $5bn were off-balance sheet deposits. Client assets related to our Middle East clients are booked across to various other regions, primarily in Europe. Risk-weighted assets are non-additive across geographical regions due to market risk diversification effects within the Group. 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. Amounts are non-additive across geographical regions due to inter-company transactions within the Group. Europe’s adjusted 2017 profit of $1.0bn includes a number of items incurred centrally on behalf of the Group as a whole, but which are disclosed in the Europe segment, including consolidation adjustments and Holdings costs such as interest costs on Group debt and the UK bank levy. Excludes intra-Group dividend income. 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. 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). Taxes paid by HSBC relate to HSBC’s own tax liabilities, including tax on profits earned, employer taxes, the UK bank levy and other duties/levies such as stamp duty. Numbers are reported on a cash flow basis. Report of the Directors | Other information | Risk Footnotes to strategic report, financial summary, global businesses, geographical regions and other information 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Achieved Mexico profit before tax target on a local currency basis; US dollar target set using the 2014 average exchange rate. Further detail on the Monitor can be found on page 78. Net operating income before loan impairment charges and other credit risk provisions, also referred to as revenue. ‘Other personal lending’ includes personal non-residential closed-end loans and personal overdrafts. ‘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. ‘Other’ mainly includes the distribution and manufacturing (where applicable) of retail and credit protection insurance. Adjusted return on average risk-weighted assets (‘RoRWA’) is used to measure the performance of RBWM, CMB, GB&M and GPB. Adjusted RoRWA is calculated using profit before tax and reported average risk-weighted assets at constant currency adjusted for the effects of significant items. ‘Markets products, Insurance and Investments and Other’ includes revenue from Foreign Exchange, insurance manufacturing and distribution, interest rate management and global banking products. In 2017, credit and funding valuation adjustments included an adverse fair value movement of $546m on the tightening of own credit spreads on structured liabilities (2016: adverse fair value movement of $125m; 2015: favourable fair value movement of $163m). ‘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 adjusted revenue, 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 offsets to these tax credits are included within ‘Other’. Central Treasury includes revenue relating to BSM of $2,688m (2016: $3,007m; 2015: $2,805m), interest expense of $1,275m (2016: $967m; 2015: $696m) and favourable valuation differences on issued long-term debt and associated swaps of $122m (2016: loss of $271m; 2015: loss of $63m). 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 offsets to these tax credits are included in other Central Treasury. Other miscellaneous items in Corporate Centre includes internal allocations relating to Legacy Credit. 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. Dividends per ordinary share expressed as a percentage of basic earnings per share. Return on average risk-weighted assets is calculated using profit before tax and reported average risk-weighted assets. Gross interest yield is the average annualised interest rate earned on average interest-earning assets (‘AIEA’). 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 payable on average interest-bearing funds. Net interest margin is net interest income expressed as an annualised percentage of AIEA. Interest income on trading assets is reported as ‘Net trading income’ in the consolidated income statement. 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. Including interest-bearing bank deposits only. 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’. Including interest-bearing customer accounts only. 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. 62 HSBC Holdings plc Annual Report and Accounts 2017 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 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 2017 Key developments in 2017 Credit risk profile Liquidity and funding risk profile Market risk profile Operational risk profile Insurance manufacturing operations risk profile Page 63 63 63 65 66 66 66 66 70 72 73 74 77 77 78 78 79 80 80 81 81 81 101 105 111 112 Our conservative risk appetite Throughout its history, HSBC has maintained an evolving 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. Top and emerging risks Our approach to identifying and monitoring top and emerging risks is described on page 69. During 2017, there have been a number of developments in our top and emerging risks analysis to reflect our assessment of the issues facing HSBC. Our current top and emerging risks are as follows. Externally driven Economic outlook and capital flows Although global economic activity strengthened in 2017, growth was weak in many countries and headwinds remain in both developed and emerging economies. Global central banks have initiated a gradual tightening of monetary policy that will likely continue into 2018. Sharper than expected interest rate rises, or economic and/or geopolitical shocks, could lead to an increase in capital flows volatility, especially for emerging markets, potentially impacting economic growth. Protectionism is on the rise in many parts of the world, driven by both populist sentiment and structural challenges facing developed economies. This rise could contribute to weaker global trade, potentially affecting HSBC’s traditional lines of business. The ongoing uncertainty regarding the terms of the UK’s exit from the EU, the UK’s future relationship with the EU, and its trading relationship with the rest of the world, may lead to market volatility, which could affect both the Group and its customers. The level of indebtedness in mainland China remains high. Any policy action to restrain credit growth could have wider ramifications for regional and global economic growth, trade and capital flows. Increased tensions in the Middle East may have significant regional economic and political consequences which could impact the Group’s operations within the region. Oil prices have staged a partial recovery since mid-2017, returning to levels last seen in late 2014. Nevertheless, certain producers, exporters and oil services companies are still under financial strain, which could negatively affect their investment budgets and thus business prospects for HSBC. Enterprise-wide application Mitigating actions • Our risk appetite encapsulates consideration of financial and non-financial risks and is expressed in both quantitative and qualitative terms. • It is applied at the global business level, at the regional level, and to material operating entities. 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, 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. • We actively assess the impact of economic developments in key markets on specific customer segments and portfolios and take appropriate mitigating actions. These actions include revising risk appetite and/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. Our approach to stress testing is described on page 69. • We have carried out detailed reviews and stress tests of our wholesale credit and trading portfolios to determine those sectors and customers most vulnerable to the UK’s exit from the EU, in order to proactively manage and mitigate this risk. Geopolitical risk Our operations and portfolios are exposed to risks associated with political instability, civil unrest and military conflict, which could lead to disruption to our operations, physical risk to our staff and/ or physical damage to our assets. In addition, rising protectionism and the increasing trend of using trade and investment policies as diplomatic tools may also adversely affect global trade flows. Geopolitical risk remained heightened throughout 2017. While elections across the EU during 2017 have temporarily stemmed a populist tide, political uncertainty remains high in the UK as negotiations progress towards an exit from the EU (see ‘Process of UK withdrawal from the European Union’ in Areas of special interest on page 66). In addition, the threat of terrorism within the region remains high. HSBC Holdings plc Annual Report and Accounts 2017 63 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk In the Middle East, a number of countries severed diplomatic and transport ties with Qatar, a leading exporter of liquefied natural gas and a significant global investor. Further sanctions may be imposed on Iran outside the guidelines laid out in the Joint Comprehensive Plan of Action, which was decertified, rather than dismantled, by the Trump administration. The tensions between Saudi Arabia, the US and Iran may remain. In Asia, tensions continue to rise between North Korea and the US as a result of North Korean progress in its missile and nuclear programmes. The stronger Chinese enforcement of UN sanctions on North Korea may not halt further missile and nuclear tests. Any escalation could have a significant impact on regional and global trade. Mitigating actions • We continually monitor the geopolitical outlook, in particular in countries where we have material exposures and/or a physical presence. We have also established dedicated forums to monitor geopolitical developments. • We use internal stress tests and scenario analysis as well as regulatory stress test programmes, to adjust limits and exposures to reflect our risk appetite and mitigate risks as appropriate. Our internal credit risk ratings of sovereign counterparties take into account geopolitical developments that could potentially disrupt our portfolios and businesses. • Contingency planning for the UK’s exit from the EU continues and we are assessing the potential impact on our portfolios, operations and staff. • We have taken steps to enhance physical security in those geographical areas deemed to be at high risk from terrorism and military conflicts. The credit cycle The credit environment remains benign as evidenced by the continued fall in loan impairment charges during 2017. However, there is a risk that the credit cycle could turn sharply as a result of shocks. These could occur as a result of political events in the US, UK and EU, or sentiment towards mainland China deteriorating amid concerns over increasing leverage in the financial system. Additionally, a renewed downward trend in oil prices could increase financial difficulties in the oil and gas sector. Substantial amounts of external refinancing are due in emerging markets in 2018. Stress could appear in a wide array of credit segments and impairment allowances could increase if the credit quality of our customers is affected by less favourable global economic conditions in some markets. Mitigating actions • We closely monitor economic developments in key markets and sectors and undertake scenario analysis. This enables us to take 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 rebalance exposures and manage risk appetite where necessary. • Reviews of key portfolios are undertaken regularly to help ensure that individual customer or portfolio risks are understood and our ability to manage the level of facilities offered through any downturn is appropriate. Cyber-threat and unauthorised access to systems HSBC and other public and private organisations continue to be the targets of increasingly sophisticated cyber-attacks. Ransomware and distributed denial of service attacks appear to be an increasingly dominant threat to the financial industry, which may result in disruption to our operations and customer-facing websites or loss of customer data. 64 HSBC Holdings plc Annual Report and Accounts 2017 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. Regulatory, technological and sustainability developments including conduct, 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, internal control frameworks, 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. Regulatory changes, including any resulting from the UK’s exit from the EU, may affect the activities of the Group as a whole, or of some or all of its principal subsidiaries. In September 2017, HSBC Holdings and HSBC North America Holdings Inc. (‘HNAH’) consented to a civil money penalty order with the US Federal Reserve Board (‘FRB’) in connection with its investigation into HSBC’s foreign exchange activities. Under the terms of the order, HSBC Holdings and HNAH agreed to undertake certain remedial steps and to pay a civil money penalty to the FRB. In January 2018, HSBC Holdings entered into a three-year deferred prosecution agreement with the US Department of Justice (‘DoJ’) (‘FX DPA’), regarding fraudulent conduct in connection with two particular transactions in 2010 and 2011. This concluded the DoJ’s investigation into HSBC’s historical foreign exchange activities. Under the terms of the FX DPA, HSBC has a number of ongoing obligations, including continuing to cooperate with authorities and implementing enhancements to its internal controls and procedures in its Global Markets business which will be the subject of annual reports to the DoJ. In addition, HSBC agreed to pay a financial penalty and restitution. While we are actively engaging in opportunities, there is a risk that the rise of financial technology (‘fintech’) could disrupt the traditional business model of financial institutions. The financial sector has also been subject to an increasing number of campaigns promoting environmental objectives, including climate change related risks (see page 27 ), as the sophistication of campaigns and research capabilities of non-governmental organisations (‘NGOs’) develop. Mitigating actions • We are fully engaged 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. Significant regulatory programmes, such as Global Standards (see page13) and the establishment of the UK ring- fenced bank, are overseen by the Group Change Committee (‘GCC’). • We hold regular meetings with UK authorities to discuss strategic contingency plans covering a wide range of scenarios relating to the UK’s exit from the EU. • We have invested significant resources and have taken, and will continue to take, a number of steps to improve our compliance systems and controls relating to global markets activities. For further details, see ‘Regulatory compliance risk management’ on page 77. • The HSBC Digital Solutions team is actively pursuing opportunities in the fintech space and is deploying solutions with a higher level of agility than our traditional model, helping to enable us to be more competitive in this area. • We continue to work with NGOs to enhance our policies to support sustainable finance. Financial crime risk environment Financial institutions remain under considerable regulatory scrutiny regarding their ability to prevent and detect financial crime. Financial crime threats continue to evolve, often in tandem with geopolitical developments. The financial crime risks related to the use of innovative fintech are not yet fully understood, while the changing sanctions regulatory landscape presents execution challenges. Recent terrorist attacks in Europe and the US may increase law enforcement and/or regulatory focus on bank controls to combat terrorist financing and timely reporting to authorities. This focus may also lead to conflicts between data demands from law enforcement and the data protections which HSBC is required to enforce. HSBC Bank USA entered into a consent cease and desist order with the OCC in October 2010 and HSBC North America Holdings entered into a consent cease and desist order with the FRB. HSBC Bank USA further entered into an enterprise-wide compliance consent order in 2012. HSBC Holdings consented to a cease and desist order with the FRB in December 2012. Together, these orders required improvements to establish an effective compliance risk management programme across HSBC, including risk management related to the Bank Secrecy Act, AML and compliance with US sanctions laws. Failure to comply with these orders by HSBC could place further restrictions on the operations of HSBC entities, and therefore impact the achievement of our strategic objectives. 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 and become subject to legal or regulatory enforcement actions by the Office of Foreign Assets Control and other US agencies. Mitigating actions • We continued to enhance our Financial Crime Risk function which brings together all areas of financial crime risk management at HSBC (see page 78). • We strengthened governance processes during 2017 by establishing formal financial crime risk governance committees at region, global business and country levels of the organisation. This will help to ensure appropriate oversight and escalation of issues to the Financial Crime Risk Management Meeting of the Group Management Board. • We are working to develop enhanced risk management capabilities through better use of sophisticated analytical techniques. • We are working to ensure that the reforms we have put in place are both effective and sustainable over the long term. Work in these areas will continue to be consistent with the terms of the orders by which we are bound and the strategic objectives of the Group. Internally driven IT systems infrastructure and resilience HSBC continues to invest in the reliability and resilience of our IT systems and critical services. We do so to help prevent disruption to customer services, which could result in reputational and regulatory damage. Mitigating actions • Strategic initiatives are transforming how technology is developed, delivered and maintained, with a particular focus on providing high-quality, stable and secure services. As part of this, we are concentrating on materially improving system resilience and service continuity testing. In addition, we have enhanced the security of our development life cycle and improved our testing processes and tools. • During 2017, we continued to monitor and upgrade our IT systems, simplifying our service provision and replacing older IT infrastructure and applications. These enhancements led to a further improvement in service availability during the year for our customers and employees. Impact of organisational change and regulatory demands on employees Our success in delivering the Group’s strategic priorities, as well as significant regulatory change programmes, depends in part on the retention of key members of our management team and wider employee base. The ability to continue to attract, train, motivate and retain highly qualified professionals in an employment market where expertise is often mobile and in short supply is critical. This may depend on factors beyond our control, including economic, market and regulatory conditions. In addition, the impact of the UK’s exit from the EU on our employees and the scale of the resultant organisational change is yet to be fully understood. Mitigating actions • 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, development and extensive relocation support to existing employees in the UK ring-fenced bank. • Through dedicated work streams, we continue to develop succession plans using a broad array of talent-sourcing channels for key management roles, which are reviewed on a regular basis. • Contingency planning to address the potential impacts of the UK’s exit from the EU on our staff is underway with regular updates provided to the UK authorities. Execution risk In order to deliver our strategic objectives and meet mandatory regulatory requirements, it is important for HSBC to maintain a strong focus on execution risk. This requires robust management of significant resource-intensive and time-sensitive programmes. Risks arising from the magnitude and complexity of change may include regulatory censure, reputational damage or financial losses. Mitigating actions • The GCC, chaired by the Group Chief Operating Officer, oversees these key regulatory and strategic initiatives, managing interdependencies and providing direction and support to help ensure their effective and timely delivery. • In 2017, we continued to manage execution risks through closely monitoring the punctual delivery of critical initiatives, internal and external dependencies, and key risks, to allow better portfolio management across Group. The GCC also monitors the ongoing completion of material deliverables across these programmes in order to address any resourcing challenges. • The GCC escalates any necessary issues to the Group Risk Management Meeting of the Group Management Board. HSBC Holdings plc Annual Report and Accounts 2017 65 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Risks arising from the receipt of services from third parties We utilise third parties for the provision of a range of services, in common with other financial service providers. Risks arising from the use of third-party service providers may be less transparent and therefore more challenging to manage or influence. It is critical that we ensure that we have appropriate risk management policies, processes and practices, including adequate control over the selection, governance and oversight of third parties, particularly for key processes and controls that could affect operational resilience. Any deficiency in our management of risks arising from the use of third parties could affect our ability to meet strategic, regulatory or client expectations. Mitigating actions • In the fourth quarter, we commenced the deployment of our delivery model in the first line of defence by establishing a dedicated team and developing associated processes, controls and technology for undertaking assessments of third-party service providers against key criteria throughout the third-party life cycle. In addition, we started to roll out associated control monitoring, testing and assurance processes. • We established a dedicated oversight forum in the second line of defence to monitor the embedding of policy requirements and performance against risk appetite. 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 risk management and financial reporting. Internal and external factors have had a significant impact on our approach to model risk management. Moreover, the adoption of more sophisticated modelling techniques and technology across the industry could also lead to increased model risk. Mitigating actions • We have established a model risk management sub-function in the second line of defence to strengthen governance and oversight of this risk type. • We further strengthened our model risk management framework throughout 2017 by establishing additional global model oversight committees and implementing policies and standards in accordance with key regulatory requirements. • As we adopt new modelling technologies, we are updating our model risk management framework and governance standards to help address any new risks arising. Data management The Group uses a large number of systems and applications to support key business processes and operations. As a result, we often need to reconcile multiple data sources, including customer data sources, to reduce the risk of error. HSBC, along with other organisations, also needs to meet external/regulatory obligations such as the General Data Protection Regulation (‘GDPR’) which requires implementation of data privacy and protection capabilities across our customer data systems by May 2018. Mitigating actions • We continue to improve data quality across a large number of systems globally. Our data management and aggregation continues to strengthen and enhance the effectiveness of internal systems and processes. We are implementing data controls for critical processes in the ‘front-office’ systems to improve our data capture at the point of entry. • We continue to proactively monitor customer and transaction data resolving any associated data issues. We have also implemented data controls and enhanced reconciliation in order to improve the reliability of data used by our customers and staff. 66 HSBC Holdings plc Annual Report and Accounts 2017 • Our data culture is strengthening with ownership and accountability attributed to our businesses and increased focus on data as a Group asset. • We have deployed risk and finance data aggregation and advanced reporting capabilities to key markets in 2017. We are on track for completing actions for the remaining countries in scope by the end of 2018. • A dedicated programme of work has been mobilised to execute the GDPR requirements in order to enhance our customers’ data protection and privacy. Areas of special interest During 2017, we considered a number of areas because of the effect they may have on the Group. While these areas have been identified and considered as part of our top and emerging risks, we have placed particular focus on the UK withdrawal from the European Union in this section. Process of UK withdrawal from the European Union The UK is due to formally leave the EU in March 2019. Before this can happen, the UK and the EU have to finalise the Article 50 Withdrawal Agreement, which will then need to be approved by their respective Parliaments. Concluding negotiations on a comprehensive trade deal within this time frame could be challenging. A period of transition is therefore possible but the scope and length of any such arrangement would need to be agreed between the UK and the EU. Uncertainty therefore continues and with it the risk of significant market volatility. Our objective in all scenarios is to continue to meet customers’ needs and minimise disruption. This is likely to require adjustments to our cross-border banking model, with impacted business transferring from the UK to our existing subsidiary in France or other European subsidiaries, as appropriate. Given the tight time frame and the complexity of the negotiations, we have put in place a robust contingency plan. It is based on a scenario whereby the UK exits the EU in March 2019, without access to the single market or customs union, and without a transitional arrangement. When negotiation positions and timelines become clearer, we will update our contingency plan. Risk management This section describes the enterprise 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 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. Key components of our risk management framework HSBC Values and risk culture Non-executive risk governance 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 127). Risk governance Executive risk governance Responsible for the enterprise-wide management of all risks, including key policies and frameworks for the management of risk within the Group (see pages 67 and 69). Roles and responsibilities Three lines of defence model Our three lines of defence model defines roles and responsibilities for risk management. An independent Global Risk function helps ensure the necessary balance in risk/return decisions (see page 68). Risk appetite Processes and tools Enterprise-wide risk management tools Processes to identify/assess, monitor, manage and report risks to ensure we remain within our risk appetite (see pages 67 to 69). Active risk management: identification/assessment, monitoring, management and reporting Policies and procedures Policies and procedures define the minimum requirements for the controls required to manage our risks. Internal controls Control activities The operational risk management framework defines minimum standards and processes for managing operational risks and internal controls (see page 77). Systems and infrastructure Systems and/or processes that support the identification, capture and exchange of information to support risk management activities. Our risk culture Governance and structure Systems and tools Risk culture refers to HSBC’s norms, attitudes and behaviours related to risk awareness, risk taking and risk management. HSBC has long recognised the importance of a strong risk culture, the fostering of which is a key responsibility of senior executives. Our risk culture is reinforced by the HSBC Values and our Global Standards programme. It is instrumental in aligning the behaviours of individuals with our attitude to assuming and managing risk, which helps to ensure that our risk profile remains in line with our risk appetite. We use clear and consistent employee communication on risk to convey strategic messages and set the tone from senior management and the Board. We also deploy mandatory training on risk and compliance topics to embed skills and understanding in order to strengthen our risk culture and reinforce the attitude to risk in the behaviour expected of employees, as described in our risk policies. 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 their concerns. All allegations of retaliation reported are escalated to senior management. For further details on whistleblowing, see page 23 and also our ESG reporting available on www.hsbc.com/our- approach/measuring-our-impact and for details on the governance of our whistleblowing policy, see pages 127 and 132. Our risk culture is also reinforced by our approach to remuneration. Individual awards, including those for senior executives, are based on compliance with the 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 141. 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 pages 130, 131 and 132 respectively). Executive accountability for the ongoing monitoring, assessment and management of the risk environment and the effectiveness of the risk management framework resides with the Group Chief Risk Officer. He is supported by the Risk Management Meeting of the Group Management Board (‘RMM’). The management of financial crime risk resides with the Group Head of Financial Crime Risk. He is supported by the Financial Crime Risk Management Meeting, as described under ‘Financial crime risk management’ on page 78. Day-to-day responsibility for risk management is delegated to senior managers with individual accountability for decision making. All employees have a role to play in risk management. These roles are defined using the three lines of defence model, which takes into account the Group’s business and functional structures as described below. We use a defined executive risk governance structure to help ensure appropriate oversight and accountability of risk, which facilitates reporting and escalation to the RMM. This structure is summarised in the following table. HSBC Holdings plc Annual Report and Accounts 2017 67 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk 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 Global Risk Management Board Global business/regional risk management meetings Group Chief Risk Officer 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 • Supporting the Group Chief Risk Officer in exercising Board-delegated risk management authority • Overseeing the implementation of risk appetite and the enterprise risk management framework • Forward-looking assessment of the risk environment, analysing possible risk impacts 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 • Supporting the Group Chief Risk Officer in providing strategic 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 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 127. Our responsibilities Risk appetite 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 To create a robust control environment to manage risks, we use an activity-based three lines of defence model. This model delineates management accountabilities and responsibilities for risk management and the control environment. The model underpins our approach to risk management by clarifying responsibility, encouraging collaboration, and enabling efficient coordination of risk and control activities. The three lines 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 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 management tools are summarised below. Our risk appetite encapsulates consideration of financial and non- financial risks and is expressed in both quantitative and qualitative terms. It is applied at the global business level, at the regional level, and to material operating entities. 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’). The RAS 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 131). Additionally, for key risk areas, quantitative metrics are defined along with appetite and tolerance thresholds. Risk map The Group risk map provides a point-in-time view of the risk profiles of countries, regions and global businesses across HSBC’s risk taxonomy. 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 70. 68 HSBC Holdings plc Annual Report and Accounts 2017 In 2017, 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. This outcome reflected our strong capital position, conservative risk appetite and diversified geographical and business mix. It also reflected our ongoing strategic actions, including the sale of operations in Brazil, ongoing RWA reduction initiatives and continued sales from our US CML run-off portfolio. 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 13.6% at the end of 2016, the BoE’s 2017 stress test results showed a projected minimum stressed CET1 ratio of 8.9% 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 2017 % 13.6 8.9 4.7 2016 % 11.9 9.1 2.8 2015 % 10.9 7.7 3.2 Source: Bank of England. 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 an important element in our risk management and capital management frameworks. Our capital plan is assessed through a range of stress scenarios which explore risks identified by management. They include potential adverse macroeconomic, geopolitical and operational risk events, and other potential events that are specific to HSBC. The selection of scenarios reflects our top and emerging risks identification process and our risk appetite. Stress testing analysis helps management understand the nature and extent of vulnerabilities to which the bank is exposed. 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 HKMA. 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. 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. 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 63. Stress testing 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 assesses our capital strength through a rigorous examination of our resilience to external shocks. It also helps us understand and mitigate risks and informs our decisions about capital levels. As well as undertaking regulatory-driven stress tests, we conduct our own internal stress tests. Many of our regulators – including the BoE, the FRB and the HKMA – use stress testing as a prudential regulatory tool and the Group has focused significant governance and resources to meet their requirements. Bank of England stress test results for 2017 The BoE’s Annual Cyclical Scenario (‘ACS’) stress test in 2017 specified a global downturn with severe effects in the UK, US, Hong Kong and mainland China, which accounted for approximately two-thirds of HSBC’s RWAs at the end of 2016. We estimated that the economic shock to global GDP in this scenario was about as severe as in the global financial crisis of 2007 to 2009, but with a greater impact on emerging markets: for example, the scenario featured a contraction of 1.2% of the Chinese economy in the first year. Additionally, and in contrast to 2016, the ACS featured a 32% depreciation of sterling in the first year and a rise of UK base rates to 4%. The assumed GDP growth rates are detailed in the following table. Assumed GDP growth rates in the 2017 Bank of England ACS stress test UK USA Mainland China Hong Kong 2016 2017 2018 2019 % 2.2 1.9 6.8 1.8 % (4.7) (3.5) (1.2) (7.9) % 0.7 0.7 3.7 1.1 % 1.3 1.4 5.0 2.3 Source: Bank of England. PRA assumed GDP growth rates are shown in terms of fourth quarter on fourth quarter annual changes. HSBC Holdings plc Annual Report and Accounts 2017 69 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk 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 72) 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 that 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 73) 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. Market risk (see page 74) 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. Operational risk (see page 77) 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. 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; • assessed through the internal liquidity adequacy assessment process (‘ILAAP’); • 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. Exposure to market risk is separated into two portfolios: trading and non-trading. Market risk exposures arising from our insurance operations are discussed on page 114. Market risk is: • measured using sensitivities, value at risk (‘VaR’) and stress testing, giving a detailed picture of potential gains and losses for a range of market movements and scenarios, as well as tail risks over specified time horizons; • 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 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 the effectiveness of controls, and measured for Economic Capital management using risk event losses and scenario analysis; • monitored using key indicators and other internal control activities; and • managed primarily by global business and functional managers who identify and assess risks, implement controls to manage them and monitor the effectiveness of these controls using the operational risk management framework. Regulatory compliance risk (see page 77) 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 counterparties, inappropriate market conduct and breaching other regulatory requirements. 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 the first line of defence risk and control assessments, the results of the monitoring and control assurance 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 (see page 78) 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. 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 risk appetite statements 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. 70 HSBC Holdings plc Annual Report and Accounts 2017 Description of risks – banking operations (continued) Risks Other material risks Reputational risk (see page 79) 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. Pension risk (see page 80) Pension risk is the risk of increased costs to HSBC from offering post- employment benefit plans to its employees. Sustainability risk (see page 80) Sustainability risk is the risk that financial services provided to customers by the Group indirectly result in unacceptable impacts on people or the environment. Arising from Measurement, monitoring and management of risk 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 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. 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. 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 Forum and ultimately the RMM. 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. Description of risks – insurance manufacturing operations Risks Arising from Measurement, monitoring and management of risk Financial risk (see page 114) 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. Insurance risk (see page 116) Insurance risk is the risk that, over time, the cost of insurance policies written, including claims and benefits, may exceed the total amount of premiums and investment income received. 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 being unable to make payments to policyholders as they fall due. The cost of claims and benefits can be influenced by many factors, including mortality and morbidity experience, as well as lapse and surrender rates. 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 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. HSBC Holdings plc Annual Report and Accounts 2017 71 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Credit risk management Details of changes in our credit risk profile in 2017 can be found on page 81, in ‘Key developments and risk profile in 2017’. There were no material changes to the policies and practices for the management of credit risk in 2017. 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 Credit quality classification 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. Credit quality of financial instruments (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. 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 % 1, 2 BBB and above A- and above CRR 1 to CRR 2 0 – 0.169 EL 1 to EL 2 0 – 0.999 BBB- to BB BBB+ to BBB- CRR 3 0.170 – 0.740 EL 3 1.000 – 4.999 BB- to B and unrated BB+ to B and unrated CRR 4 to CRR 5 0.741 – 4.914 EL 4 to EL 5 5.000 – 19.999 B- to C B- to C CRR 6 to CRR 8 4.915 – 99.999 EL 6 to EL 8 20.000 – 99.999 3 Default Default CRR 9 to CRR 10 100 EL 9 to EL 10 100+ or defaulted Quality classification Strong Good Satisfactory Sub-standard Impaired 1 Customer risk rating (‘CRR’). 2 Expected loss (‘EL’). 3 The EL percentage is derived through a combination of probability of default (‘PD’) and loss given default (‘LGD’), and may exceed 100% in circumstances where the LGD is above 100% reflecting the cost of recoveries. Quality classification definitions • ‘Strong’ exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default and/or low levels of expected loss. • ‘Good’ exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk. • ‘Satisfactory’ exposures require closer monitoring and demonstrate an average-to-fair capacity to meet financial commitments, with moderate default risk. • ‘Sub-standard’ exposures require varying degrees of special attention and default risk is of greater concern. • ‘Impaired’ exposures have been assessed as impaired, as described on page 86. These also include retail accounts classified as EL 1 to EL 8 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 following page). 72 HSBC Holdings plc Annual Report and Accounts 2017 Renegotiated loans and forbearance (Audited) Impairment methodologies for available-for-sale asset- backed securities (‘ABSs’) ‘Forbearance’ describes concessions made on the contractual terms of a loan in response to an obligor’s financial difficulties. A loan is classed as ‘renegotiated’ when we modify the contractual payment terms, on concessionary terms, because we have significant concerns about the borrowers’ ability to meet contractual payments when due. Non-payment related concessions (e.g. covenant waivers), while potential indicators of impairment, do not trigger identification as renegotiated loans. 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. Loans arising as a result of derecognition events will continue to be disclosed as renegotiated loans. Credit quality of renegotiated loans On execution of a renegotiation, the loan will also be classified as impaired if it is not already so classified. In wholesale lending, all facilities with a customer, including loans which have not been modified, are considered impaired following the provision of a renegotiated loan. 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. 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 typically encountered with renegotiated loans. For wholesale lending, renegotiated loans are typically assessed individually. Credit risk ratings are intrinsic to the impairment assessments. 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 1.2(d) on 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 1.2(d) on the Financial Statements. 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. However, in exceptional circumstances, they may be extended further. For example, 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 more time. For secured personal facilities, final write-off should generally occur within 60 months of the default. In the event of bankruptcy or analogous proceedings, write-off may occur earlier than the maximum periods stated above. Collection procedures may continue after write-off. (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 HSBC’s Liquidity and Funding Risk Management Framework (‘LFRF’) can be found in the Group’s Pillar 3 Disclosures at December 2017 document. Liquidity and funding risk management framework The LFRF aims to allow us to withstand very severe liquidity stresses. It is designed to be adaptable to changing business models, markets and regulations. The Group Treasurer, who reports to the Group Finance Director, has responsibility for the oversight of the LFRF. Asset, Liability and Capital Management (‘ALCM’) teams are responsible for the application of the LFRF at a local operating entity level. This comprises of the following elements: • 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; • management and monitoring of intra-day liquidity; • liquidity funds transfer pricing; and • forward-looking funding assessments. HSBC Holdings plc Annual Report and Accounts 2017 73 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Risk governance and oversight Market risk management The elements of the LFRF are underpinned by a robust governance framework, the two major elements of which are: Details of changes in our market risk profile in 2017 can be found on page 81, in ‘Key developments and risk profile in 2017’. • Group, regional and entity level asset and liability management committees (‘ALCOs’). There were no material changes to our policies and practices for the management of market risk in 2017. • Annual internal liquidity adequacy assessment process (‘ILAAP’) for principal operating entities used to validate risk tolerance and set risk appetite. Liquidity and funding are predominantly managed at an entity level. Where appropriate, management may be expanded to cover a consolidated group of legal entities or narrowed to a principal office (branch) of a wider legal entity to reflect the management under internal or regulatory definitions. The RMM reviews and agrees annually the list of countries, legal entities or consolidated groups it directly oversees and the composition of these entities (‘principal operating entities’). This list forms the basis of liquidity and funding risk disclosures. There were no material changes to the policies and practices for the management of liquidity and funding risk in 2017. HSBC Holdings HSBC Holdings’ primary sources of liquidity 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, payment of operating expenses, 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 relating to its subsidiaries. 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 2017, 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. 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 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 101. 2 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. 74 HSBC Holdings plc Annual Report and Accounts 2017 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 that incorporates 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. 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 normally 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. 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. We hedge structural foreign exchange exposures only in limited circumstances. For further details of our structural foreign exchange exposures, please see page 108. HSBC Holdings plc Annual Report and Accounts 2017 75 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Interest rate risk in the banking book Overview Interest rate risk in the banking book is the risk of an adverse impact to earnings or capital due to changes in market interest rates. It is generated by our non-traded assets and liabilities and is monitored and controlled at Group level by Group Treasury and at the entity level by Asset, Liability and Capital Management (‘ALCM’). Group Treasury and ALCM functions are governed by RMM who approve risk limits used in the management of interest rate risk. Interest rate risk in the banking book is transferred to and managed by BSM, which is overseen by Wholesale Market Risk, Product Control and Group Treasury functions. Key risk drivers BSM manages the banking book interest rate positions transferred to it within the Market Risk limits approved by RMM. Effective governance of BSM is supported by the dual reporting lines it has to the Chief Executive Officer of GB&M and to the Group Treasurer. The global businesses can only transfer non-trading assets and liabilities to BSM provided BSM can economically hedge the risk they receive. Hedging is generally executed through vanilla interest rate derivatives or fixed rate government bonds. Any interest rate risk which BSM cannot economically hedge is not transferred and will remain within the global business where the risk is originated. Measurement of interest rate risk in the banking book ALCM uses a number of measures to monitor and control interest rate risk in the banking book, including: The bank’s interest rate risk in the banking book can be segregated into the following drivers: • non-traded VaR; • Managed rate risk – the risk that the pricing of products, which are dependent upon business line decisions, do not correlate to movements in market interest rates. • Re-investment risk – risk arising due to change in rates when behaviouralised balances are reinvested as per the transfer pricing policy. • Basis risk – the risk arising from assets and liabilities that are priced referencing different market indices creating a repricing mismatch. • Prepayment risk – the risk that the actual customer prepayment in different interest rate scenarios does not match the profile used to hedge the interest rate risk. • Duration risk – the risk that there are changes in the maturities of assets and liabilities due to changes in interest rate, which create or exacerbate a mismatch. Governance and structure Group Treasury and ALCM monitor and control non-traded interest rate risk. This includes reviewing and challenging the business prior to the release of new products and in respect of proposed behavioural assumptions used for hedging activities. ALCM are also responsible for maintaining and updating the transfer pricing framework, informing the Asset and Liability Committee (‘ALCO’) of the Group’s overall banking book interest rate risk exposure and managing the balance sheet in conjunction with BSM. The internal transfer pricing framework is constructed to ensure that structural interest rate risk, arising due to differences in the repricing timing of assets and liabilities, is transferred to BSM and business lines are correctly allocated income and expense based on the products they write, inclusive of activities to mitigate this risk. Contractual principal repayments, payment schedules, expected prepayments, contractual rate indices used for repricing and interest rate reset dates are examples of elements transferred for risk management by BSM. The internal transfer pricing framework is governed by each entity’s ALCO. The ALCO defines each operating entity’s transfer pricing curve, reviews and approves the transfer pricing policy, including behaviouralisation assumptions used for products where there is either no defined maturity or customer optionality exists. The ALCO is also responsible for monitoring and reviewing each entity’s overall structural interest rate risk position. Interest rate behaviouralisation policies have to be formulated in line with the Group’s behaviouralisation policies and approved at least annually by local ALCOs. Non-traded assets and liabilities are transferred to BSM based on their repricing and maturity characteristics. For assets and liabilities with no defined maturity or repricing characteristics behaviouralisation is used to assess the interest rate risk profile; the maximum average duration to which a portfolio of non- maturity defined customer balances or equity can be behaviouralised is five years. The maximum percentage of any portfolio that can be behaviouralised is 90% with the residual treated as overnight. 76 HSBC Holdings plc Annual Report and Accounts 2017 • net Interest Income (‘NII’) sensitivity; and • economic value of equity (‘EVE’). Non-traded VaR Non-traded VaR uses the same models as those used in the trading book and excludes both HSBC Holdings and the elements of risk which are not transferred to BSM. NII 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, where entities forecast both one-year and five-year net interest income sensitivities across a range of interest rate scenarios. 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 a hypothetical base case of 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, other than where the size of the balances or repricing is deemed interest rate sensitive, for example, non-interest bearing current account migration and fixed rate loan early prepayment. These sensitivity calculations do not incorporate actions which would be taken by BSM or in the business units to mitigate the effect of interest rate movements. 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. In these cases, rates are 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 internally determined interest rates over which the entity has discretion in terms of the timing and extent of rate changes. Tables showing our calculations of net interest income sensitivity can be found on page 108. Economic value of equity EVE represents the present value of the future banking book cash flows that could be distributed to equity providers under a managed run-off scenario, i.e. the current book value of equity plus the present value of future net interest income in this scenario. This can be used to assess the economic capital required to support IRRBB. An EVE sensitivity is the extent to which the EVE value will change due to a pre-specified movements in interest rates, where all other economic variables are held constant. Operating entities are required to monitor EVE sensitivity as a percentage of capital resources. HSBC Holdings Key risk management processes HSBC Holdings is a financial services holding company. 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; payment of operating expenses; providing dividend payments to its equity shareholders and interest payments to providers of debt capital; and maintaining a supply of short-term liquid assets for deployment under extraordinary circumstances. 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 2017 can be found on page 111, in ‘Operational risk exposures in 2017’. 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 2017 During 2017 we implemented a new operational risk management framework (‘ORMF’) and group-wide risk management system. The new ORMF provides an end-to-end view of non-financial risks, enhancing focus on the risks that matter the most and associated controls. It provides a platform to drive forward-looking risk awareness and assist management focus. It also helps the organisation understand the level of risk it is willing to accept. We also maintained activity to continually strengthen our risk culture. In particular, we focused on the use of the three lines of defence model to reinforce individual accountability. It sets our roles and responsibilities for managing operational risk 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 66. 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. We have a dedicated Global Operational Risk sub-function within our Global Risk function. It is responsible for leading the embedding of the ORMF, and assuring adherence to associated policies and processes across the first and second lines of defence. It supports the Group Chief Risk Officer and the Global Operational Risk Committee, which meets at least quarterly to discuss key risk issues and review implementation of the ORMF. The sub-function is also responsible for preparation of operational risk reporting at Group level, including reports for consideration by the RMM and Group Risk Committee. A formal governance structure provides oversight of the sub-function’s management. 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 group-wide risk management system is used to record the results of the operational risk management process. Operational risk and control self-assessments, along with issue and action plans, are entered and maintained by business units. Business and functional management monitor the progress of documented action plans to address shortcomings. To help ensure that operational risk losses are consistently reported and monitored at Group level, all Group companies are required to report individual losses when the net loss is expected to exceed $10,000, and to aggregate all other operational risk losses under $10,000. Losses are entered into the group-wide risk management system and reported to governance on a monthly basis. Regulatory compliance risk management Overview The Regulatory Compliance sub-function (‘RC’) provides independent, objective oversight and challenge, and promotes a compliance-orientated culture that supports the business in delivering fair outcomes for customers, maintaining the integrity of financial markets and achieving HSBC’s strategic objectives. Key developments in 2017 There were no material changes to the policies and practices for the management of RC risk in 2017, except for the following: • We implemented a number of initiatives to raise our standards in relation to the conduct of our business, as described below under ‘Conduct of business’. • Surveillance capabilities have been strengthened during the year with the deployment of an unauthorised trading detection tool in London, New York and Hong Kong, implementation of a foreign exchange trade analytics platform and expanded coverage of electronic communications surveillance. Infrastructure to support the effective delivery and reporting of surveillance activity continues to mature. • We continued to take steps to enhance our regulatory compliance risk management and controls, and to work with regulators in relation to their investigations into historical activities. This included, in September 2017, matters giving rise to a civil money penalty order with the Federal Reserve Board in connection with its investigation into HSBC’s historical foreign exchange activities, and in January 2018, matters giving rise to HSBC’s entry into a three-year deferred prosecution agreement with the US Department of Justice (‘DoJ’) regarding fraudulent conduct in connection with two particular transactions in 2010 and 2011 which concluded the DoJ’s investigation into HSBC’s historical foreign exchange activities. For further details, see Note 34 on the Financial Statements. 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. HSBC Holdings plc Annual Report and Accounts 2017 77 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Conduct of business Key risk management processes In 2017, we focused on embedding conduct considerations in business-as-usual activity and decision making across the Group, reflecting our values and required behaviours, to deliver fair outcomes for customers and maintain market integrity. During the year, we continued to focus on work relating to potentially vulnerable customers, third parties, digital channels, markets trading surveillance and monitoring and testing. Other key activities in 2017 included: • Ongoing oversight of the breadth, depth and effectiveness of conduct management and governance at country level. • Identification and integration of conduct considerations in the enterprise-wide risk management framework and the Group’s planning processes. • Expansion of conduct management information to identify actual or potential issues for resolution, in the global functions and HSBC Operations Services and Technology, complementing global business conduct management information. • Implementing new conduct-specific global mandatory training modules and an enhanced programme of conduct communications. • Enhancing the assessment of conduct in performance appraisal scorecards and remuneration decision-making processes. The Board maintained oversight of conduct matters through the Conduct & Values Committee. Further detail can be found under the Our conduct section of www.hsbc.com. For conduct-related costs relating to significant items, see page 61. Financial crime risk management Overview HSBC continued its progress towards implementing an effective financial crime risk management capability across the Group. We completed the roll-out of major compliance systems and shifted our focus towards embedding a sustainable approach to financial crime risk management everywhere we operate. This was underpinned by the implementation of a target operating model for the Financial Crime Risk function and by the completion of a country-by-country assessment against our financial crime risk framework. Key developments in 2017 During 2017, HSBC continued to increase its efforts to assist with keeping financial crime out of the financial system. We completed the roll-out of compliance systems to support our anti-money laundering and sanctions policies, having invested $1bn in new and upgraded IT systems since 2015. To ensure we have a clear view of our progress, we completed an assessment of each country in which we operate against the capabilities set out in our financial crime risk framework. We implemented a new target operating model for the Financial Crime Risk function which puts in place a sustainable structure at a global, regional and country level, and across all lines of business, and continued to build the function’s leadership at the most senior levels. An engaged and well-trained workforce is crucial and in 2017 we continued to invest significantly in this area. We relaunched and refreshed our global mandatory training for all employees and introduced targeted training for relationship managers and other key roles. Working in partnership is vital to managing financial crime risk. HSBC is a strong proponent of public-private partnerships and information-sharing initiatives. During 2017 we joined three new partnerships – in Australia, Singapore and Hong Kong – and co- sponsored a major public report into the future of financial intelligence sharing. We also worked with, or invested in, a number of financial technology (‘fintech’) firms to help us continue to strengthen our analytical and innovative approach to financial crime risk management. 78 HSBC Holdings plc Annual Report and Accounts 2017 During 2017, HSBC introduced a strengthened financial crime risk management governance framework, mandating Financial Crime Risk Management Committees with a standardised agenda at country, region and global business line levels. At a Group level, the Financial System Vulnerabilities Committee continues to report to the Board on matters relating to financial crime, and we introduced new members with significant external expertise in this area. Throughout the year the committee, which is attended by the Group Head of Financial Crime Risk, received regular reports on actions being taken to address issues and vulnerabilities. We strengthened our approach to affiliate risk management, implementing an effective Group-level process to assess and remediate affiliate risk, and established a strong investigations and analytical capability to enable us to proactively identify emergent risk issues. The Monitor Under the agreements entered into with the US Department of Justice (‘DoJ’) and the UK Financial Conduct Authority (‘FCA’) in 2012, including the five-year deferred prosecution agreement (‘AML DPA’) and a Direction issued by the FCA, the Monitor (who is, for FCA purposes, a ‘skilled person’ under section 166 of the Financial Services and Markets Act) 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. Additionally, under the Cease and Desist Order issued by the US Federal Reserve Board (‘FRB’) in 2012, the Monitor also serves as an independent consultant to conduct annual assessments. In December 2017, the AML DPA expired and the charges deferred by the AML DPA were dismissed. The Monitor will continue working in his capacity as a skilled person and independent consultant for a period of time at the FCA’s and FRB’s discretion. In February 2018, the Monitor delivered his fourth annual follow- up review report based on various thematic and country reviews he had conducted during 2017. In his report, the Monitor concluded that, in 2017, HSBC made significant progress in developing a reasonably effective and sustainable AML and sanctions compliance programme and expressed confidence that HSBC can achieve its target end state within the next 18 months if it is able to maintain the concerted effort and focus it has demonstrated in remediating and enhancing its programme over the last five years. Nonetheless, the Monitor identified various challenges that HSBC faces in achieving this objective, noted deficiencies in HSBC’s financial crime compliance controls and areas of HSBC’s programme that require further work, and highlighted potential instances of financial crime and certain areas in which he believes that HSBC is not yet adequately managing financial crime risk. As described on page 246 of note 34, the Monitor identified potential anti-money laundering and sanctions compliance issues that HSBC is reviewing further with the DoJ, FRB and/or FCA. Throughout 2017, the FSVC received regular reports on HSBC’s relationship with the Monitor and its compliance with the AML DPA. The FSVC received regular updates on the Monitor’s review activity as part of the fourth annual review, and has received the Monitor’s fourth annual review report. Insurance manufacturing operations risk management Details of changes in our insurance manufacturing operations risk profile in 2017 can be found on page 111, under ‘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 2017. Governance (Audited) Insurance risks are managed to a defined risk appetite, which is aligned to the Group’s risk appetite and risk management framework, including its three lines of defence model. For details of the Group’s governance framework, see page 66. The Global 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 our 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 and Regulatory Compliance 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 taken a number of actions including repricing some products to reflect lower interest rates, launching less capital intensive products, investing in more capital efficient assets and developing investment strategies to optimise the expected returns against the cost of economic capital. Management and mitigation of key risk types Market risk (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 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 best to structure asset holdings to support liabilities. • Using derivatives to protect against adverse market movements or better match liability cash flows. • For new products with investment guarantees, considering the cost when determining the level of premiums or the price structure. • Periodically reviewing products identified as higher risk, which contain investment guarantees and embedded optionality features linked to savings and investment products, for active management. • Designing new products to mitigate market risk, such as changing the investment return sharing 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 insurance manufacturing subsidiaries, and are aggregated and reported to the Group Insurance Credit Risk and Group Credit Risk functions. Stress testing is performed on investment credit exposures using credit spread sensitivities and default probabilities. We use tools to manage and monitor credit risk. These include a credit report containing a watch-list of investments with current credit concerns, primarily investments that may be at risk of future impairment or where high concentrations to counterparties are present in the investment portfolio. The report is circulated monthly to senior management in Group Insurance and individual country chief risk officers to identify investments that 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: • formalised product approval process covering 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 Overview Reputational risk is the risk of failing to meet stakeholder expectations as a result of any event, behaviour, action or inaction, either by HSBC, our employees or those with whom we are associated. This might cause stakeholders to form a negative view of the Group and result in financial or non-financial effects and loss of confidence in the Group. 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 material lapse in standards of integrity, compliance, customer service or operating efficiency may represent a potential reputational risk. HSBC Holdings plc Annual Report and Accounts 2017 79 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Key developments in 2017 Key developments in 2017 There were no material changes to the policies and practices for the management of reputational risk in 2017, except for the formation of a new Group Reputational Risk Committee which replaced the Group Reputational Risk Policy Committee and the Global Risk Resolution Committee, as described below. We periodically review our sustainability risk policies. In 2017, we issued a revised Agricultural Commodities policy, requiring palm oil customers to make further commitments in line with recently enhanced sustainability standards in the industry. We are also currently conducting a review of our Energy Policy. Governance and structure From December, the development of policies and an effective control environment for the identification, assessment, management and mitigation of reputational risk, are considered by the new Group Reputational Risk Committee (‘GRRC’) which is chaired by the Group Chief Risk Officer. It is the highest decision- making forum in the Group for dealing with matters arising from clients or transactions that either present a serious potential reputational risk to the Group or merit a Group-led decision to ensure a consistent risk management approach across the regions, global businesses and global functions. The committee is responsible for keeping the RMM apprised of areas and activities presenting significant reputational risk and, where appropriate, for making recommendations to the RMM to mitigate such risk. Prior to December, these responsibilities were split between the Group Reputational Risk Policy Committee and the Global Risk Resolution Committee which were demised to create the GRRC. Key risk management processes The Global Communications 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 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 reports to both 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 the 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. For further details of our financial crime risk management and regulatory compliance risk management, see ‘Financial crime risk management’ on page 78 and ‘Regulatory compliance risk management’ on page 77 respectively. 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. 80 HSBC Holdings plc Annual Report and Accounts 2017 In 2017, we rolled out a training module for relevant relationship managers globally on our sustainability risk policies and their responsibilities, to ensure consistent implementation. By the end of the year, over 9,000 of our employees had completed this training. Governance and structure The Global Risk function is mandated to manage sustainability risk globally, working with the Global Businesses, Global Functions and 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 to which they provide financing; 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 help 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. Pension risk management There were no material changes to our policies and practices for the management of pension risk in 2017. Governance and structure A global pension risk framework and accompanying global policies on the management of risks related to defined benefit and defined contribution plans are in place. Pension risk is managed by a network of local and regional pension risk forums. The Global Pensions Oversight Forum 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; Credit risk profile Credit risk in 2017 Credit exposure Wholesale lending Personal lending Supplementary information HSBC Holdings Securitisation exposures and other structured products Credit risk in 2017 Page 81 83 90 95 99 100 100 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. All amounts shown by geographical region or country are based on 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. For details on the adoption of IFRS 9, see Note 1.1(c) on the Financial Statements. A summary of our current policies and practices regarding the management of credit risk is provided from page 72. Gross loans and advances increased by $103bn to $1,060bn. This included foreign exchange movements increasing balances by $48bn. Loan impairment charges and other credit provisions (‘LICs’) for the year were $1.8bn, which was $1.6bn lower than the prior year. In wholesale lending, balances increased by $67bn to $684bn. This increase included foreign exchange movements of $30bn. Excluding foreign exchange movements, Asia grew strongly with loans and advances increasing by $34bn. In North America and Latin America, loans and advances increased by $2.3bn in each region, while Europe increased by $1.8bn. These increases were offset by a decrease in loans and advances in MENA of $3.2bn. In personal lending, balances increased by $37bn to $376bn. This increase included foreign exchange movements of $19bn. Excluding foreign exchange movements, lending balances increased by $13bn in Asia and $9.0bn in Europe. Growth was partly offset by a $3.7bn fall in North America, due to the final loans sales of $5.0bn in our US CML run-off portfolio, which were sold through 2017. MENA and Latin America lending balances were broadly unchanged. Information on constant currency movements is provided on page 32. • 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 to five years and more frequently if required by local legislation or circumstances. The process generally involves an extensive asset and liability review. Key developments and risk profile in 2017 Key developments in 2017 In 2017, HSBC undertook a number of initiatives to enhance its approach to the management of risk. These included: • Implementing a new operational risk management framework (‘ORMF’) and system of record (known as Helios), as described on page 77 of the ‘Operational risk management’ section. • We have completed the introduction of the major compliance IT systems, put in place our AML and sanctions policy framework, and assessed our current financial crime risk management capabilities to identify any gaps and enable integration into our day-to-day operations. All of the actions that we committed to in 2013 as part of the Global Standards programme have been completed or superseded. Further improvements are underway to make our reforms more effective and sustainable. • We continued to take steps to enhance our regulatory compliance risk management and controls, implementing a number of initiatives to raise our standards in relation to the conduct of our business and other regulatory compliance- related initiatives, as described on page 77 of the ‘Regulatory compliance risk management’ section. • The formation of a new Group Reputational Risk Committee which replaced the Group Reputational Risk Policy Committee and the Global Risk Resolution Committee, as described on page 79 under ‘Reputational risk management’. HSBC Holdings plc Annual Report and Accounts 2017 81 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Summary of credit risk Loan impairment charge over five years ($bn) 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 Total 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 2017 $bn 3,030 2,306 724 1,060 376 684 15 5 10 % 1.3 1.5 1.5 $bn 7.5 1.7 5.8 1,053 2.0 1.0 1.0 (0.2) 1.8 2016 $bn 2,898 2,205 Page 83 3.1 2.9 96 90 86 90 89 91 88 693 958 340 618 18 6 12 % 1.8 1.9 1.9 $bn 7.9 2.0 5.9 950 3.3 1.7 1.6 0.1 3.4 2.3 1.8 1.8 1.8 1.7 1.6 1.0 1.0 2013 2014 2015 2016 2017 Personal Wholesale Loan impairment charges by geographical region ($bn) 0.8 0.7 0.6 0.5 1.2 0.7 0.5 0.3 0.2 (0.1) Gross loans to customers and banks over five years ($bn) Personal Wholesale Europe Asia MENA North America Latin America 18 14 12 12 10 2017 2016 Loan impairment charges by industry ($bn) 19 15 12 6 5 698 692 638 606 674 392 378 362 334 371 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 Unimpaired Impaired 1.5 1.0 1.6 0.7 0.2 — 0.2 — First Lien residential mortgages Other personal lending Commercial real estate Other corporate commercial 0.1 — Financial 2017 2016 82 HSBC Holdings plc Annual Report and Accounts 2017 Loan impairment allowances over five years ($bn) The offset on derivatives remains in line with the movements in maximum exposure amounts. Personal Wholesale 55% 54% 55% 50% 48% 8.6 7.8 6.7 5.9 5.8 35% 35% 30% 30% 25% 6.6 4.6 2.9 2.0 1.7 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 – w – Loan impairment allowances as a percentage of impaired loans Loan impairment allowances ($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 consolidated balance sheet movements in 2017 is provided on page 44. Maximum exposure to credit risk (Audited) ‘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 29 and pages 190 and 193 on the Financial Statements for further details of collateral in respect of certain loans and advances and derivatives. 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 219,818 962,964 374,762 516,754 71,448 90,393 2017 Offset $m (204,829) (35,414) (2,946) (29,459) (3,009) (273) Net $m 14,989 927,550 371,816 487,295 68,439 90,120 Maximum exposure $m 290,872 861,504 337,826 460,209 63,469 88,126 201,553 (3,724) 197,829 160,974 2016 Offset $m (262,233) (33,657) (3,629) (27,686) (2,342) (248) (4,764) Net $m 28,639 827,847 334,197 432,523 61,127 87,878 156,210 2,305,592 (244,240) 2,061,352 2,204,751 (300,902) 1,903,849 723,917 38,328 685,589 — — — 723,917 38,328 685,589 692,915 37,072 655,843 — — — 692,915 37,072 655,843 3,029,509 (244,240) 2,785,269 2,897,666 (300,902) 2,596,764 HSBC Holdings plc Annual Report and Accounts 2017 83 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Concentration of exposure 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 100. 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 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 geographical diversification of our lending portfolio, and our broad range of global businesses and products, ensured that we did not overly depend on a few markets or businesses to generate growth in 2017. For an analysis of: • financial investments, see Note 15 on the Financial Statements; • trading assets, see Note 10 on the Financial Statements; • derivatives, see page 94 and Note 14 on the Financial Statements; and • loans and advances by industry sector and by the location of the principal operations of the lending subsidiary (or, 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 90 for wholesale lending and page 95 for personal lending. Distribution of financial instruments by credit quality (Audited) Neither past due nor impaired Strong Good Satisfactory Sub- standard Past due but not impaired Impaired Total gross amount Impairment allowances $m Cash and balances at central banks 179,155 Items in the course of collection from other banks Hong Kong Government certificates of indebtedness 6,322 34,186 $m 1,043 29 — $m 407 273 — Trading assets 137,983 22,365 26,438 $m 19 4 — 1,949 1,098 498 26 327 28 922 $m $m $m $m 180,624 6,628 34,186 188,735 17,532 107,486 26,057 37,660 4,704 219,818 Total $m 180,624 6,628 34,186 188,735 17,532 107,486 26,057 37,660 4,704 219,818 8,600 4,658 3,422 520 9 — — 107 15 91 1 15,470 970,448 (7,484) 962,964 4,922 10,254 294 — — 728 143 31 56 56 376,481 522,248 71,719 90,393 201,553 385,159 30,876 9,750 20,644 482 (1,719) (5,494) 374,762 516,754 (271) 71,448 — — (48) (48) 90,393 201,553 385,159 30,828 9,750 20,644 434 550 39 442 2,886 681 183 361 137 15,412 84,493 15,496 22,582 531 9,517 5,778 6,539 3,378 269 181,195 31,827 491 12,978 4,757 8,212 1,029 5,874 503,759 222,343 204,162 16,114 324,960 140,382 38,417 26,612 14,549 780 176,745 176,661 14,784 18,986 12,952 77,175 9,026 4,144 143,154 356,065 12,714 1,430 11,175 109 32,321 10,463 6,526 4,636 1,837 53 25,636 15,017 10,705 3,455 7,124 126 1,635,086 336,212 293,685 23,084 8,716 16,341 2,313,124 (7,532) 2,305,592 % 70.7 % 14.5 % 12.7 % 1.0 % 0.4 % 0.7 % 100.0 – 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 Other assets – endorsements and acceptances – accrued income and other – assets held for sale At 31 Dec 2017 Percentage of total gross amount 84 HSBC Holdings plc Annual Report and Accounts 2017 Distribution of financial instruments by credit quality (continued) Cash and balances at central banks 126,838 Strong $m Neither past due nor impaired Good Satisfactory Sub- standard Past due but not impaired Impaired $m $m 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 Other assets – endorsements and acceptances – accrued income and other – assets held for sale At 31 Dec 2016 Percentage of total gross amount $m 711 14 — 20,345 672 7,746 6,119 5,808 4,656 31,228 127,997 13,595 73,171 15,356 25,875 3,249 367 236,693 45,961 437,531 290,313 111,848 35,370 200,385 24,544 158,878 16,963 $m 444 329 — 21,947 138 12,741 3,250 5,818 542 7,368 185,717 12,505 163,107 10,105 $m 16 4 — 1,232 46 396 44 746 314 850 18,831 884 17,504 443 73,516 8,238 6,293 73 123,822 401,010 12,977 1,160 10,043 1,774 18,223 13,579 5,884 3,688 1,660 536 18,166 13,570 9,619 3,125 6,102 392 763 2,940 1,071 474 331 266 1,579,517 313,707 263,995 26,094 % 71.4 % 14.2 % 11.9 % 1.2 Total gross amount $m 128,009 5,003 31,228 171,521 14,451 94,054 24,769 38,247 4,472 290,872 869,354 339,798 465,827 63,729 88,126 160,974 432,130 31,162 8,574 18,354 4,234 Impairment allowances $m (7,850) (1,972) (5,618) (260) — — (250) (250) Total $m 128,009 5,003 31,228 171,521 14,451 94,054 24,769 38,247 4,472 290,872 861,504 337,826 460,209 63,469 88,126 160,974 432,130 30,912 8,574 18,354 3,984 20,510 2,212,851 (8,100) 2,204,751 % 0.9 % 100.0 18,228 6,490 11,362 376 — — 1,031 1,251 92 129 1,030 8,662 5,062 3,128 472 6 — — 360 35 89 236 9,028 % 0.4 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 86. In North America, past due but not impaired balances decreased, mainly due to the final loan sales in our US CML run-off portfolio. Past due but not impaired balances are concentrated in the up to 29 days ageing bucket. Past due but not impaired gross financial instruments by geographical region (Audited) At 31 Dec 2017 At 31 Dec 2016 Europe $m 1,324 1,206 Asia $m 3,892 3,484 MENA $m 852 1,260 North America Latin America $m 2,015 2,549 $m 633 529 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 Other financial instruments At 31 Dec 2017 Loans and advances to customers and banks held at amortised cost – personal – corporate and commercial – financial Other financial instruments At 31 Dec 2016 Up to 29 days $m 6,837 3,455 2,899 483 33 30-59 days $m 1,255 866 343 46 12 6,870 1,267 6,743 3,696 2,593 454 264 7,007 1,320 986 316 18 47 1,367 60-89 days 90-179 days 180 days and over $m 493 337 156 — 18 511 587 380 201 6 23 610 $m 10 — 10 — 12 22 11 — 11 — 12 23 $m 14 — 14 — 32 46 7 — 7 — 14 21 Total $m 8,716 9,028 Total $m 8,609 4,658 3,422 529 107 8,716 8,668 5,062 3,128 478 360 9,028 HSBC Holdings plc Annual Report and Accounts 2017 85 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk 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 and Movement in impaired loans by industry sector 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 completion of loan sales in our US CML run-off portfolio reduced impaired loan balances by a further $1.5bn. The reduction in corporate and commercial balances is a result of fewer significant current year impaired loans together with loan credit grade improvements, repayments and write-offs. 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 2017 Corporate and commercial $m 11,362 3,691 (1,324) (1,257) (2,218) 10,254 Personal $m 6,490 2,671 (677) (1,330) (2,232) 4,922 Financial Total Personal 2016 Corporate and commercial Financial $m 376 17 (8) (53) (38) $m 18,228 6,379 (2,009) (2,640) (4,488) 294 15,470 $m 11,507 3,521 (1,210) (1,252) (6,076) 6,490 $m 11,949 6,032 (922) (1,720) (3,977) 11,362 $m 322 133 (7) (11) (61) 376 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 2017 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 2016 Impaired loans % of total gross loans and advances Currency translation adjustment 31 Dec 2016 at 31 Dec 2017 exchange rates Movement – constant currency basis 31 Dec 2017 as reported Europe $m 4,551 1,648 2,895 8 3,491 381 2,926 184 8,042 2.0% 4,354 1,239 3,029 86 3,708 648 2,868 192 8,062 2.3% 855 8,917 (875) 8,042 Asia $m 1,645 475 1,146 24 604 125 478 1 2,249 0.5% 1,771 453 1,291 27 728 113 614 1 2,499 0.6% 72 2,571 (322) 2,249 MENA North America Latin America $m 870 227 639 4 $m 1,180 665 508 7 1,079 1,426 120 895 64 1,949 5.4% 1,042 459 582 1 1,188 72 1,052 64 2,230 5.5% (25) 2,205 (256) 1,949 958 466 2 2,606 2.2% 1,913 1,043 865 5 2,929 2,213 716 — 4,842 4.1% 37 4,879 (2,273) 2,606 $m 452 280 172 — 172 43 129 — 624 2.6% 399 220 179 — 196 30 166 — 595 2.9% 20 615 9 624 Total $m 23,778 9,686 (2,139) (2,983) (10,114) 18,228 Total $m 8,698 3,295 5,360 43 6,772 1,627 4,894 251 15,470 1.5% 9,479 3,414 5,946 119 8,749 3,076 5,416 257 18,228 1.9% 959 19,187 (3,717) 15,470 86 HSBC Holdings plc Annual Report and Accounts 2017 Renegotiated loans and forbearance The following tables show the gross carrying amounts of the Group’s holdings of renegotiated loans and advances to customers by industry sector, geographical region, credit quality classification and arrangement type. Renegotiated loans and advances to customers by industry sector The completion of loan sales in our US CML run-off portfolio reduced renegotiated loans by $2.0bn during 2017. First lien residential mortgages Other personal lending Corporate and commercial Non-bank financial institutions $m 476 58 1,329 1,863 165 976 346 2,751 4,073 267 Asia $m 921 1,046 $m 268 49 298 615 127 282 78 325 685 150 $m 2,082 120 4,894 7,096 1,584 1,848 301 5,416 7,565 1,667 $m 257 — 251 508 151 260 — 257 517 130 MENA $m 1,622 1,871 North America Latin America $m 1,604 3,736 $m 268 332 Total $m 3,083 227 6,772 10,082 2,027 3,366 725 8,749 12,840 2,214 Total $m 10,082 12,840 Europe $m 5,667 5,855 The following tables 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. The movements in personal lending arrangement types in 2017 are mainly driven by the loan sales in our US CML run-off portfolio. Neither past due nor impaired Past due but not impaired Impaired At 31 Dec 2017 Impairment allowances on renegotiated loans Neither past due nor impaired Past due but not impaired Impaired At 31 Dec 2016 Impairment allowances on renegotiated loans Renegotiated loans and advances to customers by geographical region At 31 Dec 2017 At 31 Dec 2016 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. Renegotiated loans by arrangement type: personal lending Interest rate and terms modifications Payment concessions Collection re-age Modification re-age Other At 31 Dec 2017 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 2017 2017 % 35.8 23.8 17.7 9.0 13.7 100.0 2017 % 42.6 15.8 2.1 24.0 15.5 100.0 2016 % 21.9 14.3 19.2 34.6 10.0 100.0 2016 % 37.3 21.4 19.4 9.3 12.6 100.0 HSBC Holdings plc Annual Report and Accounts 2017 87 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Impairment of loans and advances (Audited) For an analysis of LICs by global business, see page 40. The tables below analyse the loan impairment charges for the year by industry sector for impaired loans and advances that are either Loan impairment charge to the income statement by industry sector individually or collectively assessed, and for collective impairment allowances on loans and advances that are classified as not impaired. 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 2017 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 For footnote, see page 116. Footnote 45 Europe $m 140 6 134 619 314 200 105 66 825 162 1 161 337 38 (15) 314 34 533 Asia $m 243 (1) 244 298 236 21 41 17 558 264 (1) 265 388 306 (28) 110 2 654 MENA North America Latin America $m 92 5 87 83 95 (4) (8) 22 197 226 10 216 53 105 (16) (36) 13 292 $m 32 — 32 (163) 18 9 (190) 1 (130) 219 149 70 500 81 3 416 (10) 709 $m 452 (27) 479 90 59 — 31 — Total $m 959 (17) 976 927 722 226 (21) 106 542 1,992 832 7 825 330 195 25 110 — 1,703 166 1,537 1,608 725 (31) 914 39 1,162 3,350 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 2017 Amount written off net of recoveries New allowances net of allowance releases Recoveries At 31 Dec 2016 Amount written off net of recoveries Europe % 0.33 (0.09) 0.24 0.23 0.23 (0.08) 0.15 0.26 Asia % 0.17 (0.03) 0.14 0.13 0.23 (0.04) 0.19 0.14 MENA % 0.79 (0.14) 0.65 1.35 0.93 (0.13) 0.80 0.84 North America Latin America % (0.05) (0.07) (0.12) 0.28 0.62 (0.06) 0.56 0.48 % 3.20 (0.41) 2.79 2.42 7.02 (0.56) 6.46 2.99 Total % 0.29 (0.07) 0.22 0.28 0.46 (0.07) 0.39 0.32 88 HSBC Holdings plc Annual Report and Accounts 2017 Movement in impairment allowances by industry sector and by geographical region North America Latin America At 1 Jan 2017 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 2017 Impairment allowances against banks: – individually assessed Impairment allowances against customers: – individually assessed – collectively assessed Impairment allowances at 31 Dec 2017 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 Europe $m 2,789 (438) (8) (430) (648) (318) (121) (209) (74) (1,160) 296 9 287 35 10 8 17 2 333 825 274 Asia $m 1,635 MENA $m 1,681 (366) (6) (360) (273) (250) (10) (13) (1) (640) 104 4 100 10 9 — 1 — 114 558 5 (329) (42) (287) (119) (74) (37) (8) — (448) 39 — 39 2 1 1 — — 41 197 (10) 3,061 1,672 1,461 — — — 2,296 765 3,061 1,056 616 1,672 1,104 357 1,461 $m 1,272 (100) (26) (74) (273) (44) (20) (209) (2) (375) 38 17 21 37 11 1 25 — 75 (130) (51) 791 — 383 408 791 3,477 1,525 1,810 2,041 (412) (10) (402) (730) (380) (109) (241) (1) (1,143) 225 3 222 35 15 9 11 1 261 533 (339) 2,789 (358) (6) (352) (285) (172) (31) (82) (5) (648) 124 4 120 24 23 — 1 1 149 654 (45) 1,635 (208) (3) (205) (137) (78) (54) (5) (18) (363) 34 — 34 10 5 — 5 — 44 292 (102) 1,681 (284) (142) (142) (381) (125) (35) (221) — (665) 54 26 28 18 9 2 7 1 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 473 (487) (9) (478) (63) (18) (4) (41) — Total $m 7,850 (1,720) (91) (1,629) (1,376) (704) (192) (480) (77) (550) (3,173) 68 25 43 13 3 — 10 — 81 542 (47) 499 — 121 378 499 720 (340) (12) (328) (297) (10) (223) (64) — (637) 78 8 70 22 16 — 6 — 100 1,162 (872) 473 — 157 316 473 545 55 490 97 34 10 53 2 644 1,992 171 7,484 — 4,960 2,524 7,484 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 HSBC Holdings plc Annual Report and Accounts 2017 89 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 $m — — — — — — — 2017 Customers Individually assessed Collectively assessed $m 4,932 (1,468) 119 1,114 263 4,960 $m 2,918 (1,705) 525 878 (92) 2,524 Total $m 7,850 (3,173) 644 1,992 171 7,484 0.5% 0.3% 0.8% Banks individually assessed 2016 Customers Individually assessed Collectively assessed $m 18 (18) — — — — — $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 0.6% 0.3% 0.8% In North America, lending increased by $2.3bn in the US and Canada. The US bank loans increased by $5.8bn largely due to excess liquidity placement. This was mostly offset by decreased US corporate and commercial lending of $5.1bn as paydowns and maturities exceeded new loan originations owing to our continued efforts to improve returns. In MENA, overall lending fell by $3.2bn, mainly within the UAE owing to a combination of large run-offs and repayments together with the exiting of some customer relationships. In Latin America, lending increased by $2.3bn largely in Mexico. 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 Total wholesale lending balances increased by $67bn with foreign exchange differences accounting for $30bn of the increase. While the tables are presented on a reported basis, the commentary that follows is on a constant currency basis. In Asia, particularly within Hong Kong, lending balances increased by $34bn. In this region, demand for lending increased across most industry sectors with notable growth in commercial real estate and property-related lending of $15bn and international trade services of $10bn. In Europe, overall lending increased by $1.8bn owing to decreased lending in the UK of $2.8bn being offset by increased lending in the rest of Europe, mainly in France and Germany. 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 2017 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 2016 Currency translation adjustment 31 Dec 2016 at 31 Dec 2017 exchange rates Movement – constant currency basis 31 Dec 2017 as reported Loan and other credit-related commitments – corporate and commercial – financial Europe $m Asia $m 182,501 250,950 29,098 65,149 25,956 7,982 3,619 50,697 46,274 32,093 14,181 228,775 143,015 123,972 19,043 32,275 84,340 40,246 46,164 5,767 42,158 81,730 26,311 55,419 332,680 195,396 179,302 16,094 MENA $m 21,533 2,836 10,130 687 1,821 1,366 4,693 7,609 1,107 6,502 29,142 17,935 17,390 545 161,653 212,848 22,078 27,005 55,875 21,460 7,025 3,009 47,279 43,666 31,307 12,359 32,564 72,166 32,798 37,628 2,919 34,773 79,254 19,517 59,737 205,319 292,102 21,696 6,604 227,015 298,706 1,760 228,775 135,394 112,229 23,165 33,974 332,680 183,508 167,298 16,210 2,941 8,448 724 1,856 1,619 6,490 10,370 2,599 7,771 32,448 (84) 32,364 (3,222) 29,142 18,562 18,474 88 North America $m 54,915 14,503 10,272 8,917 7,999 406 12,818 21,746 10,926 10,820 76,661 123,267 102,666 20,601 58,276 15,348 11,035 7,849 8,823 354 14,867 14,823 9,750 5,073 73,099 1,297 74,396 2,265 76,661 124,720 96,301 28,419 Total as a % of total gross loans % 49.2 7.7 16.3 7.3 6.1 1.1 10.7 15.3 6.8 8.5 64.5 48.6 8.4 15.6 6.7 5.8 0.9 11.2 15.9 6.7 9.2 64.5 Latin America $m Total $m 12,349 522,248 3,145 3,336 1,506 369 570 3,423 4,753 1,282 3,471 17,102 11,666 10,795 871 10,972 2,785 2,518 1,340 306 541 3,482 3,742 556 3,186 81,857 173,227 77,312 64,335 11,728 113,789 162,112 71,719 90,393 684,360 491,279 434,125 57,154 465,827 80,643 150,042 64,171 55,638 8,442 106,891 151,855 63,729 88,126 14,714 617,682 40 14,754 2,348 17,102 9,849 9,174 675 29,553 647,235 37,125 684,360 472,033 403,476 68,557 90 HSBC Holdings plc Annual Report and Accounts 2017 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 2017 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 2016 Impairment allowances % of impaired loans Currency translation adjustment 31 Dec 2016 at 31 Dec 2017 exchange rates Movement – on constant currency basis 31 Dec 2017 as reported Commercial real estate Commercial real estate lending Europe $m 2,286 332 671 362 347 3 571 183 183 — Asia $m 1,375 372 612 10 44 — 337 27 27 — MENA $m 1,092 188 480 142 161 6 115 39 39 — North America $m 557 114 101 75 41 — 226 22 22 — Latin America $m 184 70 35 — 42 — 37 — — — Total $m 5,494 1,076 1,899 589 635 9 1,286 271 271 — 2,469 41.1% 1,402 85.0% 1,131 70.6% 579 58.9% 184 61.1% 5,765 54.7% 2,048 1,343 1,137 411 473 402 167 2 593 216 216 — 2,264 36.7% 260 2,524 (55) 2,469 342 647 11 34 — 309 9 9 — 1,352 69.9% 33 1,385 17 1,402 174 476 144 202 1 140 15 15 — 1,152 67.8% (5) 1,147 (16) 1,131 880 139 81 67 37 — 556 20 20 — 900 56.7% 19 919 (340) 579 210 38 35 36 55 1 45 — — — 210 60.9% 9 219 (35) 184 5,618 1,104 1,712 660 495 4 1,643 260 260 — 5,878 50.0% 316 6,194 (429) 5,765 Europe $m Asia $m MENA $m North America Latin America $m $m Gross loans and advances Neither past due nor impaired 24,822 40,175 Past due but not impaired Impaired loans At Dec 2017 – of which: renegotiated loans Impairment allowances Gross loans and advances Neither past due nor impaired Past due but not impaired Impaired loans At Dec 2016 – of which: renegotiated loans Impairment allowances 56 1,078 25,956 1,112 362 20,208 41 1,212 21,461 1,117 403 55 16 40,246 — 10 32,688 88 22 32,798 — 11 500 5 182 687 190 142 541 — 183 724 192 144 8,637 197 83 8,917 97 75 7,650 89 110 7,849 118 67 1,407 34 65 1,506 79 — 1,255 3 81 1,339 98 35 Total $m 75,541 347 1,424 77,312 1,478 589 62,342 221 1,608 64,171 1,525 660 UK $m Hong Kong $m 18,361 31,325 2 895 19,258 1,010 302 15,143 1 1,027 16,171 997 330 49 11 31,385 — 7 25,561 29 15 25,605 — 8 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 grew $13bn, including foreign exchange movements of $2.9bn, mainly in Hong Kong and, to a lesser extent, within the UK and Canada. HSBC Holdings plc Annual Report and Accounts 2017 91 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Refinance risk in commercial real estate Commercial real estate lending tends to require the repayment of a significant proportion of the principal at maturity. Typically, a customer will arrange repayment through the acquisition of a new loan to settle the existing debt. Refinance risk is the risk that a Commercial real estate loans and advances maturity analysis 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. On demand, overdrafts or revolving < 1 year 1-2 years 2-5 years > 5 years At Dec 2017 On demand, overdrafts or revolving < 1 year 1-2 years 2-5 years > 5 years At Dec 2016 Europe $m 6,192 4,440 13,109 2,215 25,956 5,687 2,904 10,846 2,024 21,461 Asia $m MENA $m North America $m 10,559 7,693 15,856 6,138 40,246 7,773 5,075 13,691 6,259 32,798 268 119 117 183 687 280 72 250 122 724 4,678 1,178 2,199 862 8,917 3,568 1,453 1,733 1,095 7,849 Latin America $m 260 58 734 454 1,506 328 27 309 675 1,339 Total $m 21,957 13,488 32,015 9,852 77,312 17,636 9,531 26,829 10,175 64,171 UK $m Hong Kong $m 4,651 3,339 10,716 552 19,258 4,701 1,930 8,778 762 16,171 8,531 5,502 11,723 5,629 31,385 5,574 3,365 10,858 5,808 25,605 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 off-balance sheet loan commitments, primarily undrawn credit lines. 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 189. 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 8–10, 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. 92 HSBC Holdings plc Annual Report and Accounts 2017 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 2017 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 2016 Europe $m 6,114 25,958 1,631 1,270 Asia $m MENA $m 18,338 30,289 1,623 975 315 192 — — North America Latin America $m 590 11,201 1,797 1,281 $m 397 931 149 76 Total $m 25,754 68,571 5,200 3,602 UK $m Hong Kong $m 4,812 20,709 968 568 12,678 24,708 1,229 729 33,703 50,250 507 13,588 1,477 99,525 26,489 38,615 5 145 64 34 23 24 62 42 212 56 445 82 165 127 71 441 250 942 — — — — — — — — — — 10 6 2 2 — 6 3 16 34,857 50,266 3,887 21,815 1,360 1,021 27,062 12,714 27,296 1,106 552 41,116 12 190 54 76 44 16 91 70 293 62 764 79 571 64 50 384 148 — — — — — — — — — 3 14 7 5 1 1 5 5 1,210 28,565 22 41,138 — — — — — — — — — 2 194 19 — — 175 — — 196 703 391 152 — — 543 — — — — — — — — — 4 194 19 — — 175 — — 198 741 — 77 3 7 66 1 10 1 87 2 45 26 6 13 — 36 13 83 — — — — — — — — — 3 16 15 1 — — 10 32 29 5 222 67 41 89 25 72 43 299 63 710 148 174 142 246 493 298 1,266 3 129 64 32 19 14 55 40 187 46 376 60 149 122 45 351 188 773 — — — — — — — — — — 5 — 2 2 1 6 3 11 13,758 1,506 101,090 27,449 38,626 561 10,618 1,388 991 12,567 760 449 63 7 1,272 1 6 4 1 — 1 11 1 18 4 85 5 34 7 39 21 13 110 12,695 — — — — — — — — — 2 61 31 14 16 — 2 36 65 1,337 18,313 60,330 3,917 2,571 82,560 13 196 58 77 44 17 102 71 311 75 1,118 141 624 88 265 412 202 1,605 84,476 2,888 18,009 1,004 672 21,901 9,971 21,821 644 314 32,436 11 158 39 70 39 10 82 61 251 16 740 62 569 64 45 361 131 — — — — — — — — — — 10 4 4 1 1 5 5 1,117 23,269 15 32,451 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. HSBC Holdings plc Annual Report and Accounts 2017 93 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk 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 2017 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 2016 Hong Kong $m 15 5 3 2 — — 135 10 155 511 105 69 9 20 7 161 119 777 932 Europe $m 1,730 293 72 73 16 132 94 62 2,117 1,710 1,520 634 431 256 199 452 243 42 9 7 2 — — 140 12 191 926 365 113 27 39 186 343 208 3,682 5,799 1,634 1,825 1,766 141 86 34 10 11 191 23 2,098 1,439 1,394 570 412 180 232 478 322 405 3 2 1 — — 12 3 420 848 447 126 104 86 131 642 268 3,311 5,409 1,937 2,357 Asia $m MENA $m North America Latin America $m $m Total $m 109 25 9 12 4 — 34 3 1,721 222 96 69 19 38 224 128 121 3,723 4 4 — — — — 1 553 188 156 39 170 492 206 168 2,167 125 4,768 514 UK $m 320 103 25 65 11 2 91 59 875 180 30 62 88 — 404 68 1,459 1,627 51 94 10 15 7 62 20 5 73 460 14 64 11 371 517 337 1,050 3,217 2,976 362 151 118 79 14 242 26 165 3,580 900 160 54 6 87 13 442 75 1,502 1,667 154 488 59 85 53 291 771 353 1,413 4,993 150 54 22 21 3 8 27 18 231 356 85 — — — — — — — 85 167 56 29 8 8 11 35 16 258 343 3,734 2,579 813 605 397 764 1,743 874 8,056 12,824 1,508 1,223 516 403 235 69 397 210 3,128 3,642 5,283 172 287 600 249 168 96 87 465 57 6,348 3,508 2,545 838 615 414 678 2,368 1,034 8,421 14,769 70 30 28 5 7 187 19 429 1,347 1,159 449 367 144 199 454 300 2,960 3,389 1 1 — — — 12 3 300 377 144 54 32 44 14 305 150 826 1,126 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 100. • 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. 94 HSBC Holdings plc Annual Report and Accounts 2017 Collateral accepted as security that the Group is permitted to sell or repledge under these arrangements is described on page 220 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 32 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. 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 2017 Fair value Assets Liabilities $m $m Notional amount $m 2016 Fair value Assets Liabilities $m $m 6,244,286 78,517 75,768 5,846,095 127,413 119,781 13,520 70,719 6,160,047 37 1,312 77,168 105 1,394 12,657 66,209 74,269 5,767,229 19,929,866 236,795 233,031 13,944,763 1,536,818 11,730,237 6,662,811 240 114,003 122,552 590,156 313,483 276,673 391,798 107,370 284,428 59,716 5,389 54,327 9,353 1,104 8,249 4,692 2,715 1,977 886 56 830 189 1,075,299 115,020 117,822 11,845 2,463 9,382 5,369 2,980 2,389 1,233 47 1,186 8,207,550 4,661,914 472,169 250,810 221,359 448,220 122,832 325,388 62,009 5,596 56,413 25,346,612 11,908,326 13,438,286 1,869,210 328,806 118,030 210,776 1,437 324,442 19,428,894 119,394 8,396,591 205,048 11,032,303 2,804 1,344,362 209 698 126,506 255,385 277 120,017 135,091 7,410 919 6,491 5,199 1,954 3,245 2,020 117 1,903 395,905 122,669 273,236 1,522 65 748 118,968 250,022 214 122,022 127,786 9,240 2,173 7,067 5,767 1,941 3,826 1,564 — 1,564 383,922 124,711 259,211 2,452 27,215,822 330,243 327,246 20,773,256 397,427 386,374 (110,425) (110,425) 219,818 216,821 (106,555) (106,555) 290,872 279,819 The purposes for which HSBC uses derivatives are described in Note 14 on the Financial Statements. Loan impairment allowances for personal lending were broadly unchanged at $1.7bn. 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 239 and Note 29 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 increased by $37bn to $376bn. This increase included foreign exchange movements of $19bn. Excluding foreign exchange movements, lending balances increased by $13bn in Asia and $9.0bn in Europe. Growth was partly offset by a $3.7bn fall in North America, due to the final loans sales of $5.0bn in our US CML run-off portfolio, which were sold through 2017. Balances grew on an underlying basis by $0.7bn in Latin America and reduced by $0.8bn in MENA. Loan impairment charges for personal lending were $1.0bn for 2017, $0.7bn lower compared with 2016, mainly due to our sale of operations in Brazil in 2016 and the US CML run-off portfolio. For further analysis of LICs by global business, see page 40. 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 loan sales in the US CML run-off portfolio. Overall, personal lending increased by $23bn, mainly driven by mortgage balances which grew $19bn. UK mortgage balances increased by $8.2bn reflecting stronger acquisition performance, including the expanded use of broker relationships. Mortgages in Asia grew by $9.3bn, mainly driven by Hong Kong, Australia and China, as a result of business growth initiatives and property market growth. Mortgages in Canada grew by $2.3bn, mainly due to business growth initiatives and competitive product offerings. 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 50% compared with an estimated 31% for the overall mortgage portfolio. The average LTV ratio on new lending in the UK was 59% compared with an estimated 40% for the overall 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. LTV thresholds 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. HSBC Holdings plc Annual Report and Accounts 2017 95 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Other personal lending balances increased by $3.7bn, mainly due to growth of $2.9bn in loans and overdrafts, and $1.0bn in credit cards, as a result of business growth initiatives and increased demand. Loans and overdrafts grew by $3.1bn in Hong Kong mainly due to Private Bank growth, and $1.0bn in France, partially offset by decreases in North America and MENA. Credit cards grew by $0.4bn in Hong Kong, $0.3bn in China and $0.3bn in the UK. Total personal lending gross loans Europe $m Asia $m MENA $m North America Latin America $m $m Total $m UK $m Total as a % of total gross loans Hong Kong $m First lien residential mortgages 126,685 109,502 2,375 37,330 2,281 278,173 119,770 70,279 26.2 – of which: interest only (including offset) 35,242 873 affordability (including US adjustable rate mortgages) Other personal lending – other – credit cards – second lien residential mortgages – motor vehicle finance At 31 Dec 2017 409 3,111 43,329 32,995 10,235 99 — 40,880 29,400 11,435 21 24 170,014 150,382 Loan and other credit-related commitments 50,384 120,312 65 — 4,496 2,663 1,531 2 300 6,871 3,975 92 13,742 5,227 2,919 1,037 1,233 38 42,557 14,443 — — 4,376 2,205 1,642 — 529 6,657 5,196 36,272 33,468 17,262 98,308 70,182 25,880 1,355 891 — 19,790 10,039 9,751 — — — 3 27,868 19,977 7,891 — — 376,481 139,560 194,310 48,413 98,147 89,994 3.4 1.6 9.3 6.7 2.4 0.1 0.1 35.5 First lien residential mortgages 108,008 98,072 2,535 39,239 1,924 249,778 101,822 63,565 26.1 – of which: interest only (including offset) 33,045 876 affordability (including US adjustable rate mortgages) Other personal lending – other – credit cards – second lien residential mortgages – motor vehicle finance At 31 Dec 2016 Currency translation adjustment 31 Dec 2016 at 31 Dec 2017 exchange rates 297 38,491 29,297 9,096 97 1 3,427 36,628 26,059 10,438 24 107 92 — 5,209 3,072 1,816 2 319 113 14,182 5,717 3,061 993 1,631 32 — — 3,975 2,018 1,595 — 362 34,126 31,893 17,906 90,020 63,507 23,938 1,754 821 — 17,820 9,189 8,631 — — — 5 24,558 17,042 7,516 — — 3.6 1.9 9.4 6.6 2.5 0.2 0.1 146,499 134,700 7,744 44,956 5,899 339,798 119,642 88,123 35.5 14,499 2,890 (120) 1,337 53 18,659 11,406 (672) 160,998 137,590 7,624 46,293 5,952 358,457 131,048 87,451 Movement – constant currency basis 9,016 12,792 (753) (3,736) 705 18,024 8,512 31 Dec 2017 as reported 170,014 150,382 Loan and other credit-related commitments 49,029 111,123 6,871 4,291 42,557 13,944 6,657 5,423 376,481 139,560 183,810 47,250 10,696 98,147 85,208 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 2017 Europe Asia MENA North America Latin America $m 262 341 230 111 — — 603 $m 30 237 109 128 — — 267 $m 68 259 132 122 — 5 327 $m 148 60 17 30 13 — 208 $m 16 298 151 140 — 7 314 Impairment allowances % of impaired loans 29.7% 44.5% 94.2% 12.8% 97.2% 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 Currency translation adjustment 31 Dec 2016 at 31 Dec 2017 exchange rates Movement – constant currency basis 31 Dec 2017 as reported 225 300 224 76 — — 525 27.8% 58 583 20 603 34 249 122 127 — — 283 81 448 226 217 — 5 529 289 83 23 34 26 — 372 14 249 128 117 — 4 263 50.0% 99.6% 11.4% 105.2% 12 295 (28) 267 (20) 509 (182) 327 1 373 (165) 208 7 270 44 314 Total $m 524 1,195 639 531 13 12 UK $m 145 257 147 110 — — 1,719 34.9% 402 28.3% 643 1,329 723 571 26 9 1,972 30.4% 58 2,030 (311) 1,719 123 231 155 76 — — 354 26.0% 33 387 15 402 Hong Kong $m — 86 36 50 — — 86 62.3% — 99 42 57 — — 99 67.8% (1) 98 (12) 86 96 HSBC Holdings plc Annual Report and Accounts 2017 Exposure to UK interest-only mortgage loans Of total UK mortgage lending, interest-only mortgage products contributed $33bn, including $12bn of offset mortgages in First Direct and $1.1bn of endowment mortgages. On a constant currency basis, total UK interest-only mortgage products declined by $1.6bn on prior year. The following information is presented for HSBC Bank plc’s UK interest-only mortgage loans with balances of $16bn at the end of 2017. During the year, $0.17bn of interest-only mortgages matured. Of these, 1,290 loans with total balances of $0.06bn were repaid in full, 153 loans with balances of $0.01bn have agreed future repayment plans and 438 loans with balances of $0.10bn are subject to ongoing individual assessment. The profile of expiring HSBC Bank plc’s UK interest-only loans was as follows. UK interest-only mortgage loans Expired interest-only mortgage loans Interest-only mortgage loans by maturity – 2018 – 2019 – 2020 – 2021 – 2022-2026 – Post 2026 At 31 Dec 2017 $m 216 465 520 532 652 3,185 10,215 15,785 Collateral and other credit enhancements held (Audited) The following table shows the values of the fixed charges we hold over specific assets where we 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 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 North America Latin America $m $m 131,205 115,928 2,194 72,513 21,702 16,500 12,857 6,347 1,286 309 125 46 138 258 77,286 16,891 10,900 7,848 2,316 687 53 34 10 9 48 582 321 445 579 230 37 71 15 7 49 48 35,597 12,902 8,948 8,786 4,341 391 229 216 89 57 70 187 2,164 827 425 423 268 161 60 11 7 1 3 9 Total $m 287,088 164,110 48,287 37,054 25,893 9,445 2,299 660 270 121 269 550 UK $m 124,736 69,679 20,706 15,422 11,992 5,824 1,113 174 89 16 69 125 Hong Kong $m 72,073 55,237 8,340 3,282 3,402 1,376 436 — — — — — Non-impaired loans and advances 131,514 115,981 2,265 35,813 2,175 287,748 124,910 72,073 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% to 120% – greater than 120% Collateral on B 1,241 637 236 157 116 53 42 86 38 13 35 67 284 133 40 36 37 27 11 10 5 2 3 9 46 12 4 10 6 6 8 56 9 12 35 48 1,306 446 230 210 191 135 94 187 49 34 104 143 127 10 8 3 4 102 — 3 — — 3 2 3,004 1,238 518 416 354 323 155 342 101 61 180 269 1,008 538 196 130 85 40 19 38 15 5 18 31 46 42 3 — 1 — — — — — — — Impaired loans and advances At 31 Dec 2017 1,327 294 132,841 116,275 102 2,367 1,493 37,306 130 2,305 3,346 1,046 46 291,094 125,956 72,119 HSBC Holdings plc Annual Report and Accounts 2017 97 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Residential mortgage loans including loan commitments by level of collateral (continued) (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% to110% – 111% to 120% – greater than 120% Collateral on A Europe $m 111,799 63,404 19,129 14,437 9,029 4,963 837 430 150 64 216 342 Asia $m 104,122 63,009 18,198 10,908 7,370 3,463 1,174 41 20 2 19 27 MENA $m 2,333 617 369 505 659 148 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 255,840 140,160 46,136 35,687 21,685 9,606 2,566 939 381 167 391 762 UK $m 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% to110% – 111% to 120% – greater than 120% Collateral value on B Impaired loans At 31 Dec 2016 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 59 21 3 13 4 9 9 73 10 12 51 64 1,293 254 113,522 104,417 132 2,534 2,905 825 527 540 449 336 228 182 94 38 50 152 3,087 39,233 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 98 HSBC Holdings plc Annual Report and Accounts 2017 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 2017 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 First lien residential mortgages Other personal Property-related Commercial, international trade and other $m 126,685 119,770 2,910 1 839 3,165 109,502 70,279 12,444 1,185 64 8,877 3,003 5,760 4,877 3,013 2,375 — 206 1,880 289 37,330 17,415 18,639 1,276 2,281 2,129 152 $m 43,329 19,790 16,650 234 5,776 879 40,880 27,868 838 441 322 1,170 3,385 4,952 822 1,082 4,496 283 1,035 1,682 1,496 5,227 2,278 2,731 218 4,376 3,044 1,332 $m 33,938 26,012 6,255 361 491 819 86,410 66,668 2,851 1,110 164 5,674 2,144 4,727 19 3,053 2,508 39 265 1,727 477 16,916 11,092 5,429 395 1,875 1,702 173 $m 180,656 131,938 28,440 10,485 1,284 8,509 190,851 104,876 10,815 6,437 4,107 25,202 5,676 13,073 5,342 15,323 20,132 1,342 2,702 11,172 4,916 48,925 34,790 13,583 552 11,756 8,735 3,021 Total $m 384,608 297,510 54,255 11,081 8,390 13,372 427,643 269,691 26,948 9,173 4,657 40,923 14,208 28,512 11,060 22,471 29,511 1,664 4,208 16,461 7,178 108,398 65,575 40,382 2,441 20,288 15,610 4,678 278,173 98,308 141,647 452,320 970,448 108,008 101,822 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 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 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 1,528 118 164,465 124,341 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 2,762 339,449 265,690 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 HSBC Holdings plc Annual Report and Accounts 2017 99 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk 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). 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, the maximum exposure to credit risk arises from two components: • financial instruments on the balance sheet (see page 183); and • financial guarantees and similar contracts, where the maximum exposure is the maximum that we would have to pay if the guarantees were called upon (see Note 32). In the case of our derivative balances, we have amounts with a legally enforceable right of offset in the case of counterparty default that are not included in the carrying value. These offsets also include collateral received in cash and other financial assets. The total offset relating to our derivative balances is $2.1bn at 31 December 2017 (2016: $1.8bn). 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 (2016: 100%). For further details of credit quality classification, see page 73. 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 legacy credit portfolio (held within the Corporate Centre) with a carrying value of $9bn (2016: $11bn). At 31 December 2017, the available-for-sale reserve in respect of ABSs was a deficit of $466m (2016: deficit of $749m). For 2017, the impairment write-back in respect of ABSs was $240m (2016: write-back of $121m). Carrying amount of HSBC’s consolidated holdings of ABSs Trading Available for sale Held to maturity Designated at fair value through profit or loss Loans and receivables $m $m $m $m $m Total $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 2017 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 1,767 14,221 13,965 22 — 331 814 600 128 155 1,266 3,316 1,320 63 — 247 662 348 175 140 1,278 2,913 918 1,102 — 3 11,750 13,962 181 270 373 2,198 731 — — — — — 17,523 13,965 17,575 1,544 1,453 13,070 362 1,146 1,284 2,865 730 12,793 — 5 12,788 — — — — — 22,454 12,793 — — — — — — — — 2 2 — — — — — — — — 19 19 1,762 31,715 32 — — 1,595 135 45 — 3,553 5,360 338 104 39 — 54 141 70 11 48 467 972 1,105 26,043 2,590 1,005 546 2,353 5,552 40,166 32,026 1,711 1,497 26,105 1,078 1,635 1,529 3,016 2,075 38,646 Of which held through consolidated SEs $m 1,826 484 1,041 — 75 226 283 2,158 428 4,695 2,859 618 1,382 — 152 707 735 2,616 404 6,614 100 HSBC Holdings plc Annual Report and Accounts 2017 Liquidity and funding risk profile Liquidity and funding risk in 2017 Management of liquidity and funding risk Sources of funding Contractual maturity of financial liabilities HSBC Holdings Liquidity and funding risk in 2017 This section provides a summary of our current policies and practices regarding the management of liquidity and funding risk. Net stable funding ratio Page 101 101 102 104 104 We are required to maintain sufficient stable funding. The Net Stable Funding Ratio (‘NSFR’) measures 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 2017, 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. The liquidity position of the Group remained strong in 2017. The amount of our unencumbered liquid assets was $600bn (2016: $560bn). We recognised $536bn (2016: $447bn) of these liquid assets for the purposes of the Group consolidated Liquidity Coverage Ratio (’LCR’), which was 142% (2016: 136%). Management of liquidity and funding risk Liquidity coverage ratio The 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. The Group’s LCR is calculated on a European Commission (‘EC’) basis and at 31 December 2017 was 142% (31 December 2016: 136%). We assume no transferability of liquidity from non-EU entities other than to the extent currently permitted. This results in $64bn of HQLA being excluded from the Group’s LCR. If there were no exclusions on transferability of liquidity between entities, the Group’s LCR would have been 160% (31 December 2016: 171%), reflecting this additional $64bn (31 December 2016: $113bn) of HQLAs. At 31 December 2017, 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 following table displays the individual LCR levels for our principal operating entities on an EC LCR basis, a key element of our LFRF. This basis may vary from local LCR measures due to differences in the way non-EU regulators have implemented the Basel III recommendations. Operating entities’ LCRs Footnotes 46 47 47 48 48 At 31 Dec 2017 31 Dec 2016 % 139 151 181 132 149 204 123 162 197 215 220 % 123 185 154 130 122 218 142 253 241 177 178 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 116. 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 46 47 47 48 48 At 31 Dec 31 Dec 2017 2016 % 108 144 117 129 116 155 136 148 143 123 185 % 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 retail, corporate and financial deposit segments. 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 refinancing concentration risk if the current maturity profile results in future maturities being overly concentrated in any defined period. At 31 December 2017, 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 liquidity that cannot be freely transferred up to Group. HSBC Holdings plc Annual Report and Accounts 2017 101 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk 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 Total of HSBC’s other principal entities 49 Level 1 Level 2a Level 2b For footnotes, see page 116. 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 adjacent ‘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 2017, 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. 102 HSBC Holdings plc Annual Report and Accounts 2017 31 Dec 2017 31 Dec 2016 Recognised at Group and entity level Recognised at entity level only Recognised at Group and entity level Recognised at entity level only $m $m $m $m Footnotes 46 161,036 2,914 18,777 161,036 2,914 18,777 68,335 26,848 5,528 46,443 13,690 39 20,804 3,287 197 77,958 7,899 1,003 77,217 26,848 5,528 65,131 13,690 39 31,091 3,287 197 88,281 7,899 1,003 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 Loans and advances to customers Loans and advances to banks 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 2017 $m 2016 $m 1,364,462 1,272,386 69,922 130,002 64,546 1,286 19,826 94,429 85,667 59,939 88,958 65,915 2,790 20,984 86,832 75,273 184,361 153,691 2,255 8,363 11,198 162,545 197,871 1,428 3,643 15,271 133,349 182,578 2,212,372 2,009,346 962,964 861,504 90,393 88,126 Reverse repurchase agreements – non-trading 201,553 160,974 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 781 4,389 287,995 235,125 10,224 6,895 15,258 255,618 389,076 180,624 4,780 5,427 17,850 207,068 436,797 128,009 98,986 94,422 2,212,372 2,009,346 Wholesale term debt maturity profile The maturity profile of our wholesale term debt obligations is set out in the following table. The balances in the table are not directly comparable with those in the consolidated balance sheet because 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 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 2017 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 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 not more than 1 month Due over 5 years $m 7,502 1,085 1,614 1,298 — 3,479 — 26 3 3 — $m 8,409 3,636 2,973 1,796 — — — 4 1,918 1,918 — $m 9,435 4,334 3,047 2,054 — — — — 74 74 — $m 8,132 3,064 2,924 1,935 209 — — — — — — Total $m $m $m $m $m 15,111 13,000 55,347 48,234 165,170 6,132 5,109 2,870 — — — 1,000 170 170 — 137 6,564 4,586 212 — — 1,501 2,371 2,371 — 386 41,090 10,156 2,494 — 914 307 4,077 3,618 459 277 19,051 39,544 102,865 5,328 1,655 — 436 994 32,000 30,162 1,838 30,023 4,570 3,479 1,350 3,832 40,612 38,315 2,297 7,505 10,327 9,509 8,132 15,281 15,371 59,424 80,234 205,782 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 — 6,930 3,152 2,699 882 71 — 126 — — — — 8,043 2,384 3,580 2,066 — — 13 — 500 500 — 21,906 242 13,626 5,940 207 — 91 1,800 1,775 1,775 — 43,764 133 30,519 8,344 1,357 — 908 2,503 7,292 6,881 411 7,475 10,173 11,979 6,930 8,543 23,681 51,056 44,164 154,213 12 36,240 3,885 2,559 — 439 1,029 32,179 30,425 1,754 76,343 18,050 92,934 25,269 6,073 3,196 2,504 6,187 41,967 39,802 2,165 196,180 HSBC Holdings plc Annual Report and Accounts 2017 103 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Contractual maturity of financial liabilities The table below shows, 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). For this reason, balances in the table below do not agree directly with those in our consolidated balance sheet. 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 28 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 loan and other credit-related commitments, and financial guarantees and similar contracts are classified on the basis of the earliest date they can be called. Application of this policy throughout the Group was improved in 2017, and therefore comparative information has been represented. Cash flows payable by HSBC under financial liabilities by remaining contractual maturities (Audited) On demand $m 48,247 1,159,962 20,550 184,361 715 212,797 11 3 48,407 1,675,053 570,132 16,712 2,261,897 76% 40,277 1,079,866 18,134 153,691 1,307 274,283 9 1 45,569 1,613,137 554,801 12,608 2,180,546 78% Due within 3 months Due between 3 and 12 months Due between 1 and 5 years Due after 5 years $m 10,596 153,018 106,236 — 1,249 219 12,624 2,227 18,780 304,949 96,670 4,029 405,648 14% 10,222 145,932 66,801 — 2,265 287 13,118 400 15,844 254,869 84,800 4,647 344,316 12% $m 1,877 44,348 2,270 — 7,117 1,221 21,066 841 3,701 82,441 9,176 10,410 $m 7,814 7,238 1,085 — 39,596 3,170 25,654 7,011 1,994 93,562 7,261 5,856 $m 1,508 675 — — 59,428 1,506 11,092 21,775 1,314 97,298 2,350 1,321 102,027 3% 106,679 4% 100,969 3% 3,284 38,273 2,929 — 5,003 1,129 19,492 1,378 3,050 74,538 8,162 10,301 93,001 3% 5,233 8,676 1,048 — 34,707 2,472 29,487 10,302 1,525 93,450 6,865 8,138 108,453 4% 1,033 559 — — 61,929 1,727 8,089 21,552 843 95,732 1,216 1,378 98,326 3% incorporates, on an undiscounted basis, all cash flows relating to principal and future coupon payments (except for derivatives not treated as hedging derivatives). Undiscounted cash flows payable in relation to hedging derivative liabilities are classified according to their contractual maturities. Derivatives not treated as hedging derivatives are included in the ‘On demand’ time bucket. In addition, loan commitments and financial guarantees and similar contracts are generally not recognised on our balance sheet. The undiscounted cash flows potentially payable under financial guarantees and similar contracts are classified on the basis of the earliest date on which they can be called. 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 2017 Proportion of cash flows payable in period 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 Proportion of cash flows payable in period 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 and to pay its operating expenses. 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 104 HSBC Holdings plc Annual Report and Accounts 2017 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 2017 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 Market risk profile Market risk in 2017 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 Balance Sheet Management Defined benefit pension schemes Additional market risk measures applicable only to the parent company $m — — 2,008 — — — 2,008 — 7,778 9,786 — — 3,841 — — — 3,841 — 7,619 11,460 Page 105 105 106 107 108 108 109 109 109 109 Market risk in 2017 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 78. A summary of our current policies and practices regarding the management of market risk is set out on page 75. Global markets were influenced by positive global growth forecasts and broadly accommodative monetary policies. Although bond yields have started to increase, yield curves remain low and flat by historical standards. Outside of the US and UK, where central banks started to raise interest rates, other key central banks kept reference interest rates unchanged. Realised and implied volatilities also remain low by historical standards, despite various geopolitical tensions that create uncertainty for markets. The impact of these risks on markets, in particular China, where debt levels remain high, did not crystallise into significant market moves or volatility during 2017. $m 2,525 286 — 232 2,113 849 6,005 — — 6,005 2,051 314 — 157 196 1,343 4,061 — — 4,061 $m 46 875 — 1,787 537 200 3,445 — — $m — 16,554 293 13,975 2,852 — 33,674 — — $m — 19,465 781 26,452 20,944 — 67,642 — — 3,445 33,674 67,642 — 960 — 478 598 164 2,200 — — 2,200 105 11,964 592 8,393 4,461 — 25,515 — — — 25,665 592 19,164 20,899 — 66,320 — — 25,515 66,320 Equity markets continued to reach new highs into the year end, in both developed and emerging markets, supported by robust earnings forecasts. The EU and UK have agreed to move to the next phase of the ‘Brexit’ talks, however the ongoing uncertainty regarding the terms of the exit from the EU remains. Trading value at risk (‘VaR’) ended the year higher when compared to the previous year. The trading VaR composition changed during the year, where equity and credit spread trading VaR increased relative to interest rate VaR. The increases in equity and credit spread trading VaR during 2H17 has resulted in these asset classes becoming major contributors to the overall trading VaR, in addition to interest rate risk trading VaR. Non-trading interest rate VaR ended the year lower when compared to the previous year. In 1H17 non-trading interest rate VaR decreased as exposures were managed down and was largely range bound during 2H17. Trading portfolios Value at risk of the trading portfolios Trading VaR predominantly resides within Global Markets where trading VaR was higher at 31 December 2017 compared with 31 December 2016. In 1H17, the trading VaR from the credit spread asset class increased reflecting larger exposures. This was partly offset by a reduction in the interest rate asset class, from modelling enhancements, which led to an improved measure. In 2H17, trading VaR increased from two asset classes: credit spread and equity. The increase in the credit spread trading VaR was driven by increased exposures and changes to the calibration of benchmark curves used for lower rated trading portfolios. The change in equity trading VaR was from fluctuations in dividend and correlation exposures. These increases into year-end in the VaR measures for these asset classes were partially offset by a reduction in the interest rates asset class VaR. HSBC Holdings plc Annual Report and Accounts 2017 105 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk The daily levels of total trading VaR over the last year are set out in the graph below. Daily VaR (trading portfolios), 99% 1 day ($m) 100 80 60 40 20 0 -20 -40 -60 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Trading VAR IR Trading Equity Trading CS Trading Intent FX Trading Diversification The Group trading VaR for the year is shown in the table below. Trading VaR, 99% 1 day50 (Audited) Balance at 31 Dec 2017 Average Maximum Minimum Balance at 31 Dec 2016 Average Maximum Minimum For footnotes, see page 116. Back-testing Foreign exchange (FX) and commodity Interest rate (IR) Equity (EQ) Credit spread (CS) Portfolio diversification51 $m 7.4 10.4 23.0 4.9 8.9 11.1 16.9 5.4 $m 30.8 38.2 67.1 27.2 49.8 42.8 64.2 31.8 $m 32.6 16.7 32.6 9.1 11.8 20.4 32.4 11.8 $m 31.1 15.4 31.8 5.1 5.9 13.5 28.1 5.0 $m (38.2) (32.9) (23.5) (30.3) Total52 $m 63.7 47.8 70.8 36.6 52.8 57.5 91.5 42.1 Non-trading VaR includes the interest rate risk in the banking book transferred to and managed by Balance Sheet Management (‘BSM’) and the non-trading financial instruments held by BSM. The management of interest rate risk in the banking book and the role of BSM are described further in Interest rate risk in the banking book section below. Non-trading VaR excludes the insurance operations which are discussed further on page 111 and the interest rate risk in the banking book arising from HSBC Holdings. In 2017, the Group experienced two back-testing exceptions against hypothetical profit and loss in December: a loss exception, driven by a margin loan; and a profit exception, driven by gains on Japanese yen cross currency swaps, and gains in strategic foreign exchange hedges. There was no evidence of model errors or control failures. The back-testing result excludes exceptions due to changes in fair value adjustments. Non-trading portfolios Value at risk of the non-trading portfolios Non-trading VaR of the Group includes contributions from all global businesses. There is no commodity risk in the non-trading portfolios. The gradual reduction in the non-trading interest rate VaR was due to de-risking the banking book in 2017. 106 HSBC Holdings plc Annual Report and Accounts 2017 The daily levels of total non-trading VaR over the last year are set out in the graph below. Daily VaR (non-trading portfolios), 99% 1 day ($m) 200 180 160 140 120 100 80 60 40 20 0 -20 -40 -60 -80 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Non-Trading VAR IR non-Trading CS non-Trading Intent Diversification 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 2017 Average Maximum Minimum Balance at 31 Dec 2016 Average Maximum Minimum For footnotes, see page 116. 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 53 54 Other strategic investments At 31 Dec For footnotes, see page 116. 2017 $bn 1.0 1.6 1.3 3.9 2016 $bn 1.2 1.5 2.0 4.7 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 $4.7bn to $3.9bn. The decrease in ‘Other strategic investments’ was largely due to the sale of two investments: Visa and First Data. Interest rate (IR) Credit spread (CS) Portfolio diversification51 $m 88.5 119.0 164.1 88.5 157.0 131.6 171.9 100.2 $m 46.7 46.1 71.9 24.5 46.5 52.8 82.8 36.9 $m (38.9) (36.9) (32.1) (32.1) Total52 $m 96.3 128.2 183.8 93.3 171.4 152.2 182.1 123.3 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 176, HSBC’s net trading income in 2017 was $7,719m (2016: $9,452m). Adjustments to trading income such as valuation adjustments do not affect the trading VaR model. For information on the accounting policies applied to financial instruments at fair value, see Note 13 on the Financial Statements. HSBC Holdings plc Annual Report and Accounts 2017 107 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Structural foreign exchange exposures Net interest income sensitivity For our policies and procedures for managing structural foreign exchange exposures, see page 75 of the Risk management section. Structural foreign exchange exposures represent net investments in subsidiaries, branches and associates, the functional currencies of which are currencies other than the US dollar. Exchange differences on structural exposures are recognised in ‘Other comprehensive income’. Net structural foreign exchange exposures Currency of structural exposure Pound sterling1 Hong Kong dollars Chinese renminbi Euros Indian rupees Mexican pesos Canadian dollars Saudi riyals Malaysian ringgit Singapore dollars UAE dirhams Australian dollars Taiwanese dollars Indonesian rupiah Korean won Swiss francs Turkish lira Thai baht Argentine pesos Brazilian real 2017 $m 37,039 33,992 27,968 20,269 4,286 4,270 4,241 3,971 2,461 2,433 2,054 1,892 1,877 1,845 1,423 950 778 766 753 745 2016 $m 27,527 32,472 24,504 17,397 3,901 3,826 3,734 3,690 2,079 1,995 2,073 1,667 1,753 1,439 1,260 2,226 734 736 860 755 Others, each less than $700m At 31 Dec 5,623 159,636 5,728 140,356 1 At 31 December, we maintained forward foreign exchange contracts of $5bn (2016: $5bn) in order to manage our sterling structural foreign exchange exposure. Shareholders’ equity would decrease by $2,659m (2016: $2,247m) if euro and sterling foreign currency exchange rates weakened by 5% relative to the US dollar. Net interest income sensitivity (12 months) (Audited) These disclosures have been enhanced in order to show sensitivity effects above one year. The tables set out the assessed impact to a hypothetical base case projection of our net interest income (‘NII’) (excluding insurance) under the following scenarios: • a series of four quarterly parallel shocks of 25 basis points to the current market-implied path of interest rates across all currencies at the beginning of each quarter from 1 January 2018 (effect over 1 year); • an immediate shock of 25 basis points to the current market- implied path of interest rates across all currencies on 1 January 2018 (effects over 1 year and 5 years); and • an immediate shock of 100 basis points to the current market- implied path of interest rates across all currencies on 1 January 2018 (effects over 1 year and 5 years). The sensitivities shown represent our assessment of the change to a hypothetical base case NII, assuming a static balance sheet and no management actions from BSM. They incorporate the effect of interest rate behaviouralisation, managed rate product pricing assumptions and customer behaviour, for example, prepayment of mortgages or customer migration from non-interest bearing to interest bearing deposit accounts under the specific interest rate scenarios. The scenarios represent interest rate shocks to the current market implied path of rates. The NII sensitivities shown are indicative and based on simplified scenarios. A sequence of four quarterly 25 bps rises would increase projected net interest income for 2018 by $2,178m (2017: $1,709), while a sequence of four quarterly 25bps falls would decrease projected net interest income in 2018 by $2,492, (2017: $2,409). These figures reflect a reassessment of assumptions from those used in 2017. The structural sensitivity arising from the four global businesses, excluding Global Markets, is positive in a rising rate environment and negative in a falling rate environment. Both BSM and Global Markets have NII sensitivity profiles that offset this to some degree. The tables do not include BSM management actions or changes in Global Markets’ net trading income that may further limit the offset. The limitations of this analysis are discussed within the ‘Risk management’ section on page 76. Change in 2018 net interest income arising from a shift in yield curves of: +25 basis points at the beginning of each quarter -25 basis points at the beginning of each quarter Change in 2017 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 US dollar HK dollar Sterling $m $m $m 563 (821) 577 (985) 511 (789) 504 (797) 407 (494) 61 (261) NII sensitivity to an instantaneous change in yield curves (12 months) +25bps parallel -25bps parallel +100bps parallel -100bps parallel US dollar HK dollar Sterling Currency $m 227 (287) 845 $m 179 (305) 711 (1,444) (1,425) $m 147 (181) 600 (631) Euro $m 249 17 153 9 Euro $m 50 8 412 31 Other $m Total $m 448 (405) 2,178 (2,492) 414 (372) 1,709 (2,406) Other $m 203 (160) 731 (732) Total $m 806 (925) 3,299 (4,201) The net interest income sensitivities arising from the scenarios presented in the tables above are not directly comparable. This is due to timing differences relating to interest rate changes and the repricing of assets and liabilities. 108 HSBC Holdings plc Annual Report and Accounts 2017 NII sensitivity to an instantaneous change in yield curves (5 years) +25bps parallel -25bps parallel +100bps parallel -100bps parallel 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 using the portfolio’s stressed VaR, with a 99% confidence level and an assumed holding period of one quarter. At December 2017, the stressed VaR of the portfolio was $2.6bn (2016: $3.2bn). We monitor the sensitivity of reported cash flow hedging reserves to interest rate movements on a monthly basis by assessing the Year 1 $m 806 (925) 3,299 (4,201) Year 2 $m 1,153 (872) 4,463 (4,538) Year 3 $m 1,326 (1,154) 5,105 (5,102) Year 4 $m 1,439 (1,271) 5,472 (5,498) Year 5 $m 1,507 (1,381) 5,759 (5,813) Total $m 6,231 (5,603) 24,098 (25,152) 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 2017 +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 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 Third-party assets in Balance Sheet Management For our BSM governance framework, see page 76 of ‘Risk management’. Third-party assets in BSM increased by 1% during 2017. Cash and balances at central banks increased by $52bn, predominantly in Europe as a result of Financial investment maturities and disposals. 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 Maximum impact $m (839) (0.44)% 860 0.45% (1,173) (0.7)% 1,145 0.7% Minimum impact $m (684) (0.36)% 720 0.38% (1,051) (0.60)% 1,080 0.60% $m (684) (0.36)% 720 0.38% (1,051) (0.6)% 1,080 0.6% Financial investments decreased by $50bn, predominantly in Europe, along with a decrease in Asia, where funds were deployed into other business lines. 2017 $m 161,715 637 36,047 3,202 38,842 309,908 4,648 554,999 2016 $m 110,052 414 38,188 2,564 35,143 360,315 4,839 551,515 Defined benefit pension schemes 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 80. Additional market risk measures applicable only to the parent company HSBC Holdings uses VaR to monitor and manage foreign exchange risk. In order to manage interest rate risk, HSBC Holdings uses the project sensitivity of its net interest income to future changes in yield curves and the interest rate gap repricing tables. HSBC Holdings plc Annual Report and Accounts 2017 109 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Foreign exchange risk Total foreign exchange VaR arising within HSBC Holdings in 2017 was as follows. HSBC Holdings – foreign exchange VaR At 31 Dec Average Minimum Maximum 2017 $m 78.9 86.1 74.9 101.2 2016 $m 32.1 44.4 32.1 58.2 The foreign exchange risk 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, and from structural foreign exchange hedges. Changes in the carrying amount of these loans due to foreign exchange rate differences, and changes in the fair value of foreign exchange hedges are taken directly to HSBC Holdings’ income statement. 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 at the beginning of each quarter during the 12 months from 1 January 2018. Assuming no management actions, under the scenarios outlined above, base case NII for the next five years would increase by $981m (2017: increase of $746m) under rising rates, and decrease by $904m (2017: decrease of $723m) under falling rates. Sensitivity of HSBC Holdings’ net interest income to interest rate movements Change in projected net interest income as at 31 Dec arising from a shift in yield curves 2018 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 2017 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 NII sensitivity to an instantaneous change in yield curves (5 years) US dollar Sterling $m $m Euro $m Total $m 86 362 365 (86) (362) (365) 84 299 304 (84) (299) (304) 9 39 41 (7) (36) (41) 6 20 20 (4) (13) (19) (13) 41 52 24 7 (38) — 6 8 — — (1) 82 442 458 (69) (391) (444) 90 325 332 (88) (312) (324) Total $m 244 (236) 973 (860) +25bps parallel -25bps parallel +100bps parallel -100bps parallel For footnote, see page 116. Year 1 Year 2 Year 3 Year 4 Year 5 $m 34 (26) 135 (97) $m 52 (47) 208 (168) $m 52 (57) 210 (189) $m 53 (53) 210 (201) $m 53 (53) 210 (205) 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. The sensitivities represent our assessment of the change to a hypothetical base case based on a static balance sheet assumption and do not take into account the effect of actions that could be taken to mitigate this interest rate risk. Interest rate repricing gap table The interest rate risk on the fixed-rate securities issued by HSBC Holdings is not included within the Group VaR but is managed on a repricing gap basis. The interest rate repricing gap table below analyses the full-term structure of interest rate mismatches within HSBC Holdings’ balance sheet where debt issuances are reflected based on either the next reprice date if floating rate or the maturity/call date, whichever is first, if fixed rate. 110 HSBC Holdings plc Annual Report and Accounts 2017 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 2017 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 2016 1 Cumulative interest rate gap 1 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. Responsibility for minimising operational risk lies with HSBC’s employees. They are required to manage the operational risks of the business and operational activities for which they are responsible. A summary of our current policies and practices regarding the management of operational risk is set out on page 77. Operational risk exposures in 2017 In 2017 we continued our ongoing work to strengthen those controls that manage our most material risks. Among other measures, we: • further developed controls to help ensure that we know our customers, ask the right questions, monitor transactions and escalate concerns to detect, prevent and deter financial crime risk; • implemented a number of initiatives to raise our standards in relation to the conduct of our business and other regulatory compliance-related initiatives, as described on page 77 of the ‘Regulatory compliance risk management’ section; From over 1 to 5 years From over 5 to 10 years More than 10 years Non-interest bearing Total $m 1,985 2,388 88,571 4,264 92,930 1,596 Up to 1 year $m 1,985 — 63,237 2,375 4,866 — 191,734 72,463 $m — — 6,027 — 2,640 — 8,667 $m — — $m — — 12,521 3,351 — — — — — 12,521 3,351 — — — (12,895) (10,175) (4,453) — — — (8,433) (9,017) (14,517) (3,351) (2,571) (30,890) (3,082) (34,258) (1,269) (15,877) (103,787) (191,734) 247 2,148 77,421 3,590 95,850 1,542 180,798 (2,157) (30,113) (5,025) (21,805) (1,651) (15,189) (104,858) (180,798) — (2,000) (8,899) (35,591) 14,171 (8,899) 1,286 — (9,713) (1,498) (19,015) 7,705 (7,959) (6,673) — (1,918) (7,450) (17,801) (41,199) 13,463 13,463 247 — 72,288 2,675 4,751 — 79,961 (105) (1,109) — (4,199) — — (7,450) (12,863) (57,089) 10,009 10,009 — (1,798) (6,047) (29,757) 17,812 (3,278) 10,185 — — 279 731 2,445 105 3,560 — — 405 8 — — 413 (7,344) (12,588) — — (2,997) (11,708) — (3,267) (3,500) (17,108) 13,608 60 10,069 — (2,000) (7,502) (33,798) 26,296 (7,089) 2,980 — — — — — — — (6,422) — (3,916) — (9,445) — (19,783) 13,441 (6,342) (3,362) $m — 2,388 3,435 1,889 85,424 1,596 94,732 (2,571) (3,367) (3,082) 1,060 (1,269) (448) (79,893) (89,570) 1,511 6,673 — — 2,148 4,449 176 88,654 1,437 96,864 (2,052) (2,650) (5,025) 1,015 (1,651) (477) (86,406) (97,246) 3,744 3,362 — • 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 our 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 63 and in ‘Risk management’ from pages 66 to 81. Operational risk losses in 2017 Operational risk losses in 2017 are lower than in 2016, reflecting a reduction in losses incurred relating to large legacy conduct- related events. Provisions related to the civil money penalty order associated with the Federal Reserve Board agreed in September 2017 and the deferred prosecution agreement with the US Department of Justice in January 2018, in connection with investigations into HSBC’s historical foreign exchange activities, were recognised in prior periods. For further details see Note 34 on the Financial Statements and on conduct-related costs included in significant items on page 61. HSBC Holdings plc Annual Report and Accounts 2017 111 Investments in subsidiaries and equity have been allocated based on call dates for any callable bonds. The prior year figures have been amended to reflect this. Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Insurance manufacturing operations risk profile Insurance manufacturing operations risk in 2017 HSBC’s bancassurance model Measurement Key risk types – Market risk – Credit risk – Liquidity risk – Insurance risk Page 112 112 112 114 114 115 115 116 Insurance manufacturing operations risk in 2017 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 78. 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. For the products we manufacture, the majority of sales are of savings, universal life and credit and term 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 a life insurance manufacturing associate in 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 worldwide, predominantly by RBWM, CMB and GPB through our branches and direct channels. Measurement (Audited) The risk profile of our insurance manufacturing businesses is measured using an economic capital approach. Assets and liabilities are measured on a market value basis, and a capital requirement is defined to ensure that there is a less than one- in-200 chance of insolvency over a one-year time horizon, given the risks to which the businesses are exposed. The methodology for the economic capital calculation is largely aligned to the pan- European Solvency II insurance capital regulations. The economic capital coverage ratio (economic net asset value divided by the economic capital requirement) is a key risk appetite measure. The business has a current appetite to remain above 140% with a tolerance of 110%. In addition to economic capital, the regulatory solvency ratio is also a metric used to manage risk appetite on an entity basis. The following tables show the composition of assets and liabilities by contract type and by geographical region. A portfolio of business in our Maltese insurance operations was reported as held for sale at 31 December 2017. 112 HSBC Holdings plc Annual Report and Accounts 2017 Balance sheet of insurance manufacturing subsidiaries by type of contract55 (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 2017 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 For footnotes, see page 116. Footnotes 57 57 58 59 60 57 57 58 59 60 With DPF $m 65,112 — 15,533 286 29,302 15,280 4,711 1,108 — 1,975 68,195 — 67,137 14 — 67,151 — 67,151 57,004 — 12,134 212 25,867 14,359 4,432 498 — 1,716 59,218 — 58,800 13 — 58,813 — 58,813 Unit-linked $m 9,081 — 8,814 — — — 267 274 — 2 9,357 1,750 7,548 6 — 9,304 — 9,304 8,877 — 8,592 2 — — 283 322 — 5 9,204 2,197 6,949 3 — 9,149 — 9,149 Other contracts64 $m 14,849 — 2,951 13 6,396 4,836 653 1,154 — 164 16,167 3,885 10,982 9 — 14,876 — 14,876 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 Shareholder assets and liabilities $m 6,662 — 1,259 41 3,331 1,877 154 — 6,610 1,126 Total $m 95,704 — 28,557 340 39,029 21,993 5,785 2,536 6,610 3,267 14,398 108,117 — — 1,230 3,325 4,555 12,231 16,786 5,141 — 684 46 2,919 1,355 137 — 6,502 525 12,168 — — 1,166 1,805 2,971 10,561 13,532 5,635 85,667 1,259 3,325 95,886 12,231 108,117 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 HSBC Holdings plc Annual Report and Accounts 2017 113 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk Balance sheet of insurance manufacturing subsidiaries by geographical region55, 61 (Audited) Footnotes 57 57 58 59 60 57 57 58 59 60 Europe $m 30,231 — 12,430 169 — 15,144 2,488 469 773 1,666 33,139 739 28,416 217 2,043 31,415 1,724 33,139 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 Asia $m 63,973 — 15,633 171 38,506 6,393 3,270 2,063 5,709 1,577 73,322 4,896 56,047 1,033 1,209 63,185 10,137 73,322 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 Latin America $m 1,500 — 494 — 523 456 27 4 128 24 1,656 — 1,204 9 73 1,286 370 1,656 1,434 2 510 — 491 373 58 7 109 53 1,603 — 1,170 32 50 1,252 351 1,603 Total $m 95,704 — 28,557 340 39,029 21,993 5,785 2,536 6,610 3,267 108,117 5,635 85,667 1,259 3,325 95,886 12,231 108,117 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 DPF products expose HSBC to the risk of variation in asset returns, which will impact our participation in the investment performance. In addition, in some scenarios the asset returns can become insufficient to cover the policyholders’ financial guarantees, in which case the shortfall has to be met by HSBC. 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 following table 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 increased to $696m (2016: $625m) primarily due to the impact of modelling changes. 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 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 2017 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 For footnotes, see page 116. Key risk types The key risks for the insurance operations are market risks (in particular interest rate and equity) and credit risks, followed by insurance underwriting risk and operational risks. Liquidity risk, while significant for the bank, is minor for our insurance operations. Market risk (Audited) Description and exposure Market risk is the risk of changes in market factors affecting HSBC’s capital or profit. Market factors include interest rates, equity and growth assets and foreign exchange rates. Our exposure varies depending on the type of contract issued. Our most significant life insurance products are contracts with discretionary participating features (‘DPF’) issued in France and Hong Kong. These products typically include some form of capital guarantee or guaranteed return on the sums invested by the policyholders, to which discretionary bonuses are added if allowed by the overall performance of the funds. These funds are primarily invested in bonds, with a proportion allocated to other asset classes to provide customers with the potential for enhanced returns. 114 HSBC Holdings plc Annual Report and Accounts 2017 Financial return guarantees55 (Audited) Capital Nominal annual return Nominal annual return Nominal annual return At 31 Dec For footnotes, see page 116. Sensitivities Investment returns implied by guarantee % 0.0 0.1–2.0 2.1–4.0 4.1–5.0 Footnote 62 2017 Long-term investment returns on relevant portfolios % 0.0–3.2 3.2–3.7 3.2–4.4 3.2–4.1 Cost of guarantees Investment returns implied by guarantee $m 103 64 459 70 696 % 0.0 0.1–2.0 2.1–4.0 4.1–5.0 2016 Long-term investment returns on relevant portfolios % 0.0–3.0 3.7–3.8 3.0–4.4 3.0–4.1 Cost of guarantees $m 59 64 426 76 625 Changes in financial market factors, from the economic assumptions in place at the start of the year, had a positive impact on reported profit before tax of $296m (2016: $386m 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. 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 116. Credit risk (Audited) Footnote 63 2017 2016 Effect on profit after tax Effect on total equity Effect on profit after tax Effect on total equity $m 42 (140) 223 (225) 24 (24) $m (583) 617 237 (239) 24 (24) $m 63 (182) 189 (191) 19 (19) $m (494) 490 190 (191) 19 (19) Liquidity risk (Audited) Description and exposure Description and exposure 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: • risk associated with credit spread volatility and default by debt security counterparties after investing premiums to generate a return for policyholders and shareholders; and • risk of default by reinsurance counterparties and non- reimbursement for claims made after ceding insurance risk. The amounts outstanding at the balance sheet date in respect of these items are shown in the table on page 113. The credit quality of the reinsurers’ share of liabilities under insurance contracts is assessed as ‘satisfactory’ or higher (as defined on page 72), with 100% of the exposure being neither past due nor impaired (2016: 100%). Credit risk on assets supporting unit-linked liabilities is predominantly borne by the policyholder; therefore, our exposure is primarily related to liabilities under non-linked insurance and investment contracts and shareholders’ funds. The credit quality of insurance financial assets is included in the table on page 84. 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 2017. 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 2017 remained comparable with 2016. The remaining contractual maturity of investment contract liabilities is included in Note 28. HSBC Holdings plc Annual Report and Accounts 2017 115 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Risk | Capital Expected maturity of insurance contract liabilities55 (Audited) Unit-linked With DPF and Other contracts At 31 Dec 2017 Unit-linked With DPF and Other contracts At 31 Dec 2016 For footnotes, see page 116. 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 113 and 114 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 2016. Sensitivities (Audited) The following table 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. 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 2017 $m 2016 $m (77) 82 (93) 106 (92) 91 (71) 75 (80) 93 (89) 87 116 HSBC Holdings plc Annual Report and Accounts 2017 Within 1 year 1-5 years 5-15 years Over 15 years Expected cash flows (undiscounted) $m 969 6,916 7,885 630 5,582 6,212 $m 3,041 26,453 29,494 2,468 23,136 25,604 $m 4,695 43,784 48,479 5,101 40,621 45,722 $m 6,814 45,334 52,148 9,513 40,447 49,960 Total $m 15,519 122,487 138,006 17,712 109,786 127,498 Footnotes to Risk 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 2016 includes loan impairment charges from the operations in Brazil that we sold on 1 July 2016. 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. 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. 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. 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. Trading portfolios comprise positions arising from the market-making and warehousing of customer-derived positions. 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. The total VaR is non-additive across risk types due to diversification effects. 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. Investments held to facilitate ongoing business include holdings in government- sponsored enterprises and local stock exchanges. Does not include associated insurance companies SABB Takaful Company and Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited. ‘Other Contracts’ includes term insurance, credit life insurance, universal life insurance and investment contracts not included in the ‘Unit-linked’ or ‘With DPF’ columns. Financial investments held to maturity (‘HTM’) and available for sale (‘AFS’). Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities. Present value of in-force long-term insurance business. ‘Deferred tax’ includes the deferred tax liabilities arising on recognition of PVIF. HSBC has no insurance manufacturing subsidiaries in Middle East and North Africa or North America. 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. For 2016, 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%. Capital Capital overview Capital management Capital Risk-weighted assets Leverage ratio Capital overview Capital ratios CRD IV transitional Common equity tier 1 ratio Tier 1 ratio Total capital ratio CRD IV end point Common equity tier 1 ratio Tier 1 ratio Total capital ratio Page 117 117 118 119 120 At 31 Dec 31 Dec 2017 % 14.5 17.3 20.9 14.5 16.4 18.3 2016 % 13.6 16.1 20.1 13.6 14.9 16.8 Total regulatory capital and risk-weighted assets CRD IV transitional Common equity tier 1 capital Additional tier 1 capital Tier 2 capital Total regulatory capital Risk-weighted assets CRD IV end point Common equity tier 1 capital Additional tier 1 capital Tier 2 capital Total regulatory capital Risk-weighted assets RWAs by risk types Credit risk Counterparty credit risk Market risk Operational risk At 31 Dec 2017 At 31 Dec 31 Dec 2017 $m 2016 $m 126,144 116,552 24,810 31,429 182,383 871,337 21,470 34,336 172,358 857,181 126,144 115,984 16,531 16,413 159,088 871,337 11,351 16,289 143,624 855,762 RWAs $bn 685.2 54.5 38.9 92.7 871.3 Capital required 1 $bn 54.8 4.4 3.1 7.4 69.7 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 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. We aim 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 ICAAP is an assessment of the bank’s capital position, outlining both 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 capital. 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 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 the plan. The responsibility for global capital allocation principles 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 in order to meet their regulatory and economic capital needs. We manage business returns by using a return on risk-weighted assets (‘RoRWA’) measure and a return on tangible equity (‘RoTE’) measure. Risks to capital Outside the stress testing framework, other risks may be identified that have the potential to affect our RWAs and/or capital position. The downside or upside scenarios are assessed against our capital management objectives and mitigating actions are assigned as necessary. There are a number of regulatory changes on the horizon. The impacts of these are included in the Annual Operating Plan where the rules are sufficiently certain to estimate a reliable impact. Foremost among these changes are the final reforms to the Basel III package, which were published in December 2017. Due to the number of national discretions, the recalibration of the market risk framework and the need to transpose the requirements into national law, it remains too early to assess reliably the impact. Stress testing In addition to annual internal stress tests, 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 Prudential Regulatory Authority (‘PRA’), the Federal Reserve Board (‘FRB’), the European Banking Authority (‘EBA’), the European Central Bank (‘ECB’) and the Hong Kong Monetary Authority (‘HKMA’), as well as stress tests undertaken in other jurisdictions. We take into account the results of regulatory stress testing and our internal stress tests when assessing our internal capital requirements. The outcome of stress testing exercises carried out by the PRA also feeds into a PRA buffer under Pillar 2 requirements, where required. HSBC Holdings plc Annual Report and Accounts 2017 117 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Capital 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 Capital instruments and the related share premium accounts – ordinary shares Retained earnings Accumulated other comprehensive income (and other reserves) Minority interests (amount allowed in consolidated CET1) Independently reviewed interim net profits net of any foreseeable charge or dividend Common equity tier 1 capital before regulatory adjustments Common equity tier 1 capital: regulatory adjustments Additional value adjustments Intangible assets (net of related deferred tax liability) Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability) Fair value reserves related to gains or losses on cash flow hedges Negative amounts resulting from the calculation of expected loss amounts Gains or losses on liabilities at fair value resulting from changes in own credit standing Defined-benefit pension fund assets Direct and indirect holdings of own CET1 instruments 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) Total regulatory adjustments to common equity tier 1 Common equity tier 1 capital Additional tier 1 (‘AT1’) capital: instruments Capital instruments and the related share premium accounts – classified as equity under IFRSs Amount of qualifying items and the related share premium accounts subject to phase out from AT1 Qualifying tier 1 capital included in consolidated AT1 capital (including minority interests not included in CET1) issued by subsidiaries and held by third parties – of which: instruments issued by subsidiaries subject to phase out Additional tier 1 capital before regulatory adjustments 1 2 3 5 5a 6 7 8 10 11 12 14 15 16 19 28 29 30 31 33 34 35 36 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 44 45 46 47 48 49 51 52 55 57 58 59 Total regulatory adjustments to additional tier 1 capital Additional tier 1 capital Tier 1 capital (T1 = CET1 + AT1) Tier 2 capital: instruments and provisions Capital instruments and the related share premium accounts Amount of qualifying items and the related share premium accounts subject to phase out from T2 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 – of which: instruments issued by subsidiaries subject to phase out Tier 2 capital before regulatory adjustments Tier 2 capital: regulatory adjustments Direct and indirect holdings of own T2 instruments 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) Total regulatory adjustments to tier 2 capital Tier 2 capital Total capital (TC = T1 + T2) * The references identify the lines prescribed in the EBA template, which are applicable and where there is a value. 1 In the comparative period, dividend paid has been reallocated from row 2 to row 5a. 118 HSBC Holdings plc Annual Report and Accounts 2017 Footnotes 1 1 At 31 Dec 2017 $m 18,932 18,932 124,679 9,433 4,905 608 31 Dec 2016 $m 21,310 21,310 129,552 560 3,878 (6,009) 158,557 149,291 (1,146) (16,872) (1,358) (15,037) (1,181) 208 (2,820) 3,731 (6,740) (40) (7,553) (32,413) 126,144 16,399 16,399 6,622 1,901 1,374 24,922 (60) (52) (52) (112) (1,696) (52) (4,025) 1,052 (3,680) (1,573) (6,370) (32,739) 116,552 11,259 11,259 7,946 2,419 1,522 21,624 (60) (94) (94) (154) 24,810 150,954 21,470 138,022 16,880 4,746 10,306 10,236 31,932 (40) (463) (503) 16,732 5,695 12,323 12,283 34,750 (40) (374) (414) 31,429 182,383 34,336 172,358 CET1 capital increased during the year by $9.5bn, due to: • $3.7bn of capital generation through profits, net of dividends The following comments describe RWA movements in 2017, excluding foreign currency translation differences. and scrip; RWA initiatives • $6.3bn of favourable foreign currency translation differences; • regulatory netting of $1.5bn; • a decrease of $1.3bn in the deduction for excess expected loss; and • an increase of $1.0bn in the value of minority interests allowed in CET1. These increases were partly offset by: • the $3.0bn share buy-back; and • a $1.2bn decrease as a result of the change in US tax legislation; this change also reduces RWAs by $3.1bn. Risk-weighted assets RWAs RWAs increased by $14.1bn during the year, including an increase of $27.7bn due to foreign currency translation differences. The resulting decrease of $13.6bn (excluding foreign currency translation differences) was primarily due to RWA initiatives of $70.8bn and asset quality improvement of $4.6bn, less increases from asset size growth of $48.4bn, changes in methodology and policy of $8.2bn and model updates of $6.2bn. RWAs by global business Continued reduction in legacy credit and US run-off portfolios reduced RWAs by $21.3bn. Further savings mainly came from process improvements $13.7bn, exposure reductions $9.9bn, trade actions $9.7bn and refined calculations $8.3bn. Asset size Asset size movements principally represent $40.4bn of lending growth, mainly in GB&M and CMB in Asia and Europe, and new transactions and movements in market parameters increasing counterparty credit risk and market risk by $9.0bn. Methodology and policy Methodology and policy movements increased credit risk RWAs by $11.3bn, mainly as a result of changes to: • the treatment of non-performing exposures of $5.0bn; • the netting of current accounts of $2.1bn; • non-recourse purchased receivables of $1.6bn; and • risk-weight floors for HK residential mortgages of $0.6bn. Market risk RWAs decreased by $3.7bn as a result of increased diversification following regulatory approval to consolidate additional companies. Credit risk Counterparty credit risk Market risk Operational risk At 31 Dec 2017 Credit risk Counterparty credit risk Market risk Operational risk At 31 Dec 2016 RWAs by geographical region Credit risk Counterparty credit risk Market risk1 Operational risk At 31 Dec 2017 Credit risk Counterparty credit risk Market risk1 Operational risk At 31 Dec 2016 RBWM $bn 94.2 — — 27.3 121.5 84.6 — — 30.5 115.1 Europe $bn 225.9 27.8 29.0 28.9 311.6 205.8 30.9 30.8 30.9 298.4 CMB $bn 277.3 — — 23.7 301.0 250.6 — — 25.3 275.9 Asia $bn 284.2 13.0 23.5 37.1 357.8 260.0 16.1 21.3 36.6 334.0 GB&M $bn 180.2 52.4 35.9 30.8 299.3 170.8 59.1 38.5 32.0 300.4 GPB $bn 13.0 0.2 — 2.8 16.0 12.2 0.2 — 2.9 15.3 Corporate Centre $bn 120.5 1.9 3.0 8.1 133.5 137.5 2.7 3.0 7.3 150.5 MENA North America Latin America $bn 47.7 1.1 3.3 7.1 59.2 49.0 1.2 1.4 7.5 59.1 $bn 101.2 10.9 7.1 12.1 131.3 118.5 12.6 6.8 12.8 150.7 $bn 26.2 1.7 1.0 7.5 36.4 22.4 1.2 0.5 10.2 34.3 Total $bn 685.2 54.5 38.9 92.7 871.3 655.7 62.0 41.5 98.0 857.2 Total $bn 685.2 54.5 38.9 92.7 871.3 655.7 62.0 41.5 98.0 857.2 1 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group. HSBC Holdings plc Annual Report and Accounts 2017 119 Strategic ReportCorporate Governance Financial Statements Shareholder Information Financial Review Report of the Directors | Capital | Corporate Governance RWA movement by global business by key driver RWAs at 1 Jan 2017 RWA initiatives Asset size Asset quality Model updates – portfolios moving onto IRB approach – new/updated models Methodology and policy – internal updates – external updates – regulatory Acquisitions and disposals Foreign exchange movements Total RWA movement RWAs at 31 Dec 2017 RWA movement by geographical region by key driver RWAs at 1 Jan 2017 RWA initiatives Asset size Asset quality Model updates – portfolios moving onto IRB approach – new/updated models Methodology and policy – internal updates – external updates – regulatory Acquisitions and disposals Foreign exchange movements Total RWA movement RWAs at 31 Dec 2017 Leverage ratio Ref* 20 21 Tier 1 capital Total leverage ratio exposure 22 Leverage ratio Credit risk, counterparty credit risk and operational risk RBWM $bn 115.1 (0.4) 4.4 0.2 1.1 0.2 0.9 (1.8) (2.5) 0.7 (0.1) 3.0 6.4 CMB $bn 275.9 (13.8) 16.7 1.5 5.0 — 5.0 3.6 3.6 — (0.4) 12.5 25.1 GB&M $bn 261.9 (27.6) 21.9 (6.1) 0.3 — 0.3 4.8 4.8 — — 8.2 1.5 GPB $bn 15.3 (0.2) 0.8 0.2 (0.1) (0.1) — (0.5) (0.5) — — 0.5 0.7 121.5 301.0 263.4 16.0 Corporate Centre Market risk $bn 147.5 (24.8) (0.6) (0.4) — — — 5.8 5.8 — (0.5) 3.5 (17.0) 130.5 $bn 41.5 (4.0) 5.2 — (0.1) (0.1) — (3.7) (3.7) — — — (2.6) 38.9 Credit risk, counterparty credit risk and operational risk Europe $bn 267.6 (26.6) 11.1 1.4 6.4 — 6.4 3.7 3.6 0.1 — 19.0 15.0 282.6 Asia $bn 312.7 (14.0) 27.8 (5.7) 0.1 0.1 — 6.2 5.7 0.5 — 7.2 21.6 334.3 MENA North America Latin America Market risk $bn 57.7 (1.4) (0.2) 1.1 — — — (0.1) (0.1) — (1.0) (0.2) (1.8) 55.9 $bn 143.9 (22.2) 1.0 (2.3) (0.2) — (0.2) 2.1 2.0 0.1 — 1.9 (19.7) 124.2 $bn 33.8 (2.6) 3.5 0.9 — — — — — — — (0.2) 1.6 35.4 $bn 41.5 (4.0) 5.2 — (0.1) (0.1) — (3.7) (3.7) — — — (2.6) 38.9 At 31 Dec 2017 $bn 142.7 2,557.1 % 5.6 Total RWAs $bn 857.2 (70.8) 48.4 (4.6) 6.2 — 6.2 8.2 7.5 0.7 (1.0) 27.7 14.1 871.3 Total RWAs $bn 857.2 (70.8) 48.4 (4.6) 6.2 — 6.2 8.2 7.5 0.7 (1.0) 27.7 14.1 871.3 31 Dec 2016 $bn 127.3 2,354.4 % 5.4 EU-23 Choice of transitional arrangements for the definition of the capital measure Fully phased-in Fully phased-in UK leverage ratio exposure – quarterly average UK leverage ratio – quarterly average UK leverage ratio – quarter end * The references identify the lines prescribed in the EBA template. Our leverage ratio calculated in accordance with CRD IV was 5.6% at 31 December 2017, up from 5.4% at 31 December 2016. Growth in tier 1 capital was partly offset by a rise in exposure, primarily due to growth in customer advances, balances at central banks and trading assets. In October 2017, following the FPC recommendation, the PRA increased the minimum requirement for the UK leverage ratio from 3% to 3.25%, following a change in its guidance to exclude central bank balances from the exposure measure. At 31 December 2017, our UK minimum leverage ratio requirement of 3.25% was supplemented by an additional leverage ratio buffer of 0.4% and a countercyclical leverage ratio 120 HSBC Holdings plc Annual Report and Accounts 2017 2,351.4 % 6.1 6.1 n/a % n/a 5.7 buffer of 0.1%. These additional buffers translate into capital values of $10.3bn and $1.8bn respectively. 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. Our Pillar 3 Disclosures at December 2017 is published on our website, www.hsbc.com, under Investor Relations. Corporate Governance Report Financial Crime Risk Management Meeting, chaired by the Group Head of Financial Crime Risk). The Board Operation of the Board Director and Group Managing Director biographies Board of Directors Board committees Internal control Internal audit Going concern and viability Share capital and other disclosures Employees Statement of compliance Page Powers of the Board 121 121 122 126 127 133 134 134 135 138 140 In exercising its duty to promote the success of the Company, 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’). However, certain matters, including the review and approval of annual operating plans, risk appetite, performance targets, 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 to the Board for its approval. The Board Operation of 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. Group Chairman Douglas Flint retired as Group Chairman on 30 September 2017. Mark Tucker was appointed to the Board as an independent non- executive Director on 1 September 2017. He became non- executive Group Chairman on 1 October 2017. Executive Directors The Group Chief Executive, the Group Finance Director and the Group Chief Risk Officer are HSBC employees. Independent non-executive Directors The Board comprises a majority of independent non-executive Directors. Their role is to challenge and scrutinise the performance of management and to 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 and 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. The non- executive Group Chairman was considered to be independent upon appointment. Board and executive responsibilities 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. Jonathan Symonds was appointed as Senior Independent Director (‘SID’) in April 2017 following the retirement of Rachel Lomax. The roles of the Group Chairman, Group Chief Executive and SID are set out in writing and are available on the website at www.hsbc.com/about-hsbc/corporate-governance/board- committees. The Board delegates day-to-day management of the business and implementation of strategy to the Group Chief Executive. To assist the Group Chief Executive in his day-to-day management of the Group, as delegated by the Board, he is supported with recommendations and advice from the Group Management Board (‘GMB’), an executive forum which he chairs. There are special meetings of the GMB that provide oversight of risk matters (the Risk Management Meeting (‘RMM’), chaired by the Group Chief Risk Officer) and of financial crime risk (the 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 2017, 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’), the 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 support the maintenance of a strong risk management framework. 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. The Group Chairman meets with the independent non-executive Directors without the executive Directors in attendance after each Board meeting and otherwise, as necessary. 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. Board performance evaluation The Board is committed to regular, independent evaluation of its own effectiveness and that of its committees. Following on from the review of the Board undertaken by JCA Group in 2016, the actions identified and agreed were addressed during 2017. These actions included a stronger focus for the Board on individual business unit strategy and performance, as well as opportunities to address particular business themes, such as digital and IT innovation. The actions that have not already been closed out from this review form part of an ongoing assessment of the Group's governance framework being led by the Group Chairman. Director performance evaluation For non-executive Directors, individual performance evaluation is undertaken by the Group Chairman. In 2017, this involved a discussion about each Director’s individual contribution, their individual training and development needs, and the time commitment that is required to continue to deliver the role effectively. 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 HSBC Holdings plc Annual Report and Accounts 2017 121 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the Directors | Corporate Governance each year, as set out in the Directors' Remuneration Report contained in this Annual Report. The Group Chairman’s performance is evaluated by the non- executive Directors, led by the SID. Non-executive Group Chairman Mark E Tucker, 60 Non-executive Group Chairman Appointed to the Board: September 2017 Group Chairman since October 2017 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. Iain is also an Independent Member of the Court of the University of Aberdeen. Marc Moses, 60 Group Chief Risk Officer Appointed to the Board: January 2014 Chairman of the Nomination Committee Skills and experience: Mark has extensive experience in the financial services industry in Asia and the UK. Most recently he was Group Chief Executive and President of AIA Group Limited (‘AIA’). Before joining AIA, Mark was Group Chief Executive of Prudential plc and the founding Chief Executive of Prudential Corporation Asia Limited. Mark also previously served as a non- executive director of the Court of The Bank of England, as an independent non-executive director of the Goldman Sachs Group and as Group Finance Director of HBOS plc. Current appointments include: Serves on the Asia Business Council and the Advisory Board of the Asia Global Institute. Executive Directors Stuart Gulliver, 58 Group Chief Executive Appointed to the Board: May 2008 Group Chief Executive since January 2011 Retiring from Board: 21 February 2018 Skills and experience: Stuart has more than 37 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, 56 Group Finance Director Appointed to the Board: December 2010 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 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 122 HSBC Holdings plc Annual Report and Accounts 2017 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 Price Waterhouse. Independent non-executive Directors Phillip Ameen, 69 Independent non-executive Director Appointed to the Board: January 2015 Member of the Group Audit Committee. Skills and experience: Phillip has extensive financial and accounting experience. He served as Vice President, Comptroller, and Principal Accounting Officer of General Electric. Prior to that, 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. 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, 51 Independent non-executive Director Appointed to the Board: March 2014 Member of the Group Audit Committee and the Financial System Vulnerabilities Committee. Skills and experience: Kathleen has extensive financial regulatory policy experience. She is a former Commissioner of the US Securities and Exchange Commission, 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. Protection of National Infrastructure, and attended the National Security Council. Current appointments include: Senior adviser to Patomak Global Partners and to a number of public bodies in the US, and a member of the Board of Trustees of the Financial Accounting Foundation. Current appointments include: A non-executive director of Ark Data Centres and an adviser to various cybersecurity and technology companies. Laura Cha, GBM, 68 Independent non-executive Director Appointed to the Board: March 2011 Joachim Faber, 67 Independent non-executive Director Appointed to the Board: March 2012 Chairman of the Philanthropic & Community Investment Oversight Committee and 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; and Tata Consultancy Services Limited. She also served as 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, 63 Independent non-executive Director Appointed to the Board: March 2016 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 a former 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. Irene Lee, 64 Independent non-executive Director Appointed to the Board: July 2015 Member of the Group Remuneration Committee Skills and experience: Henri has more than 25 years’ international experience in the financial services industry. He joined AXA in 1989 holding a number of senior roles, ultimately as Chairman and Chief Executive Officer of AXA SA until 1 September 2016. Current appointments include: Chairman of Europe and Special Advisor of General Atlantic, Chairman of Institut Montaigne, a French think-tank; the lead independent director of Nestlé S.A. and a non-executive director of the French National Foundation for Political Science. Lord Evans of Weardale, 60 Independent non-executive Director Appointed to the Board: August 2013 Skills and experience: Irene has more than 40 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 and CLP Holdings Limited. John Lipsky, 71 Independent non-executive Director Appointed to the Board: March 2012 Chairman of the Financial System Vulnerabilities Committee, and member of the Conduct & Values Committee and the Philanthropic & Community Investment Oversight Committee. Skills and experience: Jonathan has 30 years of experience in national security policy and operations. He was formerly Director General of the UK‘s Security Service (MI5) and had oversight of the Joint Terrorist Analysis Centre and the Centre for the Member of the Group Risk Committee, the Nomination Committee and the Group Remuneration Committee. Skills and experience: John worked for the International Monetary Fund (IMF) in Washington and Chile, for Salomon Brothers in New York and London, and for JP Morgan in New York. At JP Morgan, he was Vice Chair of the Investment Bank, and at the IMF he served as the First Deputy Managing Director – also serving pro tem as the Acting Managing Director. Other former appointments include Trustee of the Economic Club of New York, and Chairman of the World Economic Forum’s Global Agenda HSBC Holdings plc Annual Report and Accounts 2017 123 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the Directors | Corporate Governance Council on the International Monetary System. Current appointments include: Peterson Distinguished Scholar at the Kissinger Centre for Global Affairs of Johns Hopkins University‘s School of Advanced International Studies. He also serves as the Vice Chair of the National Bureau of Economic Research (NBER), and of the Centre for Global Development. Current appointments include: Chairman of HSBC Bank plc and Proteus Digital Health Inc., and a non-executive director of Genomics England Limited. Jackson Tai, 67 Independent non-executive Director Appointed to the Board: September 2016 Heidi Miller, 64 Independent non-executive Director Appointed to the Board: September 2014 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: Chairman 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, 57 Independent non-executive Director Appointed to the Board: May 2016 Chairman of the Group Risk Committee and member of 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 J.P. 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 Audit Committee and Group Remuneration 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. Other former appointments include non- executive director of the UK Green Investment Bank plc, 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 and Zurich Insurance Group. Jonathan Symonds, CBE, 58 Independent non-executive Director Appointed to the Board: April 2014 Senior Independent Director since April 2017 Chairman of the Group Remuneration Committee and the Conduct & Values Committee and member of the Group Nomination 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: Chair of the supervisory board of EY Netherlands and member of the supervisory boards of ASML Holding N.V. and Royal DSM N.V. Group Company Secretary Ben Mathews, 50 Group Company Secretary Chairman of the Group Audit Committee and member of the Nomination Committee and the Conduct & Values Committee. 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. 124 HSBC Holdings plc Annual Report and Accounts 2017 Ben joined HSBC in June 2013 and became Group Company Secretary in July 2013. He is a Fellow of the Institute of Chartered Secretaries and Administrators. Former appointments include Group Company Secretary of Rio Tinto plc and of BG Group plc. Group Chief Executive Designate John Flint, 49 Group Chief Executive Designate 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. John was CEO, Retail Banking and Wealth Management until January 2018. John was appointed as a director of The HongKong and Shanghai Banking Corporation Limited on 16 January 2018 and will take over from Stuart Gulliver as Group Chief Executive on 21 February 2018. Group Managing Directors Elaine Arden, 49 Group Head of Human Resources CEO of HSBC North America Holdings Inc. and Chairman of HSBC Bank USA, N.A., HSBC Finance Corporation, HSBC USA Inc. and HSBC Global Asset Management (USA) Inc. Pierre Goad, 56 Group Head of Global 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 Co-Head of Communications; and Head of Corporate Development, Europe, Middle East and Global Businesses. Pam Kaur, 54 Group Head of Internal Audit Pam joined HSBC and became a Group Managing Director in 2013. She is a co-opted Council 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, 54 Chief Legal Officer Elaine joined HSBC in June 2017 as Group Head of Human Resources. She has previously held senior human resources and employee relations roles in a number of other financial institutions. Elaine is a fellow of the Chartered Institute of Banking in Scotland and a member of the Chartered Institute of Personnel & Development. 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. Samir Assaf, 57 Chief Executive, Global Banking and Markets Andy Maguire, 51 Group Chief Operating Officer 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. 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 and a director of HSBC Global Services Limited and HSBC Group Management Services Limited. He is formerly a Managing Partner (UK and Ireland) of the Boston Consulting Group. Colin Bell, 50 Group Head of Financial Crime Risk Paulo Maia, 59 Chief Executive, Latin America Colin Bell joined HSBC in July 2016 and was appointed a Group Managing Director in March 2017. Colin previously worked at UBS, where he was Head of Compliance and Operational Risk Control. He has 10 years of experience in managing risk and financial crime, following 16 years in the British Army. 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. Peter Boyles, 62 Chief Executive Officer of Global Private Banking Charlie Nunn, 46 Chief Executive Officer, Retail Banking and Wealth Management Peter joined HSBC in 1975 and became a Group Managing Director in 2013. He is 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 plc and HSBC Trinkaus & Burkhardt AG. Patrick Burke, 56 President and Chief Executive Officer of HSBC USA Patrick joined HSBC in 1989 and became a Group Managing Director in 2015. He is also an Executive Director, President and Charlie joined HSBC in 2011 and became a Group Managing Director and CEO, Retail Banking and Wealth Management in January 2018. Charlie was previously Head of Group Retail Banking and Wealth Management, leading the teams supporting HSBC’s Retail and Wealth businesses globally. Prior to this, he was Group Head of Wealth Management and before that Global Chief Operating Officer for Retail Banking and Wealth Management. Charlie has extensive financial services experience and was formerly a Partner at Accenture and a Senior Partner at McKinsey & Co. HSBC Holdings plc Annual Report and Accounts 2017 125 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the Directors | Corporate Governance Noel Quinn, 56 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, 42 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. Antonio was also formerly the Chairman of the Practitioner Panel of the FCA, a Partner of McKinsey & Company and an Associate at Goldman Sachs. Peter Wong, 66 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 and non-executive Director of HSBC Bank (China) Company Limited and a non-executive director of Hang Seng Bank Limited and HSBC Bank Malaysia Berhad. He is also non-executive Vice Chairman of Bank of Communications Co., Limited and an independent non-executive Director of Cathay Pacific Airways Limited. Other appointments include President of the Hong Kong Institute of Bankers, Vice Chairman of the Hong Kong General Chamber of Commerce and First Vice President, Board Member and Chairman of the Executive Committee and Nominating Committee of The Community Chest of Hong Kong. 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 the diversity of the Board. A rigorous selection process is followed in relation to the appointment of Directors and certain specified senior appointments. For further details on the appointments made in 2017 please refer to the report of the Nomination Committee. 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. 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 each AGM, 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 to meet their 126 HSBC Holdings plc Annual Report and Accounts 2017 commitment to the Group. The current anticipated minimum time commitment, which is subject to periodic review, is around 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, in practice, 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. 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 contain a qualifying third-party indemnity provision which entitles Directors and other Officers 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. Training and development Training and development is provided for each Director supported by the Group Company Secretary. Non-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. During the year, all Directors were provided with training on MiFID 2, anti-money laundering, anti- bribery and corruption, embedding good conduct, protecting information and sanctions. 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, culture and conduct and business developments. Jonathan Symonds, Chair of the Group Audit Committee (‘GAC’), and Jackson Tai, Chair of the GRC, hosted a separate forum for the chairs of the Group's subsidiary audit and risk committees. In addition, non-executive Directors sitting on risk and audit committees across the Group received training on IFRS 9. Shareholder engagement Communication with shareholders is given high priority by the Board. Extensive information about HSBC and its activities is provided to shareholders in its Annual Report and Accounts, the Strategic Report and the Interim Report as well as at www.hsbc.com. To complement these publications, 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. As SID, Jonathan Symonds is available to shareholders if they have concerns that cannot be resolved or for which the normal channels would be inappropriate. He may be contacted via the Group Company Secretary at 8 Canada Square, London E14 5HQ. The AGM and other general meetings The 2018 AGM will be held at the Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE on Friday 20 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 20 May 2018. Shareholders are encouraged to attend the meeting. 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. 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. Interaction with principal subsidiaries The Board manages relationships with the regions through seven principal subsidiary companies. There are close interactions between the subsidiary boards and the Group Board and their respective committees, including the sharing of minutes and a requirement for certain appointments to subsidiary boards to be approved by the Group Board. As explained in more detail in the reports of the GAC and the GRC on pages 128 and 130, this interaction is reinforced through an Audit and Risk Committee Chairs' Forum. The Chairs of the subsidiary audit and risk committees globally are invited to attend the forum to raise and discuss current and future global risk and audit issues. Board members are encouraged to, and do, make visits to the regions and attend principal subsidiary meetings as guests. Similarly, directors from the regions regularly are invited to attend committee meetings at a Group level. 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 receive regular updates on relevant concerns raised under these procedures, together with management actions taken in response. Committee effectiveness The effectiveness of the Committees is evaluated as part of the overall performance evaluation of the Board and through annual effectiveness reviews at a Committee level. 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. HSBC Holdings plc Annual Report and Accounts 2017 127 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the Directors | Corporate Governance 2017 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 held* Group Chairman Mark Tucker1 Douglas Flint2 Executive Directors Stuart Gulliver Iain Mackay Marc Moses Non-executive Directors Phillip Ameen Kathleen Casey Laura Cha Henri de Castries3 Lord Evans of Weardale Joachim Faber4 Sam Laidlaw5 Irene Lee John Lipsky Rachel Lomax6 Heidi Miller David Nish7 Jonathan Symonds8 Jackson Tai Pauline van der Meer Mohr Paul Walsh9 1 8 n/a 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 — 3/3 6/6 8 8 8 8 8 7 6 7 8 3/3 8 8 3/3 8 6 8 7 8 2/2 8 — — — — — 8 8 — — — — — — — — — 8 8 — — — 7 — — — — — — — — — — 6 — — 7 3/3 7 — — 7 — — 7 — — — — — — — — 4/4 — — 2/2 — 7 — — 4/4 — — 7 0/1 7 2/2 — — — — — — 7 — — — 2/2 — 7 2/2 — — 5/5 — 6 0/1 7 — — — — — — 7 — — 7 — — — — — — — — 7 — — 6 — — — — — — — 6 — 6 — — — — 2/2 — — 5 — 6 — 3 — — — — — — — 3 — 3 — — — — — — — — — — — *Board meetings in 2017 were held in London, New York and Hong Kong. In addition to the Board meetings listed there were also Chairman’s Committee meetings held in 2017. 1 Appointed to the Board and as Chair of the Nomination Committee on 1 September 2017. Appointed as Group Chairman on 1 October 2017. 2 Resigned from the Board 30 September 2017. 3 Appointed to the Group Remuneration Committee 26 May 2017 4 Stepped down from the Group Risk Committee 30 November 2017. 5 Resigned from the Board 28 April 2017. 6 Resigned from the Board 28 April 2017. 7 Appointed to the Group Remuneration Committee 26 May 2017. 8 Appointed as interim Chair of the Nomination Committee from 28 April 2017 to 1 September 2017. Appointed as Senior Independent Director on 28 April 2017. 9 Resigned from the Board 21 April 2017. Group Audit Committee Members Jonathan Symonds (Chairman) Phillip Ameen Kathleen Casey David Nish Role and responsibilities The GAC has non-executive responsibility for reviewing matters relating to financial reporting, including Pillar 3 disclosures, and the effectiveness of internal financial control systems. The Committee also safeguards the independence of the Group Internal Audit function and oversees its performance. Governance The Group Finance Director, Group Chief Accounting Officer, Group Head of Internal Audit, Group Financial Controller and other members of senior management routinely attend meetings of the GAC. The external auditor also attended all meetings. The Chairman of the GAC had regular meetings with management 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, Costs to Achieve and significant items. It also 128 HSBC Holdings plc Annual Report and Accounts 2017 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 relevant to its responsibilities. Linkages with principal subsidiary audit committees The GAC maintains links with the audit committees of The Hong Kong and Shanghai Banking Corporation, HSBC North America Holdings Inc., HSBC Bank Canada, HSBC Bank plc, HSBC Latin America Holdings (UK) Limited, HSBC Bank Middle East Limited and HSBC Private Banking Holdings (Suisse) SA (‘the Principal Subsidiaries’). During the year, in addition to the annual Audit and Risk Committee Chairs‘ Forum, the Chairman attended an audit committee meeting of The Hongkong and Shanghai Banking Corporation to discuss key judgements made in the Bank of Communications impairment assessment. Any new appointments to the audit committees of the Principal Subsidiaries are also reviewed by the GAC. The GAC Chairman meets with any proposed new chairs of the Principal Subsidiary audit committees. 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 Group's framework of controls. Further detail of how the Board reviews the effectiveness of key aspects of internal control can be found on page 133. External audit The GAC reviews the external auditor’s approach, strategy for the annual audit and audit findings. All non-audit services provided by the external auditor are pre- approved by the GAC in accordance with the auditor independence policy to ensure that services do not create a conflict. 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. The GAC regularly meets privately with the external auditor and the GAC Chairman maintains regular contact with the audit partner throughout the year. Fees payable to PwC for the year ended 31 December 2017 totalled $129.7m, of which $44.9m or 34.6% 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 reviewed the findings of the Financial Reporting Council's audit quality review carried out on the 2016 audit and endorsed PwC's proposed action plan in response. 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 2017. 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 2018 will be proposed to shareholders at the 2018 AGM. 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 2017. Principal activities and significant issues considered during 2017 Internal control framework The GAC continued to monitor the progress being made to upgrade entity level controls. During 2017, the GAC undertook a series of deep dives to monitor the remediation of identified control deficiencies, noting that good progress was made during the year. The GAC continued to monitor the remediation of controls over access management in IT. IFRS 9 implementation The GAC continued to receive detailed presentations and updates from management on the Group’s readiness to implement IFRS 9 and considered the possible commercial impact of IFRS 9 on the global businesses. Bank of Communications (‘BoCom’) The GAC received regular updates on the assumptions underpinning the valuation of BoCom. It monitored indicators of impairment, both macro and BoCom specific, and reviewed the results of the impairment assessments carried out by management. Resolution planning The Group is required to have in place a Group Recovery Plan that sets out recovery options to be initiated in the event of the Group coming under severe financial stress. During 2017, the GAC received updates on the structure of the Group Recovery Plan. The GAC considered the Group Recovery Plan and its integration with the Group’s Risk Management Framework. Establishment of the ring-fenced bank Progress on the establishment of HSBC UK, the ring-fenced bank, was monitored by the GAC during 2017. The GAC considered the accounting judgements in relation to the creation of HSBC UK. Internal Audit Internal Audit The GAC approves Internal Audit’s annual plan, resource and budget, and reviews the performance and effectiveness of the Group Head of Internal Audit. The Group Head of Internal Audit reports to the Chairman of the GAC and administratively to the Group Chief Executive. 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 GAC concluded that the Internal Audit function remained effective. External auditor During the year, the Committee assesses the effectiveness of PwC as the Group’s external auditor, using a questionnaire which focuses on the overall audit process, its effectiveness and the quality of output. Changing regulatory landscape The GAC received briefings on the significant forthcoming changes in the regulatory landscape. Plans around the implementation of IFRS 9 were reviewed. HSBC Holdings plc Annual Report and Accounts 2017 129 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the Directors | Corporate Governance Significant accounting judgements considered during 2017 included: Key area Action taken Expected impact of IFRS 9 Bank of Communications Co., Limited (‘BoCom’) impairment testing Appropriateness of provisioning for legal proceedings and regulatory matters Since 2014, the GAC has considered the progress of the project to implement IFRS 9 and the key judgements related to its implementation, including the expected impacts disclosed and the approach to transition disclosures. Topics addressed include: the approach to the incorporation of forward economic guidance for expected credit losses (ECL) and the economic scenarios to be applied at 1 January 2018, the operating model and approach to governance of ECL, impact assessments and dry runs including key learnings and how these issues are being addressed, expected commercial impacts of ECL and status updates on implementation challenges to systems and governance processes. During the year, the GAC considered the regular impairment reviews of HSBC’s investment in BoCom. 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. The audit committee considered the model’s sensitivity to long-term assumptions including the continued appropriateness of the discount rate. The GAC received reports from management on the recognition and amounts of provisions, as well as the existence of contingent liabilities for legal proceedings and regulatory matters. Specific matters addressed included accounting judgements in relation to provisions and contingent liabilities arising out of: (a) investigations by regulators and competition and law enforcement authorities around the world into trading on the foreign exchange markets; (b) investigations of HSBC’s Swiss Private Bank by a number of tax administration, regulatory and law enforcement authorities; and (c) 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. It reviewed draft presentations to external analysts and key financial metrics included in HSBC’s strategic actions. Loan impairment, allowances and charges Valuation of financial instruments Viability statement The GAC considered loan impairment allowances for personal and wholesale lending. For personal lending this included a review of the adequacy of and movement in collective impairment allowances, and consideration of portfolio-specific characteristics. For wholesale lending, the GAC considered management’s key judgements used to establish the appropriate level of individual allowances on material individually assessed cases and whether management overlays were appropriate on collective allowances. Specific attention was applied to credit risk in the UK and the implications of Brexit from a credit perspective. 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. Goodwill impairment testing The GAC noted that no impairment was identified as a result of the annual goodwill impairment test and subsequent review for any impairment indicators. Following the full impairment of GPB Europe goodwill in 2016 along with an improved performance outlook for RBWM Europe, there are no longer any CGUs considered sensitive to key assumptions. Tax-related judgements The GAC considered the recoverability of deferred tax assets, in particular in the US. The committee also considered management’s judgements relating to the tax indemnity agreed to by HSBC as part of the sale of its Brazilian operations in 2016. This includes consideration of the key inputs and assumptions used to estimate any obligation under the indemnity. UK customer remediation The GAC considered the provisions for redress for mis-selling of payment protection insurance (‘PPI’) policies in the UK and the associated redress on PPI commissions earned under certain criteria, including management’s judgements regarding the effect of the time-bar for claims ending August 2019. In addition, the GAC monitored progress on the remediation of operational processes and associated customer redress. Group Risk Committee Members Jackson Tai (appointed Chairman effective from 25 April 2017) Joachim Faber (stepped down as Chairman effective 25 April 2017 and resigned on 30 November 2017) John Lipsky Heidi Miller Rachel Lomax (resigned on 28 April 2017) Role and responsibilities The GRC has non-executive responsibility for the oversight of enterprise risk management, risk governance and internal control systems (other than internal financial control systems, which are overseen by the GAC). In forming a holistic view of risk, the GRC is supported by the FSVC and CVC, which are the Board committees responsible for overseeing risks relating to financial crime, cyber- crime and information security, anti-bribery and corruption, and for culture and conduct respectively. These two committees escalate and report second order risks to the GRC. Appropriate linkages and information flows between these three committees are further enhanced by cross membership and close engagement of the members and the committee attendees. Governance In carrying out its responsibilities, the GRC is closely supported by the Group Chief Risk Officer, Group Finance Director, Group Head of Internal Audit, Group Financial Controller, Global Head of Regulatory Compliance and Global Head of Risk Strategy, who all 130 HSBC Holdings plc Annual Report and Accounts 2017 regularly attend GRC meetings in order to contribute to discussions relating to their areas of expertise. The GRC works closely with the GAC to ensure there are no gaps, that any areas of significant overlap are appropriately addressed and to improve inter-committee communication. The chairmen of both these committees engage on the agendas of each other’s committee meetings and attend as guests as appropriate. This further enhances the linkages and the flows of information between the GRC and GAC. The GRC meets with the Group Chief Risk Officer and, separately, with the Group Head of Internal Audit and external auditors without management present at the majority of its meetings. How the Committee discharges its responsibilities At each meeting, the GRC reviews the Group Risk Profile report which identifies the key issues and common themes arising from the Group’s enterprise risk reports. This report includes a synthesised view of the Group’s risk appetite statement, top and emerging risks and the Group risk map. It clearly sets out which Board committee has accountability for the monitoring and oversight of each risk and issue and identifies any areas where management is required to assess vulnerabilities via stress testing. Page 63 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 its principal markets. 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. The GRC reviews any revisions to the Group risk appetite statement (‘RAS’) bi-annually and any proposed changes are recommended to the Board. It reviews management’s assessment of risk and provides scrutiny of management’s proposed mitigating actions. committees to participate in GRC meetings and thematic reviews, receiving regional updates and conducting holistic deep dives and sharing GRC highlights with the subsidiaries, the GRC has further enhanced its connectivity and linkages with the principal subsidiary risk committees. The GRC programmes forward-looking and thematic agendas which are supported by input from all three lines of defence within the global businesses and regions. The Committee also conducts deep dives on the risk implications of strategic matters, risks specific to regions, significant projects and key topical risks that are identified during the GRC’s deliberations and discussion. By extending invitations to the chairmen of principal subsidiary risk Principal activities and significant issues considered during 2017 During 2017, the GRC has provided challenge and review to the Group’s regulatory submissions relating to capital management and liquidity adequacy assessments. It has continued to maintain oversight of the Group’s regulatory and internal stress testing programmes with specific review and challenge of the design, key assumptions and outcomes of the principal tests conducted. The Group risk appetite statement (‘RAS’) and monitoring of the Group risk profile against the RAS Capital and liquidity Stress testing Execution risk Following its bi-annual reviews, the GRC did not recommend any material changes to the overall level of Risk Appetite in 2017. The GRC expanded its focus on non-financial risk and significant work was undertaken to define forward-looking exposure based on metrics taking into account the inherent level of risk as well as the performance of our control environment. The GRC has fully engaged management in evaluating and challenging the Group’s liquidity and funding risk appetite and the effectiveness of the liquidity and funding risk framework. The GRC continued to review the Group’s approach to capital planning to ensure it is comprehensive, rigorous and forward looking. The GRC reviewed and challenged both the Group Individual Liquidity Adequacy Assessment Process and Internal Capital Adequacy Assessment. The GRC conducted a comprehensive review and challenge of the scenarios and approach to the PRA stress tests and reviewed the results of both the Annual Cyclical Scenario and Biennial Exploratory Scenario stress tests. The GRC continued to review and oversee the regulatory and internal global stress testing programmes throughout the year. 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 change and transformation programmes and mitigating measures being introduced to manage the identified risks appropriately. The GRC placed priority on monitoring and challenging management’s assessment of execution risk and corresponding mitigating actions, as evidenced by thematic reviews on the execution risks at launch of our required ringfencing in the UK, on the progress of remediating high residual risks in non-financial risks, and the implications of economic growth rates for our China strategy. 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 2017, as part of the Board’s assessment of internal control. Deep dive reviews The GRC conducted in-depth reviews of the risk implications relating to the Group’s approach to model risk, to changes in economic growth rate assumptions for the Group’s China strategy as well as execution risks arising from required ringfencing in the UK. The GRC also examined the Group’s management of its non-financial risks, including its ability to remediate high residual risks. Connectivity between the GRC and Subsidiary Risk Committees The GRC has enhanced the connectivity and flow of information both to and from the Subsidiary Risk Committees during 2017. There has been more focused participation by the principal Subsidiary Risk Committee chairmen at GRC meetings. In addition, the GRC Chairman has attended risk committee meetings in Latin America, Europe, Middle East and Asia Pacific regions. The linkages with the Group and subsidiaries was further strengthened at the annual Non-Executive Director and Subsidiary Audit and Risk Committee Chairmen’s Forum held in Hong Kong. Committee effectiveness The GRC Chairman has addressed the actions agreed at the beginning of the year arising from an external independent effectiveness review conducted at the end of 2016. Financial System Vulnerabilities Committee Members Lord Evans of Weardale (Chairman) Kathleen Casey Jackson Tai Michael Burgess (non-Director member) (appointed on 1 September 2017 and resigned on 11 December 2017) Nick Fishwick, CMG (non-Director member) Dave Hartnett, CB (non-Director member) Lord Hogan-Howe (non-Director member) (appointed on 1 September 2017) William Hughes, CBE QPM (non-Director member) (resigned on 30 June 2017) David Irvine (non-Director member) Clovis Meath Baker (non-Director member) (appointed on 1 September 2017) Nehchal Sandhu (non-Director member) Leonard Schrank (non-Director member) (resigned on 30 June 2017) Sir William Patey (non-Director member) (resigned on 30 June 2017) John Raine (non-Director member) (appointed on 1 September 2017) The Honourable Juan Zarate (non-Director member) 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. HSBC Holdings plc Annual Report and Accounts 2017 131 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the Directors | Corporate Governance Principal activities and significant issues considered during 2017 Group Remuneration Committee Financial crime Members The Committee monitored the Group’s progress on the implementation of its Global Standards programme, and reviewed and discussed findings from country visits conducted by the Monitor. Pauline van der Meer Mohr (Chair) Henri de Castries (appointed on 26 May 2017) Sam Laidlaw (resigned on 28 April 2017) 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 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. Conduct & Values Committee Members Pauline van der Meer Mohr (Chair) Laura Cha Lord Evans of Weardale Rachel Lomax (resigned on 28 April 2017) Jonathan Symonds Role and responsibilities The Committee has non-executive responsibility for oversight of culture and conduct risk. It is responsible for the Group’s policies, procedures and standards and ensuring that the Group conducts business responsibly and consistently adheres to the HSBC Values. The CVC is also responsible for Group policies and procedures for capturing and responding to whistleblowing reports. The CVC reports 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 2017 Conduct The Committee reviewed the Group’s conduct approach and how effectively global programmes were being implemented throughout the organisation. Deep dives were undertaken on the Singapore, China and Middle East operations and the Global Businesses to determine how effectively the conduct programme was embedding. Sustainability The Committee was responsible for reviewing how effectively the Group sought to satisfy itself that it was meeting its sustainability commitments. Diversity The Committee monitored the Group’s refreshed approach to Diversity and Inclusion and the updating of the Group Diversity and Inclusion Policy. Further information, including the Group's Statements on Conduct, the Group Diversity and Inclusion Policy and the Statement on Modern Slavery and Human Trafficking can be found at www.hsbc.com/our-approach/measuring-our-impact. 132 HSBC Holdings plc Annual Report and Accounts 2017 John Lipsky David Nish (appointed on 26 May 2017) Paul Walsh (resigned on 21 April 2017) Role and responsibilities The Committee is responsible for setting the overarching 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 141 to 164. Nomination Committee Members Mark Tucker (Chairman – appointed on 1 September 2017) Laura Cha Sam Laidlaw (resigned on 28 April 2017) John Lipsky Rachel Lomax (resigned on 28 April 2017) Pauline van der Meer Mohr Jonathan Symonds (appointed as interim Chair from 28 April 2017 to 1 September 2017) Paul Walsh (resigned on 21 April 2017) Role and responsibilities The Committee leads the Board appointment process, agrees the criteria for any appointments and engages independent external search consultants, as required. At the conclusion of this process, the Committee will nominate potential candidates for appointment to the Board. It is also responsible for succession planning for both senior executive roles, as well as executive and non-executive Directors, and for determining the membership of Board committees. In the exercise of its responsibilities, the Committee regularly reviews the Board’s structure, size and composition, including skills, knowledge, experience, independence and diversity. Principal activities and significant issues considered during 2017 Succession planning In 2016, a committee was established with specific responsibility for succession planning for the Group Chairman. The process was led by the Chairman of the Nomination Committee at the time, Sam Laidlaw, and the Senior Independent Director, Rachel Lomax. The committee, comprising all members of the Nomination Committee, including the chairs of the other principal Board committees, was assisted and advised by independent external search consultants. This process culminated on 12 March 2017 following a recommendation from the committee, and unanimous endorsement by the Board, with the announcement that Mark Tucker would be appointed as the new Group Chairman, with effect from 1 October 2017. During 2017, the Nomination Committee led the succession process for the Group Chief Executive Officer. The Committee, chaired by Jonathan Symonds on an interim basis from April 2017 (pending the appointment of Mark Tucker as Chair of this Committee on 1 September) included Jonathan Evans, Jackson Tai, Heidi Miller, David Nish and Joachim Faber, and led the succession process for the Group Chief Executive Officer. The process involved the engagement of independent external search consultants to advise on, and support, the Committee. It culminated in a recommendation from the Committee and unanimous support from the Board with an announcement made on 12 October 2017 that John Flint would be appointed as successor to Stuart Gulliver, to take effect from 21 February 2018. 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 Committee has non-executive responsibility for HSBC’s philanthropic and community investment activities in support of the Group’s corporate sustainability objectives. The Committee oversees activity including both the Group’s monetary contributions and employee volunteering. Principal activities and significant issues considered during 2017 Charitable giving The Committee was responsible for reviewing the Group’s risk appetite for charitable donations, the budgets 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. 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 20 February 2018, the date of approval of this Annual Report and Accounts 2017. 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. The Group‘s 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 the Group to heightened risk of loss or reputational damage. The Group employs a top and emerging risks framework at all levels of the organisation, which enables it to identify current and forward-looking risks and to take action which either prevents them materialising or limits their impact. • Responsibility for risk management: all employees are responsible for identifying and managing risk within the scope of their role as part of the three lines of defence model, which is an activity-based model to delineate management accountabilities and responsibilities for risk management and the control environment. The second line of defence sets the policy and guidelines for managing specific 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 HSBC Holdings plc Annual Report and Accounts 2017 133 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the Directors | Corporate Governance adopted by all major Group 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 the 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: chaired by the Group Company Secretary, this Committee 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. In so doing the Committee is empowered to determine whether a new event or circumstances should be disclosed, including the form and timing of such disclosure, and 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, Group Head of Communications, 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 the Group 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 conduct-related risk 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 2017, deficiencies in the design and operational effectiveness of a number of controls were identified. Significant improvement in the control environment has been observed as a result of management’s progress on the execution of the remediation programme. 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 134 HSBC Holdings plc Annual Report and Accounts 2017 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 66 to 69. Based on the assessment performed, the Directors concluded that for the year ended 31 December 2017, 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 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. 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 2020. 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 its long-term viability, 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 63 to 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 2017, there were four heightened top and emerging risks: economic outlook and capital flows, geopolitical risk, cyber-threat and unauthorised access to systems and data management. 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 risk reports, including the Group’s risk appetite profile see page 63, top and emerging risks see page 63 and risk map see page 69. • Reports and updates regarding regulatory and internal stress testing exercises see page 69. In 2017, 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 assumed no dividend payments in the first two years 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. • Reports and updates on regulatory developments. • Legal reports. Share capital and other disclosures Share buy-back programme On 22 February 2017, HSBC Holdings commenced a share buy- back programme to purchase its ordinary shares of $0.50 each up to a maximum consideration of $1.0bn. This programme concluded on 12 April 2017. 122,599,324 ordinary shares were purchased and cancelled. On 1 August 2017, HSBC Holdings announced a further share buy-back programme for the purchase of up to a maximum of $2.0bn of its ordinary shares of $0.50. This programme concluded on 20 November 2017 and 205,624,077 ordinary shares were purchased and cancelled. The purpose of both buy-back programmes was to reduce HSBC’s number of outstanding ordinary shares. The nominal value of shares purchased during 2017 was $164,111,701 and the aggregate consideration paid by HSBC was £2,326,610,093. The table that follows outlines details of the shares purchased on a monthly basis during 2017. At 31 December 2017, the total number of shares purchased was 328,223,401, representing 1.62% of the shares in issue and 1.64% of the shares in issue excluding treasury shares. Month First share buy-back of 2017 Feb-17 Mar-17 Apr-17 Second share buy-back of 2017 Aug-17 Sep-17 Oct-17 Nov-17 Dividends Dividends for 2017 First, second and third interim dividends for 2017, each of $0.10 per ordinary share, were paid on 5 July 2017, 20 September 2017 and 22 November 2017, respectively. Note 8 on the Financial Statements gives more information on the dividends declared in 2017. On 20 February 2018, the Directors declared a fourth interim dividend for 2017 of $0.21 per ordinary share in lieu of a final dividend, which will be payable on 6 April 2018 in cash in US dollars, or in sterling or Hong Kong dollars at exchange rates to be determined on 26 March 2018, with a scrip dividend alternative. As the fourth interim dividend for 2017 was declared after 31 December 2017 it has not been included in the balance sheet of HSBC as a liability. The reserves available for distribution at 31 December 2017 were $38.0bn. 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 2017. Dividends for 2018 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 Number of shares Highest price paid per share Lowest price paid per share Average price paid per share Aggregate price paid £ £ £ £ 20,682,000 77,853,860 24,063,464 122,599,324 49,649,445 55,482,328 53,192,769 47,299,535 205,624,077 6.8080 6.7800 6.6360 7.7090 7.5260 7.6880 7.4650 6.4500 6.4070 6.4610 7.3010 7.0530 7.3400 7.2730 6.5677 6.5977 6.5390 7.4789 7.2806 7.4595 7.3513 135,833,224 513,656,572 157,350,841 806,840,637 371,323,631 403,943,040 396,791,032 347,711,753 1,519,769,456 preference share was declared on 6 February 2018 for payment on 15 March 2018. Share capital Issued share capital The nominal value of HSBC Holdings’ issued share capital paid up at 31 December 2017 was $10,160,372,629 divided into 20,320,716,258 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 2017. 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/board-responsibilities. 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 HSBC Holdings plc Annual Report and Accounts 2017 135 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the Directors | Corporate Governance 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 262, 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 2017 was $3.6m. Share capital changes in 2017 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 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 2017 and 2018 may be found on page 206, 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 31 on the Financial Statements. The following events occurred during the year in relation to the ordinary share capital of HSBC Holdings: Scrip dividends Issued in lieu of Fourth interim dividend for 2016 First interim dividend for 2017 Second interim dividend for 2017 Third interim dividend for 2017 All-employee share plans HSBC Holdings ordinary shares issued Aggregate nominal value Market value per share on number $ $ £ 6 Apr 2017 241,151,585 120,575,793 5 Jul 2017 95,501,245 47,750,623 20 Sep 2017 19,315,343 9,657,672 22 Nov 2017 24,684,023 12,342,012 8.0636 8.6500 9.9680 9.8000 6.5160 6.6610 7.6606 7.4434 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 Number Aggregate nominal value $ 8,935,312 4,467,656 377,804 125,058 64,712 188,902 62,529 32,356 6,301,579 3,150,790 Options over HSBC ordinary shares granted in response to approximately 14,932 applications from HSBC employees in the UK on 21 Sep 2017 10,447,272 HSBC International Employee Share Purchase Plan 693,152 346,576 HSBC share plans Exercise price from to 4.0472 55.4701 7.1456 5.3532 5.964 63.9864 8.2094 5.7974 6.2620 7.6950 £ HK$ $ € £ HSBC Holdings ordinary shares issued Aggregate nominal value $ Market value per share from £ to £ Vesting of awards under the HSBC Share Plan and HSBC Share Plan 2011 66,505,211 33,252,606 6.4600 7.6880 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 pre-emption rights At the AGM in 2017, shareholders renewed the general authority for the Directors to allot new shares up to 13,244,610,940 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. Shareholders also renewed the authority for the Directors to make market purchases of up to 1,986,691,641 ordinary shares. The Directors exercised this authority during the year and purchased 328,223,401 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 3,973,383,282 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 31 on the Financial Statements. Other than as disclosed in the tables above headed ‘Share capital changes in 2017’, the Directors did not allot any shares during 2017. 136 HSBC Holdings plc Annual Report and Accounts 2017 • Ping An Asset Management Co., Ltd. gave notice on 6 December 2017 that on 5 December 2017 it had a long position of 1,017,946,172 in HSBC Holdings ordinary shares, representing 5.01% of the ordinary shares in issue at that date. Since 31 December 2017, Ping An Asset Management Co., Ltd. gave notice on 13 February 2018 that on 9 February 2018 it had a long position of 1,253,254,972 in HSBC Holdings ordinary shares, representing 6.17% of the ordinary shares in issue at that date. 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 2017 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 2017. 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 2017 had certain interests, all beneficial unless otherwise stated, in the shares or debentures of HSBC Holdings and its associated corporations. Save as stated in the below table, 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. Debt securities In 2017, following its capital plan, HSBC Holdings issued the equivalent of $16.8bn of debt securities in the public capital markets in a range of currencies and maturities, including $5.1bn of contingent convertible and $11.7bn 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 27 and 31 on pages 232 and 241. Treasury shares In accordance with the terms of a waiver granted by the Hong Kong Stock Exchange on 19 December 2005, HSBC Holdings will comply with the applicable law and regulation in the UK in relation to the holding of any shares in treasury and with the conditions of the waiver in connection with any shares it may hold in treasury. Pursuant to Chapter 6 of the UK Companies Act 2006, 325,273,407 ordinary shares are currently held in treasury. This was the maximum number of shares held at any time during 2017; representing 1.60% of the shares in issue. The nominal value of shares held in treasury is $162,636,704. Notifiable interests in share capital At 31 December 2017, HSBC Holdings had received the following notification of major holdings of voting rights pursuant to the requirements of Rule 5 of the Disclosure, Guidance and Transparency Rules: • BlackRock, Inc. gave notice on 18 October 2017 that on 16 October 2017 it had the following: an indirect interest in HSBC Holdings ordinary shares of 1,214,807,412; qualifying financial instruments with 52,830,499 voting rights that may be acquired if the instruments are exercised or converted; and financial instruments with a similar economic effect to qualifying financial instruments which refer to 6,978,758 voting rights, representing 6.06%, 0.26% and 0.03%, respectively, of the total voting rights at that date. • Ping An Asset Management Co., Ltd. gave notice on 6 December 2017 that on 4 December 2017 it had an indirect interest in HSBC Holdings ordinary shares of 1,007,946,172, representing 5.04% of the total voting rights at that date. At 31 December 2017, according to the register maintained by HSBC Holdings pursuant to section 336 of the Securities and Futures Ordinance of Hong Kong: • BlackRock, Inc. gave notice on 30 December 2017 that on 28 December 2017 it had the following interests in HSBC Holdings ordinary shares: a long position of 1,424,882,481 shares and a short position of 6,642,872 shares, representing 7.01% and 0.03%, respectively, of the ordinary shares in issue at that date. Since 31 December 2017 and following interim notifications on 6 January and 15 January, BlackRock Inc. gave notice on 2 February 2018 that on 30 January 2018 it had the following interests in HSBC Holdings ordinary shares: a long position of 1,434,324,764 shares and a short position of 5,356,892 shares, representing 7.06% and 0.03%, respectively, of the ordinary shares in issue at that date; and HSBC Holdings plc Annual Report and Accounts 2017 137 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 Stuart Gulliver Irene Lee John Lipsky Iain Mackay Heidi Miller Marc Moses David Nish Jonathan Symonds Jackson Tai Mark Tucker Pauline van der Meer Mohr Footnotes At 1 Jan 2017 Beneficial owner At 31 Dec 2017 Child under 18 or spouse Jointly with another person Trustee Total interests 1 1 2 3 1 3 1 3 1, 4 5,000 8,620 13,200 16,165 9,170 66,605 5,000 9,125 10,200 17,116 12,892 66,605 — — 8,000 — — — 3,344,208 3,534,284 176,885 10,000 16,165 10,588 16,165 345,469 442,118 3,975 4,200 824,241 1,207,068 50,000 21,771 31,605 — 37,936 12,900 — 276,000 15,000 15,000 — — — — — 50,000 4,885 10,350 — — — — — — — — — — — — — — — — 21,575 — — — — — — — — 5,000 9,125 18,200 17,116 12,892 66,605 — 3,711,169 — — — — 10,588 16,165 442,118 4,200 — 1,207,068 — — — — — 50,000 42,821 44,825 276,000 15,000 1 Phillip Ameen has an interest in 1,000, Kathleen Casey has an interest in 1,825, John Lipsky has an interest in 3,233, Heidi Miller has an interest in 840 and Jackson Tai has an interest in 8,965 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. 2 HSBC Holdings was advised on 23 January 2018 that Laura Cha's spouse acquired 8,000 shares on 24 August 2015. 3 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 141. At 31 December 2017, the aggregate interests under the Securities and Futures Ordinance of Hong Kong in HSBC Holdings ordinary shares, including interests arising through employee share plans and the interests above were: Stuart Gulliver – 6,742,739; Iain Mackay – 2,140,600; and Marc Moses – 2,920,384. 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. Jackson Tai has a non-beneficial interest in 10,350 shares of which he is custodian. 4 There have been no changes in the shares or debentures of the Directors from 31 December 2017 to the date of this report. 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 2017, HSBC had a total workforce of 229,000 full- and part-time employees compared with 241,000 at the end of 2016 and 264,000 at the end of 2015. Our main centres of employment were the UK with approximately 40,000 employees, India 36,000, Hong Kong 30,000, mainland China 24,000, Mexico 16,000, the US 11,000 and France 8,000. 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 well-developed communications and consultation programmes with all employee representative bodies and there have been no material disruptions to our operations from labour disputes during the past five years. Diversity and inclusion We are committed to enabling a thriving environment where people are valued, respected and supported; where different ideas, backgrounds, styles and perspectives are actively sought out to create business value; and where career advancement is based on objective criteria. We are focusing on the diversity profile of our workforce to make it more reflective of the communities we operate in and the customers we serve. Everyone has a role to play in building our inclusive workplace. Our Global Diversity and Inclusion Policy is clear that all employees and workers are responsible for treating colleagues with dignity and respect, and for creating an inclusive environment free from 138 HSBC Holdings plc Annual Report and Accounts 2017 discrimination, bullying, harassment or victimisation, irrespective of their age, colour, disability, ethnic or national origin, gender, gender expression, gender identity, marital status, pregnancy, race, religion or belief, or sexual orientation. Our employees are expected to demonstrate openness by listening and valuing different backgrounds, perspectives and cultures. Diversity and Inclusion carries the highest level of executive support. It was governed by the Conduct and Values Committee in 2017, and will be governed by the Group People Committee from 2018. Gender diversity statistics Holdings Board Group Management Board (GMB) 12 5 12 2 Combined Executive Committee and Direct Reports* 135 45 Senior employees** 6,540 2,393 71% 29% 86% 75% 73% 14% 25% 27% All employees 112,390 122,239 48% 52% Male Female *Combined Executive Committee and Direct Reports was reported as at 30 June 2017 to the UK's Hampton Alexander Review and includes HSBC's Executive Directors, Group Managing Directors and their direct reports (excluding administrative staff). **Senior employees refers to employees performing roles classified as 0, 1, 2 or 3 in our Global Career Band structure. Employee development Employee health and safety The development of our employees is essential to the future strength of our business. We continue to develop employee capability. We 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. In 2017, we introduced HSBC University, the new home of learning at HSBC. HSBC University brings new programmes, training facilities, and technologies with a particular focus on Leadership, Risk Management, Strategy and Performance, as well as business-specific technical training. Its new leadership programmes are designed to support our leaders at all levels, encouraging collaboration and future thinking across HSBC's businesses, functions and geographies. In 2018 HSBC University will bring colleagues together to learn, develop and connect through new dedicated classroom space at our offices in Dubai, Mexico City, and the new HSBC UK Head Office in Birmingham. Employment of people with a disability We believe in providing equal opportunities for all employees. The employment of people with a disability is included in this commitment. The recruitment, training, career development and promotion of people with a disability are based on the aptitudes and abilities of the individual. Should employees become disabled during their employment with us, efforts are made to continue their employment and, if necessary, appropriate training and reasonable equipment and facilities are provided. Health and safety The Group is committed to providing a healthy and safe working environment for our employees, contractors, customers and visitors on HSBC premises and where impacted by our operations. We aim to be compliant with all applicable health and safety legal requirements, and to ensure that best practice health and safety management standards are implemented and maintained across the HSBC Group. Everyone at HSBC has a responsibility for helping to create a healthy and safe working environment. Employees are expected to take ownership of their safety and are encouraged and empowered to report any concerns. Chief Operating Officers have overall responsibility for ensuring that the correct policies, procedures and safeguards are put into practice. This includes making sure that everyone in HSBC has access to appropriate information, instruction, training and supervision. Putting our commitment into practice, in 2017 the Group delivered a health and safety education and information training programme to every one of our employees, and the Group implemented a range of programmes to help us understand the risks we face and improve the buildings in which we operate: • We completed fire risk assessments in over 2,000 properties worldwide, and addressed areas of concern. • We completed a health and safety inspection and remediation programme in 97% of our premises across the globe. • The application of our health and safety policies and procedures continues to be integrated throughout our supply chain, particularly in developing markets, with audit and inspection programmes demonstrating continued improvements in health and safety performance. • We developed and implemented an improved risk assurance and oversight function to ensure our health and safety management system was performing appropriately, including conducting full reviews of health and safety management in 12 countries. Number of workplace fatalities Number of major injuries to employees All injury rate per 100,000 employees 1 2 2 31 1 44 205 246 0 n/a n/a Footnotes 2017 2016 2015 1 Customer death on branch premises; contractor involved in road traffic accident on bank business. 2 Fractures, dislocation, concussion. n/a Comparable data not available at global level for 2015 following change in reporting procedure for 2016. 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 141. 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 following table 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 2017 is shown in the following table. Further details required to be disclosed pursuant to Chapter 17 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited are available on our website at www.hsbc.com/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 153. Note 5 on the Financial Statements gives details of share-based payments, including discretionary awards of shares granted under HSBC share plans. HSBC Holdings plc Annual Report and Accounts 2017 139 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the Directors | Corporate Governance | Directors’ Remuneration Report 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 2017, options were granted at the mid-market closing price for HSBC Holdings ordinary shares quoted on the London Stock Exchange which, as derived from the Daily Official List on 20 September 2017, the day before the options were granted, was £7.23. HSBC Holdings All-employee Share Option Plans 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 27 jurisdictions. Dates of awards from to Exercise price Exercisable At Granted Exercised Lapsed At from to from to Footnotes 1 Jan 2017 during year during year during year 31 Dec 2017 HSBC Holdings ordinary shares Savings-Related Share Option Plan 21 Apr 2011 21 Sep 2017 (£) 4.0472 (£) 5.9640 Savings-Related Share Option Plan: International 21 Apr 2011 21 Apr 2011 21 Apr 2011 21 Apr 2011 24 Apr 2012 24 Apr 2012 24 Apr 2012 24 Apr 2012 (£) (£) 4.4621 5.0971 ($) ($) 7.1456 8.2094 (€) 5.3532 (HK$) (€) 5.7974 (HK$) 55.4701 63.9864 1 Aug 2016 1 Aug 2016 1 Aug 2016 1 Aug 2016 1 Aug 2016 1 2 30 Apr 2023 31 Jan 2018 31 Jan 2018 31 Jan 2018 31 Jan 2018 68,777,416 10,447,272 8,580,981 6,077,604 64,566,103 440,309 217,738 86,916 504,467 — — — — 354,331 47,149 38,829 125,058 74,807 17,873 64,712 11,665 10,539 377,804 90,354 36,309 1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £7.32. 2 The weighted average closing price of the shares immediately before the dates on which options were exercised was £7.48. Statement of compliance The statement of corporate governance practices set out on pages 121 to 174 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) www.hkex.com.hk Descriptions of the roles and responsibilities of the: www.hsbc.com/about-hsbc/corporate- governance/board-committees – Group Chairman – Group Chief Executive – Senior Independent Director 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. Following specific enquiry, all Directors have confirmed that they have complied with their obligations in respect of transacting in Group securities during the year. Board and senior management www.hsbc.com/about-hsbc/leadership On behalf of the Board Mark E Tucker Group Chairman HSBC Holdings plc Registered number 617987 20 February 2018 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 2017, 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. 140 HSBC Holdings plc Annual Report and Accounts 2017 Directors’ Remuneration Report Annual Statement from the Group Remuneration Committee Chair Directors’ remuneration policy Annual report on remuneration Additional remuneration disclosures Pillar 3 remuneration disclosures Page 141 143 144 156 158 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 Chair Dear Shareholder, I am delighted to present our 2017 Directors’ Remuneration Report. I have been a member of the Committee since 1 January 2016 and took over the role of Chair from 28 April 2017. 2017 was the second year under our current remuneration policy, and I was pleased to note that at the last Annual General Meeting (‘AGM’) we received strong support for how the policy was implemented, with over 96% of shareholders voting in favour of the 2016 remuneration report. I have set out below a summary of our 2017 performance, key decisions made during the year and the areas of focus envisaged for 2018. Performance achieved during 2017 During 2017, the Group made good financial and strategic progress. The Group 2017 reported profit before tax was $17.2bn, up 141% from $7.1bn in 2016. On an adjusted basis, profit before tax was $21.0bn, up 11% from $18.9bn in 2016. 2017 was the final year to implement the Group's planned strategic actions and to achieve the targets we had set out to our investors in 2015. The scorecards of our executive Directors incorporated measures that were aligned to the delivery of these strategic actions. We exceeded our risk-weighted assets (‘RWA’) reduction target, extracting a total of $338bn of RWA's from the business since the start of 2015, in excess of the $290bn target we had set out in our strategic actions. We achieved annualised run-rate savings of $6.1bn and delivered positive adjusted jaws for 2017. We missed our targets for NAFTA profitability and RMB internationalisation although we made good progress on actions to deploy capital and deliver revenue growth. The set-up of the UK ring-fenced bank is nearly complete, with 91% of head office roles resourced, and we expect to have a fully functioning team by the end of the first quarter of 2018. Details of performance against each of the strategic actions is set out on page 13 of the Strategic Report. In December we launched HSBC Qianhai Securities, the first securities joint venture in mainland China to be majority-owned by an international bank. We will be offering a range of services to our customers, including equity research and brokerage, equity and debt underwriting and cross-border M&A advisory, and emphasising our commitment in pivoting our business to Asia. The Group announced a dividend of $0.51 per ordinary share and in 2017, we returned a total of $3bn to shareholders through share buy-backs. A total shareholder return of 24% was achieved in 2017, which outperformed the FTSE 100 index over the year. We remain a well-funded business with a strong capital generation and a diversified balance sheet. We received the ‘World’s Best Bank’ award at the Euromoney Awards for Excellence 2017 in July, showcasing our devotion to customers and our strong market position. Over the past five years, we significantly strengthened our ability to combat financial crime through our Global Standards programme and the five-year deferred prosecution agreement ('AML DPA') with, among others, the US Department of Justice ('DoJ'), has expired. In January 2018, HSBC Holdings entered into a three-year deferred prosecution agreement with the DoJ (‘FX DPA’), regarding fraudulent conduct in connection with two particular transactions in 2010 and 2011. This concluded the DoJ’s investigation into HSBC’s historical foreign exchange activities. Under the terms of the FX DPA, HSBC has a number of ongoing obligations, including continuing to cooperate with authorities and implementing enhancements to its internal controls and procedures in its Global Markets business which will be the subject of annual reports to the DoJ. In addition, HSBC agreed to pay a financial penalty and restitution. This agreement acts as a reminder of the necessity of pursuing the highest standards of conduct in our business. Group variable pay pool and risk adjustments The Committee’s decision on the Group variable pay pool took into consideration our performance against metrics set out in the Group risk appetite statement and an assessment against our global conduct outcomes for our global businesses. The Committee also took into consideration the Group’s financial performance, and fines, penalties and customer redress costs. The total variable pay pool for 2017 was $3,303m, representing a 8.8% increase on the 2016 variable pay pool. In setting the pool, the Committee used its discretion to apply the following reductions: • $84m for the fines, penalties and cost of customer redress faced by the Group; and • $383m for: – financial performance based on certain metrics, in particular, return on equity; – performance against certain metrics in our Group risk appetite profile; and – continued work required to address financial crime compliance issues. The Committee also strongly believes that individual performance should be judged not only on what is achieved over the period but more importantly on how it is achieved, as we believe the latter contributes to the long-term sustainability of the business. To further reinforce this in our culture, we continue our workstream on incentivising compliance through: • the use of behaviour and performance ratings for all employees, which directly influence pay outcomes; • variable pay adjustments: – positive adjustments to variable pay outcomes for individuals who have exhibited positive behaviour and consistent adherence to the HSBC Values and go the extra mile to courageously do the right thing. During 2017, we made positive adjustments totalling $14.9m of variable pay awards; and – we reduced variable pay awards to certain individuals by $2.9m in aggregate to reflect individual conduct and behaviours; and • the global recognition programme where our employees can recognise peers and reward positive behaviours in a real-time, visible way. Fixed pay for executive Directors No fixed pay increases were made in 2017 for executive Directors and no increase in fixed pay is proposed for executive Directors for 2018. Across the UK employee population the average base salary increase in 2017 was 5%. HSBC Holdings plc Annual Report and Accounts 2017 141 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Directors’ Remuneration Report Executive Directors’ 2017 variable pay awards Employee remuneration policy The 2017 annual incentive scorecard outcome was 80.0% for Stuart Gulliver, 89.5% for Iain Mackay and 91.2% for Marc Moses, reflecting the performance achieved against their individual scorecards. Details of the annual incentive scorecard outcome are provided on page 146. Iain Mackay and Marc Moses will be awarded a long-term incentive award (‘LTI’) in respect of 2017 performance. In granting these awards, the Committee took into consideration the performance achieved for the financial year ended 31 December 2017 and the achievements against the strategic actions announced in June 2015. These awards will also be subject to a three-year forward-looking performance period ending on 31 December 2020. Details of the performance measures are set out on page 151. At the end of the three-year performance period, subject to the outcome of the performance conditions, awards will vest in five equal annual instalments commencing from the third anniversary of the award date. This gives a total deferral period of seven years and links a significant portion of our executive Directors’ pay to the achievement of long-term objectives, and the long-term interests of shareholders and other stakeholders. Following Stuart Gulliver’s announcement of his retirement, the Committee considered that it would not be appropriate for him to receive a LTI award for 2017. To meet regulatory deferral requirements for 2017, 60% of his 2017 annual incentive award will be deferred over a period of seven years, vesting in five equal annual tranches commencing from the third anniversary of the grant date. In accordance with regulatory requirements, the post-vesting retention period for all shares awarded to executive Directors has been increased from six months to one year. Director changes and implementation of policy for 2018 Mark Tucker joined the Board on 1 September 2017 as a non- executive Director and Group Chairman designate, and succeeded Douglas Flint as Group Chairman with effect from 1 October 2017. He will receive a fee of £1,500,000 per annum in respect of his chairmanship and was paid a one-time relocation benefit of £300,000. In line with our remuneration policy, Douglas Flint was paid his salary and pension allowance and received contractual benefits in respect of his contractual notice period. Full details are provided on page 151. Stuart Gulliver will step down as executive Director and Group Chief Executive on 20 February 2018 and John Flint will succeed Stuart Gulliver as Group Chief Executive from 21 February 2018. Stuart Gulliver will remain as an employee until 11 October 2018, working on key strategic projects and supporting the smooth transition of the Group Chief Executive role to John Flint. Up until retirement, Stuart Gulliver will continue to receive his current fixed pay and benefits. In accordance with the terms of our remuneration policy, the Committee has agreed that Stuart Gulliver will remain eligible to be considered for an annual incentive award for the period up to 11 October 2018, based on his contribution during 2018. Further details on Stuart Gulliver’s annual incentive opportunity and performance measures for 2018 can be found on page 156. John Flint’s salary as Group Chief Executive is set at £1,200,000 and will be reviewed on an annual basis. He will also receive a fixed pay allowance of £1,700,000 per annum and a cash in lieu of pension at 30% of salary, consistent with the approved policy. His maximum annual incentive and LTI opportunity will be set at 215% and 320% of salary, respectively, as per our approved policy. Our wider employee remuneration policy is driven by the Group reward strategy, which has evolved over time to reflect changes in our operating environment, including ongoing regulatory and governance changes. The Committee reviewed and agreed updates to the Group reward strategy during 2017 to ensure that it continues to support HSBC’s overall employment proposition to attract, retain and motivate the best people, who are aligned to HSBC’s values and committed to maintaining a long-term career within the Group. Our 2017 employee survey feedback indicated that employees needed more support in understanding the objectives of the different components of total compensation. To address this, the Committee reviewed and supported management’s proposals to streamline the parameters and principles which managers are asked to consider and apply when making fixed and variable pay recommendations, with a view to ensuring employees have more visibility and clarity on the factors that influence their total remuneration. Details of the Group's remuneration policy for all employees are set out on page 158. Gender pay Gender pay is an area of focus in the UK with the introduction of the Gender Pay Gap Reporting regulations. We will be complying with those regulations and reporting accordingly. Our global pay strategy is designed to attract and motivate the very best people regardless of any factor unrelated to their performance or experience. Pay recommendations consider internal and external market comparisons and reflect the employee’s performance during the year. Recommendations are reviewed during a robust annual process, involving business and function heads, senior management and Human Resources. Review of our policy The Group's remuneration policy is due to expire at the 2019 AGM. During the course of this year, we will be reviewing our current approach to Directors' remuneration and will consult with our large shareholders and proxy advisory bodies with the aim of introducing a policy in 2019. Our annual report on remuneration The next section provides an overview of our remuneration policy for executive Directors, which was approved by shareholders at the 2016 AGM. In the annual report section, we provide details of remuneration decisions made for executive Directors in 2017. In the additional remuneration disclosure section of this report, we provide additional remuneration-related disclosures, including an overview of the policy that applies to our employees. As Chair of the Committee, I hope you will support the report. Pauline van der Meer Mohr Chair Group Remuneration Committee 20 February 2018 142 HSBC Holdings plc Annual Report and Accounts 2017 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, which is available under group results and reporting 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. Benefits To provide benefits in accordance with local market practice. Annual incentive To drive and reward performance against annual financial and non- financial 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. Implementation in 20181 No change from 2017. • Stuart Gulliver: £1,250,000 • John Flint: £1,200,000 • Iain Mackay: £700,000 • Marc Moses: £700,000 No change from 2017. • Stuart Gulliver: £1,700,000 • John Flint: £1,700,000 • Iain Mackay: £950,000 • Marc Moses: £950,000 • Non-pensionable and paid in shares. • Released annually on a pro-rata basis over five years, starting from March 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 base No change from 2017. salary. • Include, for example, medical insurance, income protection No change from 2017. insurance, health assessment, life assurance, club membership, tax return assistance, car benefit and travel assistance, including any tax due on the benefit. • Additional benefits may also be provided where an executive Director 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 base salary. • Performance is measured against an annual scorecard, which varies by individual. • On vesting, shares are subject to a retention period of at least six months. • Number of shares to be awarded can be determined taking into consideration a share price discounted for expected dividend yield. • 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 outcomes, 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. • On vesting, shares are subject to a retention period of at least six months. • Awards are discretionary and subject to malus during the vesting period and clawback for a period of seven to 10 years from the date of award. • Number of shares to be awarded can be determined taking into consideration a share price discounted for expected dividend yield. • See page 156 for details of performance measures. • Shares issued are subject to a retention period of one year after vesting in accordance with new regulatory requirements. • Details of the performance measures and targets for awards to be made in 2018 (in respect of 2017) are set out on page 151. • For awards to be made in respect of 2018, the measures and targets will be determined at the end of 2018 for the performance period commencing on 1 January 2019. • On vesting, awards are subject to a retention period of one year in accordance with new regulatory requirements. • Awards are not entitled to dividend equivalents during the performance and deferral period in accordance with new regulatory requirements. No change from 2017. Shareholding guideline To ensure appropriate alignment with the interest of our shareholders. The shareholding guidelines as a percentage of base salary are: • Group Chief Executive: 400% • Group Finance Director and Group Chief Risk Officer: 300% 1 John Flint will succeed Stuart Gulliver as executive Director and Group Chief Executive with effect from 21 February 2018. Stuart Gulliver will step down as executive Director and Group Chief Executive on 20 February 2018. 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. HSBC Holdings plc Annual Report and Accounts 2017 143 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Directors’ Remuneration Report Remuneration policy summary – non-executive Directors Non-executive Directors are not employees and receive a fee for their services, as follows: • base fee; 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 achieved by 2019 or within five years of their appointment if later. A travel allowance of £4,000 is provided to non-UK based non- executive Directors to reflect the additional time commitment required for travel. Category Non-executive Group Chairman1 Base fee SID Audit, Risk, Remuneration, Financial System Vulnerabilities and Conduct & Values Committees Nomination Committee Philanthropic & Community Investment Oversight Committee Chairman Member Chairman Member Chairman Member 2018 fees £ 1,500,000 110,000 54,000 60,000 30,000 40,000 25,000 25,000 15,000 1 Group Chairman does not receive a base fee or any other fees in respect of chairmanship of any other committee. The Committee has exercised its discretion to provide Mark Tucker with life assurance and healthcare insurance with effect from 1 February 2018, taking into consideration that he is performing the role with a time commitment of not less than four days per week, and holds no other offices outside of HSBC Holdings plc. Service contracts Executive Directors Douglas Flint1 14 Feb 2011 John Flint 21 Feb 2018 Stuart Gulliver 10 Feb 2011 Iain Mackay 4 Feb 2011 Marc Moses 27 Nov 2014 12 months 12 months 12 months 12 months 12 months Contract date (rolling) Notice period (Director & HSBC) 1 Douglas Flint stepped down from the Board on 30 September 2017. 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. The Directors’ biographies are set out on pages 122 to 125, 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 Directors' letters of appointment that could give rise to remuneration payments or payments for loss of office. Non-executive Directors’ current terms of appointment will expire as follows: 2018 AGM Phillip Ameen Joachim Faber John Lipsky Heidi Miller 2019 AGM 2020 AGM Henri de Castries Irene Lee Pauline van der Meer Mohr 2021 AGM Mark Tucker Kathleen Casey Laura Cha David Nish Jonathan Symonds Jackson Tai Lord Evans of Weardale Activities The Committee met seven times during 2017. The following is a summary of the Committee’s key activities during 2017. 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. Annual report on remuneration Remuneration Committee Details of the roles, responsibilities and membership of the Committee are set out on page 132. During 2017, members of the Committee included Pauline van der Meer Mohr (Chair from 28 April 2017), Henri de Castries (appointed on 26 May 2017), John Lipsky, David Nish (appointed on 26 May 2017), Sam Laidlaw (Chairman and member until 28 April 2017) and Paul Walsh (until 21 April 2017). 144 HSBC Holdings plc Annual Report and Accounts 2017 Details of the Committee’s key activities Executive Directors All employees • Approved Directors' Remuneration Report and Strategic Report. • Considered executive Director remuneration policy matters for shareholder consultation. • Consulted with key shareholders and proxy advisory bodies on executive Director remuneration matters. • Reviewed and approved executive Director remuneration matters. • Reviewed and approved executive Directors’ scorecards and pay • Approved 2016/2017 performance year pay review matters and high- priority programmes progress. • Reviewed remuneration policy effectiveness. • Considered progress update on Monitor recommendations. • Received updates on notable events and regulatory and corporate governance matters. • Reviewed and approved 2017 Material Risk Taker ('MRT') identification proposals. Advisers The Committee received input and advice from different advisers on specific topics during 2017. 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 in 2015 after considering invited proposals from a number of consultancy firms. In 2017, 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 tax compliance and other advisory services to the Group. 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 2017. 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 2017, total fees of £109,350 were incurred in relation to 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. No executive Directors are involved in deciding their own remuneration. In addition, the Committee engaged with and received updates from the following employees: Single figure of remuneration (Audited) approach and MRT list. • Approved 2017 regulatory submissions. • Iain Mackay, Group Finance Director; • Marc Moses, Group Chief Risk Officer; • Stuart Levey, Chief Legal Officer; • John Flint, Chief Executive, Retail Banking and Wealth Management; • Elaine Arden, Group Head of Human Resources (from June 2017); • Donna Wong, Acting Group Head of Human Resources (until May 2017); • Alexander Lowen, Group Head of Performance and Reward; • Colin Bell, Group Head of Financial Crime Risk; • Ralph Nash, Global Head of Financial Crime Compliance and Group Money Laundering Reporting Officer; • Andy Maguire, Group Chief Operating Officer; and • Ben Mathews, Group Company Secretary. The Committee also received feedback and input from the Group Risk Committee, the Financial System Vulnerabilities Committee and the Conduct & Values Committee on risk, conduct and compliance-related matters relevant to remuneration. This included input from the Financial System Vulnerabilities Committee in relation to progress on enhancing the anti-money laundering (‘AML’) and sanctions compliance programmes, for the purposes of the Committee’s determination on any adjustments to be made under the downward override policy. The following table shows the single figure total remuneration of each executive Director for 2017, together with comparative figures for 2016. Single figure of remuneration Base salary Fixed pay allowance Cash in lieu of pension Annual incentive LTI1 Sub-total Taxable benefits Non- taxable benefits Notional returns (£000) (£000) (£000) (£000) (£000) (£000) (£000) (£000) (£000) Douglas Flint2 Stuart Gulliver3 Iain Mackay Marc Moses 2017 2016 2017 2016 2017 2016 2017 2016 1,125 1,500 1,250 1,250 700 700 700 700 — — 1,700 1,700 950 950 950 950 338 450 375 375 210 210 210 210 — — 2,127 1,695 1,334 987 1,358 1,005 — — — — — — — — 1,463 1,950 5,452 5,020 3,194 2,847 3,218 2,865 83 100 500 557 64 52 16 15 64 86 71 71 37 37 38 38 — — 63 27 42 17 42 18 Total (£000) 1,610 2,136 6,086 5,675 3,337 2,953 3,314 2,936 1 The first LTI award was made in February 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. 2 Douglas Flint stepped down from the Board on 30 September 2017 and his remuneration reflects time served as an executive Director. Details on retirement arrangements are provided on page 151. 3 To meet regulatory deferral requirements for 2017, 60% of the annual incentive award of Stuart Gulliver has been deferred in shares and will vest in five equal instalments between the third and seventh anniversary of the grant date. HSBC Holdings plc Annual Report and Accounts 2017 145 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Directors’ Remuneration Report 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 2018. 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 • Paid in immediately vested shares subject to a retention period of one year. Perform -ance period Annual incentive Long-term incentive • Subject to clawback provisions for seven years from grant, which may be extended to 10 years in the event of an ongoing internal/ regulatory investigation.1 • Award subject to a three-year forward-looking performance period. • Subject to performance outcome, awards will vest in five equal annual instalments starting from the third anniversary of the grant date. • On vesting, shares are subject to a retention period of one year. Malus/Clawback provisions1 Performance period Vesting period Retention period 1 Applies to both annual incentive and long-term incentive. Notes to the single figure of remuneration (Audited) Benefits In the single figure of remuneration table, ‘benefits’ refers to: • all taxable benefits (gross value before payment of tax) including provision of medical insurance, accommodation and car, club membership, including any tax gross-up; and non- taxable benefits including the provision of life assurance and other insurance coverage. The values of the significant benefits in the single figure table are set out in the following table. (Audited) Douglas Flint Stuart Gulliver 2017 2016 2017 2016 Car benefit (UK and Hong Kong)1 Hong Kong bank-owned accommodation2 Tax expense on car benefit and Hong Kong bank-owned accommodation (£000) — — — 64 (£000) — — 282 263 (£000) — — 164 211 Insurance benefit (non-taxable)1 (£000) 56 75 63 63 1 The car benefit, tax on car benefit and insurance benefits for Iain Mackay and Marc Moses are not included in the above table as they were not significant. 2 Taxable value determined 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. Notional returns In the single figure of remuneration table above, ‘notional returns’ refers to the notional return on deferred cash for awards made prior to 2017. The deferred cash portion of the annual incentive granted prior to 2017 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. No deferred cash awards have been made to executive Directors under the current policy that has been operated from the 2016 financial year. Determining executive Directors’ annual performance (Audited) Executive Director’s awards reflected the Committee’s assessment of their performance against the personal and corporate objectives in their scorecards, which were agreed at the start of the year and reflect the Group’s strategic priorities and risk appetite. In accordance with the downward override policy, the Committee also consulted the Financial System Vulnerabilities Committee and took into consideration its feedback in relation to progress on enhancing AML and sanctions compliance, along with progress in meeting the Group’s obligations under the AML 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 achieve a required behaviour rating, which is assessed by reference to the HSBC Values. For 2017, all executive Directors achieved the required behaviour rating. 146 HSBC Holdings plc Annual Report and Accounts 2017 The performance achieved by executive Directors in the year is shown in the table below. Annual assessment Profit before tax1 Capital management 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) Financial performance Annual assessment Measure Profit before tax ($bn)1 Deliver cost savings ($bn) 2 Reduce Group RWAs ($bn) Strategic growth3 Stuart Gulliver Iain Mackay Marc Moses Weighting (%) Assessment (%) Outcome (%) Weighting (%) Assessment (%) Outcome (%) Weighting (%) Assessment (%) Outcome (%) 20.00 100.00 — 20.00 10.00 10.00 25.00 15.00 100.00 — 25.00 100.00 90.19 85.00 97.92 20.00 — 5.00 10.00 9.02 21.25 14.69 79.96 £2,660 £2,127 10.00 25.00 10.00 10.00 — 25.00 20.00 100.00 100.00 100.00 25.00 100.00 — 90.00 97.70 10.00 25.00 2.50 10.00 — 22.50 19.54 89.54 £1,490 £1,334 10.00 100.00 10.00 — — — — 15.00 100.00 — — 50.00 25.00 100.00 86.25 92.18 — — 15.00 — 43.13 23.04 91.17 £1,490 £1,358 Minimum (25% payout) Maximum (100% payout) Performance Assessment $16.0 $30.2 $63.4 Various $19.0 $29.6 $70.5 Various $21.2 $30.2 $70.7 Fully met targets for six measures and partly met targets for three measures. 100.00% 25.00% 100.00% 90.19% 1 Profit before tax, as defined for Group annual bonus pool calculation. This definition excludes business disposal gains and losses, debt valuation adjustments, restructuring and write- off costs included in ‘Costs to Achieve' and variable pay expense. It does, however, take into account fines, penalties and costs of customer redress, which are excluded from the adjusted profit before tax. The adjusted profit before tax as per adjusted results is found on page 2. 2 Measured by reference to the 2017 exit run-rate for adjusted costs compared with our 2014 cost base. 3 Strategic growth measures include optimising global network, rebuilding NAFTA region profitability, delivering growth above GDP from our international network, pivot to Asia and Renminbi internationalisation. HSBC Holdings plc Annual Report and Accounts 2017 147 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Directors’ Remuneration Report 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 • Achieve and sustain compliance with global financial crime compliance policies and procedures, and/or have approved dispensations in place. Implementation of 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. Personal objectives • Ensure climate change is reflected 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 UK departure from the EU. • Delivery of high-priority projects. • Improve customer satisfaction and employee diversity. • Complete succession and transition planning. Performance Assessment • The financial crime risk management agenda has continued to be pursued rigorously 85.0% resulting in key compliance action plan deliverables being met and strong progress made on Global Standards programme. This has been reinforced by a strong tone from the top, active engagement at relevant governance forums and full commitment to the ongoing development of the Financial Crime Risk ('FCR') function. Risk management practices materially strengthened across regions and businesses. However, further improvement is needed before sustainable maturity is achieved. Implemented the operational risk management framework with key milestones met. • • The conduct programme consistently delivered against the committed plan, including high priority conduct gaps closed and action plans implemented in respect of remaining gaps as well as the production and embedding of conduct management information. Achieved consistent management, oversight and delivery of conduct outcomes across all global businesses and significant global functions, including the effective transition to business as usual activities. • The AML DPA expired on 11 December 2017, and at the DoJ's request, the charges deferred by the AML DPA have been dismissed by the US district court that oversaw the agreement. • HSBC scored ‘A-’ (leadership level) in the Climate Disclosure Project 2017 climate change 97.9% rankings. In 2017, HSBC developed and published its sustainability strategy and announced five commitments to support the transition to a low-carbon economy. These include a commitment to provide $100bn of sustainable finance, demonstrating HSBC’s ambition to be a leading global partner to the public and private sectors in the transition to a low carbon economy. • The Group’s geographic coverage has been reduced to 67 countries and territories and previously announced transactions/closures are being progressed. • Establishment of the UK ring-fenced bank is on track, with the provisional banking licence approved by the Prudential Regulation Authority (‘PRA’). 91% of Birmingham head office roles resourced, and the majority of technology deployments complete. Implementation plan for a UK departure from the EU is on track. • • The high-priority programmes, including digital transformation and cybersecurity have been assessed as fully met. • Achieved customer recommendation of 82% (target 75%) by retail customers. Good progress has been made in 2017, notably establishing the ‘Moments Of Truth’ survey in key markets. • Achieved target (26.3%) for female representation at senior management level. • Group succession plan is in place for key management personnel. • Stuart Gulliver was awarded ‘Order of the Aztec Eagle’, Mexico‘s highest distinction for foreign citizens and was the first banking executive ever to receive this award. 148 HSBC Holdings plc Annual Report and Accounts 2017 Iain Mackay Performance • Capital management framework fully implemented with capital actions enabled and return on tangible equity introduced as the revised capital management measure in internal and external reporting. Assessment 100.0% Capital management • Implement consistent capital management framework across the Group for internal and external reporting. Global Standards including risk and compliance • 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 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. • Significant effort undertaken during 2017 to strengthen the self-identification, recording 90.0% and remediation of audit issues through the implementation, training and awareness of the enhanced control framework. There were a small number of residual risks, all of which are appropriately managed. • Largely implemented the operational risk transformation programme and operational risk management framework. • Strong progress made towards the implementation of risk steward responsibilities for accounting and tax risk. Oversight of these risks within business areas is being progressed through the controls optimisation project. • Completed implementation of the global conduct programme milestones including the production and embedding of conduct management information. • Successfully delivered stress test submissions; including Comprehensive Capital Analysis and Review (‘CCAR’), Annual Stress Testing and PRA stress tests. Largely completed delivery of IFRS 9 programme. Personal objectives • Enhanced environmental, social and • First ESG report published in April 2017. Updated ESG report published in November 2017. • Significant cost and headcount saves achieved through the Global Finance transformation 97.7% governance (‘ESG’) disclosures. • 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. together with substantial strengthening of the Global Finance centres. Progress achieved in enhancing efficiency through process re-engineering and technology deployment with improvements in timing and quality of delivery. • UK ring-fenced bank financial and regulatory reporting infrastructure on track to support employees and product systems migrations and to start trading as HSBC UK on 1 July 2018, subject to ring-fencing transfer scheme approval by court. 91% of Birmingham head office roles resourced. • Finance Steering Committee established for dealing with UK’s departure from the EU and implementation plan is on track. • Achieved 26.7% (target = 28.5%) for female representation at senior management in the Finance function. • Global people & talent programme established across the Global Finance function, focusing on the identification, development and leverage of talent at all levels to strengthen capability, quality and diversity of leadership succession across the function. Top 100 Programme launched in partnership with Duke Corporate Education. • Succession plans in place for key management personnel. HSBC Holdings plc Annual Report and Accounts 2017 149 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Directors’ Remuneration Report Marc Moses Global Standards including risk and compliance • Ensure the Global Risk function enables and supports the FCR function to achieve and sustain compliance with global financial crime compliance policies and procedures. Implementation of the operational risk management framework. • • Effective management of material Performance Assessment • Enabled effective FCR management through the enterprise wide and operational risk 86.3% • management frameworks, provision of risk analytics support to FCR management and the completion of FCR model. Implementation of operational risk management framework and the delivery of risk management system of record on time and within budget. Material operational risks are being actively managed and remediation actions relating to high and very high residual risks are being completed. • Completed the delivery of the US risk management measures to enable compliance with regulations; largely completed the delivery of IFRS 9 and Dodd-Frank programmes. • Successfully delivered the 2017 Annual Cyclical Scenario: Biennial Exploratory Scenario operational risks. submissions to the PRA and the CCAR submissions to the Federal Reserve Board. • 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. Personal objectives • 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 function • transformation. Improve RWA effectiveness and efficiency. Improve employee diversity. • • Complete succession and transition planning. • Credit, market and liquidity metrics effectively managed through the Group Risk Management Meeting and within Group risk appetite profile. • Successfully completed all 2017 conduct programme milestones including the production and embedding of conduct management information, and enabling compliance with conduct regulations. Maturity levels across conduct outcomes largely met expectations. • Enabled the embedding of effective client and sustainability risk management; engaged 92.2% constructively with non-governmental organisations and participated actively in the Global Climate Change Disclosure taskforce. Actively applied revised sustainability policies and frameworks to support the successful launch of Green and Social Bonds, the risk management of our environmentally-sensitive exposures such as incorporating new standards for the palm oil sector to protect high carbon stock forests and peat, and delivery of actions to reduce client sensitivity to risks associated with the transition from a high- carbon to low-carbon economy through the financing of green initiatives. • Pivot to Asia with ongoing RBWM expansion and launch of China Cards has driven higher returns and lending growth, particularly in Hong Kong and the Pearl River Delta. Regulatory approval obtained to establish HSBC Qianhai Securities Limited will increase access to China’s markets for domestic and international clients. • Effectively managed costs and headcount of the Global Risk function through rigorous monitoring of performance and implementation of transformation activities including process re-engineering, and location optimisation. • Strengthened RWA effectiveness and efficiency within CMB and GBM supporting overall reduction in Group RWAs. • Delivered Global Risk function people initiatives including succession plans and achieved 27.1% (target = 27.7%) for female representation at senior management in the Risk function. 150 HSBC Holdings plc Annual Report and Accounts 2017 Long-term incentive awards (Audited) For the 2017 performance year, the Committee determined to grant Iain Mackay and Marc Moses an LTI award equivalent to 319% of base salary after taking into consideration performance achieved for the financial year ended 31 December 2017 and the achievements against the strategic actions announced in June 2015. The awards will be subject to a three-year performance period starting 1 January 2018. As the awards are not entitled to Performance conditions for LTI awards in respect of 2017 Measures Average return on equity (with CET1 underpin)1 Cost-efficiency ratio Relative total shareholder return2 Minimum (25% payout) 9.0% 60.0% At median of the peer group. dividend equivalents per regulatory requirements, the number of shares to be awarded to executive Directors will be adjusted to reflect the expected dividend yield of the shares over the vesting period. The measures that will be used to assess performance and payout are described below. To the extent performance conditions are satisfied at the end of the three-year performance period, 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 retention period of one year. Target (50% payout) 10.0% 58.0% 11.0% 55.5% Maximum (100% payout) Weighting % Straight-line vesting between minimum and maximum. At upper quartile of the peer group. Risk and compliance • Achieve and sustain compliance with Global Financial Crime Compliance policies and procedures. • Achieve a sustainable adoption of Group operation risk management framework, along with its policies and practices. • Achieve and sustain delivery of global conduct outcomes and compliance with conduct of business regulatory obligations. Strategy • Sustainable finance3 • Employee confidence4 • Customer (Based on customer recommendation in top five markets by revenue) Total 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. $30bn 65% $34bn 67% $37bn 70% Improvement in recommendation in three of top five markets for CMB, GBM and RBWM. Improvement in recommendation in four of top five markets for CMB, GBM and RBWM. Improvement in recommendation in all of top five markets for CMB, GBM and RBWM. 20 20 20 25 15 100 1 Significant items are excluded from the profit attributable to ordinary shareholders of the company for the purpose of computing adjusted return on equity. If the CET1 ratio at the end of performance period is below the CET1 risk tolerance level set in the RAS then, the assessment for this measure will be reduced to nil. 2 The peer group for the 2017 award is: 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. 3 To be assessed based on cumulative financing and investment made to develop clean energy, lower-carbon technologies and projects that contribute to the delivery of the Paris Agreement and the UN sustainable development goals. 4 Assessed based on results of the latest employee snapshot survey question ‘I am seeing the positive impact of our strategy’. Payments to past Directors Retirement arrangements for Douglas Flint (Audited) (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 Douglas Flint received £31,500 in fees from Chairman Mentors International in the period to 30 September 2017. During 2017, Stuart Gulliver received SGD10,000 in fees as a member of the Monetary Authority of Singapore International Advisory Panel, which was donated to charity. Douglas Flint retired from the Board on 30 September 2017. In line with the remuneration policy, he is not entitled to be considered for any variable pay awards in respect of 2017. In accordance with his contractual entitlements and the approved policy, he received the following payments and benefits until he ceased to be an employee on 31 December 2017. • Salary and cash in lieu of pension: £487,500; and • Contractual benefits valued at: £24,068. In December 2017, Douglas Flint received a payment of £377,500 in lieu of his salary and cash in lieu of pension for the period from 1 January 2018 to 11 March 2018 and a payment of £180,000 in lieu of unused holiday entitlement. He received no compensation payment for ceasing to be an executive Director. As disclosed in our approved remuneration policy, he is also eligible to receive medical coverage for a period of seven years from 1 January 2018. Scheme interests awarded during 2017 (Audited) The table below sets out the scheme interests awarded to Directors in 2017, for performance in 2016, as disclosed in the 2016 Directors’ Remuneration Report. No non-executive Directors received scheme interests during the financial year. HSBC Holdings plc Annual Report and Accounts 2017 151 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Directors’ Remuneration Report Scheme awards in 2017 (Audited) Type of interest awarded Basis on which award made Face value awarded1,2 £000 Percentage receivable for minimum performance1,2 Date of award Number of shares awarded Share price on date of grant3 End of performance period Stuart Gulliver Deferred shares Long-term incentive 2016 27 Feb 2017 Iain Mackay Deferred shares Long-term incentive 2016 27 Feb 2017 Marc Moses Deferred shares Long-term incentive 2016 27 Feb 2017 3,990 2,232 2,232 25 25 25 613,562 343,226 343,226 £6.5030 31 Dec 2019 £6.5030 31 Dec 2019 £6.5030 31 Dec 2019 1 For annual incentive, awards were determined based on performance achieved during the period to 31 December 2016 and were subject to a six-month retention period on vesting. These awards are also subject to clawback for a maximum period of 10 years from the date of the award. The overall award level could have been 0% of the maximum opportunity if minimum performance was not achieved at the end of the performance period. 2 For LTI, awards are subject to a three-year forward-looking performance period and awards vest in five equal instalments subject to performance achieved. On vesting, awards will be subject to a six-month retention period. Awards are subject to malus during the vesting period and clawback for a maximum period of 10 years from the date of the award. Details of performance conditions applicable during the forward-looking performance period are set out below. 3 Share price used is the closing mid-market price on the last working day preceding the date of grant. The above table does not include details of shares issued as part of the fixed pay allowances, as those shares vested immediately and are not subject to any service or performance conditions. Details of the performance measures and targets for the LTI award in respect of 2016 are detailed below. Performance conditions for LTI awards in respect of 2016 Measures Average return on equity1 Cost efficiency (adjusted jaws) Relative total shareholder return2 Global Standards including risk and compliance • Status of AML DPA. Minimum (25% payout) 7.0% Positive Target (50% payout) 8.5% 1.5% Maximum (100% payout) 10.0% 3.0% At median of the peer group. Straight-line vesting between minimum and maximum. At upper quartile of the peer group. Not applicable Not applicable Met all commitments to achieve closure of the AML 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) • Employee3 (Results of employee survey) 50% 22% 65% 51% 23% 67% 52% 24% 70% • Customer (Based on customer recommendation in home country markets) 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. Total Weighting % 20 20 20 25 15 100 1 Significant items are excluded from the profit attributable to ordinary shareholders of the company for the purpose of computing adjusted return on equity. 2 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. 3 Assessed based on results of the latest employee snapshot survey question ‘I am seeing the positive impact of our strategy’. 152 HSBC Holdings plc Annual Report and Accounts 2017 Directors’ interests in shares (Audited) The shareholdings of all persons who were Directors in 2017, including the shareholdings of their connected persons, at 31 December 2017, or date of retirement from the Board, if earlier, 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 2017 to the date of this report. Shares (Audited) Executive Directors Douglas Flint (retired from the Board on 30 September 2017) Stuart Gulliver Iain Mackay Marc Moses Group Managing Directors8 At 31 Dec 2017, or date of retirement from the Board, if earlier Shareholding guidelines2 (% of salary) Shareholding at 31 Dec 2017, or date of retirement from the Board, if earlier3 (% of salary) Share interests4 (number of shares) Share options5 Scheme interests Shares awarded subject to deferral1 without performance conditions4, 6 with performance conditions7 100% 400% 300% 300% 250,000 shares 125% 2,211% 470% 1,284% 252,606 3,711,169 442,118 1,207,068 n/a n/a 2,919 — 3,469 — n/a — 2,293,071 1,268,016 1,288,389 — 738,499 426,997 424,927 n/a n/a 1 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. 2 Unvested share-based incentives are note counted towards compliance with the shareholding guideline. 3 The value of the shareholding is calculated using an average of the daily closing share prices in the three months to 31 December 2017, (£7.4468). 4 For variable pay awards (annual incentive and LTI), 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 retaining the shares that vested from the underlying award (net of tax) or 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 Group Performance Share Plan ('GPSP') awards, which were made following an assessment of performance over the relevant period ending on 31 December 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 AML DPA, as determined by the Committee. The AML DPA condition ends on the fifth anniversary of the award date. LTI awards granted in February 2017 are subject to the performance conditions as set out on page 152. 8 All Group Managing Directors are expected to meet their shareholding guideline by 2019 or within five years of the date of their appointment, whichever is later. Share options (Audited) Douglas Flint Iain Mackay Date of award Exercise price Exercisable 23 Sep 2014 23 Sep 2014 £ 5.1887 5.1887 from1 until 1 Jan 2018 30 June 2018 1 Nov 2017 30 April 2018 At 1 Jan Exercised 2017 in year 2,919 3,469 — — At 31 Dec 2017, or date of retirements from the Board, if earlier 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 determined by reference to the average market value of HSBC Holdings ordinary shares on the five business days immediately preceding the invitation date, then applying a discount of 20%. 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 29 December 2017 was £7.6650. Market value is the mid-market price derived from the London Stock Exchange Daily Official List on the relevant date. Under the Securities and Futures Ordinance of Hong Kong, the options are categorised as unlisted physically settled equity derivatives. 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 nine- year period that ended on 31 December 2017. 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 for the Group Chief Executive over the past nine years, together with the outcomes of the respective annual incentive and long-term incentive awards, is presented in the following table. HSBC Holdings plc Annual Report and Accounts 2017 153 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Directors’ Remuneration Report HSBC TSR and FTSE 100 Total Return Index 280% 230% 180% 130% 80% Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015 Dec 2016 Dec 2017 HSBC TSR FTSE 100 Total Return Index Group Chief Executive Total single figure £000 Annual incentive1 (% of maximum) Long-term incentive2,3 (% of maximum) 2009 2010 Michael Geoghegan Michael Geoghegan 2011 Stuart Gulliver 2012 Stuart Gulliver 2013 Stuart Gulliver 2014 Stuart Gulliver 2015 Stuart Gulliver 2016 2017 Stuart Gulliver Stuart Gulliver 7,580 7,932 8,047 7,532 8,033 7,619 7,340 5,675 6,086 94% 25% 82% 19% 58% 50% 52% 40% 49% 49% 54% 44% 45% 41% 64% —% 80% —% 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 AML DPA as determined by the Committee. The AML DPA condition ends on the fifth anniversary of the award date. 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 was made in February 2017, with a performance period ending in 2019. For year-on-year comparison purposes, if target performance is achieved over the three-year performance period, LTI payout would be 50% of grant value. In this case, the single figure total remuneration of the Group Chief Executive for year-on-year comparison would be (in £000) £7,670 for 2016. Stuart Gulliver was not eligible for an LTI award in respect of 2017 given his announced retirement. Comparison of Group Chief Executive and all- employee pay Relative importance of spend on pay The chart below shows the change in: The following charts compare the changes in Group Chief Executive pay to changes in employee pay between 2016 and 2017, and provide a breakdown of total staff pay relative to the amount paid out in dividends. • total staff pay between 2016 and 2017; and • dividends paid out in respect of 2016 and 2017. In 2017, we returned a total of $3bn to shareholders through share buy-backs. Percentage change in remuneration between 2016 and 2017 Group Chief Executive Employee group Relative importance of spend on pay Base salary1 Benefits2, 3 Annual incentive4 —% (10)% 25 % 5% 3% 12% 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. For benefits, employee group consists of UK employees which was deemed the most appropriate comparison for the Group Chief Executive given varying local requirements. For annual incentive, employee group consists of all employees globally. The change is based on annual incentive pool as disclosed on page 31 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 2016 and 2017 scorecard outcome, reflecting performance achieved in those years, and change in policy. Details of the 2017 total single figure of remuneration for the Group Chief Executive are on page 145. 154 HSBC Holdings plc Annual Report and Accounts 2017 ì 5% î 4% $13,196m $12,600m $17,315m $18,065m 2017 2016 2017 2016 Return to shareholder Employee compensation and benefits Dividends Share buy-back Non-executive Directors (Audited) The table below shows the total fees of non-executive Directors for 2017, together with comparative figures for 2016. Fees and benefits (Audited) (£000) Phillip Ameen Kathleen Casey Henri de Castries Laura Cha Lord Evans of Weardale Joachim Faber Sam Laidlaw (Retired on 28 April 2017) Irene Lee John Lipsky Rachel Lomax (Retired on 28 April 2017) Heidi Miller David Nish Jonathan Symonds Jackson Tai Mark Tucker (Appointed on 1 September 2017) Pauline van der Meer Mohr Paul Walsh (Resigned on 21 April 2017) Total Total ($000) Footnotes 2017 2016 2017 2016 2017 2016 Fees1 Benefits2 Total 3 4 5 6 7 8 9 10 11 12 13 474 174 132 269 215 162 70 300 199 93 571 158 639 194 500 239 55 440 155 79 247 190 152 185 268 180 254 536 83 520 48 — 172 142 4,444 5,720 3,651 4,926 12 16 5 22 8 9 1 8 25 1 18 18 2 43 318 16 2 524 674 38 21 4 20 5 10 11 9 21 6 30 19 6 4 — 9 5 486 190 137 291 223 171 71 308 224 94 589 176 641 237 818 255 57 478 176 83 267 195 162 196 277 201 260 566 102 526 52 — 181 147 218 294 4,968 6,395 3,869 5,220 1 Fees include a travel allowance of £4,000 for non-UK based non-executive Directors. 2 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. The 2016 amounts have been restated to exclude National Insurance Contributions. Includes fees of £330,000 in 2017 (£315,000 in 2016) as a Director, Chairman of the Audit Committee and member of the Risk Committee of HSBC North America Holdings Inc. 3 4 Appointed as a member of the Group Remuneration Committee on 26 May 2017. 5 6 7 Includes fees of £75,000 in 2017 (£72,000 in 2016) as a Director, Deputy Chairman and member of the Nomination Committee of The Hongkong and Shanghai Banking Corporation Limited. Includes £8,000 (inclusive of VAT) in respect of his membership of a verwaltungsrat (advisory body) to HSBC Trinkaus & Burkhardt AG. Stepped down as Chairman of the Group Risk Committee on 28 April 2017 and resigned from the Group Risk Committee on 30 November 2017. Includes fees of £187,000 in 2017 (£173,000 in 2016) as a Director, and member of the Audit Committee and the Risk Committee of The Hongkong and Shanghai Banking Corporation Limited and as a Director, member of the Audit Committee and Chairman of the Risk Committee of Hang Seng Bank Limited. Includes fees of £427,000 in 2017 (£411,000 in 2016) as Chairman of HSBC North America Holdings Inc. 8 9 Appointed as a member of the Group Remuneration Committee on 26 May 2017. 10 Appointed as Senior Independent Director on 28 April 2017. Includes fees of £382,000 in 2017 (£345,000 in 2016) as non-executive Chairman of HSBC Bank plc. 11 Appointed as Chairman of the Group Risk Committee on 28 April 2017. 12 Received a one time relocation benefit of £300,000. 13 Appointed as Chairman of the Conduct & Values Committee and the Group Remuneration Committee on 28 April 2017. Non-executive Directors’ interests in shares (Audited) The shareholdings of persons who were non-executive Directors in 2017, including the shareholdings of their connected persons, at 31 December 2017, or date of cessation as a Director, if earlier, are set out below. The table below shows the comparison of shareholdings to the company shareholding guidelines. Shares Phillip Ameen Kathleen Casey Laura Cha Henri de Castries Lord Evans of Weardale Joachim Faber Sam Laidlaw (Retired on 28 April 2017) Irene Lee John Lipsky Rachel Lomax (Retired on 28 April 2017) Heidi Miller David Nish Jonathan Symonds Jackson Tai Mark Tucker (Appointed on 1 September 2017) Pauline van der Meer Mohr Paul Walsh (Resigned on 21 April 2017) 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 15,000 5,000 9,125 18,200 17,116 12,892 66,605 41,887 10,588 16,165 18,900 4,200 50,000 42,821 44,825 276,000 15,000 5,211 HSBC Holdings plc Annual Report and Accounts 2017 155 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Directors’ Remuneration Report Voting results from Annual General Meeting The table below summarises the voting results at our AGM. Annual General Meeting voting results Remuneration Report (2017 AGM) Remuneration Policy (2016 AGM) 1 Votes cast. For1 96.47% Against1 3.53% Withheld – 8,885,701,458 324,969,999 30,526,965 96.05% 3.95% – 8,887,168,002 365,908,568 35,165,873 Implementation of remuneration policy in 2018 for executive Directors Implementation of fixed remuneration is disclosed on page 144, along with the remuneration policy summary. Further details on performance measures and weightings for the 2018 annual incentive award are provided below. John Flint's fixed remuneration on taking on the the role of Group Chief Executive is disclosed on page 144. In line with the other executive Directors, he will be eligible for discretionary variable pay that consists of an annual incentive award up to a maximum value of 215% of base salary, and a long-term incentive award up to a maximum of 320% of base salary. Annual incentive scorecards The weightings and performance measures for the 2018 annual incentive award for Stuart Gulliver, John Flint, Iain Mackay and Marc Moses are disclosed below. 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 for a given year in the Annual Report and Accounts for that year in the Directors‘ Remuneration Report. 2018 annual incentive scorecards Executive Directors will be eligible for an annual incentive award of up to 215% of base salary. 2018 annual incentive scorecards measures and weightings John Flint and Stuart Gulliver Iain Mackay Marc Moses Measures Profit before tax Positive JAWS Revenue growth Capital management Strategic priorities1 Risk and compliance2 Total % 20 10 10 10 25 25 100 % 10 15 – 25 25 25 100 % 15 – – 10 15 60 100 1 Measures will include key objectives set out in the strategy to be agreed with the Board. 2 Measures will include objectives relating to financial crime risk, operational risk, conduct and other financial risks. Stuart Gulliver will step down as Group Chief Executive on 20 February 2018, and John Flint will succeed as Group Chief Executive with effect from 21 February 2018. The scorecard outcome as determined in line with the table above will be applied to the maximum annual incentive award opportunity for Stuart Gulliver and John Flint on a pro-rata basis taking into account time spent by them in the Group Chief Executive role. Stuart Gulliver will also be eligible to be considered for an annual incentive award and the Committee will consider his contribution as he continues to advise HSBC during the period between 21 February 2018 and his retirement date of 11 October 2018. Long-term incentives Details of the performance measures and targets for LTI awards to be made in 2018, in respect of 2017, are provided on page 151. The performance measures and targets for awards to be made in respect of 2018, granted in 2019, will be provided in the Annual Report and Accounts 2018. Retirement arrangements for Stuart Gulliver Stuart Gulliver will step down as executive Director and Group Chief Executive on 20 February 2018 and will then cease employment with the Group on 11 October 2018. Under the terms of his service contract, Stuart Gulliver will continue to receive his current salary of £1,250,000 per annum, his fixed pay allowance of £1,700,000 per annum, his cash in lieu of pension allowance of £375,000 per annum and his contractual benefits until his retirement. He will also be eligible to be considered for a 2018 annual incentive award as set out above. He will not receive a 2017 or 2018 LTI award, for which he otherwise would have been eligible to be considered for an amount which could have totalled up to £3,990,000 per year. 156 HSBC Holdings plc Annual Report and Accounts 2017 Stuart Gulliver will also be granted Good Leaver status, in accordance with the plan rules, in respect of his unvested deferred awards that were awarded in performance years 2012 to 2017. These awards were published in the annual report in those respective years and approved by shareholders at the respective AGMs. These awards will vest on the scheduled vesting dates, subject to the relevant terms (including post-vest retention periods, malus and, where applicable, clawback) and the achievement of any required performance conditions. Vesting of his 2016 performance year LTI award will be pro-rated for the period he is employed by the Group. As per the shareholder approved remuneration policy, Stuart Gulliver will be entitled to a payment in lieu of any accrued but untaken holiday entitlement at his retirement date of 11 October 2018, and certain post-departure benefits including medical cover for a period of up to seven years. He will receive no compensation or payment for the termination of his service contract. Implementation of remuneration policy in 2018 for non-executive Directors The Committee has reviewed the fee levels payable to the non- executive Directors and details can be found on page 143. 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 2017. Emoluments Basic salaries, allowances and benefits in kind Pension contributions Performance-related pay paid or receivable 1 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 2017 £000 1,610 — — — — — 2016 £000 2,136 — — — — — 2017 £000 3,896 — 2,127 — — 63 2016 £000 3,953 — 5,685 — — 27 2017 £000 1,961 — 3,566 — — 42 1,610 2,072 2,136 2,882 6,086 7,834 9,665 13,039 5,569 7,168 2016 £000 1,949 — 3,219 — — 17 5,185 6,995 2017 £000 1,914 — 3,590 — — 42 5,546 7,139 2016 £000 1,913 — 3,237 — — 18 5,168 6,972 1 Includes the value of the deferred and LTI awards at grant. The information for 2016 has been restated to include the value of LTI. The aggregate amount of Directors' emoluments as defined above (including both executive Directors and non-executive Directors) for the year ended 31 December 2017 was $30,608,444. 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, car benefit, travel assistance, and relocation costs (including any tax due on these benefits, where applicable). Medical insurance benefit of £4,181 ($5,382) was provided to former director, Alexander Flockhart, during the year ended 31 December 2017. 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 The following table sets out the details of emoluments paid to senior management (being here, executive Directors and Group Managing Directors of the Group) for the year ended 31 December 2017, or for the period of appointment in 2017 as a Director or Group Managing Director. Details of the remuneration paid to the five highest paid employees, comprising one executive Director and four Group Managing Directors of the Group, for the year ended 31 December 2017 are also presented. 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 value of deferred shares awards at grant. Emoluments by bands Hong Kong dollars US dollars $16,000,001 – $16,500,000 $24,500,001 – $25,000,000 $25,500,001 – $26,000,000 $33,500,001 – $34,000,000 $34,000,001 – $34,500,000 $36,000,001 – $36,500,000 $43,500,001 – $44,000,000 $47,500,001 – $48,000,000 $52,500,001 – $53,000,000 $55,000,001 – $55,500,000 $60,000,001 – $60,500,000 $61,500,001 – $62,000,000 $64,500,001 – $65,000,000 $65,000,001 – $65,500,000 $89,000,001 – $89,500,000 $2,053,177 – $2,117,338 $3,143,927 – $3,208,088 $3,272,250 – $3,336,412 $4,298,839 – $4,363,000 $4,363,000 – $4,427,162 $4,619,647 – $4,683,809 $5,582,074 – $5,646,236 $6,095,368 – $6,159,530 $6,736,986 – $6,801,147 $7,057,795 – $7,121,956 $7,699,412 – $7,763,574 $7,891,898 – $7,956,059 $8,276,868 – $8,341,030 $8,341,030 – $8,405,192 $11,420,795 – $11,484,956 Five highest paid employees Senior management £000 18,729 12 15,272 2,465 — 36,478 46,955 £000 41,143 198 40,220 2,465 — 84,026 108,159 Number of highest paid employees Number of senior management — — — — — — — — — — 1 1 1 1 1 2 1 1 1 2 1 1 1 1 2 1 1 1 1 1 HSBC Holdings plc Annual Report and Accounts 2017 157 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Directors’ Remuneration Report Pillar 3 remuneration disclosures Remuneration for all employees Remuneration policy overview and governance 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. We believe that remuneration is an important tool for instilling the right behaviours, and driving and encouraging actions that are aligned to organisational values and expectations. Our remuneration strategy as approved by the Committee is based on the following principles: • An alignment to performance at all levels (individual, business and Group) taking into account both ‘what’ has been achieved and ‘how’ it has been achieved. The ‘how’ helps ensure that performance is sustainable in the longer term, consistent with HSBC’s values, conduct and risk and compliance standards. • Being informed, but not driven by, market position and practice. Market benchmarks are sourced through independent specialists and provide an indication of the range of pay levels and employee benefits provided by our competitors. • Targeting pay for employees across the full market range depending upon their individual performance and that of the Group. An individual’s position in this market range will also vary depending upon their performance in any given year. • Compliance with relevant regulation across all of our countries and territories. Based on these principles, our approach to determining remuneration is based on the following objectives: • Offering our employee a competitive total reward package that includes a mix of fixed pay, variable pay and employee benefits. • Maintaining an appropriate balance between fixed pay, variable pay and employee benefits, taking into consideration an employee’s seniority, role, individual performance and the market. Fixed pay levels should be market competitive and allow our employees to meet their basic day-to-day living expenses. • Variable pay is awarded on a discretionary basis and dependent upon Group, business and individual performance. • Employee benefits offered should be valued by a diverse workforce, appropriate at the local market level and support HSBC’s commitment to employee well-being. • Promoting employee share ownership through variable pay deferral or voluntary enrolment in an all employee share plan. • Reward packages should be linked to performance and behaviour with no bias towards an individual’s ethnicity, gender, age, or any other characteristic. The Group remuneration policy for all employees based on the above principles and objectives applies on a group-wide basis, subject to compliance with any applicable local laws and regulation. Governance and role of relevant stakeholders The Committee is responsible for setting the principles, parameters and governance framework for the Group‘s remuneration policy applicable to all Group employees. The Committee also oversees the application of the policy to the wider employee population, including employees in subsidiaries and branches, subject to local regulations. All members of the Committee are independent non-executive Directors of HSBC Holdings plc. Details of the roles, responsibility and membership of the Committee, including other committees and senior management that the Committee engages with, are set out on page 132. Activities and advisers used by the Committee are detailed on page 144. The Committee reviewed the Group's remuneration policy in 2017 and made no material changes to the policy and its implementation for 2017. 158 HSBC Holdings plc Annual Report and Accounts 2017 Link between risk, performance and reward Our remuneration practices promote sound and effective risk management while supporting our business objectives. The key features of our remuneration framework that (subject to compliance with local laws and regulations) enable us to achieve alignment between risk, performance and reward are detailed in the following table. Alignment between risk and reward Framework elements Variable pay pool and individual performance scorecard Application The Group variable pay pool is expected to move in line with Group performance. We also use a countercyclical funding methodology, which is categorised by both a floor and a ceiling, and the payout ratio reduces as performance increases to avoid pro-cyclicality. The floor recognises that even in challenging times, remaining competitive is important. The ceiling recognises that at higher levels of performance it is not always necessary to continue to increase the variable pay pool, thereby limiting the risk of inappropriate behaviour to drive financial performance. The main quantitative and qualitative performance and risk metrics used for assessment of performance include: • Group and business unit performance: an evaluation of overall Group and business unit performance provided by Finance is considered by the Committee when determining the Group variable pay pool and, subsequently, the variable pay pool for each business unit. Where performance in a year is weak, as measured by profits, this will have a direct and proportionate impact on the pool. Judgement is exercised to ensure that the pool is adjusted for appropriate current and future risks taking into consideration performance against the RAS and global conduct outcomes. Fines, penalties and provisions for customer redress are automatically included in the Committee’s definition of profit. • Individual performance: assessment of performance is made with reference to a balanced scorecard of clear and relevant objectives. Risk and compliance objectives are included in the performance scorecard of senior management and a mandatory global risk objective is included in the scorecard of all other employees. All employees receive a behaviour rating as well as a performance rating, which ensures performance is assessed not only on what is achieved but also on how it is achieved. Therefore, variable pay of individuals is expected to reflect Group performance, their individual behaviour rating and performance rating determined against their performance objectives for the year, which are aligned to the Group's strategic actions, risk objectives and adherence to the HSBC Values. Remuneration for Control Function staff • The performance and remuneration of individuals in Control Functions, including risk and compliance employees, 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. • The Committee is responsible for approving the remuneration recommendations for the Group Chief Risk Officer and senior management in Control Functions. • Group policy is for Control Functions staff to report into their respective function and remuneration decisions for senior functional roles are led by, and must carry the approval of, the global function head. • The variable pay pool for Control Functions is determined centrally, without influence from the relevant business areas. Furthermore, employees performing a Control Function role have a direct reporting line through the relevant global function rather than through the relevant business areas. • Remuneration is carefully benchmarked with the market and internally to ensure that it is set at an appropriate level. Variable pay adjustments • Variable pay awards may be adjusted downwards in circumstances including: – Detrimental conduct, including conduct which brings HSBC 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 the HSBC Values and other mandatory requirements or policies. Malus Clawback • Positive adjustments to variable pay awards can also be made where exceptional behaviours have been demonstrated which go beyond the normal course of an employee’s responsibilities, and those which set an outstanding example of our Values-aligned behaviours and conduct expectations. • The override policy was introduced in 2014, based on the recommendations received from the independent Monitor as appointed by the AML DPA. This is applicable for current-year variable pay awards for executive Directors and certain other senior management. 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 its review and our group legal function. Malus can be made to unvested deferred awards granted in prior years. It may be applied in circumstances including: • 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. Clawback can be applied to vested or paid awards granted to MRTs on or after 1 January 2015 for a period of 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. Clawback may be applied in circumstances including: • 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. • A material failure of risk management suffered by HSBC or a business unit in the context of Group risk-management standards, policies and procedures. • We do not have commission-based sales plans globally. Sales incentives HSBC Holdings plc Annual Report and Accounts 2017 159 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Directors’ Remuneration Report Remuneration structure Total compensation (fixed pay and variable pay) is the key focus of our remuneration framework, with variable pay differentiated by performance and adherence to the HSBC Values. The key features and design characteristic of our remuneration system that applies on a Group-wide basis, subject to compliance with local laws, is set out below: Overview of remuneration structure for employees Remuneration components and objectives Application Fixed pay Attract and retain employees by paying market competitive pay for the role, skills and experience required for the business. • This may include salary, fixed pay allowance, cash in lieu of pension and other cash allowances in accordance with local market practices. They are categorised as fixed pay as all of these elements are based on predetermined criteria, non- discretionary, transparent and are not reduced based on performance. • Represent a higher proportion of total compensation for more junior employees. • All elements of fixed pay are fixed and may change to reflect an individual’s position, role or grade, cost of living in the country, individual skills, competencies, capabilities and experience, as may be evidenced by sustained strong performance of the individual. • Fixed pay is delivered in cash on a monthly basis, except for executive Directors, where the fixed pay allowance is delivered in shares. Benefits Ensure market competitiveness and provide benefits in accordance with local market practice. Annual incentive Drive and reward performance based on annual financial and non- financial measures consistent with the medium- to long-term strategy, stakeholder interests and adherence to HSBC values. Deferral Alignment with the medium- to long-term strategy, stakeholder interests and adherence to the HSBC Values. • This may include, but not be limited to, the provision of pensions, medical insurance, life insurance, health assessment and relocation allowances. • All employees are eligible to be considered for a discretionary variable pay award. Individual awards are determined on the • basis of individual performance against their performance objectives for the year, which are aligned to the Group’s strategic actions, a global risk objective and adherence to the HSBC Values and business principles. In addition, there is a process to identify behavioural transgressions for all employees during the year to ensure compliance with Group policies and procedures, and other expected behaviours. Such transgressions are taken into consideration in determining ex-ante adjustments to variable pay. • Represent a higher proportion of total compensation for more senior employees and will be more closely aligned to Group and business performance as seniority increases. • Variable pay awards for all Group employees identified as MRTs under European Union Regulatory Technical Standard 604/2014 are limited to 200% of fixed pay.1 • All awards are subject to malus and awards granted to employees identified as MRTs are subject to clawback (see section on variable pay adjustment, malus and clawback). • Awards can be in the form of cash, shares and, where required by regulations, in units linked to asset management funds. A portion of the annual incentive award may be deferred and vests over a period of three years, five years or seven years. • A Group-wide deferral approach is applicable to all employees across the Group. Awards above a specified threshold are subject to deferral based on a deferral table, as approved by the Group Remuneration Committee. The deferred variable pay is delivered over HSBC shares. Vesting of deferred awards will be annually over a three-year period with 33% vesting on the first anniversary of grant, 33% on the second anniversary and 34% on the third anniversary. • For MRTs identified in accordance with the PRA and Financial Conduct Authority (‘FCA’) remuneration rules, awards are generally subject to a minimum 40% deferral (60% for awards of £500,000 or more) over a minimum period of three years2. A longer deferral period is applied for certain MRTs as follows: – Five years for individuals identified in a risk-manager MRT role under the PRA and FCA remuneration rules. This reflects the deferral period prescribed by both the PRA and the European Banking Authority ('EBA') for individuals performing key senior roles with the Group. – Seven years for individuals in PRA designated senior management functions, being the deferral period mandated by the PRA as reflecting the typical business cycle period. • Individuals identified as MRTs under local regulations and not considered Group MRTs are subject to a three-year deferral period, except in Germany and Malta where individuals reporting into the local management Board and Executive Committee members, respectively, are subject to a five-year deferral. Local MRTs are also subject to a minimum deferral rate aligned to the Group MRT policy, except in China (where a minimum deferral rate of 50% is applied for the CEO in China), Oman (where a minimum deferral rate of 45% is applied) and Germany (where a minimum deferral rate of 60% is applied for local management board members). • All deferred awards are subject to malus provisions subject to compliance with local laws. Awards granted to MRTs on or after 1 January 2015 are also subject to clawback. • 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 in respect of HSBC securities. Deferral instruments Alignment with the medium- to long-term strategy, stakeholder interests and adherence to the HSBC Values. • For all employees, other than MRTs identified in accordance with the PRA and FCA remuneration rules or other similar local rules, the underlying instrument for all deferred awards is HSBC shares to ensure alignment between the long-term interest of our employees and the interest of shareholders. • For Group and local MRTs, excluding executive Directors where deferral is typically in the form of shares only, a minimum of 50% of the deferred awards is over HSBC shares and the balance is deferred into cash. In accordance with local regulatory requirements, for local MRTs in Oman 100% of the deferred amount is delivered in shares and for local MRTs in Poland 50% of the deferred awards are delivered in an instrument linked to the value of the local entity and the balance in deferred cash. • For some employees in our asset management business, where required by the regulations applicable to asset management entities within the Group, at least 50% of the deferred awards is linked to fund units reflective of funds managed by those entities, with the remaining portion of deferred awards being in the form of deferred cash awards. 160 HSBC Holdings plc Annual Report and Accounts 2017 Overview of remuneration structure for employees (continued) Remuneration components and objectives Application Post-vesting retention period To ensure appropriate alignment with shareholders. • Awards over HSBC shares or linked to relevant fund units granted to MRTs identified in accordance with the PRA and FCA remuneration rules and local MRTs (except those in Brazil, China, Germany, Oman and Russia) are generally subject to a one-year retention period post vesting. For local MRTs in Brazil, Russia and Germany, a six-month retention period is applied. No retention period is applied for local MRTs in China and Oman. • MRTs who are subject to a five-year deferral period, except senior management or individuals in PRA and FCA designated senior management functions, have a six-month retention period applied to their awards. Long-term incentive awards (‘LTI’) Alignment with the medium- to long-term strategy, stakeholder interests and adherence to the HSBC Values. Shareholding requirement Align interests of senior management with shareholders' interests. Buy-out awards To support recruitment of talent. Guaranteed variable remuneration To support recruitment of talent. Severance payments To adhere to contractual agreements with involuntary leavers. • Only executive Directors are eligible to be considered for an LTI award. See details on page 151. • All executive Directors, Group Managing Directors and Group General Managers of HSBC Holdings are subject to this requirement. Details of the minimum shareholding requirement for executive Directors and Group Managing Directors are set out on page 153. Group General Managers have a minimum shareholding requirement of 25,000 shares. • The minimum shareholding requirement must be achieved by 2019 or within five years of their appointment, whichever is later. • Awards may be offered if an individual holds any outstanding unvested awards that are forfeited on resignation from the previous employer. • The terms of the buy-out awards will not be more generous than the terms attached to the awards forfeited on cessation of employment with the previous employer. • Guaranteed variable remuneration is awarded in exceptional circumstances for new hires, and is limited to the individual’s first year of employment only. • The exceptional circumstances where HSBC would offer a guaranteed variable remuneration would typically involve a critical new hire and would also depend on factors such as the seniority of the individual, whether the new hire candidate has any competing offers and the timing of the hire during the performance year. • Where an individual’s employment is terminated involuntarily for gross misconduct then, subject to compliance with local laws, the Group’s policy is not to make any severance payment in such cases. For such individuals, all outstanding unvested awards are forfeited. • For other cases of involuntary termination of employment, any severance that may be determined to be paid to an individual will take into consideration the performance of the individual, contractual notice period, applicable local laws and circumstances of the case. • Where an individual’s employment is terminated involuntarily (except where an individual is dismissed for gross misconduct), all outstanding unvested awards will normally continue to vest in line with the applicable vesting dates and, where relevant, any performance conditions attached to the awards and malus and clawback provisions applicable to those awards. • Severance amounts awarded to MRTs are considered as fixed pay where such amounts include: (i) payments of fixed remuneration that would have been payable during the notice and/or consultation period; (ii) statutory severance payments; (iii) payments determined in accordance with any approach applicable in the relevant jurisdictions; and (iv) payments made to settle a potential or actual dispute. 1 Shareholders approved the increase in the maximum ratio between the fixed and variable components of total remuneration from 1:1 to 1:2 at the 2014 Annual General Meeting held on 23 May 2014 (98% in favour). The Group has also used the discount rate of 21.85% for individuals with seven-year deferral period and 13.85% for individuals with five-year deferral period. This discount rate was used for six MRTs in UK and one MRT Hong Kong. 2 HSBC does not dis-apply any remuneration rules on proportionality grounds. However, in accordance with the terms of the PRA and FCA remuneration rules, the deferral requirement for MRTs is not applied to individuals where their total compensation is £500,000 or less and variable pay is not more than 33% of total compensation. For these individuals, the Group standard deferral applies. Material Risk Takers Individuals are identified as MRTs based on the qualitative and quantitative criteria set out in the Regulatory Technical Standard (‘RTS’) EU 604/2014 and additional criteria determined by the Committee. The following key principles underpin HSBC’s identification process: • MRTs are identified at Group and HSBC Bank plc (consolidated) level. • MRTs are also identified at material solo regulated entity level in EU countries. • HSBC uses the Global Business dimension as the primary basis for identifying MRTs within its matrix management structure. In addition to applying the qualitative and quantitative criteria specified in the RTS, HSBC also identifies additional MRTs based on its own internal criteria, which includes compensation thresholds and individuals in certain roles and grades outside the EU where such individuals are not strictly captured by the criteria prescribed in the RTS. The list of MRTs, and any exclusions from it, is reviewed by the heads of the relevant global businesses and global functions, Chief Risk Officers, Chief Operating Officers and Heads of Human Resources of the relevant global functions and businesses. The overall results are reviewed by the Group Chief Risk Officer. The Committee reviews the methodology, key decisions regarding identification, and approves the results of the identification exercise, including proposed MRT exclusions. Management body and senior management For the purpose of the Pillar 3 remunerations disclosures executive Directors and non-executive Directors are considered to be members of the management body. Members of the Group Management Board other than the executive Directors are considered as senior management. No guaranteed bonus, sign-on or severance payments were made to this population for the year ended 31 December 2017. Remuneration disclosures The tables below set out the remuneration disclosures for individuals identified as MRTs for HSBC Holdings plc. Remuneration information for individuals who are only identified as MRTs at HSBC Bank plc or other solo-regulated entity levels are included in those entities' relevant disclosures. The 2017 variable pay information included in the tables below is based on the market value of awards granted to MRTs. For share awards, the market value is based on HSBC Holdings plc's share price at the date of grant (unless indicated otherwise). For cash awards, it is the value of awards expected to be paid to the individual over the deferral period. HSBC Holdings plc Annual Report and Accounts 2017 161 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Directors’ Remuneration Report Remuneration – fixed and variable amounts Executive Directors Non-executive Directors Senior management Number of MRTs Total fixed Cash-based1 – of which: deferred cash Share-based – of which: deferred shares Total variable2 Cash-based – of which: deferred cash Share-based3 – of which: deferred shares3 Other forms3 – of which: deferred3 Total remuneration 4 $m 11.5 6.9 — 4.6 — 14.0 — — 14.0 9.5 — — 25.5 17 $m 4.4 4.4 — — — — — — — — — — 4.4 15 $m 33.1 33.1 — — — 44.1 20.7 12.5 23.4 15.2 — — 77.2 Total 36 $m 49.0 44.4 — 4.6 — 58.1 20.7 12.5 37.4 24.7 — — 107.1 1 Cash-based fixed remuneration is paid immediately. 2 Variable pay awarded in respect of 2017. In accordance with shareholder approval received on 23 May 2014 (98% in favour), 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. 3 Share-based awards are made in HSBC shares. Vested shares are subject to a retention period of up to one year. Deferred remuneration at 31 December1 $m Cash Total outstanding deferred remuneration2 – of which: Unvested Total amount of outstanding deferred and retained remuneration exposed to ex post explicit and/or implicit adjustment Total amount of amendment during the year due to ex post implicit adjustment Total amount of amendment during the year due to ex post explicit adjustment3 Total amount of deferred remuneration paid out in the financial year Shares Total outstanding deferred remuneration2 – of which: Unvested Total amount of outstanding deferred and retained remuneration exposed to ex post explicit and/or implicit adjustment Total amount of amendment during the year due to ex post implicit adjustment Total amount of amendment during the year due to ex post explicit adjustment3 Total amount of deferred remuneration paid out in the financial year4 Other forms Total outstanding deferred remuneration2 – of which: Unvested Total amount of outstanding deferred and retained remuneration exposed to ex post explicit and/or implicit adjustment Total amount of amendment during the year due to ex post implicit adjustment Total amount of amendment during the year due to ex post explicit adjustment3 Total amount of deferred remuneration paid out in the financial year4 Executive Directors Non-executive Directors Senior management 3.1 3.1 3.1 — — 1.5 66.7 66.7 66.7 9.7 — 20.0 — — — — — — — — — — — — — — — — — — — — — — — — 24.8 24.8 24.8 — — 7.2 68.7 68.7 68.7 10.5 — 25.1 — — — — — — Total 27.9 27.9 27.9 — — 8.7 135.4 135.4 135.4 20.2 — 45.1 — — — — — — 1 This table provides details of balances and movements during performance year 2017. For details of variable pay awards granted for 2017, please refer to the remuneration tables above. Deferred remuneration is made in cash and/or shares. Share-based awards are made in HSBC shares. Includes unvested deferred awards, and vested deferred awards subject to retention period as at 31 December 2017. Includes any amendments due to malus or clawback. Page 160 provides details of in-year variable pay adjustments. 2 3 4 Shares are considered as paid when they vest. Vested shares are valued using the sale price or the closing share price on the business day immediately preceding the vesting day. 162 HSBC Holdings plc Annual Report and Accounts 2017 Other MRTs (non-senior management) Remuneration – fixed and variable amounts Number of MRTs Total fixed Cash-based1 – of which: deferred cash Share-based – of which: deferred shares Total variable2 Cash-based – of which: deferred cash Share-based3 – of which: deferred shares3 Other forms3 – of which: deferred shares3 Total remuneration Investment banking Retail banking Asset management Corporate functions Independent control functions All other 677 $m 406.2 406.2 — — — 417.7 203.5 105.1 214.2 117.0 — — 124 $m 61.3 61.3 — — — 58.4 28.3 13.8 30.1 15.9 — — 30 $m 18.5 18.5 — — — 19.0 9.4 4.6 5.1 2.8 4.5 2.7 115 $m 58 58.0 — — — 57.2 28.0 13.8 29.2 15.8 — — 156 $m 57.2 57.2 — — — 44.1 22.5 9.0 21.5 10.8 0.1 — 96 $m 61.6 61.6 — — — 55.1 27.0 14.3 28.1 15.7 — — Total 1,198 $m 662.8 662.8 — — — 651.5 318.7 160.6 328.2 178.0 4.6 2.7 823.9 119.7 37.5 115.2 101.3 116.7 1,314.3 1 Cash-based fixed remuneration is paid immediately. 2 Variable pay awarded in respect of 2017. In accordance with shareholder approval received on 23 May 2014 (98% in favour), for each MRT the variable component of remuneration for any one year is limited to 200% of the fixed component of the total remuneration of the MRT. 3 Share-based awards are made in HSBC shares and/or linked to notional fund units in the HSBC World Selection Balanced Portfolio. Vested shares are subject to a retention period of up to one year. Guaranteed bonus, sign-on and severance payments Guaranteed bonus and sign-on payments1 Made during year ($m) Number of beneficiaries Severance payments2 Awarded during year ($m) Number of beneficiaries Highest such award to a single person ($m) Made during year ($m) Number of beneficiaries Investment banking Retail banking Asset management Corporate functions Independent control functions All other Total 11.4 17 17.3 31 1.9 17.1 31 0.4 1 1.9 3 0.7 1.5 2 — — — — — — — 1.7 3 1.4 2 1.2 1.4 2 0.8 3 0.6 2 0.5 0.6 2 0.7 1 4.8 4 2.9 4.8 4 15.0 25 26.0 42 2.9 25.4 41 1 No sign-on payments were made in 2017. A guaranteed bonus is awarded in exceptional circumstances for new hires, and in the first year only. The circumstances where HSBC would offer a guaranteed bonus would typically involve a critical new hire and would also depend on factors such as the seniority of the individual, whether the new hire candidate has any competing offers and the timing of the hire during the performance year. Includes payments such as payment in lieu of notice, statutory severance, outplacement service, legal fees, ex-gratia payments and settlements (excludes pre-existing benefit entitlements triggered on terminations). 2 HSBC Holdings plc Annual Report and Accounts 2017 163 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Directors’ Remuneration Report Deferred remuneration at 31 December1 $m Cash Total outstanding deferred remuneration2 – of which: Unvested Total amount of outstanding deferred and retained remuneration exposed to ex post explicit and/or implicit adjustment Total amount of amendment during the year due to ex post implicit adjustment Total amount of amendment during the year due to ex post explicit adjustment3 Total amount of deferred remuneration paid out in the financial year Shares Total outstanding deferred remuneration2 – of which: Unvested Total amount of outstanding deferred and retained remuneration exposed to ex post explicit and/or implicit adjustment Total amount of amendment during the year due to ex post implicit adjustment Total amount of amendment during the year due to ex post explicit adjustment3 Total amount of deferred remuneration paid out in the financial year4 Other forms Total outstanding deferred remuneration2 – of which: Unvested Total amount of outstanding deferred and retained remuneration exposed to ex post explicit and/or implicit adjustment Total amount of amendment during the year due to ex post implicit adjustment Total amount of amendment during the year due to ex post explicit adjustment3 Total amount of deferred remuneration paid out in the financial year4 Investment banking Retail banking Asset management Corporate functions Independent control functions All other Total 162.9 162.9 19.2 19.2 162.9 19.2 — — 71.1 286.2 286.1 — — 7.0 31.8 31.8 8.3 8.3 8.3 — — 4.0 12.6 12.6 19.9 19.9 12.4 12.4 24.4 24.4 247.1 247.1 19.9 12.4 24.4 247.1 — — 7.2 38.5 38.5 — — 4.6 23.9 23.9 — — — — 9.8 103.7 48.2 48.1 441.2 441.0 286.2 31.8 12.6 38.5 23.9 48.2 441.2 43.7 — 5.5 — 1.8 — 6.3 — 3.7 — 7.7 — 68.7 — 231.1 30.5 11.0 29.2 20.2 32.1 354.1 — — — — — — — — — — — — 0.5 0.5 0.5 — — 0.4 — — — — — — — — — — — — — — — — — — 0.5 0.5 0.5 — — 0.4 1 This table provides details of movements during performance year 2017. For details of variable pay awards granted for 2017, please refer to both the remuneration tables above. Deferred remuneration is made in cash and/or shares. Share-based awards are made in HSBC shares and/or linked to notional fund units in the HSBC World Selection Balanced Portfolio. Includes unvested deferred awards, and vested deferred awards subject to retention period as at 31 December 2017. Includes any amendments due to malus or clawback. Page 160 provides details of in-year variable pay adjustments. 2 3 4 Shares are considered as paid when they vest. Vested shares are valued using the sale price or the closing share price on the business day immediately preceding the vesting day. MRTs’ remuneration by band1 €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 Management body All other 17 — — 1 — — — — — — 3 — — — — 841 208 72 34 22 12 7 6 3 2 5 — — — 1 Total 858 208 72 35 22 12 7 6 3 2 8 — — — 1 1 Table prepared in euros in accordance with Article 450 of the European Union Capital Requirements Regulation, using the exchange rates published by the European Commission for financial programming and budget for December of the reported year as published on its website. 164 HSBC Holdings plc Annual Report and Accounts 2017 Directors’ Responsibility Statement The Directors are responsible for preparing the Annual Report and Accounts 2017, 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 2017 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 2017, 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 122 to 126 of the Annual Report and Accounts 2017, 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. Disclosure of Information to Auditors 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 Mark E Tucker Group Chairman 20 February 2018 HSBC Holdings plc Annual Report and Accounts 2017 165 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 Opinion In our opinion HSBC Holdings plc’s (‘HSBC’) Group financial statements1 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 2017 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 IFRSs as adopted by the European Union; 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. Basis of these opinions In expressing these opinions, I believe that the audit evidence I have obtained is sufficient and appropriate. My work has been undertaken, and my opinions expressed, in accordance with applicable law and the International Standards on Auditing (UK) as issued by the Financial Reporting Council (FRC) of the United Kingdom. My responsibilities and those of the Directors are explained later in this report. I can confirm that PricewaterhouseCoopers LLP remained independent of the Group in accordance with the ethical requirements that are relevant to the audit of listed public interest entities in the UK, which includes the FRC's Ethical Standard. PwC has also fulfilled its other ethical responsibilities in accordance with these requirements. All services provided by members of the PwC network of firms are included in Note 6 and none of these services were prohibited by the Ethical Standard. How the audit approach was structured This was the third year that it has been my responsibility to form these opinions on behalf of PwC, who you first appointed on 31 March 2015 in relation to that year's audit. I have 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’). The audit approach was structured to reflect how HSBC is organised. It incorporated four important aspects: (1) Risk assessment and audit planning at a Group level, having regard to HSBC’s global businesses: A partner led the audit of each global business. These partners 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 the operational processes which are critical to financial reporting are undertaken in Operations centres run by HSBC Operations Services and Technology ('HOST') across eleven individual sites in six countries. Financial reporting processes required to produce the financial statements are performed in HSBC’s Finance Operations Centres based in Gurugram and Hyderabad, India. Working closely with me, a partner coordinated the audit work performed by PwC member firms in each of these sites. 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. It enabled the team to evaluate 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: I received opinions from PwC member firms which had been appointed as the external auditors of The Hongkong and Shanghai Banking Corporation Limited ('HBAP'), HSBC Bank plc, HSBC North America Holdings Inc, HSBC Mexico S.A., HSBC Bank Middle East Limited, HSBC Private Bank (Suisse) S.A., HSBC Global Services (UK) Limited and HSBC Group Management Services Limited (the Significant Subsidiaries). 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 five of them. We also visited businesses in a further five countries. These meetings increased our understanding of some of the smaller businesses within HSBC. I also attended meetings with management in each of these Significant Subsidiaries at the year-end. The audits of these subsidiaries relied upon work performed by PwC member firms in Algeria, Australia, Bahrain, China, France, India and Qatar. I considered how my Significant 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 84% of assets, 73% of total operating income and 67% 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 Group and 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. Consideration was also made of all changes to, and pending changes to, financial reporting standards and requirements. Of particular focus has been HSBC’s assessment of the impacts of IFRS 9 and IFRS 15, which are discussed in Note 1. 1 We have audited the HSBC Holdings plc’s financial statements which comprise the consolidated and parent company balance sheets as at 31 December 2017, 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 on 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 2017, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. 166 HSBC Holdings plc Annual Report and Accounts 2017 Changes to the approach in 2017 The 2016 audit was comprehensively reviewed during the year by the FRC Audit Quality Review team. The review did not result in any change to our audit approach, but observations on the procedures we performed have been fully reflected in our work this year. In March 2017, I chaired a three-day meeting in Hong Kong of the partners and staff from PwC member firms who undertake audits of the Significant Subsidiaries. There were no significant changes in this team during 2017, except that a partner's resignation led to a change in Mexico. The meeting provided an opportunity for those partners and staff to hear directly from HSBC management. We considered during this meeting how our view of significant audit risks had changed. More detailed changes in the approach arose because of five areas: (1) Changes in the structure and strategy of the HSBC Group In assessing the subsidiaries which were significant in 2017, I removed HSBC Bank Argentina S.A. and included for the first time HSBC Global Services (UK) Limited and HSBC Group Management Services Limited. These are the UK based service companies which provide operational activities and transaction processing to HSBC’s banking subsidiaries and the parent company. Additionally, the scope of the smaller entities reporting to the Significant Subsidiary audit teams was changed, which introduced unpredictability into the audit. HSBC Bank Australia Limited was added; HSBC Trinkhaus & Burkhardt AG and HSBC Bank AS (Turkey) removed; and, the scope of work in the HBAP India branch was increased. (2) IFRS 9 IFRS 9 applies to HSBC from 1 January 2018. It has far reaching implications for the classification and measurement of assets and liabilities on the balance sheet, and the calculation of impairment on assets. The changes required to processes and controls to comply with this accounting standard are complex and significant. I asked a partner who is a specialist in IFRS 9 to audit the processes adopted, assumptions made, and control framework established to quantify the impact statement included within Note 1. In May 2017, he hosted a joint three day workshop in London for PwC and HSBC teams from thirteen countries to provide them with an understanding of the HSBC implementation programme and to agree the planned audit approach. This included an understanding of the activities and controls over IFRS 9 models and calculations performed in the Operations centres in Bangalore and Chennai, India. (3) Changes to HSBC processes and controls As part of the efforts to streamline controls and reduce costs, HSBC continued to migrate more activities to the global shared service centres, for example process and controls supporting intangible assets. This consequently resulted in work moving between PwC member firms. Testing over reconciliations has been mostly performed in the HOST centres, particularly for Global Banking & Markets and nostro accounts. (4) HSBC strategic actions 2017 was the final year of the strategic plan period. Such plans could increase the incentive that controls may be overridden to achieve published goals. I considered the impact that the changes in HSBC leadership had on this inherent risk. Achievement of these strategic actions is not subject to the audit. However, some of the key performance indicators (KPIs) used to track performance are derived from the financial statements. I therefore considered how the targeted outcomes in HSBC’s strategic actions may influence areas of significant judgement, cut off of revenue and expenses and management’s incentive to override controls. (5) Changes in the macro environment Other macro factors were considered to determine if changes in the approach were required, for example; geopolitical risk such as the impacts of Brexit or tensions on the Korean peninsula; the impact of natural disasters; and, changes in regulatory programmes such as UK structural reform. I reported to the GAC that I did not believe that these changed my risk assessment. Responsibilities of the Directors and auditor The Directors have, on page 165 acknowledged their responsibility to prepare the financial statements to give a true and fair view; to have controls enabling them to be satisfied that they are free from material misstatement, whether due to fraud or error; and, as described below, assess whether the Group and parent company can continue as a going concern. 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. 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. A further description of the scope of an audit is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities; 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. I and my colleagues responsible for the Significant Subsidiaries, identified the specific laws and regulations where a breach could lead to a material impact on the financial statements or the Group’s going concern, for example business authorisations issued by the Prudential Regulatory Authority. This is a small population relative to the large number with which the Group, as a financial services business, must comply. Audit procedures were performed to identify if any such breaches had occurred. These procedures included meeting with some of the Group’s regulators, reviewing correspondence with both regulators and legal advisors and meeting with the Group General Counsel. Materiality In order for me to perform my work, I had regard to the concept of materiality. I am now required to provide you with details of how I have determined materiality for both the Group and the parent company. HSBC Holdings plc Annual Report and Accounts 2017 167 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the independent auditors to the members of HSBC Holdings plc Overall Group materiality $900m (2016: $950m) Group Parent company $900m (2016: $950m) How I determined it 5% of adjusted profit before tax excluding the debit valuation adjustment and non-qualifying hedges. 0.75% of total assets capped at the materiality for the Group. 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 46, 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. A benchmark of total assets has been used as the parent company’s primary purpose is to act as a holding company with investments in the group’s subsidiaries, not to generate operating profits and therefore a profit based measure is not relevant. We considered 0.75% to be a more appropriate benchmark than 1%, given that the entity has a significant level of external debt. When planning the Group audit, I considered if multiple errors might exist which, when aggregated, could exceed $900m. 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 $675m 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 Significant Subsidiaries to work to assigned materiality levels reflecting the size of the operations they audited. The overall materialities ranged from $67m (HSBC Mexico S.A.) to $720m (The Hongkong and Shanghai Banking Corporation Limited). My objective is to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error. Reasonable assurance is not a guarantee that an audit will always detect a material misstatement when it exists. It is important to recognise that identifying a material misstatement arising from fraud is more difficult than identifying one arising solely from error because fraud generally involves deliberate concealment, collusion or misrepresentation. Misstatements are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decisions you may take on the basis of these financial statements. Where the audit identified misstatements, I considered these items carefully to assess if they were individually or in aggregate material. I reported any such item which exceeded $50m (2016: $50m) for both Group and parent company to the GAC. The Directors concluded that all items which remained unadjusted were not material to the financial statements. I agreed with their conclusion. Matters discussed with the GAC I attended each of the eight GAC meetings held during the year. Part of each meeting involved a discussion without management present. I also met with members of the GAC 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. I can confirm that this report is consistent with the reporting made to the GAC. During the April meeting, the audit plan was presented. It 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. These changes were discussed with the GAC. For example, given stakeholder interest in the impact of the adoption of IFRS 9, we updated our view of the risk associated with the IAS 8 disclosure to significant, and the risk associated with the Deferred Prosecution Agreement was reduced following the US Department of Justice’s decision in December 2017 to dismiss the charges. In November, the GAC held a meeting with a particular focus on control matters, discussing the impact of control findings on our audit approach. The key audit matters, where I focused most effort and resource throughout the year, were: • • • • • • IT access management; investment in Bank of Communications Co., Ltd (‘BoCom’); IFRS 9 expected credit loss; impairment of loans and advances; the impact of the HSBC Strategic Actions; and litigation and regulatory enforcement actions. To help you understand their impact on the audit, I have listed them in order of decreasing audit effort. I have included at the end of this report an explanation of each item, why it was considered a key audit matter and how the audit approach was tailored to address the risk of misstatement. This is not a list of all audit risks, and I do not form an opinion on any one area, but on the financial statements overall. Going concern On page 134, the Directors confirmed their belief that it was appropriate to prepare the financial statements on a going concern basis, because they believe that the Group and the parent company will continue in business. That statement also included confirmation that they had not identified any material uncertainties to either the Group’s or the parent company’s ability to continue as a going concern over a period of at least twelve months from the date of their approval of these financial statements. Because not all future events or conditions can be predicted, this statement is not a guarantee. I am required to review this statement, and in doing so I considered HSBC’s budgets, cash flows, capital plan and stress tests. I have nothing to report as a result of my review and nothing material to add or draw attention to in relation to the statement. 168 HSBC Holdings plc Annual Report and Accounts 2017 Other required matters and reporting on other information The Annual Report and Accounts contains a considerable amount of other information that is required by regulators or standard setters and is outside of the audited financial statements and the auditors’ report. This information, for example the classification of adjusted profit or risk weighted assets may be important to you. The Directors are responsible for this other information. In the table below, I have set out certain areas, my related responsibilities and reporting. Except as outlined in the table, I have not provided an audit opinion or any form of assurance. Area of the Annual Report and Accounts 2017 My responsibility My reporting Directors’ Remuneration Report on pages 141 to 164 Those parts of which are marked as audited. Consider whether the information is properly prepared. Other remuneration report disclosures. Consider whether certain other disclosures specified by the Companies Act have been made. In my opinion, this information has been properly prepared in accordance with the Companies Act 2006. The other required disclosures have been made. In my opinion, based on the work undertaken in the course of the audit, 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. I have nothing material to draw attention to or to add to the confirmation or description. 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 and the environment they operate in that was obtained during the audit. Review the confirmation and description in the light of the knowledge gathered during the audit, including making enquiries and considering the directors’ processes used to support the statements made. Consider if the statements are aligned with the relevant provisions of the UK Corporate Governance Code (the ‘Code’). Other areas Strategic Report and the Directors’ Report (as defined on page 32). Viability statement on page 134 which considers the longer term sustainability of the Group’s business model, as to whether the directors have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, and why the directors consider that period to be appropriate. This includes confirmation of the Directors’ robust assessment of principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity, and disclosures describing those risks and how they are managed or mitigated. GAC Report on page 128. Directors’ statement on page 165 that they consider the HSBC Annual Report and Accounts 2017, 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 121 to 164. All other information in the Annual Report and Accounts 2017 aside from the audited financial statements and the auditors’ report. 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. Consider whether the Directors’ statement relating to the parent company’s compliance with the Code properly discloses any departure from a relevant provision of the Code specified, under the Listing Rules, for review by the auditors. Read the other information and consider whether it is materially inconsistent with the financial statements or our knowledge gained in the audit, or otherwise appears to be materially misstated. I am required to perform additional work to validate if apparent inconsistencies or misstatements are real, and report those matters to you. Nothing to report following my review. Nothing to report following my review. HSBC Holdings plc Annual Report and Accounts 2017 169 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the independent auditors to the members of HSBC Holdings plc Other Reporting 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 20 February 2018 170 HSBC Holdings plc Annual Report and Accounts 2017 Appendix: Key audit matters discussed with the Group Audit Committee (‘GAC’) Those areas of most significance to the audit, which include those that presented the most significant risks of material misstatement in the financial statements are required to be discussed with the GAC. They include those that had the greatest effect on the overall audit strategy, and 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. The key audit matters applicable to the parent company are IT Access Management and Strategic actions. IT Access Management Nature of key audit 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 on the effectiveness of controls over IT systems. In previous years, we identified and reported that controls over access to applications, operating systems and data in the financial reporting process required improvements. Access management controls are critical to ensure that changes to applications and underlying data are made in an appropriate manner. Appropriate access controls contribute to mitigating the risk of potential fraud or errors as a result of changes to applications and data. Management implemented several remediation activities that contributed to reducing the risk over access management in the financial reporting process. These included implementation of Group wide preventative and detective controls across critical applications and infrastructure. Due to the pervasive nature of access management issues, however, 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 status on remediation of access controls was discussed at several GAC meetings during the year. Controls were enhanced and implemented over FY17 to respond to our audit findings and to reduce the risks over privileged access to IT infrastructure such as databases and operating systems. However, given the scale and complexity of the remediation, there are still actions to be taken to ensure that controls are fully embedded and operate effectively. By the end of the audit period, management had successfully operated controls to address the critical operating system and database related matters previously reported. Management continue to progress remediation relating to the management of business application access. Access rights were tested over applications, operating systems and databases relied upon for financial reporting. Specifically, the audit tested that: • new access requests for joiners were properly reviewed and authorised; • user access rights were removed on a timely basis when an individual left or moved role; • access rights to applications, operating systems and databases were periodically monitored for appropriateness; and • highly privileged access is 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; • testing was performed over toxic combination controls; and • a list of users’ access permissions was obtained and manually compared to other access lists where segregation of duties was deemed to be of higher risk, for example users having access to both core banking and payments systems. Relevant references in the Annual Report and Accounts 2017 GAC Report, page 129. Effectiveness of internal controls, page 133. HSBC Holdings plc Annual Report and Accounts 2017 171 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the independent auditors to the members of HSBC Holdings plc Investment in associate – Bank of Communications Company, Limited (‘BoCom’) Nature of key audit matter Matters discussed with the GAC HSBC's investment in BoCom is accounted for as an associate, using the equity method. For seven consecutive year-ends the market value of BoCom has been below the carrying value. At 31 December, the market value based on the share price was $7.6bn lower than the carrying value. This is considered an indicator of potential impairment under IFRSs. 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. 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. In October we discussed the assumptions with the highest level of uncertainty. Following these discussions, the long-term profit growth rate, discount rate and long-term asset growth rate were reassessed and updated; and • the reasonably possible alternative assumptions, particularly where they had the most impact on the value in use calculation. At 31 December, HSBC confirmed its view that the model and updated assumptions were appropriate, and not inconsistent with information obtained in its capacity as a shareholder and board member of BoCom. 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. • A meeting in September 2017 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 2017 in relation to BoCom were reviewed. Relevant references in the Annual Report and Accounts 2017 GAC Report, page 130. Note 1.2(a): Critical accounting estimates and judgements, page 188. Note 17: Interests in associates and joint ventures, page 221. IFRS 9 expected credit loss Nature of key audit matter This is a new and complex accounting standard which has required considerable judgement and interpretation in its implementation. These judgements have been key in the development of the new models which have been built and implemented to measure the expected credit losses on loans measured at amortised cost. There is a large increase in the data inputs required by these models. The data is from a number of systems that have not been used previously for the preparation of the accounting records. This increases the risk of completeness and accuracy of the data that has been used to create assumptions and is used to operate the model. In some cases, data is unavailable and reasonable alternatives have been applied to allow calculations to be performed. Matters discussed with the GAC Status updates were provided during the year due to the complexity and size of the implementation programme. The GAC reviewed the Global Public Policy Committee paper issued in July 2017 which promotes the high-quality audit of the accounting for expected credit losses. An assessment and conclusion on the more judgemental interpretations made by management was shared with the GAC. These included the determination of what constitutes a significant increase in credit risk for retail portfolios, the life of retail and wholesale revolving products and the judgements made in applying forward economic guidance to the expected credit loss calculation. We highlighted significant post model adjustments that had been recorded to address challenges in data quality or areas of model weakness. The Group adopted a single approach to implementation in all subsidiaries. This required a discussion with the GAC on the acceptability of assumptions made to different markets. Perspectives were shared on the control environment and quality of data being used for the disclosure of the IAS 8 impact of adopting IFRS 9. Procedures performed to support our discussions and conclusions • Controls over the selection and approval of the accounting policy were tested. This included our assessment of the technical papers prepared by management with the IFRS 9 requirements. • Controls over governance and model development were tested. We used our modelling specialists to test the modelling methodology for material portfolios. • Risk based testing of models, including independent re-build of certain assumptions, was performed. • Testing of the review controls performed by management to assess the reasonableness of the disclosed impact of adopting IFRS 9. Relevant references in the Annual Report and Accounts 2017 GAC Report, page 130. Note 1.1(c) Future accounting developments, page 186. 172 HSBC Holdings plc Annual Report and Accounts 2017 Impairment of loans and advances Nature of key audit matter 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 specific 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. A number of specific risks were discussed including; • geopolitical uncertainty, • low global growth, • slowing private investment, • concern about personal indebtedness particularly in the UK, and • natural disasters in Mexico and the US. In all of these cases, the performance of the existing credit exposure was discussed, and the potential need for changes to modelling approaches. Changes made to the inputs or models impacting the collective impairment allowance were discussed, noting the results of controls and substantive testing and the impact on the audit approach. A focus was also on significant post model adjustments and the suitability of changes made to relevant models in the period. 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 re-performance 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 re-performed. Relevant references in the Annual Report and Accounts 2017 Impaired loans, page 86. GAC Report, page 130. Note 1.2(d): Financial instruments measured at amortised cost, page 189. The impact of HSBC’s strategic actions Nature of key audit matter Matters discussed with the GAC Auditing standards require that we consider the inherent risk of the potential for management override of controls. 2017 was the final year for HSBC to achieve the outcomes set out in the strategic actions communicated to shareholders in June 2015. We considered whether this increased the incentive for management to over-ride controls given the external pressure to meet the targets. In our view, such plans could increase the incentive that controls may be overridden, and this does not reflect specific concern about HSBC or its management. Achievement of these strategic actions is not subject to audit. However, some of the KPIs used to track performance are derived from the financial statements and our test plan was established to reflect the risk that they may be misstated. An initial view of the impact of the strategic actions was agreed with the GAC during the planning stage of the audit in April 2017. At this time we set out an enhanced test plan around KPIs that were important and would relate to financial numbers in the annual report and accounts. The initial view was re-assessed in January 2018 as certain KPIs became more sensitive to underlying changes in revenue and costs. Certain additional procedures relating to cost recognition were agreed with the GAC. Procedures performed to support our discussions and conclusions Procedures performed to support our discussions and conclusions: • Reviewed and challenged accounting policies, judgements and their application. • Performed substantive tests on journals, specifically considering cut off of revenue and expenses. • Critically assessed the designation of items as ‘significant’ for the purposes of reporting adjusted profit measures and revenue/cost ratios. • Tested the clearance and appropriateness of classification of aged reconciliation breaks. • Performed testing over the controls applied to the classification of costs within ‘Costs to Achieve’. Relevant references in the Annual Report and Accounts 2017 Strategic actions, page 12. GAC Report, page 128. HSBC Holdings plc Annual Report and Accounts 2017 173 Strategic ReportFinancial Review Financial Statements Shareholder Information Corporate Governance Report of the independent auditors to the members of HSBC Holdings plc Litigation and regulatory enforcement actions Nature of key audit matter 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 litigation or investigation in multiple jurisdictions. Provisions have been established to account for probable legal liabilities 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 244. 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 significant 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 2017 GAC Report, page 130. Note 26: Provisions, page 231. Note 34: Legal proceedings and regulatory matters, page 244. 174 HSBC Holdings plc Annual Report and Accounts 2017 Financial Statements Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of cash flows Consolidated statement of changes in equity HSBC Holdings 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 2 3 4 5 6 7 8 9 10 11 Basis of preparation and significant accounting policies Net income/(expense) from financial instruments designated at fair value Insurance business Operating profit Employee compensation and benefits Auditors’ remuneration Tax Dividends Earnings per share Trading assets Fair values of financial instruments carried at fair value Page 176 177 178 179 180 182 182 183 184 185 186 195 195 197 197 203 203 206 206 207 207 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Fair values of financial instruments not carried at fair value Financial assets designated at fair value Derivatives Financial investments Assets pledged, collateral received and assets transferred Interests in associates and joint ventures Investments in subsidiaries Structured entities Goodwill and intangible assets Prepayments, accrued income and other assets Trading liabilities Financial liabilities designated at fair value Debt securities in issue Accruals, deferred income and other liabilities Provisions Subordinated liabilities 28 Maturity analysis of assets, liabilities and off-balance sheet commitments 29 30 31 32 33 34 35 36 37 Offsetting of financial assets and financial liabilities Non-controlling interests Called up share capital and other equity instruments Contingent liabilities, contractual commitments and guarantees Lease commitments Legal proceedings and regulatory matters Related party transactions Events after the balance sheet date HSBC Holdings’ subsidiaries, joint ventures and associates 215 216 217 219 220 221 224 225 227 229 229 230 230 230 231 232 235 239 240 241 243 243 244 250 252 252 HSBC Holdings plc Annual Report and Accounts 2017 175 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 9 9 2017 $m 28,176 40,995 (12,819) 12,811 15,853 (3,042) 7,719 6,098 1,621 3,698 672 3,026 1,150 106 9,779 337 63,776 (12,331) 51,445 (1,769) 49,676 (17,315) (15,707) (1,166) (696) — 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) 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) — (34,884) (39,808) (39,768) 14,792 2,375 17,167 (5,288) 11,879 9,683 90 1,025 1,081 11,879 $ 0.48 0.48 4,758 2,354 7,112 (3,666) 3,446 1,299 90 1,090 967 3,446 $ 0.07 0.07 16,311 2,556 18,867 (3,771) 15,096 12,572 90 860 1,574 15,096 $ 0.65 0.64 176 HSBC Holdings plc Annual Report and Accounts 2017 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 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 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/(expense) for the year, net of tax Total comprehensive income/(expense) 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/(expense) for the year 2017 $m 11,879 146 1,227 (1,033) 93 (141) (192) (1,046) 833 21 (43) (43) 9,077 — 8,939 138 2,419 3,440 (1,021) (2,024) (2,409) 385 9,383 21,262 18,914 90 1,025 1,233 21,262 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 HSBC Holdings plc Annual Report and Accounts 2017 177 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 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 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 21 17 20 7 22 23 14 24 25 3 26 7 27 31 31 30 2017 $m 180,624 6,628 34,186 287,995 29,464 219,818 90,393 962,964 201,553 389,076 67,191 1,006 22,744 23,453 4,676 2016 $m 128,009 5,003 31,228 235,125 24,756 290,872 88,126 861,504 160,974 436,797 63,909 1,145 20,029 21,346 6,163 2,521,771 2,374,986 34,186 69,922 31,228 59,939 1,364,462 1,272,386 130,002 6,850 184,361 94,429 216,821 64,546 45,907 928 85,667 4,011 1,982 19,826 88,958 5,977 153,691 86,832 279,819 65,915 44,291 719 75,273 4,773 1,623 20,984 2,323,900 2,192,408 10,160 10,177 22,250 7,664 139,999 190,250 7,621 197,871 10,096 12,619 17,110 (1,234) 136,795 175,386 7,192 182,578 Total liabilities and equity at 31 Dec 2,521,771 2,374,986 The accompanying notes on pages 186 to 261, the audited sections in ‘Global businesses and regions’ on pages 46 to 59, ‘Risk’ on pages 63 to 116, ‘Capital’ on pages 117 to 120 and ‘Directors’ Remuneration Report’ on pages 141 to 157 form an integral part of these financial statements. These financial statements were approved by the Board of Directors on 20 February 2018 and signed on its behalf by: Mark E Tucker Group Chairman Iain Mackay Group Finance Director 178 HSBC Holdings plc Annual Report and Accounts 2017 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 flows 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 Cancellation of shares 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 2017 $m 17,167 1,862 (1,152) (2,375) (79) 2,603 917 500 (381) 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) 1 (21,289) 15,364 18,308 (10,901) (108,984) (37,281) (5,303) (6,570) 102,211 41,044 (1,369) 8,508 13,514 740 (685) (3,175) (10,478) (357,264) 418,352 (1,167) 6,756 (1,285) 165 65,557 5,196 (3,000) (67) — — — (3,574) (9,005) (10,450) 44,629 274,550 18,233 337,412 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) 274,550 180,624 128,009 6,628 82,771 58,850 15,389 (6,850) 337,412 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 2 4 3 Interest received was $41,676m (2016: $42,586m; 2015: $47,623m), interest paid was $10,962m (2016: $12,027m; 2015: $14,559m) and dividends received were $2,225m (2016: $475m; 2015: $914m). 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 2017 $39,830m (2016: $35,501m) was not available for use by HSBC, of which $21,424m (2016: $21,108m) related to mandatory deposits at central banks. 4 Subordinated liabilities changes during the year are attributable to repayments of $(3.6)bn (2016: $(0.6)bn) of securities. Non-cash changes during the year included foreign exchange loss/gain ($0.6bn) (2016: $2.1bn) and fair value losses of ($1.2bn) (2016: ($0.3bn)). HSBC Holdings plc Annual Report and Accounts 2017 179 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Financial Statements Consolidated statement of changes in equity for the year ended 31 December Other reserves6 Available- for-sale fair value reserve Cash flow hedging reserve Foreign exchange reserve Merger reserve7 Total share- holders’ equity Non- controlling interests $m $m $m (28,038) 27,308 175,386 Called up share capital and share premium1 Other equity instru- ments2 $m $m 22,715 17,110 — — — — — — — — — 622 — — — — (3,000) — — — — — — — — — — — — 5,140 — — — — 22,263 15,112 — — — — — — — — — 452 — — — — — — — — — — — — — — — — — — 1,998 — — — Retained earnings3, 4, 5 $m 136,795 10,798 328 — — (2,024) 2,395 (43) — $m (477) — 131 131 — — — — — $m (27) — — (194) 8,966 — (194) — — — — — — — — — 8,966 11,126 131 (194) 8,966 (566) 3,206 — (11,551) 500 — 489 — — — — — — (4) — — — — — — (1) — — — — — — — 143,976 2,479 59 — — 5 54 — — (189) — (271) (271) — — — — — 34 — (61) — (61) — — — — — (7,994) — — — — 1,894 (9,888) 2,538 (271) (61) (7,994) (425) 3,040 (2,510) — (11,279) 534 921 — — — — — — (17) (477) — — — — — — — — — — — — — — At 1 Jan 2017 Profit for the year Other comprehensive income (net of tax) – available-for-sale investments – cash flow hedges – changes in fair value of financial liabilities designated at fair value due to movement in own credit risk – remeasurement of defined benefit asset/liability8 – 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 Cancellation of shares Other movements At 31 Dec 2017 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 Total equity $m 182,578 11,879 9,383 146 (192) (2,024) 2,419 (43) 9,077 $m 7,192 1,081 152 15 2 — 24 — 111 10,798 9,231 131 (194) (2,024) 2,395 (43) 8,966 20,029 1,233 21,262 56 3,206 5,140 — — — 56 3,206 5,140 (11,551) (660) (12,211) 500 (3,000) 484 — — (144) 500 (3,000) 340 (8,267) (131) (8,398) (271) (61) 5 54 1,894 (9,888) (28) (7) 2 — — (98) (299) (68) 7 54 1,894 (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) 7,192 534 (879) 182,578 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 20,337 22,250 139,999 (350) (222) (19,072) 27,308 190,250 7,621 197,871 (20,044) 27,308 188,460 2,479 9,058 967 197,518 3,446 22,715 17,110 136,795 (27) (28,038) 27,308 175,386 180 HSBC Holdings plc Annual Report and Accounts 2017 Available- for-sale fair value reserve Cash flow hedging reserve Foreign exchange reserve Merger reserve7 Total share- holders’ equity Non- controlling interests $m $m $m (9,265) 27,308 190,447 Consolidated statement of changes in equity (continued) Other reserves6 Called up share capital and share premium1 $m Other equity instru- ments2 $m 21,527 11,532 — — — — — — — — 736 — — — — — — — — — — — — — — — 3,580 — — — Retained earnings3, 4, 5 $m 137,144 13,522 73 — — 82 (9) — $m 2,143 — (2,332) (2,332) — — — — $m 58 — (24) — (24) — — — (589) 3,162 — (10,660) 757 567 — — — — — — — — — — — — 34 — (10,779) — — — — (10,779) — — — — — — 13,595 (2,332) (24) (10,779) 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 Total equity $m 199,978 15,096 (13,949) (3,072) (24) 101 (9) $m 9,531 1,574 (887) (740) — 19 — 13,522 (13,062) (2,332) (24) 82 (9) (10,779) (166) (10,945) 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 1 For further details refer to Note 31. In February 2017, HSBC announced a share buy-back of up to $1.0bn. Subsequently, HSBC completed a $1.0bn share buy-back in April 2017. In July 2017, HSBC announced a further share buy-back of up to $2.0bn. Subsequently, HSBC completed a $2.0bn share buy-back in November 2017. 2 During 2017, HSBC Holdings issued $3,000m, SGD1,000m and €1,250m of perpetual subordinated contingent convertible capital securities, on which there were $14m of external issuance costs, $37m of intra-group issuance costs and $10m of tax benefits. In 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. Under IFRSs these issuance costs and tax benefits are classified as equity. 3 At 31 December 2017, retained earnings included 360,590,019 treasury shares (2016: 353,356,251; 2015: 81,580,180). 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. 4 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. 5 At 1 January 2017, the cumulative changes in fair value attributable to changes in own credit risk of financial liabilities designated at fair value was a loss of $1,672m. 6 At 31 December 2015, our operations in Brazil were classified as held for sale. The cumulative amount of other reserves attributable to these operations were as 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. 7 Statutory share premium relief under Section 131 of the Companies Act 1985 (the ‘Act’) was taken in respect of the acquisition of HSBC Bank plc in 1992, HSBC France in 2000 and HSBC Finance Corporation in 2003, and the shares issued were recorded at their nominal value only. In HSBC’s consolidated financial statements the fair value differences of $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. 8 An actuarial gain of $1,730m has arisen as a result of the remeasurement of the defined benefit pension obligation of the HSBC Bank (UK) Pension Scheme. Refer to Note 5 for further detail. HSBC Holdings plc Annual Report and Accounts 2017 181 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 – 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 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 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: Financial investments in HSBC undertakings – 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 Notes 2 5 2017 $m (383) 2,185 (2,568) 2 (392) 314 103 211 154 10,039 769 10,503 (54) (4,911) (63) (5,028) 5,475 64 5,539 2017 $m 5,539 (53) (70) 17 (828) (1,007) 179 (881) 4,658 2016 $m (424) 1,380 (1,804) (1) 119 (49) (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) 276 276 — — 8,469 654 8,651 (908) (3,434) (26) (4,368) 4,283 570 4,853 2015 $m 4,853 (57) (77) 20 — — — (57) 4,796 182 HSBC Holdings plc Annual Report and Accounts 2017 HSBC Holdings balance sheet at 31 December Assets Cash and balances with HSBC undertakings Loans and advances to HSBC undertakings designated at fair value 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 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 23 14 24 27 31 2017 $m 1,985 11,944 2,388 76,627 4,264 369 379 2016 $m 247 — 2,148 77,421 3,590 503 631 92,930 95,850 293 555 176 232 191,734 180,798 2,571 30,890 3,082 34,258 1,269 15,877 87,947 10,160 10,177 22,107 37,440 23,903 103,787 191,734 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 The accompanying notes on pages 186 to 261 and the audited sections in ‘Global businesses and regions’ on pages 46 to 59, ‘Risk’ on pages 63 to 116, ‘Capital’ on pages 117 to 120 and ‘Directors’ Remuneration Report’ on pages 141 to 157 form an integral part of these financial statements. These financial statements were approved by the Board of Directors on 20 February 2018 and signed on its behalf by: Mark E Tucker Group Chairman Iain Mackay Group Finance Director HSBC Holdings plc Annual Report and Accounts 2017 183 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 – (credit)/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 loans and advances to HSBC undertakings designated at fair value Change in financial investments in HSBC undertakings Change in net trading securities and net derivatives Change in other assets Change in debt securities in issue2 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 Cancellation of 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 Dec1 Cash and cash equivalents comprise: – Cash at bank with HSBC undertakings – Loans and advances to banks of one month or less 2016 (Restated)1 2015 (Restated)1 2017 $m 5,475 (17) 33 (2) (48) (1,122) (11,944) (1,775) (2,183) 134 1,020 954 721 443 $m 6,193 48 10 34 4 (36,437) — 612 3,066 (239) (1,633) (1,229) (693) 646 (8,294) (29,666) — 1,165 (89) 4,070 (150) 4,996 5,647 — (3,000) — (1,184) 11,433 — (6,987) (1,359) 4,550 1,252 3,697 4,949 1,985 2,964 — 610 (2,073) 3,920 (109) 2,348 2,381 (2,510) — 2,636 (1,781) 32,080 — (7,059) (1,180) 24,567 (2,751) 6,448 3,697 247 3,450 $m 4,283 114 30 86 (2) 1,247 — (289) 1,413 (141) (49) (1,228) (1,065) 470 4,755 (276) — (2,118) 790 (79) (1,683) 4,216 — — 3,180 (1,565) — — (6,548) (950) (1,667) 1,405 5,043 6,448 242 6,206 Interest received was $2,103m (2016: $1,329m; 2015: $792m), interest paid was $2,443m (2016: $1,791m; 2015: $1,289m) and dividends received were $10,039m (2016: $10,412m; 2015: $8,469m). In 2017 cash and cash equivalents include loans and advances to HSBC undertakings of one month or less duration. The comparative figures have also been amended. 1. 2. Subordinated liabilities changes during the year $0.7bn (2016: $0.7bn) are wholly attributable to non-cash changes. During the year fair value losses amounted to $0.7bn (2016: gain $0.7bn). 184 HSBC Holdings plc Annual Report and Accounts 2017 HSBC Holdings statement of changes in equity for the year ended 31 December At 1 Jan 2017 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 Cancellation of shares Capital securities issued Dividends to shareholders Cost of share-based payment arrangements Other movements At 31 Dec 2017 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 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 Called up share capital Share premium Other equity instruments Retained earnings1 $m $m $m $m 10,096 12,619 17,004 27,656 — — — — — 38 — — — — — 584 190 (190) (164) (2,836) — — — — — — — — — — — — 5,103 5,539 (828) — (828) 4,711 (52) 3,205 — — — — — — — — (11,551) (2) (64) Other reserves Available- for-sale fair value reserve $m 112 — (53) (53) — (53) — — — — — — — Other paid-in capital2 Merger and other reserves Total share- holders’ equity $m $m $m 2,244 35,127 104,858 — — — — — — — — — — — 10 — — — — — — — — — — — — 5,539 (881) (53) (828) 4,658 570 3,205 (3,000) 5,103 (11,551) (2) (54) 10,160 10,177 22,107 23,903 59 2,254 35,127 103,787 9,842 12,421 15,020 — — — — — 35 — — — — — 417 — — — — — — — — — — — — — 45 — — — — 691 — — — — — — — — — — — — — — — — 1,984 — — — — — — — — — 3,544 — — — 32,224 6,595 (896) — (896) 5,699 (51) 3,040 (2,510) — (11,279) 34 499 183 — (72) (72) — (72) — — — — — — 1 34,986 4,853 — — 4,853 (59) 3,162 — (10,660) 86 (144) 240 — (57) (57) (57) — — — — — — 2,597 35,127 107,414 — — — — — — — — — — — (353) 2,244 — — — — — — — — — — — — 6,595 (968) (72) (896) 5,627 401 3,040 (2,510) 1,984 (11,279) 34 147 35,127 104,858 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 10,096 12,619 17,004 27,656 112 9,609 11,918 11,476 Shares issued in lieu of dividends and amounts arising thereon 219 (219) Shares issued in lieu of dividends and amounts arising thereon 188 (188) 9,842 12,421 15,020 32,224 183 Dividends per ordinary share at 31 December 2017 were $0.51 (2016: $0.51; 2015:$0.50). 1 At 31 December 2017, retained earnings included 326,843,840 ($2,542m) of treasury shares (2016: 325,499,152 ($2,499m); 2015: 67,881 ($1m)). The increase principally reflects the share buy-back initiative, with the purchase of 328.2m ordinary shares ($3,000m) all of which were cancelled during the year and used 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 2017 185 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 issued by the IFRS Interpretations Committee, and as endorsed by the European Union (‘EU’). At 31 December 2017, there were no unendorsed standards effective for the year ended 31 December 2017 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 2017 HSBC has adopted the requirements of IFRS 9 ‘Financial Instruments’ relating to the presentation of gains and losses on financial liabilities designated at fair value from 1 January 2017 in the consolidated financial statements. 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. As permitted by the transitional requirements of IFRS 9, comparatives have not been restated. Adoption increased profit after tax by $2,024m and basic and diluted earnings per share by $0.10 with the opposite effect on other comprehensive income and no effect on net assets. These requirements were adopted in the separate financial statements of HSBC Holdings in 2016. There were no other new standards applied in 2017. However, during 2017, 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 which are effective from 1 January 2018 and 2019, some of which have been endorsed for use in the EU. HSBC expects they will have an insignificant effect, when adopted, on the consolidated financial statements of HSBC and the separate financial statements of HSBC Holdings. HSBC has not early adopted any of the amendments effective after 31 December 2017, except the requirements of IFRS 9 ‘Financial Instruments’ relating to the presentation of gains and losses on financial liabilities designated at fair value which was adopted from 1 January 2017. Major new IFRSs The IASB has published IFRS 9 ‘Financial Instruments’, IFRS 15 ‘Revenue from Contracts with Customers’, IFRS 16 ‘Leases’ and IFRS 17 ‘Insurance contracts’. IFRS 9 , IFRS 15 and IFRS 16 have been endorsed for use in the EU and IFRS 17 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. In addition, on transition to IFRS 9 entities are required to revoke previous designations of financial assets and financial liabilities measured at fair value through profit or loss where the accounting mismatch no longer exists and are permitted to revoke such designations where accounting mismatches continue to exist. Impairment The impairment requirements apply to financial assets measured at amortised cost and FVOCI, 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 12-month 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 may be more volatile. IFRS 9 may also 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. 186 HSBC Holdings plc Annual Report and Accounts 2017 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. Transitional impact With the exception of the provisions relating to the presentation of gains and losses on financial liabilities designated at fair value, which were adopted from 1 January 2017, the requirements of IFRS 9 ‘Financial Instruments’ will be adopted from 1 January 2018. IFRS 9 includes an accounting policy choice to continue IAS 39 hedge accounting, which HSBC has exercised, although it will implement the revised hedge accounting disclosures required by the related amendments to IFRS 7 ‘Financial Instruments: Disclosures’. 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. For the consolidated financial statements of HSBC, adoption is expected to reduce net assets at 1 January 2018 by $1.0bn, with the classification and measurement changes increasing net assets by $0.9bn and impairment reducing net assets by $2.2bn, net of deferred tax of $0.3bn. As a consequence, common equity tier 1 capital is expected to increase by $1.2bn, applying regulatory transitional arrangements, and by $0.2bn on a fully loaded basis. For the separate financial statements of HSBC Holdings, adoption is expected to increase net assets at 1 January 2018 by $0.9bn, net of deferred tax, as a result of classification and measurement changes. These estimates are based on accounting policies, assumptions, judgements and estimation techniques that remain subject to change until the Group finalises its financial statements for the year ending 31 December 2018. IFRS 15 ‘Revenue from Contracts with Customers’ In May 2014, the IASB issued IFRS 15 ‘Revenue from Contracts with Customers’ and it is effective for annual periods beginning on or after 1 January 2018. IFRS 15 provides a principles-based approach for revenue recognition, and introduces the concept of recognising revenue for performance obligations as they are satisfied. HSBC will adopt the standard on its mandatory effective date, and the standard will be applied on a retrospective basis, recognising the cumulative effect, if any, of initially applying the standard as an adjustment to the opening balance of retained earnings. 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 33. IFRS 17 ‘Insurance contracts’ IFRS 17 ‘Insurance contracts’ was issued in May 2017, and sets out the requirements that an entity should apply in accounting for insurance contracts it issues and reinsurance contracts it holds. IFRS 17 is effective from 1 January 2021, and HSBC is considering its impact. (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 which 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 32 to 62; • 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 63 to 116; • capital disclosures are included in the ‘Report of the Directors: Capital’ on pages 117 to 120; and • disclosures relating to HSBC’s securitisation activities and structured products are included in the ‘Report of the Directors: Risk’ on pages 63 to 116. In accordance with its 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 UK Finance Disclosure Code (‘the UKF Disclosure Code’). The UKF Disclosure Code aims to increase the quality and comparability of UK banks’ disclosures and sets out five disclosure principles together with supporting guidance agreed in 2010. In line with the principles of the UKF Disclosure Code, HSBC assesses good practice recommendations issued from time to time by relevant HSBC Holdings plc Annual Report and Accounts 2017 187 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 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. This could result in materially different estimates and judgements 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 rest of the Group Management Board (‘GMB’), which operates as a general management committee under the direct authority of the Board. 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. They are therefore 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. This ensures 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. 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 188 HSBC Holdings plc Annual Report and Accounts 2017 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 (a ‘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 either 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. 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 sub-section (c) above) through the recognition of interest income, unless the loan becomes impaired. HSBC Holdings plc Annual Report and Accounts 2017 189 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 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, which are 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 that HSBC is not able to identify on an individual loan basis, and that can be reliably estimated. When information becomes available that 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 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. 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 required payments 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 190 HSBC Holdings plc Annual Report and Accounts 2017 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. 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, repurchase and similar agreements When debt 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. Contracts that are economically equivalent to reverse repurchase or repurchase agreements (such as sales or purchases of debt securities entered into together with total return swaps with the same counterparty) are accounted for similarly to, and presented together with, reverse repurchase or repurchase agreements. (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 them, and are normally derecognised when they 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 HSBC Holdings plc Annual Report and Accounts 2017 191 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 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, with changes in fair value generally recorded in the income statement. 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 and are required by IFRSs to be accounted for separately from the host contract. 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 from financial instruments designated at fair value’ together with the gains and losses on the economically hedged items. Where the derivatives are managed with debt securities issued by HSBC that are designated at fair value, the contractual interest is shown in ‘Interest expense’ together with the interest payable on the issued debt. Hedge accounting When derivatives are not part of fair value designated relationships, if held for risk management purposes they are designated in hedge accounting relationships where the required criteria for documentation and hedge effectiveness are met. HSBC uses these derivatives or, where allowed, other non-derivative hedging instruments in fair value hedges, cash flow hedges or hedges of net investments in foreign operations as appropriate to the risk being hedged. Fair value hedge Fair value hedge accounting does not change the recording of gains and losses on derivatives and other hedging instruments, but results in recognising changes in the fair value of the hedged assets or liabilities attributable to the hedged risk that would not otherwise be recognised in the income statement. 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, 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 gains and losses on hedging instruments is recognised in other comprehensive income; the ineffective portion of the change in fair value of derivative hedging instruments that are part of a cash flow hedge relationship 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. 192 HSBC Holdings plc Annual Report and Accounts 2017 Net investment hedge Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. The effective portion of gains and losses on the hedging instrument is recognised in other comprehensive income; other gains and losses are 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. 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. HSBC Holdings plc Annual Report and Accounts 2017 193 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 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 schemes 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. Remeasurements 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 on 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 are 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. 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. 194 HSBC Holdings plc Annual Report and Accounts 2017 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 Footnote 1 2017 $m 3,211 198 (9) 3,400 (375) 672 — (273) 945 1 — 298 3,698 2016 $m 1,480 90 (43) 1,527 (218) (3,975) (1,792) (1,367) (816) (6) 6 (4,193) (2,666) 2015 $m 531 89 13 633 34 863 1,002 (1,997) 1,858 3 (1) 899 1,532 1 From 1 January 2017, HSBC Holdings plc adopted, in its consolidated 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, changes in fair value attributable to changes in own credit risk are presented in other comprehensive income with the remaining effect presented in profit or loss. HSBC Holdings Net income/(expense) arising on HSBC Holdings’ long-term debt issued and related derivatives Net income/(expense) arising on: Financial assets: – other financial assets designated at fair value – derivatives managed with other financial assets designated at fair value Financial liabilities – changes in own credit spread on long-term debt 1 – derivatives managed in conjunction with HSBC Holdings issued debt securities – other changes in fair value Year ended 31 Dec Footnote 2017 $m 211 161 50 103 — 292 (189) 314 2016 $m — — — (49) — (642) 593 (49) 2015 $m — — — 276 348 (927) 855 276 1 From 1 January 2016, HSBC Holdings plc 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, changes in fair value attributable to changes in own credit risk are presented in other comprehensive income with the remaining effect presented in profit or loss. 3 Insurance business Net insurance premium income Gross insurance premium income Reinsurers’ share of gross insurance premium income Year ended 31 Dec 2017 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 1 Discretionary participation features. Non-linked insurance Linked life insurance Investment contracts with DPF1 $m 8,424 (1,016) 7,408 8,036 (629) 7,407 7,506 (648) 6,858 $m 351 (7) 344 675 (8) 667 1,409 (9) 1,400 $m 2,027 — 2,027 1,877 — 1,877 2,097 — 2,097 Total $m 10,802 (1,023) 9,779 10,588 (637) 9,951 11,012 (657) 10,355 HSBC Holdings plc Annual Report and Accounts 2017 195 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 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 2017 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 1 Discretionary participation features. Liabilities under insurance contracts Gross liabilities under insurance contracts at 1 Jan 2017 Claims and benefits paid Increase in liabilities to policyholders Exchange differences and other movements Gross liabilities under insurance contracts at 31 Dec 2017 Reinsurers’ share of liabilities under insurance contracts Net liabilities under insurance contracts at 31 Dec 2017 Gross liabilities under insurance contracts at 1 Jan 2016 Claims and benefits paid Increase in liabilities to policyholders 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 $m 8,894 2,883 6,011 (942) (297) (645) 7,952 8,778 2,828 5,950 (560) (112) (448) 8,218 7,746 3,200 4,546 (575) (153) (422) 7,171 $m 1,413 1,044 369 65 (223) 288 1,478 1,321 749 572 (78) (14) (64) 1,243 1,398 1,869 (471) (5) (64) 59 1,393 $m 2,901 2,002 899 — — — Total $m 13,208 5,929 7,279 (877) (520) (357) 2,901 12,331 2,409 2,017 392 — — — 2,409 2,728 2,101 627 — — — 12,508 5,594 6,914 (638) (126) (512) 11,870 11,872 7,170 4,702 (580) (217) (363) 2,728 11,292 Footnotes 2 2 Non-linked insurance Linked life insurance Investment contracts with DPF1 $m 46,043 (2,883) 8,894 58 52,112 (2,203) 49,909 40,538 (2,828) 8,778 (445) 46,043 (1,500) 44,543 $m 6,949 (1,044) 1,413 230 7,548 (268) 7,280 6,791 (749) 1,321 (414) 6,949 (320) 6,629 $m 22,281 (2,002) 2,901 2,827 26,007 — 26,007 22,609 (2,017) 2,409 (720) 22,281 — 22,281 Total $m 75,273 (5,929) 13,208 3,115 85,667 (2,471) 83,196 69,938 (5,594) 12,508 (1,579) 75,273 (1,820) 73,453 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. 196 HSBC Holdings plc Annual Report and Accounts 2017 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 2017 $m 261 7,577 2,691 2016 $m 574 7,732 2,543 2015 $m 934 8,736 3,052 Interest on financial instruments, excluding interest on financial liabilities held for trading or designated at fair value (10,912) (11,858) (13,680) 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) (1,475) (1,214) 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 Gain/(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 (134) (936) (911) (25) (916) (204) (98) 195 — 19 (1,769) (1,992) 190 33 (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) 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 2017 $m 51,445 11,057 14,992 4,573 2,203 18,620 60 2017 $m 15,227 1,419 669 17,315 2017 134,021 46,716 49,100 7,817 7,134 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 2,721 244,788 246,933 268,433 HSBC Holdings plc Annual Report and Accounts 2017 197 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements 2016 71,196 122,282 12,021 20,353 21,081 246,933 2016 $m 3,035 (323) 2,712 371 (128) 2,955 2015 68,408 121,438 14,467 21,506 42,614 268,433 2015 $m 3,462 (387) 3,075 483 (40) 3,518 Expected charge 2018 2019 and beyond $m 162 109 82 353 117 236 $m 175 84 21 280 99 181 2015 $m 748 43 791 Notes on the Financial Statements 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 Reconciliation of total incentive awards granted to income statement charge Total incentive awards approved 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 Variable compensation from 2017 bonus pool Variable compensation from 2016 bonus pool Variable compensation from 2015 bonus pool and earlier Total Cash awards Equity awards Share-based payments Charge recognised 2017 2016 $m 162 126 210 498 184 314 $m — 152 168 320 114 206 2017 70,301 125,004 10,408 18,610 20,465 244,788 2017 $m 3,303 (337) 2,966 336 (78) 3,224 2015 $m — — 253 253 67 186 ‘Wages and salaries’ includes the effect of share-based payments arrangements, of which $500m were equity settled (2016: $534m; 2015: $757m), as follows: Restricted share awards Savings-related and other share award option plans Year ended 31 Dec HSBC share awards Award Policy 2017 $m 520 26 546 2016 $m 591 33 624 Deferred share awards (including annual incentive awards, LTI awards delivered in shares) and GPSP • An assessment of performance over the relevant period ending on 31 December is used to determine the amount of the award to be granted. • Deferred awards generally require employees to remain in employment over the vesting period and are not subject to performance conditions after the grant date. • Deferred share awards generally vest over a period of three, five or seven years. • Vested shares may be subject to a retention requirement post-vesting. GPSP awards are retained until cessation of employment. • Awards granted from 2010 onwards are subject to a malus provision prior to vesting. • Awards granted to Material Risk Takers from 2015 onwards are subject to clawback post vesting. International Employee Share Purchase Plan (‘ShareMatch’) • The plan was first introduced in Hong Kong in 2013 and now includes employees based in 27 jurisdictions. • Shares are purchased in the market each quarter up to a maximum value of £750, or the equivalent in local currency. • Matching awards are added at a ratio of one free share for every three purchased. • Matching awards vest subject to continued employment and the retention of the purchased shares for a maximum period of two years and nine months. Movement on HSBC share awards Restricted share awards outstanding at 1 Jan Additions during the year Released in the year Forfeited in the year Restricted share awards outstanding at 31 Dec Weighted average fair value of awards granted ($) 198 HSBC Holdings plc Annual Report and Accounts 2017 2017 Number (000s) 123,166 62,044 (76,051) (4,634) 104,525 7.09 2016 Number (000s) 118,665 94,981 (76,552) (13,928) 123,166 7.25 HSBC share option plans Main plans Policy 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 anniversary of the commencement of a three-year or five-year contract, respectively. • The exercise price is set at a 20% (2016: 20%) discount to the market value immediately preceding the date of Calculation of fair values invitation. 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 2017 Granted during the year Exercised during the year Expired during the year Forfeited during the year Outstanding at 31 Dec 2017 Of which exercisable Weighted average remaining contractual life (years) Outstanding at 1 Jan 2016 Granted during the year Exercised during the year Expired during the year Forfeited during the year Outstanding at 31 Dec 2016 Of which exercisable Weighted average remaining contractual life (years) 1 Weighted average exercise price. 2 The weighted average fair value of options granted during the year was $1.29 (2016: $1.28). 3 The weighted average share price at the date the options were exercised was $9.93 (2016: $6.98). Post-employment benefit plans Footnotes 2 3 2 3 Savings-related share option plans Number (000s) 70,027 10,447 (9,503) (3,902) (2,399) 64,670 1,129 2.42 74,775 15,044 (4,354) (13,243) (2,195) 70,027 1,086 2.91 WAEP1 £ 4.30 5.96 4.83 4.45 4.27 4.49 5.00 4.36 4.40 5.02 4.49 4.34 4.30 5.25 The Group operates pension plans throughout the world for its employees. ‘Pension risk management’ on page 80 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. 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 are more prudent assumptions for discount rate, inflation rate and life expectancy. 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. The remaining contributions are £64m ($79m) in each of 2018 and 2019, and £160m ($197m) in each of 2020 and 2021. To meet the requirements of the Banking Reform Act, it is currently planned that from 1 July 2018, the main employer of the plan will change from HSBC Bank plc to HSBC UK Bank plc, with additional support from HSBC Holdings plc. At the same time, non-ring fenced entities including HSBC Bank plc will exit the section of the plan for ring-fenced entities and join a newly created section for the future defined benefit and defined contribution pension benefits of their employees (approximately 0.2% of the total plan). These changes are not expected to materially affect the funding position of the plan. HSBC Holdings plc Annual Report and Accounts 2017 199 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements The following chart shows the expected profile of future benefits payable from the plan. Future benefit payments ($bn) In next 10 years 11-20 years 21-30 years 31-40 years 41-50 years over 51 years 0.0 5.0 10.0 15.0 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 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 2017 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 2016 Total employee benefit liabilities (within ‘Accruals, deferred income and other liabilities’) Total employee benefit assets (within ‘Prepayments, accrued income and other assets’) HSBC Holdings 2017 $m 100 603 703 (34) 669 2016 $m 218 783 1,001 41 1,042 Present value of defined benefit obligations Effect of limit on plan surpluses Fair value of plan assets $m 47,265 124 47,389 $m (40,089) (663) (40,752) 42,397 118 42,515 (39,747) (711) (40,458) $m (37) — (37) (24) — (24) 2015 $m 256 793 1,049 6 1,055 Total $m 7,139 (539) 6,600 (2,152) 8,752 2,626 (593) 2,033 (2,681) 4,714 Employee compensation and benefit expense in respect of HSBC Holdings’ employees in 2017 amounted to $54m (2016: $570m). The average number of persons employed during 2017 was 55 (2016: 1,660). 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 started providing services to HSBC Holdings. HSBC Holdings recognised a management charge of $2,240m (2016 :$406m) for these services which is included under ‘General and administrative expenses’. 200 HSBC Holdings plc Annual Report and Accounts 2017 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 33,442 8,955 (29,279) (10,468) Other plans Principal plan At 1 Jan 2017 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 — — — 864 1,410 1,410 — — 3,292 449 58 391 — — (833) (833) (65) (231) (296) (160) 1,051 891 (750) (300) 272 784 784 — — 239 236 215 21 27 1,730 — 954 776 (2,723) — — — — (486) — (491) 5 (306) — — — (27) 716 17 (1,143) (49) (663) (17) 1,143 49 At 31 Dec 2017 38,265 9,000 (30,126) (9,963) Present value of defined benefit obligation relating to: – actives – deferreds – pensioners 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 (5,837) (8,745) (15,544) (5,084) (1,663) (3,216) 32,670 8,754 (27,675) (10,651) — — — 1,085 6,449 6,449 — — — (1) (1) 294 671 671 — — (6,097) (534) 347 64 283 — (970) (42) 379 207 172 30 (623) (15) (70) — (70) (235) (39) (274) (914) (337) (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 (7,066) (9,219) (12,994) (5,066) (2,306) (3,096) Other plans $m (1,537) (160) 218 58 $m 4,163 (65) (231) (296) 114 (29) 3,140 1,410 954 776 569 449 58 391 — — — 289 784 (500) 5 (70) 236 215 21 — 53 — $m (24) — — — (1) (9) — (9) — (3) — — — — — — (37) 8,139 (1,000) (14) 4,995 (1,911) — — — (1) (8) — (8) — (1) — — — — — — (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) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — HSBC expects to make $278m of contributions to defined benefit pension plans during 2018. 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 2018 $m 1,241 443 2019 $m 1,279 508 2020 $m 1,320 511 2021 $m 1,360 527 2022 $m 1,402 520 2023-2027 $m 7,692 2,307 1 The duration of the defined benefit obligation is 17.4 years for the principal plan under the disclosure assumptions adopted (2016: 19.0 years) and 12.9 years for all other plans combined (2016: 13.9 years). HSBC Holdings plc Annual Report and Accounts 2017 201 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 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 2017 Quoted market price in active market No quoted market price in active market Thereof HSBC1 $m $m $m 33,624 5,503 26,591 — 1,530 7,737 1,340 5,714 39 644 4,641 1,006 628 — 2,398 1,615 — — 1,006 — 1,263 114 665 157 (39) 480 — 7 — 107 Value $m 38,265 6,131 26,591 2,398 3,145 9,000 2,005 5,871 — 1,124 31 Dec 2016 Quoted market price in active market No quoted market price in active market $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 Value $m 33,442 5,386 23,426 2,107 2,523 8,955 2,255 5,811 (89) 978 Thereof HSBC1 $m 878 — — 878 — 239 — 5 (85) 319 1 The fair value of plan assets includes derivatives entered into with HSBC Bank plc as detailed in Note 35. 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 2017 At 31 Dec 2016 At 31 Dec 2015 Discount rate Inflation rate Rate of increase for pensions Rate of pay increase % 2.60 2.50 3.70 % 3.40 3.50 3.20 % 3.10 3.20 3.00 % 3.88 4.00 3.70 Mortality tables and average life expectancy at age 65 for the principal plan UK At 31 Dec 2017 At 31 Dec 2016 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 S22 22.2 22.4 23.6 24.1 24.4 24.7 25.9 26.6 1 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 2016 with a long-term rate of improvement of 1.25% per annum. Separate tables assuming lighter mortality have been applied to higher paid pensioners. 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. 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 Directors’ emoluments Impact on HSBC Bank (UK) Pension Scheme Obligation Financial impact of increase Financial impact of decrease 2017 $m (1,246) 850 1,077 62 1,332 2016 $m (1,322) 735 1,305 143 1,326 2017 $m 1,333 (837) (1,021) (61) n/a 2016 $m 1,419 (1,048) (1,255) (139) n/a Details of Directors’ emoluments, pensions and their interests are disclosed in the Directors’ Remuneration Report on page 141. 202 HSBC Holdings plc Annual Report and Accounts 2017 6 Auditors’ remuneration Audit fees payable to PwC Other audit fees payable Year ended 31 Dec Fees payable by HSBC to PwC Fees for HSBC Holdings’ statutory audit Fees for other services provided to HSBC – audit of HSBC’s subsidiaries – audit-related assurance services – taxation compliance services – taxation advisory services – other assurance services – other non-audit services Year ended 31 Dec Footnote 1 Footnotes 2 3 4 5 5 2017 $m 84.8 1.2 86.0 2017 $m 15.1 114.6 69.7 22.5 1.2 — 3.9 17.3 129.7 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 No fees were payable by HSBC to PwC 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 Audit of HSBC’s associated pension schemes Audit related assurance services Year ended 31 Dec 2017 $000 260 4 264 2016 $000 208 4 212 2015 $000 352 5 357 1 The 2016 audit fees payable amount includes $4.2m related to the prior year audit in respect of overruns. 2 Fees payable to PwC 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. 3 Fees payable for the statutory audit of the financial statements of HSBC’s subsidiaries, including the 2017 and 2016 changes in scope and additional procedures performed due to the technology systems and data access controls matter as described on page 166. 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. 4 5 No fees were payable by HSBC’s associated pension schemes to PwC as principal auditor for the following types of 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 associated with HSBC amount to $3.5m (2016: $4.3m; 2015: $2.4m). 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. 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 Footnote 1 2017 $m 4,264 4,115 149 1,024 (228) 1,337 (85) 5,288 2016 $m 3,669 3,525 144 (3) (111) (4) 112 2015 $m 3,797 3,882 (85) (26) (153) 110 17 3,666 3,771 1 Current tax included Hong Kong profits tax of $1,350m (2016: $1,118m; 2015: $1,294m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in Hong Kong was 16.5% (2016: 16.5%; 2015: 16.5%). HSBC Holdings plc Annual Report and Accounts 2017 203 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 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 19.25% (2016: 20.0%; 2015: 20.25%) Impact of differently taxed overseas profits in overseas locations Items increasing tax charge in 2017 not in 2016: – deferred tax remeasurement due to US federal tax rate reduction Other items increasing tax charge in 2017: – local taxes and overseas withholding taxes – other permanent disallowables – bank levy – non-deductible UK customer compensation – UK banking surcharge – UK tax losses not recognised – adjustments in respect of prior period liabilities – change in tax rates – non-UK tax losses not recognised – non-deductible goodwill write-down – non-deductible loss and taxes suffered on Brazil disposal Items reducing tax charge in 2017: – non-taxable income and gains – effect of profits in associates and joint ventures – non-deductible regulatory settlements – other deferred tax temporary differences previously not recognised – non-taxable income and gains - Industrial Bank – US deferred tax temporary differences previously not recognised – other items Year ended 31 Dec 2017 $m 17,167 % 2016 $m 7,112 3,305 407 1,288 618 400 180 166 136 70 64 49 33 — — (766) (481) (132) (49) — — — 19.25 1,422 2.3 7.5 3.6 2.3 1.0 1.0 0.8 0.4 0.4 0.3 0.2 — — (4.4) (2.8) (0.8) (0.3) — — — 43 — 434 438 170 162 199 305 256 (4) 147 648 464 (577) (461) 20 — — — — % 20.00 0.6 — 6.1 6.2 2.4 2.3 2.8 4.3 3.6 (0.1) 2.1 9.1 6.5 (8.1) (6.5) 0.3 — — — — 2015 $m 18,867 3,821 71 — 416 421 286 87 — — (68) 110 — — — (501) (508) 184 (21) (227) (184) (116) 5,288 30.8 3,666 51.6 3,771 % 20.25 0.4 — 2.2 2.2 1.5 0.5 — — (0.4) 0.6 — — — (2.7) (2.7) 1.0 (0.1) (1.2) (1.0) (0.6) 20.0 The Group’s profits are taxed at different rates depending on the country in which the profits arise. The key applicable tax rates for 2017 include Hong Kong (16.5%), the USA (35%) and the UK (19.25%). If the Group’s profits were taxed at the statutory rates of the countries in which the profits arose then the tax rate for the year would have been 21.15% (2016: 20.60%). The effective tax rate for the year was 30.8% (2016: 51.6%) and includes a charge of $1.3bn relating to the remeasurement of US deferred tax balances to reflect the reduction in the US federal tax rate to 21% from 2018. The effective tax rate for 2017 was significantly lower than for 2016 as 2016 included the impact of a non-deductible goodwill write-down and loss on disposal of our operations in Brazil, tax losses not recognised and adjustments in respect of prior periods. 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. 204 HSBC Holdings plc Annual Report and Accounts 2017 Movement of deferred tax assets and liabilities Assets Liabilities At 1 Jan 2017 Income statement Other comprehensive income Equity Foreign exchange and other adjustments At 31 Dec 2017 Assets Liabilities Assets Liabilities At 1 Jan 2016 Income statement Other comprehensive income Equity Foreign exchange and other adjustments At 31 Dec 2016 Assets Liabilities Loan impairment provisions Unused tax losses and tax credits Derivatives, FVOD1 and other investments Insurance business Expense provisions $m 950 — 950 (235) 3 — (5) 713 713 — 1,351 — 1,351 (279) — — (122) 950 950 — $m 2,212 — 2,212 (873) (6) — 40 1,373 1,373 — 1,388 — 1,388 876 — — (52) 2,212 2,212 — $m 1,441 (274) 1,167 (397) 368 — 51 1,189 1,282 $m — (1,170) (1,170) 12 — — (24) (1,182) — (93) (1,182) 1,400 (230) 1,170 18 28 — (49) 1,167 1,441 (274) — (1,056) (1,056) (123) — — 9 (1,170) — (1,170) $m 893 — 893 (269) — — 19 643 643 — 1,271 — 1,271 (370) — — (8) 893 893 — Footnote 2 2 2 2 Other $m 1,857 (1,369) 488 738 (1,255) 29 (42) (42) 2,313 (2,355) 1,050 (883) 167 (314) 259 20 356 488 1,857 (1,369) Total $m 7,353 (2,813) 4,540 (1,024) (890) 29 39 2,694 6,324 (3,630) 6,460 (2,169) 4,291 (192) 287 20 134 4,540 7,353 (2,813) 1 Fair value of own debt. 2 After netting off balances within countries, the balances as disclosed in the accounts are as follows: deferred tax assets $4,676m (2016: $6,163m); and deferred tax liabilities $1,982m (2016: $1,623m). 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 $2.7bn (2016: $4.5bn) includes $3.2bn (2016: $4.8bn) of deferred tax assets relating to the US, of which $1bn relates to US tax losses that expire in 16 -19 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 US reported a loss for the prior period, mainly due to the Household International class action litigation settlement, and a profit for the current period. Excluding the Household International class action settlement the US would have reported a profit for the prior period. Management does not expect the prior period loss to adversely impact future deferred tax asset recovery to a significant extent. US tax reform enacted in late 2017 and effective from 2018 included a reduction in the federal rate of tax from 35% to 21% and the introduction of a base erosion anti-avoidance tax. The US deferred tax asset at 31 December 2017 is calculated using the rate of 21%. The remeasurement of the deferred tax asset due to the reduction in tax rate results in charges of $1.3bn to the income statement and $0.3bn to other comprehensive income. The impact of the base erosion anti-avoidance tax is currently uncertain and will depend on future regulatory guidance and actions management may take. It is not currently expected that the base erosion anti-avoidance tax will have a material impact on the Group’s future tax charges. 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 $18.1bn (2016: $18.2bn). These amounts included unused state losses arising in the Group’s US operations of $12.3bn (2016: $12.3bn). Of the total amounts unrecognised, $4.8bn (2016: $4.9bn) had no expiry date, $0.8bn (2016: $1.0bn) 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 $12.1bn (2016: $10.6bn) and the corresponding unrecognised deferred tax liability is $0.8bn (2016: $0.7bn). HSBC Holdings plc Annual Report and Accounts 2017 205 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 8 Dividends Dividends to shareholders of the parent company 2017 2016 2015 Per share $ Total $m Settled in scrip $m Per share $ Total $m Settled in scrip $m Per share $ Total $m Settled in scrip $m Dividends paid on ordinary shares In respect of previous year: – fourth interim dividend In respect of current year: – first interim dividend – second interim dividend – third interim dividend Total Total dividends on preference shares classified as equity (paid quarterly) 0.21 4,169 1,945 0.21 4,137 0.10 0.10 0.10 0.51 2,005 2,014 2,005 826 193 242 10,193 3,206 0.10 0.10 0.10 0.51 1,981 1,991 1,990 10,099 3,040 408 703 994 935 0.20 3,845 2,011 0.10 0.10 0.10 0.50 1,951 1,956 1,958 9,710 231 160 760 3,162 62.00 90 62.00 90 62.00 90 Total coupons on capital securities classified as equity 2017 Footnotes First call date Per security Perpetual subordinated capital securities – $2,200m issued at 8.125% – $3,800m issued at 8.000% Perpetual subordinated contingent convertible securities 1, 3 2, 3 – $1,500m issued at 5.625% – $2,000m issued at 6.875% – $2,250m issued at 6.375% – $2,450m issued at 6.375% – $3,000m issued at 6.000% – €1,500m issued at 5.250% – €1,000m issued at 6.000% – SGD1,000m issued at 4.700% Total Apr 2013 Dec 2015 Jan 2020 Jun 2021 Sep 2024 Mar 2025 May 2027 Sep 2022 Sep 2023 $2.032 $2.000 $56.250 $68.750 $63.750 $63.750 $60.000 €52.500 €60.000 Jun 2022 SGD47.000 Total $m 179 304 84 138 143 156 90 89 68 17 2016 Total $m 179 304 84 69 143 156 — 88 67 — 2015 Total $m 179 304 70 — 143 78 — 86 — — 1,268 1,090 860 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 each security’s issuance currency 1,000 per security. 3 Further details of these securities can be found in Note 31. After the end of the year, the Directors declared a fourth interim dividend in respect of the financial year ended 31 December 2017 of $0.21 per ordinary share, a distribution of approximately $4,199m. The fourth interim dividend will be payable on 6 April 2018 to holders on the Principal Register in the UK, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register on 23 February 2018. No liability was recorded in the financial statements in respect of the fourth interim dividend for 2017. On 4 January 2018, HSBC paid a coupon on its €1,250m subordinated capital securities, representing a total distribution of €30m ($36.3m). On 17 January 2018, HSBC paid a coupon on its $2,200m subordinated capital securities of $0.508 per security, a distribution of $45m. On 17 January 2018, HSBC paid a coupon on its $1,500m subordinated contingent convertible securities issued at 5.625% of $28.125 per security, a distribution of $42m. No liability was recorded in the balance sheet at 31 December 2017 in respect of these coupon payments. 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 2017 $m 10,798 (90) (1,025) 9,683 2016 $m 2,479 (90) (1,090) 1,299 2015 $m 13,522 (90) (860) 12,572 206 HSBC Holdings plc Annual Report and Accounts 2017 Basic and diluted earnings per share 2017 Profit Number of shares Footnote $m (millions) Basic Effect of dilutive potential ordinary shares Diluted 1 1 9,683 19,972 100 Per share $ 0.48 2016 Number of shares Profit $m (millions) Per share $ 2015 Number of shares Profit $m (millions) 1,299 19,753 0.07 12,572 19,380 92 137 Per share $ 0.65 1 Weighted average number of ordinary shares outstanding (basic) or assuming dilution (diluted). The number of anti-dilutive employee share options excluded from the weighted average number of dilutive potential ordinary shares is nil (2016: 10m; 2015: 7m). 9,683 20,072 0.48 1,299 19,845 0.07 12,572 19,517 0.64 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 Footnote 1 1 2017 $m 17,532 107,486 99,260 224,278 26,057 37,660 287,995 1 Loans and advances to banks and customers include settlement accounts, stock borrowing, reverse repos, cash collateral and margin accounts relating to trading activities. 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 Footnotes 2 3 2017 $m 15,995 9,540 10,070 58,858 2,986 27,569 99,260 224,278 172,109 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 1 Included within these figures are debt securities issued by banks and other financial institutions of $18,585m (2016: $14,630m), of which $906m (2016: $789m) are guaranteed by various governments. 2 Includes securities that are supported by an explicit guarantee issued by the US Government. 3 Excludes asset-backed securities included under US Treasury and US Government agencies. 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. HSBC Holdings plc Annual Report and Accounts 2017 207 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 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 2017 Level 1 Level 2 Level 3 $m $m $m Total $m Level 1 $m 2016 Level 2 $m Level 3 $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 181,168 101,775 24,622 1,017 227,943 3,382 216,357 104,692 5,052 1,460 2,444 3,432 287,995 29,464 219,818 336,067 62,710 117,451 4,200 184,361 4,164 1,635 90,265 213,242 — 94,429 1,944 216,821 133,744 19,882 1,076 274,655 45,171 4,248 1,554 94,892 4,144 287,044 111,743 104,938 82,547 275,965 6,489 730 2,752 3,476 3,582 37 2,300 235,125 24,756 290,872 389,874 153,691 86,832 279,819 Transfers between Level 1 and Level 2 fair values At 31 Dec 2017 Transfers from Level 1 to Level 2 Transfers from Level 2 to Level 1 At 31 Dec 2016 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 2,231 11,173 162 1,314 1,507 1,384 1,614 — $m — — 122 — $m — — 465 — $m 35 683 2,699 341 $m — — — — $m — — 209 — Transfers between levels of the fair value hierarchy are deemed to occur at the end of each semi-annual reporting period. Transfers into and out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency. Fair value adjustments 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 therefore fair value adjustments may no longer be required 208 HSBC Holdings plc Annual Report and Accounts 2017 Global Banking & Markets (‘GB&M’) and Corporate Centre 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 2017 2016 GB&M $m 1,078 413 91 420 (82) 233 3 92 92 — 106 1,276 Corporate Centre $m 79 5 8 59 — 7 — 13 6 7 — 92 GB&M $m 1,131 416 87 633 (437) 429 3 14 14 — 99 1,244 Corporate Centre $m 5 5 — — — — — 1 1 — — 6 Fair value adjustments increased by $118m during the year. Movements in CVA, DVA, FFVA and model limitations were driven by tightening credit spreads and refinements to model methodology. Fair value adjustments under Corporate Centre in 2017 include the transfer of balances on legacy positions no longer managed in GB&M. 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. The methodologies do not, in general, account for ‘wrong-way risk’. Wrong-way risk is an adverse correlation between the counterparty’s probability of default and the mark-to-market value of the underlying transaction. The risk can either be general, perhaps related to the currency of the issuer country, or specific to the transaction concerned. 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. HSBC Holdings plc Annual Report and Accounts 2017 209 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements Fair value valuation bases Financial instruments measured at fair value using a valuation technique with significant unobservable inputs – Level 3 Assets Liabilities Held for trading Designated at fair value Derivatives Held for trading Designated at fair value Derivatives Private equity including strategic investments Asset-backed securities Loans held for securitisation Structured notes Derivatives with monolines Other derivatives Other portfolios At 31 Dec 2017 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 Available for sale $m 2,012 1,300 — — — — $m 38 1,277 24 3 — — $m $m 1,458 — — — — — 2 — — — — 113 2,331 — Total $m 3,508 2,577 24 3 113 2,331 3,832 $m 20 — — 4,180 — — — 120 3,432 3,710 5,052 2,435 761 — — — — 280 3,476 49 789 28 2 — — 5,621 6,489 1,460 2,444 12,388 4,200 712 — — — — — 18 730 — — — — 175 2,577 — 2,752 3,196 1,550 28 2 175 2,577 5,919 13,447 25 — — 3,557 — — — 3,582 $m $m — — — — — — — — — — — — — — 37 37 — — — — — 1,944 — 1,944 — — — — — 2,300 — 2,300 Total $m 20 — — 4,180 — 1,944 — 6,144 25 — — 3,557 — 2,300 37 5,919 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. 210 HSBC Holdings plc Annual Report and Accounts 2017 Reconciliation of fair value measurements in Level 3 of the fair value hierarchy Movement in Level 3 financial instruments Footnote At 1 Jan 2017 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’) 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 2017 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 2016 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 2016 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 Assets Available for sale Held for trading $m 3,476 351 — — 313 38 71 (30) — 101 200 — (939) (69) (565) 907 $m 6,489 (188) (188) — — — 106 — (1) 107 1,503 — (3,221) (331) (149) 843 Designated at fair value $m 730 (107) — (107) — — 7 — 3 4 1,127 — (130) (166) (3) 2 Derivatives $m 2,752 152 152 Held for trading $m 3,582 154 154 — — — 188 — (23) 211 2 1 (8) (60) (885) 302 — — — 169 — — 169 5 1,915 (12) (998) (678) 63 3,432 5,052 1,460 2,444 4,200 16 — — 16 4,727 178 — — 91 87 (162) 123 — (285) 350 — (110) (110) — — (146) — (146) — 6,856 474 31 31 — — — (610) — — (610) 823 — 25 — 25 — — (8) — — (8) 359 — (7) (113) (2) 2 730 21 — 21 — 218 218 — — 2,262 1,107 1,107 — — — (117) (117) — — 4,285 337 337 — — — (335) (130) — — (335) — — — (107) (187) 12 2,752 364 364 — — — — (130) 20 1,882 (40) (1,907) (920) 55 3,582 (143) (143) — — (1,212) (1,760) (177) (947) 719 3,476 87 — — 87 (311) (199) 1,659 6,489 (170) (170) — — Liabilities Designated at fair value $m 37 (5) — (5) — — 1 — — 1 — — — — Derivatives $m 2,300 400 400 — — — 120 — (35) 155 23 — (12) (123) (33) (1,030) — — — — — — 3 (1) — (1) — — (1) — — (1) 6 — (2) — — 32 37 1 — 1 — 266 1,944 (397) (397) — — 1,210 1,428 1,428 — — — (240) — 12 (252) — — — (239) (229) 370 2,300 (335) (335) — — 1 Included in ‘Available-for-sale investments: fair value gains/(losses)’ and ‘Exchange differences’ in the consolidated statement of comprehensive income. Transfers between levels of the fair value hierarchy are deemed to occur at the end of each semi-annual reporting period. Transfers into and out of Levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency. HSBC Holdings plc Annual Report and Accounts 2017 211 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements Effect of changes in significant unobservable assumptions to reasonably possible alternatives Sensitivity of Level 3 fair values to reasonably possible alternative assumptions 2017 2016 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 1 Derivatives, trading assets and trading liabilities Financial assets and liabilities designated at fair value Financial investments: available for sale At 31 Dec $m 372 89 53 514 $m $m $m (253) (74) (30) (357) — — 128 128 — — (149) (149) $m 238 48 72 358 $m (177) (38) (36) (251) $m — — 170 170 $m — — (149) (149) 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 2017 2016 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 142 66 1 12 — 249 44 514 $m (105) (39) (1) (9) — (150) (53) (357) $m 117 3 — — — — 8 $m (102) (39) — — — — (8) 128 (149) $m 112 43 1 10 3 141 48 358 $m (73) (15) (1) (7) (3) (94) (58) (251) $m 121 33 — — — — 16 170 $m (106) (27) — — — — (16) (149) 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. 212 HSBC Holdings plc Annual Report and Accounts 2017 Private equity including strategic investments Asset-backed securities 2 – CLO/CDO – 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 derivatives: 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 At 31 Dec 2017 3 Key unobservable inputs to Level 3 financial instruments Quantitative information about significant unobservable inputs in Level 3 valuations Fair value 2017 2016 Assets Liabilities Valuation techniques Key unobservable inputs Footnotes $m 3,508 2,577 520 $m 20 See page 255 See page 255 Market proxy Prepayment rate Market proxy Bid quotes 2,057 Market proxy Bid quotes Full range of inputs Core range of inputs1 Full range of inputs Core range of inputs1 Lower Higher Lower Higher Lower Higher Lower Higher n/a n/a n/a n/a n/a n/a n/a n/a 2% 7% 0 0 101 103 2% 6 34 7% 2% 53 98 0 0 7% 101 96 2% 42 57 7% 94 90 24 3 — — — 3 113 — 4,180 4,077 Model – Option model Equity volatility Model – Option model Equity correlation 7% 47% 14% 30% 11% 96% 16% 36% 33% 95% 45% 72% 33% 94% 46% 81% Model – Option model 7 Fund volatility 6% 15% 6% 15% 6% 11% 6% 11% Model – Option model FX volatility 3% 20% 4% 13% 3% 29% 5% 18% Model – Discounted cash flow Credit spread 0.4% 3% 1% 3% 2% 2% 2% 2% 76 20 — 2,331 1,944 66 145 83 129 359 329 27 — — 1,244 302 86 135 158 96 25 3,832 3,014 85 733 securitisation swaps 285 806 Model – Discounted cash flow Model – Option model Model – Option model Prepayment rate 20% 90% 20% 90% 0% 90% 8% 27% IR volatility 8% 41% 15% 31% 8% 101% 21% 39% FX volatility 0.7% 50% 5% 11% 0.6% 25% 7% 12% Model – Option model Equity volatility 7% 84% 15% 44% 11% 83% 16% 36% Model – Discounted cash flow Credit volatility — Market proxy Bid quotes — 12,388 6,144 2% 100 4% 100 2% 100 4% 100 3% 96 4% 144 3% 113 4% 113 1 The core range of inputs is the estimated range within which 90% of the inputs fall. 2 Collateralised loan obligation/collateralised debt obligation. 3 ‘Other’ includes a range of smaller asset holdings. 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. HSBC Holdings plc Annual Report and Accounts 2017 213 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 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 – financial investments in HSBC undertakings – loans and advances to HSBC undertakings designated at fair value Liabilities at 31 Dec – designated at fair value – derivatives 2017 $m 2,388 4,264 11,944 30,890 3,082 2016 $m 2,148 3,590 — 30,113 5,025 214 HSBC Holdings plc Annual Report and Accounts 2017 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 2017 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 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 Fair value Quoted market price Level 1 Observable inputs Level 2 Significant unobservable inputs Level 3 $m $m $m — — — 1,363 — — 1 — — — — — 1,190 — — — — — 87,384 20,029 200,012 52,707 69,862 1,353,017 129,995 65,138 23,740 85,568 15,670 159,504 46,014 59,883 1,262,540 88,939 66,386 23,264 3,007 944,176 1,526 17 30 11,608 — — 355 2,572 845,894 1,527 19 42 10,136 — — 292 Carrying amount $m 90,393 962,964 201,553 52,919 69,922 1,364,462 130,002 64,546 19,826 88,126 861,504 160,974 46,923 59,939 1,272,386 88,958 65,915 20,984 Total $m 90,391 964,205 201,538 54,087 69,892 1,364,625 129,996 65,138 24,095 88,140 861,564 161,031 47,223 59,925 1,272,676 88,939 66,386 23,556 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. 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 2017 Loans and advances to customers – personal – corporate and commercial – financial At 31 Dec 2016 Carrying amount Not Impaired Impaired $m $m 370,842 510,784 71,377 953,003 332,574 453,151 63,316 849,041 3,920 5,970 71 9,961 5,252 7,058 153 12,463 Total $m 374,762 516,754 71,448 962,964 337,826 460,209 63,469 861,504 Fair value Not Impaired Impaired $m $m 371,131 512,597 71,351 955,079 330,167 456,816 63,411 850,394 3,257 5,769 100 9,126 4,597 6,393 180 11,170 Total $m 374,388 518,366 71,451 964,205 334,764 463,209 63,591 861,564 Loans and advances to customers are classified as not impaired or impaired in accordance with the criteria described on page 86. 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 HSBC Holdings plc Annual Report and Accounts 2017 215 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 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 purposes 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). 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 2017 Carrying amount $m Fair value1 $m 2016 Carrying amount $m Fair value1 $m 76,627 78,534 77,421 79,985 2,571 34,258 15,877 2,571 36,611 19,596 2,157 21,805 15,189 2,156 23,147 17,715 2017 $m 29,456 606 4,090 24,760 8 29,464 2017 $m — 17 64 1,247 2 3,366 24,760 29,456 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 Footnotes 2 3 1 Included within these figures are debt securities issued by banks and other financial institutions of $1,621m (2016: $1,766m), of which $0.4m (2016: $19m) are guaranteed by various governments. 2 Includes securities that are supported by an explicit guarantee issued by the US Government. 3 Excludes asset-backed securities included under US Treasury and US Government agencies. 216 HSBC Holdings plc Annual Report and Accounts 2017 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 6,215,518 19,751,577 590,156 391,798 59,716 $m 28,768 178,289 — — — $m 78,089 235,430 9,353 4,692 886 $m 428 1,365 — — — Gross total fair values 27,008,765 207,057 328,450 1,793 Offset (Note 29) At 31 Dec 2017 Foreign exchange Interest rate Equities Credit Commodity and other Gross total fair values Offset (Note 29) At 31 Dec 2016 27,008,765 207,057 328,450 1,793 5,819,814 13,729,757 472,169 448,220 62,009 26,281 215,006 — — — 126,185 253,398 7,410 5,199 2,020 1,228 1,987 — — — 20,531,969 241,287 394,212 3,215 20,531,969 241,287 394,212 3,215 Total $m 78,517 236,795 9,353 4,692 886 330,243 (110,425) 219,818 127,413 255,385 7,410 5,199 2,020 397,427 (106,555) 290,872 Fair value – Liabilities Trading Hedging $m 74,915 229,989 11,845 5,369 1,233 $m 853 3,042 — — — 323,351 3,895 323,351 3,895 118,813 245,941 9,240 5,767 1,564 968 4,081 — — — 381,325 5,049 381,325 5,049 Total $m 75,768 233,031 11,845 5,369 1,233 327,246 (110,425) 216,821 119,781 250,022 9,240 5,767 1,564 386,374 (106,555) 279,819 The notional contract amounts of derivatives held for trading purposes and derivatives designated in hedge accounting relationships indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk. Derivative assets and liabilities decreased during 2017, reflecting changes in yield curve movements and changes in foreign exchange rates. 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 20,484 41,061 61,545 23,442 26,858 50,300 $m 1,120 25,294 26,414 1,120 24,356 25,476 $m 588 1,364 1,952 223 1,478 1,701 $m — 436 436 — 447 447 Total $m 588 1,800 2,388 223 1,925 2,148 Fair value – Liabilities Trading Hedging $m 1,330 678 2,008 3,201 639 3,840 $m 110 964 1,074 239 946 1,185 Total $m 1,440 1,642 3,082 3,440 1,585 5,025 Foreign exchange Interest rate At 31 Dec 2017 Foreign exchange Interest rate At 31 Dec 2016 Use of derivatives For details regarding use of derivatives, see page 107 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: HSBC Holdings plc Annual Report and Accounts 2017 217 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 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 2017 $m 99 191 (187) (85) (2) (100) 10 (7) 106 2016 $m 97 156 (140) (70) (5) (65) (13) (1) 99 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 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 2017 Fair Value Assets Fair Value Liabilities $m $m — 1,020 1,020 — 436 436 23 2,744 2,767 110 964 1,074 Notional $m 1,027 112,714 113,741 1,120 25,294 26,414 2016 Fair Value Assets $m Fair Value Liabilities $m 10 1,078 1,088 — 447 447 2016 $m (439) 462 23 (909) 926 17 22 3,726 3,748 239 946 1,185 2015 $m 40 (51) (11) (4) 6 2 Notional $m 618 124,361 124,979 1,120 24,356 25,476 2017 $m 621 (617) 4 (57) 23 (34) 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 2017 Notional Assets Liabilities $m 22,741 65,575 88,316 $m 424 345 769 $m 759 298 1,057 Notional $m 25,663 90,645 116,308 2016 Assets Liabilities $m 1,081 909 1,990 $m 939 355 1,294 218 HSBC Holdings plc Annual Report and Accounts 2017 Forecast principal balances on which interest cash flows are expected to arise Net cash inflows/(outflows) exposure Assets Liabilities At 31 Dec 2017 Net cash inflows/(outflows) exposure Assets Liabilities At 31 Dec 2016 3 months or less More than 3 months but less than 1 year 5 years or less but more than 1 year More than 5 years $m $m $m 70,769 (7,729) 63,040 83,472 (13,169) 70,303 65,771 (7,017) 58,754 79,749 (12,977) 66,772 44,347 (4,992) 39,355 57,553 (11,761) 45,792 $m 956 (536) 420 2,750 (1,502) 1,248 This table reflects the interest rate repricing profile of the underlying hedged items. During the year to 31 December 2017, a loss of $5m (2016: $5m loss; 2015: $15m gain) was recognised due to hedge ineffectiveness. Hedges of net investments in foreign operations The Group applies hedge accounting in respect of certain consolidated net investments. Hedging is undertaken using forward foreign exchange contracts or by financing with foreign currency borrowings. At 31 December 2017, the fair values of outstanding financial instruments designated as hedges of net investments in foreign operations were assets of $4m (2016: $137m), liabilities of $71m (2016: $7m) and notional contract values of $5,000m (2016: $3,544m). Ineffectiveness recognised in ‘Net trading income’ in the year ended 31 December 2017 was nil (2016: nil; 2015: nil). 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 $54.1bn (2016: $47.2bn). 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 2017 $m 336,157 78,851 253,389 3,917 52,919 52,919 389,076 2016 $m 389,874 99,226 285,981 4,667 46,923 46,923 436,797 Footnotes 2 2 3 2017 2016 Amortised cost Fair value1 Amortised cost Fair value1 $m 41,427 18,691 10,998 17,817 52,269 134,766 6,187 99,136 2,989 384,280 $m 41,274 18,494 11,033 18,538 52,252 136,414 5,781 102,540 3,917 390,243 $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 1 Included within ‘fair value’ figures are debt securities issued by banks and other financial institutions of $67bn (2016: $69bn), of which $15bn (2016: $20bn) are guaranteed by various governments. 2 Includes securities that are supported by an explicit guarantee issued by the US Government. 3 Excludes asset-backed securities included under US Government agencies and sponsored entities. Maturities of investments in debt securities at their carrying amount Available for sale Held to maturity At 31 Dec 2017 Available for sale Held to maturity At 31 Dec 2016 1 year or less 5 years or less but over 1 year 10 years or less but over 5 years Over 10 years $m 63,896 3,731 67,627 64,155 2,502 66,657 $m 122,113 9,406 131,519 142,700 10,210 152,910 $m 37,292 13,482 50,774 45,385 10,348 55,733 $m 30,088 26,300 56,388 33,741 23,863 57,604 Total $m 253,389 52,919 306,308 285,981 46,923 332,904 HSBC Holdings plc Annual Report and Accounts 2017 219 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 2017 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 2017 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 % 3,981 50 148 636 216 45,337 26 13,613 64,007 63,896 41 — — 227 108 — 3,355 3,731 3,731 1.1 1.9 3.5 0.2 0.8 1.8 7.8 1.7 5.0 — — 0.5 4.7 — 3.7 16,213 129 2,759 6,970 1,014 57,441 28 35,598 120,152 122,113 22 21 322 28 240 — 8,773 9,406 9,406 1.9 2.2 3.0 0.9 1.3 2.7 5.5 1.9 4.7 4.0 2.4 2.6 4.0 — 3.4 15,806 19 1,965 6,552 — 7,429 271 4,043 36,085 37,292 49 27 325 13 198 — 12,870 13,482 13,482 2.0 3.8 2.6 0.8 — 3.0 1.7 2.6 4.9 2.5 2.8 1.2 3.7 — 3.3 3,318 7,924 2,733 — — 1,678 5,858 7,779 29,290 30,088 130 10,519 2,747 7 847 4 12,046 26,300 26,300 3.1 2.6 2.7 — — 3.4 2.9 3.9 4.2 2.4 2.9 1.4 4.3 6.7 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 2017 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 2017 $m 10,183 14,518 68,336 96,245 33,209 2,743 2016 $m 7,151 17,444 74,109 80,063 2,655 1,838 225,234 183,260 Assets pledged as collateral include all assets categorised as encumbered in the disclosure on page 67 of the Pillar 3 Disclosures at 31 December 2017. 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 Collateral received 2017 $m 70,117 13,581 83,698 2016 $m 37,141 4,044 41,185 The fair value of assets accepted as collateral, relating primarily to standard securities lending, reverse repurchase agreements, swaps of securities and derivative margining, that HSBC is permitted to sell or repledge in the absence of default was $387,678m (2016: $250,919m). The fair value of any such collateral sold or repledged was $243,531m (2016: $149,185m). 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. 220 HSBC Holdings plc Annual Report and Accounts 2017 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, as well as swaps of equity and debt securities. For secured borrowings, 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. Where securities are swapped, the transferred asset continues to be recognised in full. There is no associated liability as the non-cash collateral received is not 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 2017 Repurchase agreements Securities lending agreements Other sales (recourse to transferred assets only) At 31 Dec 2016 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 55,510 33,878 2,387 40,364 3,324 2,441 52,093 3,324 2,388 39,568 2,655 2,466 2,377 2,378 (1) 2,455 2,458 (3) 17 Interests in associates and joint ventures Associates At 31 December 2017, the carrying amount of HSBC’s interests in associates was $22,577m (2016: $19,874m). Principal associates of HSBC Bank of Communications Co., Limited The Saudi British Bank 2017 2016 Carrying amount $m 18,057 3,618 Fair value1 $m 10,491 4,320 Carrying amount $m 15,765 3,280 Fair value1 $m 10,207 3,999 1 Principal associates are listed on recognised stock exchanges. The fair values are based on the quoted market prices of the shares held (Level 1 in the fair value hierarchy). At 31 Dec 2017 Footnote 1 Country of incorporation and principal place of business Principal activity PRC Banking services Saudi Arabia Banking services HSBC’s interest % 19.03 40.00 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 258. Bank of Communications Co., Limited 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. Under this programme, a number of HSBC staff have been seconded to assist in the maintenance of BoCom’s financial and operating policies. Impairment testing At 31 December 2017, the fair value of HSBC’s investment in BoCom had been below the carrying amount for approximately 68 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 2017. Bank of Communications Co., Limited At 31 Dec 2017 VIU Carrying value $bn 18.3 $bn 18.1 Fair value $bn 10.5 At 31 Dec 2016 Carrying value $bn 15.8 VIU $bn 16.1 Fair value $bn 10.2 HSBC Holdings plc Annual Report and Accounts 2017 221 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements Basis of recoverable amount 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 to derive a terminal value, which comprises the majority of VIU. 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 minimum regulatory capital requirements. An increase in the CMC as a result of a change to these principal inputs would reduce VIU. Additionally, management considers other factors (including qualitative factors) to ensure that the inputs to the VIU calculation remain appropriate. Significant management judgement is required in estimating the future cash flows of BoCom. Key assumptions in value in use calculation We used a number of assumptions in our VIU calculation: • Long-term profit growth rate of 3% (2016: 5%) for periods after 2020, which does not exceed forecast GDP growth in mainland China and is within the range forecast by external analysts. • Long-term asset growth rate of 3% (2016: 4%) for periods after 2020, which is the rate that assets are expected to grow to achieve long-term profit growth of 3%. • Discount rate of 11.85% (2016: 13.0%), which is based on 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. The discount rate used was within the range of 10.2% to 13.4% (2016: 10.2% to 15.0%) indicated by external sources. • Loan impairment charge as a percentage of customer advances: a range from 0.66% to 0.82% (2016: 0.72% to 0.87%) in the short to medium term, largely based on forecasts disclosed by external analysts. For periods after 2020, the ratio is 0.70% (2016: 0.70%), slightly higher than the historical average. • Risk-weighted assets as a percentage of total assets: 62% (2016: 62%) for all forecast periods. This is consistent with the forecasts disclosed by external analysts. • Cost-income ratio: ranges from 37.1% to 38.0% (2016: 40.0%) in the short to medium term. This is slightly higher than the forecasts disclosed by external analysts. The long-term profit growth rate, long-term asset growth rate and discount rate assumptions were updated in 2017 to better align with market practice when setting long-term assumptions in VIU calculations. The long-term profit growth rate was set at the lower end of the range forecast by external analysts and there was a corresponding change to the long-term asset growth rate. These changes reduced management’s uncertainty in respect of estimated future cash flows and accordingly the discount rate was set based on CAPM with no adjustment for uncertainty in future cash flows. 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 11 basis points • • • • • Increase by 10 basis points Increase by 13 basis points Increase by 2 basis points Increase by 63 basis points Increase by 46 basis points 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. The selected rates of reasonably possible changes to key assumptions is largely based on external analysts’ forecasts which can change period to period. Sensitivity of VIU to reasonably possible changes in key assumptions Favourable change Unfavourable change At 31 Dec 2017 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 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 222 HSBC Holdings plc Annual Report and Accounts 2017 Increase in VIU bps $bn 200 (20) (35) 2017-20: 0.71% 2021 onwards: 0.70% Decrease In VIU bps $bn — 200 65 2017-20: 0.90% 2021 onwards: 0.77% 30 — (150) — — 2016-19: 0.93% 2020 onwards: 0.80% 170 250 — (7.1) (1.2) (1.3) (0.1) — (3.3) — — (1.1) (0.6) (1.4) VIU $bn 24.9 18.9 19.1 18.5 18.6 19.8 16.1 17.8 18.4 16.1 16.2 17.0 VIU $bn 18.3 11.2 17.1 17.0 18.2 18.3 12.8 16.1 16.1 15.0 15.5 14.7 6.6 0.5 0.7 0.1 0.2 1.5 — 1.8 2.3 — 0.1 0.9 (60) (173) — (80) (100) — (30) (170) Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of VIU is $14.7bn to $21.1bn (2016: $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 2017, HSBC included the associate’s results on the basis of financial statements for the 12 months ended 30 September 2017, taking into account changes in the subsequent period from 1 October 2017 to 31 December 2017 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 2017 $m 146,029 120,403 662,706 386,067 58,202 2016 $m 137,844 101,436 566,126 311,207 48,922 1,373,407 1,165,535 366,993 747,882 123,751 32,568 1,271,194 102,213 297,442 680,915 69,954 27,860 1,076,171 89,364 Reconciliation of BoCom’s total shareholders’ equity to the carrying amount in HSBC’s consolidated financial statements HSBC’s share of total shareholders’ equity Goodwill and other intangible assets Carrying amount Selected income statement information of BoCom Net interest income Net fee and commission income Loan impairment charges Depreciation and amortisation Tax expense Profit for the year Other comprehensive income Total comprehensive income Dividends received from BoCom Summarised aggregate financial information for all associates excluding BoCom Carrying amount HSBC’s share of: – total assets – total liabilities – revenues – profit or loss from continuing operations Joint ventures At 30 Sep 2017 $m 17,551 506 18,057 2016 $m 15,285 480 15,765 For the 12 months ended 30 Sep 2017 $m 19,080 5,698 (4,286) (1,342) (2,234) 10,288 (624) 9,664 565 2017 $m 4,520 20,625 16,119 1,051 487 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 At 31 December 2017, the carrying amount of HSBC’s interests in joint ventures was $167m (2016: $155m). Associates and joint ventures For the year ended 31 December 2017, HSBC’s share of associates’ and joint ventures’ tax on profit was $440m (2016: $542m). This is included within ‘Share of profit in associates and joint ventures’ in the ‘Consolidated income statement’. HSBC Holdings plc Annual Report and Accounts 2017 223 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 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 $521m (2016: $488m). 18 Investments in subsidiaries Principal subsidiaries of HSBC Holdings Footnote 2017 $m 20,029 60 (67) 2,375 (740) 1,144 (43) (14) 2016 $m 19,139 76 (25) 2,354 (751) (1,115) 54 297 1 22,744 20,029 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 Country of incorporation or registration HSBC’s interest % Share class At 31 Dec 2017 England and Wales France France Switzerland Germany 100 99.99 99.99 £1 Ordinary and Preferred Ordinary, $0.01 Non-cumulative third Dollar Preference Shares €5 Actions 287.50 EUR Ordinary shares 100 CHF1,000 Ordinary 80.67 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 100 100 100 100 100 100 100 Ordinary no par value CNY1 Ordinary RM0.50 Ordinary TWD10 Ordinary HK$1 Ordinary Ordinary no par value, CIP1 and NIP2 SGD100 Ordinary 100 $1 Ordinary and $1 CRP3 94.54 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 1 Cumulative Irredeemable Preference shares. 2 Non-cumulative Irredeemable Preference shares. 3 Cumulative Redeemable 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 24 ‘Debt securities in issue’, 27 ‘Subordinated liabilities’ and 30 ‘Non-controlling interests’, respectively. A list of all related undertakings is set out on pages 252 to 261. The principal countries of operation are the same as the countries of incorporation except for 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. The reduction in HSBC Holdings investments in subsidiaries of $2,920m during the year (2016: $1,920m) is driven by $4,070m return of capital from subsidiaries (2016: $3,898m), $242m intra-group disposals (2016: $0m), $352m of other movements including provisions (2016: $95m) partially offset by $1,744m of new capital injections (2016: $2,073m). 224 HSBC Holdings plc Annual Report and Accounts 2017 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 2017, 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 Group entities is set out in Note 32. 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. 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 2017 2016 37.86% 37.86% Hong Kong Hong Kong $m 997 6,233 594 186,638 169,275 4,556 2,632 2,895 $m 814 5,792 811 175,242 159,035 3,937 2,148 2,044 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 2017 At 31 Dec 2016 Conduits Conduits Securitisations HSBC managed funds $bn 12.9 15.8 $bn 4.8 5.7 $bn 7.0 4.8 Other $bn 3.2 3.7 Total $bn 27.9 30.0 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 2017, Solitaire, HSBC’s principal SIC held $3.2bn of ABSs (2016: $4.7bn). These are included within the disclosures of ABSs on page 100. 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 2017, HSBC held $4.6bn of CP (2016: $6.1bn). • Mazarin, Barion and Malachite – All three SICs are now funded by medium-term notes, and are no longer funded by repurchase agreements. HSBC’s primary exposure to Mazarin, 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 2017, this amounted to $0.9bn (2016: $1.3bn). For all three SICs first loss protection is provided through the capital notes issued by these vehicles, which are held substantially by third parties. 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 facility offered to the multi-seller conduit, amounting to $15.7bn at 31 December 2017 (2016: $15.2bn (restated)). First loss protection is provided by the originator of the assets, and not by HSBC, through transaction-specific credit enhancements. A layer of secondary loss protection is provided by HSBC in the form of programme-wide enhancement facilities. Securitisations HSBC uses structured entities to securitise customer loans and advances it originates in order to diversify its sources of funding for asset origination and capital efficiency purposes. The loans and advances are transferred by HSBC to the structured entities for cash or synthetically through credit default swaps, and the structured entities issue debt securities to investors. HSBC managed funds HSBC has established a number of money market and non-money market funds. Where it is deemed to be acting as principal rather than agent in its role as investment manager, HSBC controls these funds. HSBC Holdings plc Annual Report and Accounts 2017 225 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements Other HSBC has also entered into a number of transactions in the normal course of business which include asset and structured finance transactions where it has control of the structured entity. In addition, HSBC is deemed to control a number of third-party managed funds through its involvement as a principal in the funds. Unconsolidated structured entities The term ‘unconsolidated structured entities’ refers to all structured entities not controlled by HSBC. The Group enters into transactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment opportunities. Nature and risks associated with HSBC interests in unconsolidated structured entities Securitisations HSBC managed funds Non-HSBC managed funds Other Total Total asset values of the entities ($m) 0 – 500 500 – 2,000 2,000 – 5,000 5,000 – 25,000 25,000+ Number of entities at 31 Dec 2017 Total assets in relation to HSBC’s interests in the unconsolidated structured entities – trading assets – financial assets designated at fair value – 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 Other off balance sheet commitments HSBC’s maximum exposure at 31 Dec 2017 Total asset values of the entities ($m) 0 – 500 500 – 2,000 2,000 – 5,000 5,000 – 25,000 25,000+ Number of entities at 31 Dec 2016 Total assets in relation to HSBC’s interests in the unconsolidated structured entities – trading assets – financial assets designated at fair value – 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 Other off balance sheet commitments HSBC’s maximum exposure at 31 Dec 2016 78 6 — 2 — 86 $bn 4.0 — — — 4.0 — — — — — 4.0 93 10 — — — 103 $bn 2.4 — — — 2.4 — — — — — 2.4 321 56 17 10 2 406 $bn 9.1 0.2 8.0 — — 0.9 — — — 0.1 9.2 374 43 22 8 1 448 $bn 7.1 0.4 5.9 — — 0.8 — — — — 7.1 930 578 235 104 11 1,858 $bn 9.3 0.2 8.3 — — 0.8 — — — 2.2 11.5 1,104 498 187 72 4 1,865 $bn 8.3 0.1 7.5 — — 0.7 — — — 2.7 11.0 210 1,539 3 — 1 — 214 $bn 4.1 2.4 — 0.1 1.1 0.1 0.4 0.3 0.3 0.3 4.4 95 5 2 2 1 105 $bn 6.2 2.1 — 0.4 3.2 0.2 0.3 0.2 0.2 0.1 6.3 643 252 117 13 2,564 $bn 26.5 2.8 16.3 0.1 5.1 1.8 0.4 0.3 0.3 2.6 29.1 1,666 556 211 82 6 2,521 $bn 24.0 2.6 13.4 0.4 5.6 1.7 0.3 0.2 0.2 2.8 26.8 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 100. 226 HSBC Holdings plc Annual Report and Accounts 2017 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 60. 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 to entities, asset and liability classes disclosed above HSBC enters into derivative contracts with Non-HSBC managed funds. These interests arise in the normal course of business for the facilitation of third-party transactions and risk management solutions. Note 14 provides information on derivatives entered into by HSBC. Other HSBC has established structured entities in the normal course of business, such as structured credit transactions for customers, to provide finance to public and private sector infrastructure projects, and for asset and structured finance transactions. In addition to entities, asset and liability classes disclosed above HSBC enters into derivative contracts with Other Structured Entities. These interests arise in the normal course of business for the facilitation of third-party transactions and risk management solutions. Note 14 provides information on derivatives entered into by HSBC. HSBC sponsored structured entities The amount of assets transferred to and income received from such sponsored entities during 2017 and 2016 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 $2,641m (2016: $1,982m). 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 Exchange differences Other At 31 Dec Net carrying amount at 31 Dec Impairment testing Footnote 1 2017 $m 13,588 6,610 3,255 23,453 2017 $m 21,445 1,490 — (33) 2016 $m 12,330 6,502 2,514 21,346 2016 $m 22,187 (562) (183) 3 22,902 21,445 (9,115) — (327) 128 (9,314) 13,588 (5,893) (3,240) — 18 (9,115) 12,330 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 2017. No indicators of impairment were identified as part of these reviews. 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 2016 and 2017. 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. HSBC Holdings plc Annual Report and Accounts 2017 227 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements Key assumptions in VIU calculation Cash-generating unit Europe RBWM CMB Global GB&M Goodwill at 1 Jul 2017 Discount rate Nominal growth rate beyond initial cash flow projections Goodwill at 1 Jul 2016 Footnote $m % % $m 3,508 2,570 8.9 9.9 1 4,000 10.6 3.7 3.6 5.8 3,446 2,517 n/a Nominal growth rate beyond initial cash flow projections % 3.6 3.8 n/a Discount rate % 8.9 9.7 n/a 1 Subsequent to the 1 July 2016 annual test the CGU for Global Banking and Markets was amended from a regional to a global basis. The first formal impairment test for this CGU was performed as at 1 July 2017. At 1 July 2017, aggregate goodwill of $3,059m (1 July 2016: $3,025m) 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 2017, management’s cash flow projections until the end of 2021 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. Nominal long-term growth rate The long-term growth rate is used to extrapolate the cash flows in perpetuity because of the long-term 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. Sensitivities of key assumptions in calculating VIU At 1 July 2017, none of the CGUs were sensitive to reasonably possible adverse changes in key assumptions supporting the recoverable amount. 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. 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 uncertainty in the underlying assumptions is reflected by applying margins (as opposed to a cost of capital methodology). 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 ‘Expected return’ represents the unwinding of the discount rate and reversal of expected cash flows for the period. 1 2 Relates to the Brazilian insurance operations which were classified as held for sale in 2015. Footnotes 1 2 2017 $m 6,502 24 919 (599) (280) (16) — 84 2016 $m 5,685 902 900 (532) 513 21 (45) (40) 6,610 6,502 228 HSBC Holdings plc Annual Report and Accounts 2017 Assumption changes and experience variances Included within this line item are: • $(98)m (2016: $279m), directly offsetting regulatory-driven changes to the valuation of liabilities under insurance contracts. • $(141)m (2016: $301m), reflecting the future expected 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. • $(41)m (2016: $(67)m), driven by other assumptions changes and experience variances. 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 2017 2016 Hong Kong France1 Hong Kong France1 % 2.02 6.20 3.00 % 1.50 2.20 1.48 % 2.09 6.34 3.00 % 0.99 1.84 1.66 1 For 2017, the calculation of France’s PVIF assumes a risk discount rate of 2.20% (2016: 1.84%) plus a risk margin of $80m (2016: $101m). 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 115 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 116 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 Assets held for sale 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 2017 $m 7,929 781 13,128 9,750 2,471 8,752 14,353 10,027 67,191 Prepayments, accrued income and other assets include $30,431m (2016: $26,927m) of financial assets, the majority of which are measured at amortised cost. 2016 $m 7,335 4,389 15,406 8,574 1,820 4,714 12,298 9,373 63,909 2016 $m 24,827 45,085 32,656 51,123 Footnotes 1 1, 2 3 2017 $m 23,297 52,595 40,734 67,735 184,361 153,691 22 Trading liabilities Deposits by banks Customer accounts Other debt securities in issue (Note 24) Other liabilities – net short positions in securities At 31 Dec ‘Deposits by banks’ and ‘Customer accounts’ include repos, settlement accounts, stock lending, cash collateral and margin accounts relating to trading activities. 1 2 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. 3 At 31 December 2017, the cumulative amount of change in fair value attributable to changes in HSBC’s credit risk was a loss of $543m (2016: gain of $2m). HSBC Holdings plc Annual Report and Accounts 2017 229 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 23 Financial liabilities designated at fair value HSBC Deposits by banks and customer accounts Liabilities to customers under investment contracts Debt securities in issue (Note 24) Subordinated liabilities (Note 27) Preferred securities (Note 27) At 31 Dec 2017 $m 145 5,635 64,359 23,831 459 94,429 The carrying amount of financial liabilities designated at fair value was $5,343m more than the contractual amount at maturity (2016: $4,413m more). The cumulative own credit loss recognised was $4,107m (2016: loss of $1,672m). HSBC Holdings Debt securities in issue (Note 24) Subordinated liabilities (Note 27) At 31 Dec 2017 $m 17,496 13,394 30,890 The carrying amount of financial liabilities designated at fair value was $3,370m more than the contractual amount at maturity (2016: $2,681m more). The cumulative amount of change in fair value attributable to changes in credit risk was a loss of $2,209m (2016: loss of $1,202m). 24 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 22) – financial liabilities designated at fair value (Note 23) At 31 Dec HSBC Holdings Debt securities Included within: – financial liabilities designated at fair value (Note 23) At 31 Dec 25 Accruals, deferred income and other liabilities Accruals and deferred income Endorsements and acceptances Employee benefit liabilities (Note 5) Liabilities of disposal groups held for sale Other liabilities At 31 Dec 2017 $m 146,539 23,100 169,639 (40,734) (64,359) 64,546 2017 $m 51,754 (17,496) 34,258 2017 $m 11,521 9,746 2,152 1,286 21,202 45,907 2016 $m 135 6,002 57,112 23,172 411 86,832 2016 $m 16,766 13,347 30,113 2016 $m 133,721 21,962 155,683 (32,656) (57,112) 65,915 2016 $m 38,571 (16,766) 21,805 2016 $m 10,770 8,567 2,681 2,790 19,483 44,291 Accruals, deferred income and other liabilities include $34,048m (2016: $30,932m) of financial liabilities, the majority of which are measured at amortised cost. 230 HSBC Holdings plc Annual Report and Accounts 2017 26 Provisions At 1 Jan 2017 Additions Amounts utilised Unused amounts reversed Unwinding of discounts Exchange and other movements At 31 Dec 2017 At 1 Jan 2016 Additions Amounts utilised Unused amounts reversed Unwinding of discounts Exchange and other movements At 31 Dec 2016 Restructuring costs Contractual commitments Legal proceedings and regulatory matters Customer remediation Other provisions $m 551 204 (353) (103) — 35 334 463 415 (168) (115) — (44) 551 $m 298 87 (3) (135) (1) 7 253 240 141 (1) (97) — 15 298 $m 2,436 829 (850) (980) — 66 $m 1,124 820 (543) (52) — 105 1,501 1,454 3,174 1,258 (1,831) (165) — — 2,436 1,340 762 (680) (94) — (204) 1,124 $m 364 280 (133) (107) 9 56 469 335 208 (118) (96) 6 29 364 Total $m 4,773 2,220 (1,882) (1,377) 8 269 4,011 5,552 2,784 (2,798) (567) 6 (204) 4,773 Further details of ‘Legal proceedings and regulatory matters’ are set out in Note 34. 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 $1,174m (2016: $919m) 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 $3.9bn had been paid at 31 December 2017. An increase in provisions of $637m was recognised during the year, primarily reflecting an adjustment to expected future complaint volumes; in light of additional detail becoming available around the likely impact and profile of regulatory media campaigns during the remainder of the period during which complaints could be received. 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 $3.3bn at 2017. The gross written premiums on these policies was approximately $4.4bn. At 31 December 2017, the estimated total complaints expected to be received were 2.2 million, representing 41% of total policies sold. It is estimated that contact will be made with regard to 2.6 million policies, representing 48% of total policies sold. This estimate includes inbound complaints as well as the group’s proactive contact exercise on certain policies (‘outbound contact’). The following table details the cumulative number of complaints received at 31 December 2017 and the number of claims expected in the future: Cumulative PPI complaints received to 31 December 2017 and future claims expected Inbound complaints (000s of policies) Outbound contact (000s of policies) Response rate to outbound contact Average uphold rate per claim Average redress per claim ($) Complaints to Financial Ombudsman Service (000s of policies) Average uphold rate per Financial Ombudsman Service claim 1 Excludes invalid claims for which no PPI policy exists. 2 Claims include inbound and responses to outbound contact. Footnotes Cumulative actual to 31 Dec 2017 Future expected 1 2 1,555 685 44% 76% 2,564 144 40% 363 — n/a 84% 3,029 26 47% A 100,000 increase/decrease in the total inbound complaints would increase/decrease the redress provision by approximately $194m at 2017 average exchange rates. HSBC Holdings plc Annual Report and Accounts 2017 231 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 27 Subordinated liabilities HSBC’s subordinated liabilities At amortised cost – subordinated liabilities – preferred securities Designated at fair value (Note 23) – subordinated liabilities – preferred securities At 31 Dec Issued by HSBC subsidiaries Issued by HSBC Holdings 2017 $m 19,826 17,988 1,838 24,290 23,831 459 44,116 15,470 28,646 2016 $m 20,984 19,230 1,754 23,583 23,172 411 44,567 16,860 27,707 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 IFRS basis and do not reflect the amount that the instruments contribute to regulatory capital principally due to regulatory amortisation and regulatory eligibility limits. 232 HSBC Holdings plc Annual Report and Accounts 2017 HSBC’s subordinated liabilities in issue Additional tier 1 capital securities guaranteed by HSBC Holdings plc $900m 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 $750m $500m $300m $300m £350m £300m £350m £500m £225m £600m Undated floating rate primary capital notes Undated floating rate primary capital notes Undated floating rate primary capital notes, series 3 7.65% subordinated notes 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 Tier 2 securities issued by The Hongkong and Shanghai Banking Corporation Ltd $400m Primary capital undated floating rate notes (third series) Tier 2 securities issued by HSBC Bank Malaysia Berhad MYR500m MYR500m 4.35% subordinated bonds 5.05% subordinated bonds Tier 2 securities issued by HSBC USA Inc. $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 Other subordinated liabilities each less than $150m Securities issued by HSBC Mexico, S.A. $300m Non-convertible subordinated obligations Other subordinated liability 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 Footnotes First call date Maturity date 1 1 2 3 4 5 6 4 7, 8 7, 9 5 Jun 2030 Apr 2020 Nov 2031 Jun 1990 Sep 1990 Jun 1992 — May 2025 Mar 2018 Mar 2023 — Jul 2023 Nov 2025 Nov 2030 — — — Aug 2033 Jan 2041 Mar 2046 Jul 1991 Jun 2017 Jun 2022 Nov 2022 Nov 2027 — — — — — — — Sep 2020 Jul 2097 Aug 2017 Aug 2020 Nov 2034 Aug 2035 Jan 2039 2017 $m 892 892 459 946 2016 $m 891 891 411 863 1,405 1,274 750 500 300 375 496 405 584 912 303 802 750 500 300 372 466 369 489 750 276 731 5,427 5,003 400 400 — 123 123 748 221 277 400 400 112 112 224 748 220 284 1,246 1,252 — 1,236 1,272 955 700 4,163 498 1,257 1,137 862 701 4,455 — Jan 2021 1,092 2,192 Apr 2017 Oct 1996 Apr 2022 Nov 2083 Jun 2014 Jun 2019 — 31 31 240 115 355 299 29 328 240 198 438 336 15,470 403 16,860 In 2017 HSBC redeemed these securities. In January 2018, HSBC gave notice it will redeem these securities. 1 See paragraph below, ‘Guaranteed by HSBC Holdings or HSBC Bank plc’. 2 3 The interest rate payable after November 2025 is the sum of the three-month sterling Libor plus 1.50% percentage points. 4 5 Some securities included here are ineligible for inclusion in the capital base of HSBC. 6 HSBC tendered for these securities in 2017. In January 2018 a further tender was conducted. The principal balance is now $509m. 7 These securities are ineligible for inclusion in the capital base of HSBC. 8 Approximately $60m of these securities are held by HSBC Holdings. In February 2018, HSBC gave notice it will redeem these securities. 9 HSBC Holdings plc Annual Report and Accounts 2017 233 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements HSBC Holdings At amortised cost Designated at fair value (Note 23) At 31 Dec HSBC Holdings’ subordinated liabilities Tier 2 securities issued by HSBC Holdings plc Amounts owed to third parties $2,000m $1,500m $1,500m $488m $222m $2,000m $2,500m $1,500m $1,500m £900m £650m £650m £750m £900m €1,600m €1,750m €1,500m €1,500m €1,000m 4.25% subordinated notes 4.25% subordinated notes 4.375% subordinated notes 7.625% subordinated notes 7.35% subordinated notes 6.5% subordinated notes 6.5% subordinated notes 6.8% subordinated notes 5.25% subordinated notes 6.375% 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 3.375% subordinated notes 3.0% subordinated notes 3.125% subordinated notes 2017 $m 15,877 13,394 29,271 2016 $m 15,189 13,347 28,536 Footnotes First call date Maturity date 2,4 2 2 1 1 1 1 1 2,4 1,3 2 2 2 2 2 2 2,4 2 2 — — — — — — — — — Oct 2017 — — — — — — Jan 2019 — — Mar 2024 Jun 2025 Nov 2026 May 2032 Nov 2032 May 2036 Sep 2037 Jun 2038 Mar 2044 Oct 2022 Dec 2027 Sep 2028 Apr 2038 Mar 2040 Mar 2018 Jun 2019 Jan 2024 Jun 2025 Jun 2028 2017 $m 2,038 1,586 1,580 553 248 2,042 3,365 1,489 1,755 — 1,114 873 1,043 1,199 1,918 2,349 1,827 2,037 1,363 2016 $m 2,060 1,539 1,520 528 278 2,029 3,170 1,487 1,747 1,163 932 793 971 1,086 1,693 2,168 1,626 1,716 1,139 Amounts owed to HSBC undertakings $900m 10.176% subordinated step-up cumulative notes Jun 2030 Jun 2040 At 31 Dec 28,379 27,645 892 892 891 891 29,271 28,536 1 Amounts owed to third parties represent securities included in the capital base of HSBC as tier 2 securities in accordance with the grandfathering provisions under CRD IV rules. 2 These securities are included in the capital base of HSBC as fully CRD IV compliant tier 2 securities on an end point basis. 3 4 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 In 2017, HSBC redeemed these securities. 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. The securities presented in this Note are accounted for as liabilities because HSBC has an obligation to pay dividends in perpetuity. See Note 31 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. 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 234 HSBC Holdings plc Annual Report and Accounts 2017 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 securities that are compliant with CRD IV end point rules). Tier 2 capital securities are either perpetual or dated subordinated 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. 28 Maturity analysis of assets, liabilities and off-balance sheet commitments The table on page 236 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. Application of this policy throughout the Group was improved in 2017, and therefore comparative information has been represented. HSBC Holdings plc Annual Report and Accounts 2017 235 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 180,624 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 Accrued income and other financial assets Financial assets at 31 Dec 2017 — — — 6,628 34,186 284,781 1,432 612 218,103 61,968 195,577 42,593 124,669 28,315 144,244 31,981 93 162 10,665 65,469 9,126 50,532 5,811 30,289 51,487 — — — 642 230 97 4,212 49,860 8,483 36,046 5,331 — — — — 162 124 2,344 34,107 7,441 22,932 3,734 — — — 1,140 197 42 1,502 37,176 7,492 26,577 3,107 — — — — 556 234 5,799 93,065 23,552 61,785 7,728 — — — — 2,068 592 2,491 218,784 61,238 144,451 13,095 Total $m 180,624 6,628 34,186 287,995 29,464 — — — — 25,546 464 219,818 1,412 268,926 214,837 49,762 4,327 90,393 962,964 374,762 516,754 71,448 7,951 2,194 3,960 1,072 4,598 7,245 201,553 31,634 13,446 17,647 40,582 90,366 111,933 389,076 19,259 5,795 2,050 358 411 652 513 2,046 31,084 1,177,963 165,392 96,676 52,735 62,075 141,960 319,412 417,572 2,433,785 Non-financial assets — — — — — — — 87,986 87,986 Total assets at 31 Dec 2017 1,177,963 165,392 96,676 52,735 62,075 141,960 319,412 505,558 2,521,771 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 2,431 34,186 56,829 1,269,003 648,040 458,937 162,026 — — 1,961 44,129 22,938 16,496 4,695 3,335 — 1,097 21,596 13,489 6,983 1,124 — — 616 6,810 3,712 1,048 113,208 14,042 1,592 160 6,850 — — — — 133 — 157 5,727 3,970 1,060 — — — 361 4,527 2,753 1,705 69 — — 11,570 10,757 — — 7,393 2,257 1,557 641 59 1,000 — — — 1,508 623 119 451 53 — — 5,899 34,186 69,922 1,364,462 701,433 492,895 170,134 130,002 6,850 Trading liabilities 145,028 2,026 2,177 2,130 3,077 5,038 12,814 12,071 184,361 Financial liabilities designated at fair value – debt securities in issue: covered – debt securities in issue: unsecured – subordinated liabilities and preferred securities – other Derivatives Debt securities in issue – covered bonds – otherwise secured – unsecured Accruals and other financial liabilities Subordinated liabilities Total financial liabilities at 31 Dec 2017 80 — 55 — 25 213,011 6,081 — 3,479 2,602 18,009 — 281 — 95 — 186 79 6,295 — 4 6,291 9,547 1,918 2,094 — 2,087 — 7 141 5,228 — — 5,228 2,798 73 271 209 62 — — 140 5,795 — — 5,795 749 36 2,798 — 2,797 — 1 202 9,240 1 1,000 8,239 717 132 4,215 212 1,654 2,349 — 504 6,725 3 1,100 5,622 1,007 273 22,468 2,494 19,505 459 10 1,107 22,767 10 914 21,843 1,569 3,595 62,222 1,654 33,535 94,429 4,569 59,790 21,482 24,290 5,551 1,637 2,415 34 1,193 1,188 938 13,799 5,780 216,821 64,546 48 7,690 56,808 35,334 19,826 1,862,285 80,278 36,796 21,467 27,080 22,650 74,970 95,213 2,220,739 Non-financial liabilities — — — — — — — 103,161 103,161 Total liabilities at 31 Dec 2017 1,862,285 80,278 36,796 21,467 27,080 22,650 74,970 198,374 2,323,900 Off-balance sheet commitments given Loan and other credit-related commitments – personal – corporate and commercial – financial 628,070 187,545 388,778 51,747 38,736 2,001 32,011 4,724 3,310 340 2,782 188 1,777 343 1,322 112 4,087 1,583 2,309 195 3,436 1,033 2,403 — 3,824 952 2,804 68 2,349 685,589 513 1,716 120 194,310 434,125 57,154 236 HSBC Holdings plc Annual Report and Accounts 2017 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 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 Accrued income and other financial assets 5,003 31,228 232,550 176 287,749 59,636 167,531 39,295 108,906 19,330 115,942 36,932 16,885 — — — 758 182 149 13,404 61,693 7,812 48,333 5,548 25,525 59,826 8,050 Financial assets at 31 Dec 2016 1,081,641 169,587 Non-financial assets — — — — — 230 75 207 4,494 47,664 6,723 35,180 5,761 10,378 30,403 1,737 95,188 — — — — 415 178 96 2,375 30,115 5,928 21,317 2,870 5,220 16,800 407 — — — 1,172 363 110 1,765 30,362 6,799 19,573 3,990 2,350 19,564 462 — — — — 749 704 2,879 85,144 22,664 54,739 7,741 — — — — 2,486 1,056 2,298 192,787 53,620 126,890 12,277 — — — — 20,547 801 1,275 246,208 194,985 45,271 5,952 Total $m 128,009 5,003 31,228 235,125 24,756 290,872 88,126 861,504 337,826 460,209 63,469 479 1,080 — 160,974 50,255 104,933 118,084 436,797 421 1,033 1,907 30,902 55,606 56,148 140,631 305,673 388,822 2,293,296 — — — — 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 Off-balance sheet commitments received Loan and other credit-related commitments 2,813 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 Accruals and other financial liabilities Subordinated liabilities 31,228 46,306 1,180,641 590,654 436,666 153,321 82,330 5,977 121,707 1,659 1,587 25 — 47 274,965 4,708 — 3,207 1,501 19,052 12 — — 4,075 45,245 22,222 17,460 5,563 2,707 — 2,053 958 — 15 — 943 39 8,598 — 823 7,775 8,172 — 2,050 — 2,085 19,187 12,024 6,178 985 2,871 — 1,423 1,396 303 1,091 — 2 39 8,280 1 893 7,386 2,392 143 — — 665 10,277 5,823 3,951 503 50 — 1,845 3 — 3 — — 112 5,996 71 114 5,811 833 61 — 110 — 489 8,325 4,786 3,082 457 — — 3,013 1,701 — 1,700 — 1 273 4,610 1 329 4,280 519 497 — 422 4,709 3,484 1,200 25 — — 6,219 5,046 207 4,839 — — 506 10,953 3 1,882 9,068 885 1,788 — — 4,842 3,500 2,483 967 50 1,000 — 9,010 — — 1,055 502 121 360 21 — — 4,973 31,228 59,939 1,272,386 641,597 469,864 160,925 88,958 5,977 8,421 153,691 17,989 1,348 14,056 58,080 2,558 29,380 2,578 21,005 7 1,471 19,432 24 2,680 16,728 1,299 5,056 5,137 2,414 3,338 26 1,181 2,131 568 13,427 86,832 6,003 51,109 23,583 6,137 279,819 65,915 126 11,109 54,680 33,720 20,984 Total financial liabilities at 31 Dec 2016 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 commitments – personal – corporate and commercial – financial 609,923 177,462 366,573 65,888 29,752 1,835 26,650 1,267 3,010 89 2,839 82 1,897 262 1,350 285 3,253 1,896 904 453 2,514 1,114 996 404 4,280 747 3,410 123 1,214 405 754 55 655,843 183,810 403,476 68,557 1 ‘Customer accounts’ includes $386,417m (2016: $343,782m) insured by guarantee schemes. HSBC Holdings plc Annual Report and Accounts 2017 237 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 Financial assets Cash at bank and in hand: – balances with HSBC undertakings Derivatives Loans and advances to HSBC undertakings Loans and advances to HSBC undertakings designated at fair value Financial investments in HSBC undertakings Accrued income and other financial assets Total financial assets at 31 Dec 2017 Non-financial assets Total assets at 31 Dec 2017 Financial liabilities 1,985 1,952 — — — — 4,861 13,039 3,145 — 3 4 — — — 17 — 8,815 13,046 — — 8,815 13,046 3,145 — 3,145 Amounts owed to HSBC undertakings 120 2,405 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 2017 Non-financial liabilities Total liabilities at 31 Dec 2017 Off-balance sheet commitments given Undrawn formal standby facilities, credit lines and other commitments to lend — — — 2,008 — 439 — 2,567 — 2,567 — — — — — 395 1,918 4,718 — 4,718 46 — — — — — 157 — 203 — 203 — — 5 — — — 5 — 5 — — — — — — 39 — 39 — 39 — — 2 — — — 2 — 2 — — — — — 1,081 7 — 1,088 — 1,088 — 80 — — — 356 1,985 2,388 1,134 29,560 24,881 76,627 — — — 2,411 9,533 11,944 1,798 2,446 4,264 — 123 127 1,214 33,769 — — 37,339 94,399 97,335 94,399 1,214 33,769 131,738 191,734 — — — 2,571 2,349 — 2,349 110 — 3 — 11,491 11,491 — 183 17,050 6,005 11,045 781 10,354 22,823 1 — 11 13,959 30,890 17,496 13,394 3,082 34,258 1,052 15,877 2,462 22,029 54,624 87,730 — — 217 217 2,462 22,029 54,841 87,947 — — — — — — — — — 238 HSBC Holdings plc Annual Report and Accounts 2017 Maturity analysis of assets, liabilities and off-balance sheet commitments (continued) 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 not more than 1 month Due over 5 years $m $m $m $m $m $m $m $m Total $m 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 Total liabilities at 31 Dec 2016 Off-balance sheet commitments given Undrawn formal standby facilities, credit lines and other commitments to lend — — — 3,841 — 75 — 5,968 — 5,968 — — — 2 — 2 — 2 — — — — — — 1,268 — 1,268 — 1,268 — — — — — — — — — — — — — — 142 — 142 — 142 — — — — — — — — — — — — — — — — — 22 — 22 — 22 — — — — — — — — — — — — — — — — — — — — — — — — 93 — 353 247 2,148 167 14,204 46,678 77,421 — — 167 — 167 — 2,167 — 2,167 — 953 — 1,693 4,813 — 4,813 838 — 15,135 — 2,710 3,590 107 49,848 97,273 119 83,525 97,273 15,135 147,121 180,798 105 5,845 5,845 — 592 4,822 — — 11,364 — 11,364 — 2,157 22,101 10,921 11,180 592 16,030 — 13,496 52,219 144 52,363 30,113 16,766 13,347 5,025 21,805 1,507 15,189 75,796 144 75,940 — — — — 29 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. HSBC Holdings plc Annual Report and Accounts 2017 239 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements Offsetting of financial assets and financial liabilities 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 2017 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 Financial liabilities Derivatives (Note 14) Repos, stock lending and similar agreements classified as: – trading liabilities – non-trading liabilities Customer accounts At 31 Dec 2017 Derivatives (Note 14) Repos, stock lending and similar agreements classified as: – trading liabilities – non-trading liabilities Customer accounts At 31 Dec 2016 1 2 3 1 2 3 1 2 4 1 2 4 322,422 (110,425) 211,997 (156,088) (11,092) (37,302) 7,515 7,821 219,818 15,893 — 15,893 (430) (15,462) 265,666 (105,776) 159,890 (3,714) (155,973) — (49) 1 154 1,227 17,120 41,663 201,553 42,091 (10,424) 31,667 (26,390) — (181) 5,096 619 32,286 646,072 (226,625) 419,447 (186,622) (182,527) (37,532) 12,766 51,330 470,777 387,999 (106,555) 281,444 (210,067) (11,647) (40,188) 19,542 9,428 290,872 9,859 222,485 — 9,859 (475) (9,383) (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 36,937 494,490 321,932 (110,425) 211,507 (156,072) (14,342) (28,666) 12,427 5,314 216,821 10,555 — 187,268 (105,776) 42,533 (10,424) 10,555 81,492 32,109 (430) (9,615) (7,165) (74,048) (26,390) — — (240) (188) 510 39 5,531 63 10,618 48,510 130,002 158 32,267 562,288 (226,625) 335,663 (190,057) (98,005) (29,094) 18,507 54,045 389,708 378,571 (106,555) 272,016 (210,035) (15,512) (33,754) 12,715 7,803 279,819 5,034 148,443 45,422 577,470 — (87,929) (14,602) 5,034 60,514 30,820 (475) (6,202) (24,459) (4,515) (54,126) — — (146) (248) (209,086) 368,384 (241,171) (74,153) (34,148) 44 40 6,113 18,912 37 28,444 228 5,071 88,958 31,048 36,512 404,896 1 At 31 December 2017, the amount of cash margin received that had been offset against the gross derivatives assets was $6,324m (2016: $3,720m). The amount of cash margin paid that had been offset against the gross derivatives liabilities was $5,196m (2016: $5,862m). 2 For the amount of repos, reverse repos, stock lending, stock borrowing and similar agreements recognised on the balance sheet within ‘Trading assets’ $17,120m (2016: $10,207m) and ‘Trading liabilities’ $10,618m (2016: $5,071m), see the ‘Funding sources and uses’ table on page 102. 3 At 31 December 2017, the total amount of ‘Loans and advances to customers’ was $962,964m (2016: $861,504m) of which $31,667m (2016: $31,694m) was subject to offsetting. 4 At 31 December 2017, the total amount of ‘Customer accounts’ was $1,364,462m (2016: $1,272,386m) of which $32,109m (2016: $30,820m) 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. 30 Non-controlling interests Non-controlling interests attributable to holders of ordinary shares in subsidiaries Preferred securities issued by subsidiaries At 31 Dec 2017 $m 7,621 — 7,621 2016 $m 6,932 260 7,192 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. 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. 240 HSBC Holdings plc Annual Report and Accounts 2017 2016 $m 130 130 260 $m 9,842 35 219 — All non-cumulative preferred securities are classified as additional tier 1 capital. Preferred securities issued by HSBC’s subsidiaries HSBC Bank Canada CA$175m CA$175m At 31 Dec Non-cumulative redeemable class 1 preferred shares, series C Non-cumulative redeemable class 1 preferred shares, series D 1 In 2017 HSBC redeemed these securities. 31 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 Footnote First call date 1 1 Jun 2010 Dec 2010 2017 $m — — — At 1 Jan Shares issued under HSBC employee share plans Shares issued in lieu of dividends Less: Shares repurchased and cancelled At 31 Dec 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 2017 2016 Footnote Number $m Number 20,191,586,214 10,096 19,685,096,934 76,701,249 380,652,196 (328,223,401) 38 190 (164) 69,187,052 437,302,228 — 1 20,320,716,258 10,160 20,191,586,214 10,096 Footnote 2 2017 Number 1,450,000 $m — 2016 Number 1,450,000 2017 $m 10,177 2017 $m 20,337 $m — 2016 $m 12,619 2016 $m 22,715 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 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. These securities can be redeemed by HSBC at any time, subject to prior approval by 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 right to attend or vote at shareholder meetings of HSBC Holdings. These securities can be redeemed by HSBC at any time, subject to prior approval by the PRA. 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 27 for additional tier 1 securities accounted for as liabilities. HSBC Holdings plc Annual Report and Accounts 2017 241 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 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 can be redeemed by HSBC at any time, subject to prior approval by 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 8.000% perpetual subordinated capital securities, Series 2 Additional tier 1 capital – contingent convertible securities First call date Apr 2013 Dec 2015 2017 $m 2,133 3,718 5,851 2016 $m 2,133 3,718 5,851 During 2017, HSBC continued to issue contingent convertible securities that are included in its capital base as fully CRD IV compliant additional tier 1 capital securities on an end point basis. The net proceeds of the issuances are used for general corporate purposes and to further strengthen its 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 5-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 predetermined 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. HSBC’s additional tier 1 capital – contingent convertible securities in issue which are accounted for in equity $1,500m $2,000m $2,250m $2,450m $3,000m €1,500m €1,000m €1,250m 5.625% perpetual subordinated contingent convertible securities 6.875% perpetual subordinated contingent convertible securities 6.375% perpetual subordinated contingent convertible securities 6.375% perpetual subordinated contingent convertible securities 6.000% perpetual subordinated contingent convertible securities 5.250% perpetual subordinated contingent convertible securities 6.000% perpetual subordinated contingent convertible securities 4.750% perpetual subordinated contingent convertible securities SGD1,000m 4.700% perpetual subordinated contingent convertible securities At 31 Dec Shares under option First call date Jan 2020 Jun 2021 Sep 2024 Mar 2025 May 2027 Sep 2022 Sep 2023 Jul 2029 Jun 2022 2017 $m 1,494 1,998 2,244 2,460 2,997 1,943 1,120 1,420 723 16,399 2016 $m 1,494 1,998 2,244 2,460 — 1,943 1,120 — — 11,259 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 2017 31 Dec 2016 Number of HSBC Holdings ordinary shares 64,604,932 36,309 10,539 17,873 Period of exercise Exercise price 2017 to 2023 2017 to 2018 2017 to 2018 2017 to 2018 £4.0472-5.9640 HK$55.4701 €5.3532 $7.1456 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 2016 to 2018 €5.3532–6.0657 $7.1456–8.2094 242 HSBC Holdings plc Annual Report and Accounts 2017 Maximum obligation to deliver HSBC Holdings ordinary shares At 31 December 2017, 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, long-term incentive awards and deferred share awards granted under the HSBC Share Plan and/or the HSBC Share Plan 2011, was 169,615,437 (2016: 198,483,750). The total number of shares at 31 December 2017 held by employee benefit trusts that may be used to satisfy such obligations to deliver HSBC Holdings ordinary shares was 5,883,444 (2016: 3,997,619). 32 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 2017 $m 38,328 51,434 616 90,378 8,776 4,295 672,518 685,589 2016 $m 37,072 44,394 553 82,019 9,190 5,386 641,267 655,843 HSBC Holdings1 2017 $m 7,778 — — 7,778 — — — — 2016 $m 7,619 — — 7,619 — — — — 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 26 and 34. 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 2017 stood at approximately $6.3bn (£4.7bn). 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 $38.8bn at 31 December 2017 (2016: $35.3bn). No matters arose where HSBC was severally liable. 33 Lease commitments Operating lease commitments At 31 December 2017, future minimum lease payments under non-cancellable operating leases for land, buildings and equipment were $3,950m (2016: $3,893m). 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 2017 Unearned finance income $m $m 3,523 7,033 4,784 (326) (696) (669) Present value $m 3,197 6,337 4,115 15,340 (1,691) 13,649 Total future minimum payments 2016 Unearned finance income $m $m 3,248 6,563 4,548 14,359 (330) (702) (633) (1,665) Present value $m 2,918 5,861 3,915 12,694 HSBC Holdings plc Annual Report and Accounts 2017 243 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 34 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 at 31 December 2017 (see Note 26). 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. 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, 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. In September 2017, the US Court of Appeals for the Second Circuit (the ‘Second Circuit Court of Appeals’) agreed to hear the Trustee’s appeal of the US Bankruptcy Court’s decision, where this matter is pending. The deadline by which the Trustee must serve HSBC with his English action has been extended to September 2018 for UK-based defendants and November 2018 for all other defendants. 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 acted as nominees for clients, seeking restitution of redemption payments. In October 2016, the liquidators for Fairfield (the ‘Fairfield Liquidators') filed a motion seeking leave to amend their complaints in the US Bankruptcy Court. In January 2017, the defendants moved to dismiss and oppose the Fairfield Liquidators’ motion. These motions are pending. 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 US 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. In March 2017, the court granted HSBC's motion to dismiss, which dismissal was upheld by the Second Circuit Court of Appeals in November 2017. 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. 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 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 Bank of Bermuda (Cayman) Limited, alleging breach of contract and breach of fiduciary duty, and claiming damages and equitable compensation. The trial concluded in February 2017, and in August 2017, the court dismissed all claims against the defendants. In September 2017, Primeo appealed to the Court of Appeal of the Cayman Islands, where the matter is pending. 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, where this matter is pending. 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 2017, the parties agreed a settlement, which was approved by the Luxembourg court in November 2017. The settlement was concluded in January 2018. 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. Both actions have been temporarily suspended at the plaintiffs’ 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. 244 HSBC Holdings plc Annual Report and Accounts 2017 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 provisional trial date has been scheduled for October 2018. 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 by the Irish High Court in October 2015. In March 2017, the Irish Court of Appeal affirmed the dismissal. In April 2017, SPV OSUS filed an application seeking leave to appeal the dismissal to the Irish Supreme Court. The application was heard by the Irish Supreme Court in February 2018 and judgment is pending. 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 the possible aggregate damages that might arise as a result of all claims in the various Madoff-related proceedings is up to or exceeding $500m, excluding costs and interest. Due to uncertainties and limitations of this estimate, 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 (the ’FRB Servicing 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. In January 2017, the OCC terminated the OCC Servicing Consent Order after determining that HSBC Bank USA had satisfied the requirements thereunder. In connection with the termination of the OCC 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. The civil money penalty has been paid. In January 2018, the FRB terminated the FRB Servicing Consent Order after having determined that HNAH and HBIO are in compliance with its terms. 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’ or ‘NMS’). The cash payments required under the NMS were made in 2016. In March 2017, the NMS independent monitor validated that the consumer relief obligations were satisfied; and in June 2017, the NMS independent monitor validated that all remaining obligations under the NMS were satisfied. 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 $4.1bn at 31 December 2017. 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 courts in New York and Virginia against HSBC Bank USA as trustee of more than 280 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 (‘Decision One’), an indirect subsidiary of HSBC Finance, 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. In September 2017, the court approved the settlement, concluding the matter. Another matter against HSBC Bank USA was dismissed on appeal in December 2017. 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. HSBC Holdings plc Annual Report and Accounts 2017 245 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 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 sub-prime and non-sub-prime residential mortgages. HSBC continues to cooperate with these investigations, which are 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. In March 2017, HSBC provided its response to the DoJ, which, among other things, outlined why the Bank disagrees with the DoJ’s preliminary view. Since then, the Bank has been in active discussions with the DoJ regarding a potential resolution; however, the Bank has also indicated a willingness to defend itself in the event that formal legal proceedings are commenced. 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 commencement 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 impact of this matter, which could be significant. HSBC expects the focus on mortgage securitisations to continue and that it 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 cease and desist order with the OCC, and HNAH entered into a consent cease and desist order with the FRB. In 2012, HSBC Bank USA further entered into an enterprise-wide compliance consent order (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. While these Orders remain open, HSBC Bank USA and HNAH believe that they have taken appropriate steps to bring themselves into compliance with the requirements of the Orders. In December 2012, HSBC Holdings, HNAH and HSBC Bank USA entered into agreements with US and UK government and regulatory 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 ‘AML 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 (‘FinCEN’) 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 retain an independent compliance monitor (who is, for FCA purposes, a ‘skilled person’ under section 166 of the Financial Services and Markets Act) to produce annual assessments of the Group’s AML and sanctions compliance programme (the ‘Monitor’). Under the cease and desist order issued by the FRB in 2012, the Monitor also serves as an independent consultant to conduct annual assessments. In February 2018, the Monitor delivered his fourth annual follow-up review report. Through his country-level reviews, the Monitor identified potential anti-money laundering and sanctions compliance issues that HSBC is reviewing further with the DoJ, FRB and/or FCA. In particular, the DoJ is investigating HSBC’s handling of a corporate customer’s accounts. In addition, FinCEN as well as the Civil Division of the US Attorney’s Office for the Southern District of New York are investigating the collection and transmittal of third-party originator information in certain payments instructed over HSBC’s proprietary payment systems. The FCA is also conducting an investigation into HSBC Bank plc’s compliance with UK money laundering regulations and financial crime systems and controls requirements. HSBC is cooperating with all of these investigations. In December 2017, the AML DPA expired and the charges deferred by the AML DPA were dismissed. The Monitor will continue working in his capacity as a skilled person and independent consultant for a period of time at the FCA’s and FRB’s discretion. The role of the Monitor and his fourth annual follow-up review report, as well as the AML DPA and related agreements and consent orders are discussed on pages 65 and 78. Concurrent with entry into the AML DPA, HSBC Bank USA also entered into two consent orders with the OCC. The first, discussed above, required HSBC Bank USA to adopt an enterprise-wide compliance programme. The second required HSBC Bank USA to correct the circumstances noted in the OCC’s report and imposed restrictions on HSBC Bank USA 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 AML 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 246 HSBC Holdings plc Annual Report and Accounts 2017 HSBC’s compliance with BSA, AML, sanctions and other laws. In September 2017, the Ontario Superior Court of Justice dismissed the statutory claims against HSBC Holdings and the former employee for lack of jurisdiction, and stayed the common law misrepresentation claim against HSBC Holdings on the basis of forum non-conveniens. In October 2017, the plaintiff appealed to the Court of Appeal for Ontario, where the matter is pending. Since November 2014, five 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 and Jordan or of cartel violence in Mexico. In each case, it is alleged that the defendants aided and abetted the unlawful conduct of various sanctioned parties in violation of the US Anti-Terrorism Act. One action was voluntarily dismissed in October 2017. The remaining actions are pending in federal court in New York and are at an early stage. Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these matters, including the timing or any possible impact on HSBC, which could be significant. Tax-related investigations Various tax administration, regulatory and law enforcement authorities around the world, including in the US, Belgium, Argentina, India and Spain 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 may have 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 France for alleged tax-related offences in 2006 and 2007 and, 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. In November 2017, HSBC Swiss Private Bank reached an agreement with the French public prosecutor to resolve its investigation. Under the terms of the settlement, HSBC Swiss Private Bank agreed to pay €300 million in fines and damages. The investigation into HSBC Holdings was dismissed without further proceedings. In November 2014, HSBC Swiss Private Bank was also placed under formal criminal examination in Belgium for alleged tax-related offences. In June 2017, Belgian authorities placed HSBC Holdings and HSBC Private Bank Holdings (Suisse) SA, a Swiss holding company, under formal criminal examination. 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. At 31 December 2017, HSBC has recognised a provision for these various matters in the amount of $604m. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these investigations and reviews. Based on the information currently available, management’s estimate of the possible aggregate penalties that might arise as a result of the matters in respect of which it is practicable to form estimates is up to or exceeding $1.5bn, including amounts for which a provision has been recognised. Due to uncertainties and limitations of these estimates, the ultimate penalties could differ significantly from this amount. 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 and screens used to price certain derivative products. 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 imposed a fine on HSBC based on a one-month infringement. 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. HSBC Holdings plc Annual Report and Accounts 2017 247 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements 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. The dismissal of the antitrust claims was appealed to the US Court of Appeals for the Second Circuit, which reversed the decisions in May 2016. In July 2016, the defendants filed a joint motion to dismiss the antitrust claims on additional grounds not previously addressed by the court 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. Certain plaintiffs have appealed the December 2016 order to the US Court of Appeals for the Second Circuit. Separately, in October 2016, the New York District Court granted a motion to dismiss claims brought by certain individual plaintiffs for lack of personal jurisdiction, which is also on appeal to the Second Circuit. Finally, in January 2017, the District Court granted the defendants’ motion to dismiss certain of the remaining antitrust claims against defendants that did not serve on the US dollar Libor submission panel. In the New York District Court, the cases with remaining claims against HSBC have been stayed while the court considers motions to certify classes in several putative class actions that are pending against HSBC’s co-defendants. In 2017, HSBC reached agreements with plaintiffs to resolve three putative class actions brought on behalf of persons who purchased US dollar Libor-indexed bonds, persons who purchased US Libor-indexed-exchange-traded instruments and US based lending institutions that made or purchased US dollar Libor-indexed loans. In February 2018, HSBC reached an agreement with plaintiffs to resolve a putative class action brought on behalf of persons who purchased US dollar Libor-indexed interest rate swaps and other instruments directly from the defendant banks and their affiliates. These settlements are subject to court approval. 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 December 2016, HSBC reached an agreement with plaintiffs to resolve this action, subject to court approval. The court issued an order granting preliminary approval in January 2017, and has scheduled the final approval hearing in May 2018. 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. In August 2017, the defendants moved to dismiss the SIBOR and SOR case, and this motion remains pending. The defendants moved to dismiss the BBSW case in February 2017 and this motion also remains pending. 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. In June 2017, HSBC reached an agreement with plaintiffs to resolve this consolidated action, subject to court approval. The court issued an order granting preliminary approval in July 2017, but has not yet set a date for the final approval hearing. Canadian Dealer Offered Rate: In January 2018, various HSBC entities and other banks were named as defendants in a putative class action filed in the New York District Court in relation to the Canadian Dealer Offered Rate. The claim, which is at an early stage, asserts various breaches of US laws, including US antitrust and racketeering laws, the US CEA, and common law. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be significant. Supranational, sovereign and agency bonds In April 2017, various HSBC companies, among other banks, were added as defendants in a putative class action alleging a conspiracy to manipulate the market for US dollar-denominated supranational, sovereign and agency bonds between 2005 and 2015 in violation of US antitrust laws. In November 2017, plaintiffs filed an amended consolidated complaint which omitted certain HSBC defendants. The remaining HSBC defendants moved to dismiss the amended consolidated complaint, and this motion remains pending. In November 2017, various HSBC companies and other financial institutions were named as defendants in a putative class action issued in Canada making similar allegations under Canadian law. The claim has not yet been served. 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. 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 civil and criminal investigations and reviews into trading by HSBC and others on the foreign exchange markets. HSBC is cooperating with these investigations and reviews. In August 2016, the DoJ indicted two now-former HSBC employees and charged them with wire fraud and conspiracy relating to a 2011 foreign exchange transaction. In October 2017, one of the former employees was found guilty after trial. In January 2018, HSBC Holdings entered into a three-year deferred prosecution agreement with the Criminal Division of the DoJ (the ‘FX DPA’), regarding fraudulent conduct in connection with two particular transactions in 2010 and 2011. This concluded the DoJ’s investigation into HSBC’s historical foreign exchange activities. Under the terms of the FX DPA, HSBC has a number of ongoing obligations, including continuing to cooperate with authorities and implementing enhancements to its internal controls and procedures in its Global Markets business, which will be the subject of annual reports to the DoJ. In addition, HSBC agreed to pay a financial penalty and restitution. In September 2017, HSBC Holdings and HNAH consented to a civil money penalty order with the FRB in connection with its investigation into HSBC’s foreign exchange activities. Under the terms of the order, HSBC Holdings and HNAH agreed to undertake certain remedial steps and to pay a civil money penalty to the FRB. In 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. CADE has also publicly announced that it is initiating a separate investigation into the onshore foreign exchange market and has identified a number of banks, including HSBC, as subjects of its investigation. 248 HSBC Holdings plc Annual Report and Accounts 2017 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. In April 2017, HSBC filed an exception to the complaint, based on a lack of jurisdiction and statute of limitations. In January 2018, the South African Competition Tribunal approved the provisional referral of additional financial institutions, including HSBC Bank USA, to the proceedings. 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 settlement remains subject to final approval by the court. 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. The court dismissed the claims in the ERISA action, and the plaintiffs have appealed to the US Court of Appeals for the Second Circuit. In May 2015, another complaint was filed in the US District Court for the Northern District of California making similar allegations on behalf of retail customers. HSBC filed a motion to transfer that action from California to New York, which was granted in November 2015. In March 2017, the New York District Court dismissed the retail customers’ complaint in response to the defendants’ joint motion to dismiss. In August 2017, the retail customer plaintiffs filed an amended complaint and the defendants moved to dismiss. The motion remains pending. In April and June 2017, putative class actions making similar allegations on behalf of purported ‘indirect’ purchasers of foreign exchange products were filed in New York. Those plaintiffs subsequently filed a consolidated amended complaint. HSBC’s motion to dismiss the consolidated amended complaint was filed in August 2017 and remains pending. 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. In June 2017, HSBC reached an agreement with the plaintiffs to resolve these actions. The settlement received final court approval in October 2017. At 31 December 2017, HSBC has recognised a provision for these and similar matters in the amount of $511m. 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. In January 2018, HSI reached an agreement with the US Commodity Futures Trading Commission (‘CFTC’) to resolve its investigation of HSBC’s precious metals activities. Under the terms of the settlement, HSBC Securities (USA) Inc. agreed to pay a financial penalty to the CFTC. Gold: Beginning in March 2014, numerous putative class actions were filed in the New York District Court and the US District Courts for the District of New Jersey and the Northern District of California, naming HSBC and other members of The London Gold Market Fixing Limited as defendants. The complaints allege that, from January 2004 to June 2013, defendants conspired to manipulate the price of gold and gold derivatives for their collective benefit in violation of US antitrust laws, the US CEA and New York state law. The actions were consolidated in the New York District Court. The defendants’ motion to dismiss the consolidated action was granted in part and denied in part in October 2016. In June 2017, the court granted plaintiffs leave to file a third amended complaint, which names a new defendant. The court has denied the pre-existing defendants’ request for leave to file a joint motion to dismiss. HSBC and the other pre- existing defendants have requested a stay of discovery. Beginning in December 2015, numerous putative class actions under Canadian law were filed in the Ontario and Quebec Superior Courts of Justice against various HSBC companies and other financial institutions. The plaintiffs allege that, among other things, from January 2004 to March 2014, defendants conspired to manipulate the price of gold and gold derivatives in violation of the Canadian Competition Act and common law. These actions are at an early stage. Silver: Beginning in July 2014, numerous putative class actions were filed in 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 2007 to December 2013, the defendants conspired to manipulate the price of silver and silver derivatives for their collective benefit in violation of US antitrust laws, the US CEA and New York state law. The actions were consolidated in the New York District Court. The defendants’ motion to dismiss the consolidated action was granted in part and denied in part in October 2016. In June 2017, the court granted plaintiffs leave to file a third amended complaint, which names several new defendants. The court has denied the pre- existing defendants’ request for leave to file a joint motion to dismiss. HSBC and the other pre-existing defendants have requested a stay of discovery. 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, the defendants conspired to manipulate the price of silver and silver derivatives in violation of the Canadian Competition Act and common law. The Ontario action is at an early stage. The Quebec action has been temporarily stayed. Platinum and palladium: Between late 2014 and early 2015, numerous putative class actions were filed in the New York District Court, naming HSBC and other members of The London Platinum and Palladium Fixing Company Limited as defendants. The complaints allege that, from January 2008 to November 2014, the defendants conspired to manipulate the price of platinum group metals (‘PGM’) and PGM-based financial products for their collective benefit in violation of US antitrust laws and the US CEA. In March 2017, the defendants’ motion to dismiss the second amended consolidated complaint was granted in part and denied in part. In June 2017, plaintiffs filed a third amended complaint. The defendants filed a joint motion to dismiss, which remains pending. There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be significant. HSBC Holdings plc Annual Report and Accounts 2017 249 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements Treasury auctions Beginning in July 2015, HSI, among 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. In November 2017, the plaintiffs filed an amended consolidated complaint that focused on a sub-group of primary dealer defendants, and dropped several of the financial institutions named in the original consolidated complaint, including HSBC. In December 2017 the court dismissed the consolidated class claims against those defendants, including HSBC, not named in the consolidated amended complaint. The DoJ has also 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 and credit default swap litigation In February 2016, various HSBC companies, among others, were added 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. In July 2017, the court granted HSBC’s motion to dismiss. In June 2017, certain plaintiffs in the consolidated action brought a separate individual action in the New York District Court against most of the same defendants, alleging similar violations of federal and state antitrust laws and breaches of common law in relation to the credit default swap market. 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. Fédération Internationale de Football Association (‘FIFA’) related investigations HSBC has received enquiries 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. Stanford litigation In January 2018, HSBC Bank plc received a letter of claim from the Antiguan Joint Liquidators of Stanford International Bank Ltd (‘SIB’) asserting various claims in connection with HSBC Bank plc’s role as a correspondent bank to SIB from 2003 to 2009. HSBC Bank plc denies the allegations and is preparing its response. HSBC Bank plc continues to defend putative class action lawsuits in the US District Court for the Northern District of Texas against HSBC Bank plc and other bank and individual defendants. The complaints, filed by the Official Stanford Investors Committee and a putative class of persons who held monies on deposit and/or certificates of deposit issued by SIB, allege various fraudulent transfer, statutory and tort claims. In November 2017, the court denied the class plaintiffs' motion for class certification. Permission to appeal that ruling has been requested by the class plaintiffs. 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. 35 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 141 to 157. IAS 24 ‘Related party disclosures’ requires the following additional information for key management compensation. 250 HSBC Holdings plc Annual Report and Accounts 2017 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 2017 $m 43 — 5 35 83 2016 $m 41 — 5 37 83 2017 (000s) 15 22,609 22.624 2015 $m 40 1 9 51 101 2016 (000s) 18 22,283 22,301 Key Management Personnel Advances and credits Guarantees Deposits Footnotes 1 2 2017 2016 Balance at 31 Dec Highest amounts outstanding during year Balance at 31 Dec Highest amounts outstanding during year $m 329 6 300 $m 334 52 893 $m 215 55 229 $m 220 63 677 1 Includes Key Management Personnel, close family members of Key Management Personnel and entities which are controlled or jointly controlled by Key Management Personnel or their close family members. 2 Advances and credits entered into by subsidiaries of HSBC Holdings during 2017 with Directors, disclosed pursuant to Section 413 of the Companies Act 2006, totalled $2m (2016: $2m). 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 Subordinated amounts due from associates Amounts due to associates Guarantees and commitments 2017 2016 Highest balance during the year Balance at 31 Dec Highest balance during the year Balance at 31 Dec $m 138 3,104 411 2,617 654 $m 119 2,537 411 1,232 665 $m 126 3,136 — 1,112 776 $m 113 2,881 — 576 594 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 2017, $5.3bn (2016: $4.4bn) of HSBC post-employment benefit plan assets were under management by HSBC companies, earning management fees of $8m in 2017 (2016: $6m). At 31 December 2017, HSBC’s post-employment benefit plans had placed deposits of $875m (2016: $710m) with its banking subsidiaries, earning interest payable to the schemes of nil (2016: $1m). The above outstanding balances arose from the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with third-party counterparties. 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 2017, the gross notional value of the swaps with HSBC Bank (UK) Pension Scheme was $11.3bn (2016: $10.5bn); these swaps had a positive fair value to the scheme of $1.0bn (2016: $0.9bn); and HSBC had delivered collateral of $1.0bn (2016: $0.9bn) to the scheme in respect of these arrangements. At 31 December 2017, the International Staff Retirement Benefit Scheme no longer held any swaps. In the prior year, it held swaps (gross notional value in 2016: $1.2bn) which had a net negative fair value to the scheme (2016: $85m negative). All swaps were executed at prevailing market rates and within standard market bid/offer spreads. HSBC Holdings plc Annual Report and Accounts 2017 251 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements HSBC Holdings Details of HSBC Holdings’ subsidiaries are shown in Note 37. Transactions and balances during the year with subsidiaries Assets Cash and balances with HSBC undertakings Loans and advances to HSBC undertakings designated at fair value Derivatives Loans and advances to HSBC undertakings Financial investments in HSBC undertakings 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 2017 2016 Highest balance during the year Balance at 31 Dec Highest balance during the year Balance at 31 Dec $m $m 1,985 11,944 2,796 89,810 4,264 95,850 1,985 11,944 2,388 76,627 4,264 92,930 206,649 190,138 2,906 4,904 892 8,702 9,692 2,571 3,082 892 6,545 7,778 $m 997 — 4,494 77,732 4,314 97,827 185,364 3,823 5,025 1,749 10,597 63,719 $m 247 — 2,148 77,421 3,590 95,850 179,256 2,157 5,025 891 8,073 7,619 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. 36 Events after the balance sheet date A fourth interim dividend for 2017 of $0.21 per ordinary share (a distribution of approximately $4,199m) was declared by the Directors after 31 December 2017. These accounts were approved by the Board of Directors on 20 February 2018 and authorised for issue. 37 HSBC Holdings’ subsidiaries, joint ventures and associates In accordance with section 409 of the Companies Act 2006 a list of HSBC Holdings plc subsidiaries, joint ventures and associates, the registered office address and the effective percentage of equity owned at 31 December 2017 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. 252 HSBC Holdings plc Annual Report and Accounts 2017 % of share class held by immediate parent company (or by the Group where this varies) Footnotes Subsidiaries % of share class held by immediate parent company (or by the Group where this varies) Footnotes Chongqing Dazu HSBC Rural Bank Company Limited (100.00) Subsidiaries Subsidiaries ACN 087 652 113 Pty Limited Almacenadora Banpacifico S.A. (in liquidation) Assetfinance December (F) Limited Assetfinance December (H) Limited Assetfinance December (M) Limited Assetfinance December (P) Limited Assetfinance December (R) Limited Assetfinance June (A) Limited Assetfinance June (D) 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. BFC Insurance Agency of Nevada 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. Card-Flo #1, Inc. Card-Flo #3, Inc. Cayman International Finance Limited CC&H Holdings LLC 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 n/a 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 CCF Charterhouse GmbH & Co Asset Leasing KG (In Liquidation) 100.00 (99.99) CCF Charterhouse GmbH (in Liquidation) 100.00 (99.99) CCF Holding (LIBAN) S.A.L. (in liquidation) CCF & Partners Asset Management Limited Charterhouse Administrators ( D.T.) Limited Charterhouse Development Limited Charterhouse Management Services Limited Charterhouse Pensions Limited 74.99 99.99 100.00 100.00 100.00 100.00 (99.99) (99.99) 15 9, 16 17 17 17 17 17 17 17 17 18 17 17 17 17 19 9, 20 20 21 22 7, 9, 23 25 26 27 25 25 25 25 25 25 25 25 25 25 25 25 28 29 30 223 17 27 17 17 17 17 31 32 25 33 34 35 4, 35 1, 36 17 9, 17 17 9, 17 17 Chongqing Fengdu HSBC Rural Bank Company Limited Chongqing Rongchang HSBC Rural Bank Company Limited CL Residential Limited (in liquidation) COIF Nominees Limited Cordico Management AG Corhold Limited (in liquidation) 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. Ellenville Holdings, Inc. Elysees GmbH (in Liquidation) Elysées Immo Invest EMTT Limited (in liquidation) Equator Holdings Limited (in liquidation) 12, 24 Eton Corporate Services Limited Far East Leasing SA Fdm 5 SAS FEPC Leasing Ltd. Finanpar 2 Finanpar 7 Flandres Contentieux S.A. Foncière Elysées Forward Trust Rail Services Limited Fujian Yongan HSBC Rural Bank Company 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 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 (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) 12, 37 12, 38 12, 39 40 17 41 42 12, 43 44 4, 9, 45 4, 9, 45 4, 9, 46 9, 46 9, 16 31 35 4, 47 17 17 20 48 4, 9, 45 49 4, 9, 47 4, 9, 47 1, 4, 9, 50 4, 9, 46 17 12, 51 52 1, 9, 11, 16 Fulcher Enterprises Company Limited 100.00 (62.14) Fundacion HSBC, A.C. 99.99 Gesellschaft fur Industrielle Beteiligungen und Finanzierung mbH Gesico International SA (in liquidation) Giller Ltd. GPIF Co-Investment, LLC GPIF-I Equity Co., Ltd. GPIF-I Finance Co., Ltd Griffin International Limited Grupo Financiero HSBC, S. A. de C. V. Guangdong Enping HSBC Rural Bank Company Limited GZ Guyerzeller Corporation (in liquidation) 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 100.00 (80.67) 9, 53 100.00 100.00 80.00 100.00 100.00 100.00 99.99 100.00 100.00 100.00 100.00 100.00 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 (62.14) (62.14) (62.14) (62.14) (62.14) (62.14) (62.14) (62.14) (62.14) (62.14) (62.14) (62.14) 54 31 25 8, 22 8, 22 17 9, 16 12, 55 129 52 12, 57 52 52 52 52 52 52 52 52 52 52 52 52 52 52 52 HSBC Holdings plc Annual Report and Accounts 2017 253 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements % of share class held by immediate parent company (or by the Group where this varies) Footnotes Subsidiaries % of share class held by immediate parent company (or by the Group where this varies) Footnotes Notes on the Financial Statements Subsidiaries Hang Seng Security Management Limited Haseba Investment Company Limited HFC Bank Limited (in liquidation) HFC Company LLC High Time Investments Limited HITG Administration GmbH Honey Green Enterprises Ltd. Hongkong International Trade Finance (Holdings) Limited (in liquidation) 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 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 Insurance Group Holding Company Household International Europe Limited (in liquidation) Household Pooling Corporation Household Realty Corporation HRMG Nominees Limited HSBC (BGF) Investments Limited HSBC (BVI) Limited (in liquidation) HSBC (General Partner) Limited HSBC (Guernsey) GP PCC Limited HSBC (Kuala Lumpur) Nominees Sdn Bhd HSBC (Malaysia) Trustee Berhad HSBC (Singapore) Nominees Pte Ltd HSBC Administradora de Inversiones S.A. HSBC Agency (India) Private Limited HSBC Alpha Funding (UK) Holdings LP (in liquidation) HSBC Alternative Investments Limited HSBC Amanah Malaysia Berhad HSBC Amanah Takaful (Malaysia) Berhad HSBC Americas Corporation (Delaware) HSBC Argentina Holdings S.A. HSBC Asia Holdings (UK) Limited HSBC Asia Holdings B.V. HSBC Asia Holdings Limited 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 (62.14) (99.65) 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 n/a 100.00 100.00 49.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 HSBC Asset Management (India) Private Limited 100.00 (99.99) 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 100.00 100.00 100.00 100.00 100.00 72.95 100.00 100.00 100.00 (99.99) (99.99) 254 HSBC Holdings plc Annual Report and Accounts 2017 (99.99) 52 52 40 25 52 58 59 17 25 26 25 25 25 224 25 225 25 25 25 226 227 3, 40 60 25 20 17 56 2, 61 1, 20 62 63 64 65 66 7, 67 17 62 56, 62 25 68 17 3, 17 2, 69 17 17 17 17 3, 9, 70 4, 9, 50 15 9, 71 12, 72 61 73 13, 74 64 75 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 HSBC Bank Capital Funding (Sterling 2) LP 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 HSBC Bank Middle East Limited, Representative Office Morocco SARL 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 HSBC Broking Securities (Hong Kong) Limited HSBC Broking Services (Asia) Limited HSBC Canada Holdings (UK) Limited HSBC Canadian Covered Bond (Legislative) GP Inc HSBC Capital (Canada) Inc. HSBC Capital (USA), Inc. HSBC Capital Funding (Dollar 1) L.P. HSBC Capital Limited HSBC Card Services Inc. HSBC Casa de Bolsa, S.A. de C.V., Grupo Financiero HSBC HSBC Cayman Services Limited HSBC City Funding Holdings HSBC Client Holdings Nominee (UK) Limited HSBC Client Share Offer Nominee (UK) Limited HSBC Columbia Funding, LLC 100.00 100.00 100.00 100.00 70.00 100.00 100.00 100.00 100.00 100.00 94.54 100.00 100.00 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 99.99 100.00 100.00 100.00 100.00 100.00 HSBC Corporate Advisory (Malaysia) Sdn Bhd 100.00 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 Diversified Loan Fund General Partner Sarl 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 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 76 77 78 79 80 15 21 81 7, 61 7, 61 82 83 62 84 5, 85 86 83 87 17 2, 17 3, 88 3, 89 17 90 90 69 69 69 69 69 69 69 17 199 91 25 61 69 25 9, 16 33 17 17 17 25 62 69 17 25 15 20 92 93 12, 94 95 96 97 (80.67) 9, 14, 117 9, 16 % of share class held by immediate parent company (or by the Group where this varies) Footnotes Subsidiaries % of share class held by immediate parent company (or by the Group where this varies) HSBC Global Services (UK) Limited HSBC Global Services Limited 100.00 100.00 HSBC Global Shared Services (India) Private Limited (in liquidation) 100.00 (99.99) 98 99 17 Subsidiaries 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 (in liquidation) HSBC Equipment Finance (UK) Limited HSBC Equities (Luxembourg) S.a r.l. (in liquidation) HSBC Equity (UK) Limited HSBC Europe B.V. HSBC European Clients Depositary Receipts Nominee (UK) Limited (in liquidation) 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 (Lebanon) s.a.l. HSBC Financial Services (Middle East) Limited (In Liquidation) HSBC Financial Services (Uruguay) S.A. (in liquidation) HSBC France HSBC Fund Services (Korea) Limited HSBC Funding (UK) Holdings HSBC Germany Holdings GmbH HSBC Gestion (Monaco) SA HSBC Global Asset Management (Bermuda) Limited HSBC Global Asset Management (Canada) 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 99.70 100.00 100.00 99.99 92.95 100.00 100.00 99.80 100.00 100.00 HSBC Global Asset Management (Deutschland) GmbH 100.00 (80.67) HSBC Global Asset Management (France) 100.00 (99.99) HSBC Global Asset Management (Hong Kong) Limited HSBC Global Asset Management (International) Limited HSBC Global Asset Management (Japan) K. K. 100.00 100.00 100.00 HSBC Global Asset Management (Malta) Limited 100.00 (70.02) HSBC Global Asset Management (México), S.A. de C.V., Sociedad Operadora de Fondos de Inversión, Grupo Financiero HSBC 99.99 HSBC Group Management Services Limited HSBC Group Nominees UK Limited (99.99) 4, 9, 50 HSBC Holdings B.V. 17 17 1, 100 17 17 17 17 (99.99) 4, 9, 46 101 2, 17 25 17 102 2, 17 103 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 HSBC Insurance (Asia) Limited HSBC Insurance (Asia-Pacific) Holdings Limited HSBC Insurance (Bermuda) Limited 104 HSBC Insurance (Singapore) Pte. Limited 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.99 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 105 4, 46 1, 106 17 53 107 21 108 9, 53 4, 9, 109 23 110 111 112 HSBC Insurance Agency (USA) Inc. HSBC Insurance Brokers (Philippines) Inc HSBC Insurance Brokers (Taiwan) Limited HSBC Insurance Holdings Limited HSBC Insurance Management Services Limited (in liquidation) HSBC Insurance Services (Lebanon) S.A.L. (in liquidation) 97.70 HSBC Insurance Services Holdings Limited 100.00 (99.99) HSBC International Finance Corporation (Delaware) HSBC International Financial Services (UK) Limited (in liquidation) HSBC International Holdings (Jersey) Limited HSBC International Nominees Limited HSBC International Trade Finance Limited (in liquidation) HSBC International Trustee (BVI) Limited HSBC International Trustee (Holdings) Pte. Limited HSBC International Trustee Limited HSBC Inversiones S.A. HSBC Inversiones y Servicios Financieros Limitada 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.99 100.00 (99.99) 99.99 (99.54) Footnotes 17 2, 17 9, 66 17 1, 2, 17 17 25 1, 17 17 69 118 119 120 64 121 122 21 64 123 9, 124 125 2, 17 126 9, 127 17 128 17 83 1, 129 40 10, 130 64 129 9, 71 9, 71 131 9, 16 HSBC InvestDirect (India) Limited HSBC Global Asset Management (Oesterreich) GmbH 100.00 (80.67) 6, 9, 222 HSBC InvestDirect Financial Services (India) Limited 100.00 (99.54) 9, 131 HSBC Global Asset Management (Singapore) Limited 100.00 64 HSBC InvestDirect Sales & Marketing (India) Limited 99.99 (98.54) 9, 66 HSBC Global Asset Management (Switzerland) AG 100.00 (90.33) 4, 9, 113 HSBC InvestDirect Securities (India) Private Limited 99.99 (99.61) 9, 131 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 HSBC Global Asset Management Limited HSBC Global Custody Nominee (UK) Limited HSBC Global Custody Proprietary Nominee (UK) Limited HSBC Global Services (Hong Kong) Limited 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 HSBC Investment Bank Holdings B.V. HSBC Investment Bank Holdings Limited HSBC Investment Funds (Canada) Inc. 100.00 100.00 100.00 HSBC Investment Funds (Hong Kong) Limited 100.00 HSBC Investment Funds (Luxembourg) SA 100.00 HSBC Investments (Bahamas) Limited (in liquidation) HSBC Invoice Finance (UK) Limited HSBC Iris Investments (Mauritius) Ltd HSBC Issuer Services Common Depositary Nominee (UK) Limited 100.00 100.00 100.00 100.00 114 17 115 116 17 17 17 69 17 17 108 23 100 133 134 92 17 HSBC Holdings plc Annual Report and Accounts 2017 255 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements % of share class held by immediate parent company (or by the Group where this varies) Footnotes Subsidiaries HSBC REIM (France) (55.00) 17 135 17 2, 17 69 HSBC Representative Office (Nigeria) Limited HSBC Retail Services Inc. HSBC Retirement Benefits Trustee (UK) Limited HSBC Savings Bank (Philippines) Inc. (99.99) 4, 9, 45 HSBC Securities (Asia) Limited Notes on the Financial Statements HSBC Odeme Sistemleri Bilgisayar Teknolojileri Basin Yayin Ve Musteri Hizmetleri 100.00 (99.99) HSBC Overseas Holdings (UK) Limited 100.00 Subsidiaries 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 Lodge Funding (UK) Holdings HSBC LU Nominees Limited HSBC Management (Guernsey) Limited 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. 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 n/a 49.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 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 (in liquidation) HSBC Provident Fund Trustee (Hong Kong) Limited HSBC Qianhai Securities Limited HSBC Rail (UK) Limited HSBC Real Estate Leasing (France) HSBC Realty Credit Corporation (USA) 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 99.00 100.00 (70.02) (80.00) (99.99) (99.98) 118 17 112 17 17 20 25 17 16 136 2, 17 7, 9, 137 56, 138 81 25 25 62 69 139 62 25 140 2, 17 141 17 9, 68 142 143 119 9, 144 120 9, 145 17 20 100 4, 107 143 17 132 143 142 25 17 69 108 66 17 17 40 69 (51.00) 1, 12, 146 17 4, 9, 50 25 256 HSBC Holdings plc Annual Report and Accounts 2017 % of share class held by immediate parent company (or by the Group where this varies) (99.99) (94.65) 100.00 100.00 100.00 100.00 99.99 100.00 100.00 100.00 100.00 100.00 99.99 100.00 100.00 HSBC Securities (B) Berhad HSBC Securities (Canada) Inc. HSBC Securities (Egypt) S.A.E. HSBC Securities (Japan) Limited HSBC Securities (Philippines) Inc. HSBC Securities (Singapore) Pte Limited HSBC Securities (South Africa) (Pty) Limited HSBC Securities (Taiwan) Corporation Limited 100.00 HSBC Securities (USA) Inc. 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 HSBC Seguros de Retiro (Argentina) S.A. 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 Specialist Investments Limited HSBC Stockbroker Services (Client Assets) Nominees Limited HSBC Stockbrokers Nominee (UK) Limited HSBC Taxpayer Financial Services Inc. HSBC Technology & Services (China) Limited HSBC Technology & Services (USA) Inc. HSBC TFS I 2005 LLC HSBC Transaction Services GmbH 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 99.99 100.00 100.00 100.00 99.99 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 (99.99) (99.99) (99.99) (99.99) HSBC Trinkaus & Burkhardt (International) S.A. HSBC Trinkaus & Burkhardt AG 100.00 (80.67) 100.00 (80.67) HSBC Trinkaus & Burkhardt Gesellschaft fur Bankbeteiligungen mbH 100.00 (80.67) HSBC Trinkaus Europa Immobilien-Fonds Nr. 5 GmbH 100.00 (80.67) HSBC Trinkaus Family Office GmbH HSBC Trinkaus Immobilien Beteiligungs KG HSBC Trinkaus Real Estate GmbH HSBC Trust Company (Canada) 100.00 100.00 100.00 100.00 (80.67) (80.67) (80.67) Footnotes 4, 9, 50 147 25 1, 2, 17 148 69 1, 101 149 82 17 1, 9, 150 64 151 75 25 9, 66 152 69 69 69 118 20 119 100 153 129 119 9, 68 9, 68 3, 9, 144 154 4, 9, 46 133 9, 16 9, 16 4, 9, 50 155 12, 156 157 95 17 17 17 25 12, 158 25 32 6, 159 100 14, 53 53 53 6, 53 53 6, 53 81 % of share class held by immediate parent company (or by the Group where this varies) Footnotes Subsidiaries % of share class held by immediate parent company (or by the Group where this varies) Promocion en Bienes Raices, S.A. de C.V. 100.00 (99.19) 1, 160 17 41 142 161 20 69 162 64 17 2, 17 141 9, 163 92 17 (99.99) (99.98) 9, 145 (62.14) Subsidiaries 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 (in liquidation) HSBC Trustee (Singapore) Limited HSBC UK Bank plc HSBC UK Holdings Limited HSBC USA Inc. HSBC Valores S.A. HSBC Violet Investments (Mauritius) Limited HSBC Wealth Client Nominee Limited HSBC Yatirim Menkul Degerler A.S. 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 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 Imenson Limited 100.00 (62.14) INKA Internationale Kapitalanlagegesellschaft mbH 100.00 (80.67) (98.91) (99.99) (99.99) (99.99) (99.99) (99.98) 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 James Capel (Nominees) Limited James Capel (Second Nominees) Limited (in liquidation) James Capel (Taiwan) Nominees Limited John Lewis Financial Services Limited Keyser Ullmann Limited Kings Meadow Nominees Limited Legend Estates Limited Lion Corporate Services Limited Lion International Corporate Services Limited Lion International Management Limited Lion Management (Hong Kong) Limited Lyndholme 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 Maxima S.A. AFJP (in liquidation) Mercantile Company Limited Mexicana de Fomento, S.A. de C.V. Midcorp Limited Midland Bank (Branch Nominees) Limited Midland Nominees Limited MIL (Cayman) Limited MW Gestion SA 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 99.80 100.00 100.00 100.00 100.00 100.00 25 52 17 12, 164 12, 165 12, 166 12, 167 52 159 3, 16 9, 16 9, 16 3, 9, 16 168 17 110 17 17 17 17 9, 17 169 17 69 129 129 69 69 169 169 169 169 68 17 16 17 17 17 33 68 Prudential Client HSBC GIS Nominee (UK) Limited PT Bank HSBC Indonesia PT HSBC Sekuritas Indonesia R/CLIP Corp. Republic Nominees Limited Republic Overseas Capital Corporation RLUKREF Nominees (UK) One Limited RLUKREF Nominees (UK) Two Limited S.A.P.C. - Ufipro Recouvrement Saf Baiyun Saf Chang Jiang Saf Chang Jiang Shi Liu Saf Chang Jiang Shi Wu Saf Guangzhou Saf Zhu Jiang Saf Zhu Jiang Yi Saf Zhu Jiang Ba 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 Saf Zhu Jiang Wu Samada Limited SAS Bosquet-Audrain SAS Cyatheas Pasteur SAS Orona 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 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. Société Financière et Mobilière Société Française et Suisse Societe Immobiliere Atlas S.A. Somers Dublin DAC Somers Nominees (Far East) Limited Sopingest South Yorkshire Light Rail Limited SPE 1 2005 Manager Inc. St Cross Trustees Limited Sun Hung Kai Development (Lujiazui III) Limited Swan National Leasing (Commercials) Limited Swan National Limited 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 59.99 100.00 100.00 100.00 100.00 100.00 96.64 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 (98.93) (85.00) (99.97) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (94.90) (94.93) (94.92) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) (99.99) Footnotes 3, 9, 16 17 170 171 25 20 123 17 17 11, 45 4, 9, 47 4, 9, 47 4, 9, 47 1, 4, 9, 47 4, 9, 47 4, 9, 47 4, 9, 47 4, 9, 47 4, 9, 47 4, 9, 47 4, 9, 47 4, 9, 47 4, 9, 47 4, 9, 47 4, 9, 47 4, 9, 47 4, 9, 47 4, 9, 47 4, 9, 47 4, 9, 47 4, 9, 47 4, 9, 47 142 1, 4, 221 1, 4, 45 1, 4, 220 1, 9, 11, 50 20 20 151 12, 172 173 1,9,11,174 1, 9, 11, 47 1, 9, 11, 47 11, 50 1,9,11,47 1,9,11,47 1, 4, 9, 47 1, 4, 9, 47 1, 4, 9, 47 4, 9, 36 4, 9, 46 4, 9, 47 143 119 118 (99.99) 4, 9, 47 17 32 17 12, 175 17 17 HSBC Holdings plc Annual Report and Accounts 2017 257 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements 100.00 (80.67) 53 100.00 (80.67) 6, 53 Trinkaus Canada Immobilien-Fonds Nr. 1 Verwaltungs-GmbH 100.00 (80.67) Trinkaus Europa Immobilien-Fonds Nr.3 Objekt Utrecht Verwaltungs-GmbH 100.00 (80.67) Trinkaus Immobilien-Fonds Geschaeftsfuehrungs-GmbH 100.00 (80.67) 6, 53 HSBC TFS II 2005 LLC Trinkaus Immobilien-Fonds Verwaltungs- GmbH 100.00 (80.67) Notes on the Financial Statements Subsidiaries Tasfiye Halinde HSBC Internet ve Telekomunikasyon Hizmetleri Anonim Sirketi (in liquidation) Tempus Management AG (in liquidation) Thasosfin The Hongkong and Shanghai Banking Corporation Limited The Venture Catalysts Limited Timberlink Settlement Services (USA) Inc. TKM International Limited (in liquidation) Tooley Street View Limited Tower Investment Management Trinkaus Australien Immobilien Fonds Nr. 1 Brisbane GmbH & Co. KG Trinkaus Australien Immobilien-Fonds Nr. 1 Treuhand-GmbH 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Trinkaus Private Equity Management GmbH Trinkaus Private Equity Verwaltungs GmbH Tropical Nominees Limited Turnsonic (Nominees) Limited Vadep Holding AG (in liquidation) Valeurs Mobilières Elysées Vintage 2016 HV GP Limited (in liquidation) Vintage 2016 KKR GP Limited (in liquidation) Vintage 2017 Athyrium GP Limited (in liquidation) Vintage I Secondary GP Limited (in liquidation) Vintage III Special Situations GP Limited (in liquidation) Wardley Limited Wayfoong Credit Limited Wayfoong Finance Limited Wayfoong Nominees Limited Wayhong (Bahamas) Limited (in liquidation) Westminster House, LLC Woodex Limited Yan Nin Development Company Limited Joint Ventures 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 % of share class held by immediate parent company (or by the Group where this varies) Footnotes Associates The undertakings below are associates and equity accounted. 100.00 (99.99) 176 41 Associates % of share class held by immediate parent company (or by the Group where this varies) (99.99) 4, 9, 50 Bank of Communications Co., Ltd. Footnotes 56, 188 189 190 191 192 195 7, 219 56, 69 69 217 197 9, 12, 198 7, 200 32 7, 214 187 203 205 206 7, 216 7, 216 218 56, 212 56, 215 210 211 56, 213 19.03 24.64 24.38 26.00 33.33 33.99 n/a 19.33 40.58 33.00 20.50 43.50 n/a 20.00 n/a 33.99 33.33 20.88 33.99 n/a n/a 33.46 10.00 14.35 25.00 40.00 17.95 69 17 25 17 1, 2, 17 177 Barrowgate Limited BGF Group Limited Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited CFAC Payment Scheme Limited Chemi and Cotex Industries Limited Corsair IV Financial Services Capital Partners Electronic Payment Services Company (Hong Kong) Limited EPS Company (Hong Kong) Limited Guangzhou GuangZheng Hang Seng Securities Advisory Co. Ltd. 53 53 GZHS Research Co Ltd Hang Seng Qianhai Fund Management Company Limited HSBC Mortgage LLP (80.67) (80.67) InfraRed NF China Real Estate Investments LP 6, 53 53 6, 53 33 17 178 Jeppe Star Limited MENA Infrastructure Fund (GP) Ltd Northstar Trade Finance Inc. Novo Star Limited PEF 2005 (A) & (D) Limited Partnership PEF 2010 (A) Limited Partnership (99.99) 4, 9, 179 Peregrine Capital Services Ltd Quantexa Limited Services Epargne Entreprise SAS The London Gold Market Fixing Limited The Saudi British Bank Vizolution Limited 20 20 20 20 20 69 69 69 69 116 25 21 52 The undertakings below are Joint Ventures and equity accounted. Joint Ventures HCM Holdings Limited House Network Sdn Bhd HSBC Jintrust Fund Management Company Limited HSBC Kingdom Africa Investments (Cayman) Limited HSBC Life Insurance Company Limited ProServe Bermuda Limited Vaultex UK Limited HSBC Saudi Arabia % of share class held by immediate parent company (or by the Group where this varies) 50.99 25.00 49.00 50.00 50.00 50.00 50.00 49.40 (69.40) Footnotes 40 180 12, 181 182 183 184 186 201 258 HSBC Holdings plc Annual Report and Accounts 2017 Footnotes for Note 37 Registered Offices 1 2 3 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 IFRS. HSBC’s consolidation policy is described in Note 1.2(a). Directly held by HSBC Holdings plc Preference Shares Description of Shares 4 5 6 7 8 9 10 11 12 13 14 Actions Redeemable Preference Shares GmbH Anteil This undertaking is a partnership and does not have share capital Liquidating Share Class In the prior period the Group disclosed the immediate parent company’s interest in this undertaking Non-Participating Voting Shares Parts Registered Capital Shares Russian Limited Liability Company Shares Stückaktien Registered Offices 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 Level 36 Tower 1 International Towers Sydney, 100 Barangaroo Avenue, Sydney, New South Wales, Australia, 2000 Paseo de la Reforma 347, Col. Cuauhtemoc, Mexico, 06500 8 Canada Square, London, United Kingdom, E14 5HQ 5 Donegal Square South, Belfast, Northern Ireland, BT1 5JP Camden House West The Parade, Birmingham, United Kingdom, B1 3PY Arnold House St Julians Avenue, St Peter Port, Guernsey, GY1 3NF 37 Front Street, Hamilton, Bermuda, HM 11 PO Box 513 HSBC House, 68 West Bay Road, George Town, Grand Cayman, Cayman Islands, KY1-1106 HSBC Main Building 1 Queen's Road Central, Hong Kong First Floor, Xinhua Bookstore Xindong Road (SE of roundabout), Miyun District, Beijing, China c/o The Corporation Trust Company 1209 Orange Street, Wilmington, Delaware, United States, 19801 CT Corporation System 1515 Market Street, Registered Office, Philadelphia, Pennsylvania, United States, 19102 CT Corporation System 800 S. Figueroa, Los Angeles, California, United States, 90017 CT Corporation System 530 Gay Street, Knoxville, Tennessee, United States, 37902 CT Corporation System Secretary of State, 707 Virginia Street East, Charleston, West Virginia, United States, 25301 CT Corporation System 1720 Carey Avenue, Cheyenne, Wyoming, United States, 82001 95 Washington Street, Buffalo, New York, United States, 14203 1209 Orange Street, Wilmington, Delaware, United States, 19801 PO Box 1109 HSBC House, 68 West Bay Road, George Town, Grand Cayman, Cayman Islands, KY1-1102 Corporation Service Company 251 Little Falls Drive, Wilmington, Delaware, United States, 19808 Unsoeldstrasse 2, Munich, Germany, 80538 Solidere - Rue Saad Zaghloul Immeuble - 170 Marfaa, PO Box 17 5476 Mar Michael 11042040, Beyrouth, Lebanon No 1, Bei Huan East Road Dazu County, Chongqing, China No 107, Ping Du Avenue (E), Sanhe Town, Fengdu County, Chongqing, China No. 3, 5, 7, Haitang Erzhi Road Changyuan, Rongchang, Chongqing, China, 402460 Hill House 1 Little New Street, London, United Kingdom, EC4A 3TR Bederstrasse 49, Zurich, Switzerland, CH-8002 Rawlinson and Hunter Limited Woodbourne Hall, PO Box 3162, Road Town, Tortola, British Virgin Islands, VG1110 15 Rue GFirst & Second Floor, No.3 Nanshan Road, Pulandian, Dalian, Liaoning, China uynemer BP 412 Noumea 98845 Nouvelle Calédonie CT Corporation System 225 Hillsborough Street, Raleigh, North Carolina, United States, 27603 39 rue de Bassano, Paris, France, 75008 103 avenue des Champs-Elysées, Paris, France, 75008 64 rue Galilée, Paris, France, 75008 48 49 50 51 52 53 54 55 56 57 58 59 60 61 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 MMG Tower, 23 floor Ave. Paseo del Mar Urbanizacion Costa del Este, Panama Walkers Corporate Services Limited, Walker House, 87 Mary Street, George Town, Grand Cayman KY1-9005, Cayman Islands 15 rue Vernet, Paris, France, 75008 No. 1 1211 Yanjiang Zhong Road, Yongan, Fujian, China 83 Des Voeux Road Central, Hong Kong Königsallee 21/23, Düsseldorf, Germany, 40212 Bufete Tapia, PO Box 7412, Panama, Panama, 5 No. 44, Xin Ping Road Central, Encheng, Enping, Guangdong, China, 529400 HSBC Holdings plc exercises control or significant influence over this undertaking notwithstanding its equity interest 34/F and 36/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road 27/F, Shanghai Stock Exchange Bldg, 528 Pudong South Road, Shanghai, Shanghai, China, 200120 11-17 Ludwig-Erhard-Str., Hamburg, Germany, 20459 Akara Bldg. 24 De Castro Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands The Corporation Trust Company of Nevada 311 S. Division Street, Carson City, Nevada, United States, 89703 HSBC House Esplanade, St. Helier, Jersey, JE4 8UB 10th Floor, North Tower 2 Leboh Ampang, Kuala Lumpur, Malaysia, 50100 13th Floor, South Tower 2 Leboh Ampang, Kuala Lumpur, Malaysia, 50100 21 Collyer Quay #13-02 HSBC Building, Singapore, 049320 Bouchard 557, Piso 18°, Cdad. Autónoma de Buenos Aires, Argentina, 1106 52/60 M G Road, Fort, Mumbai, India, 400 001 PO Box 513 HSBC House, 68 West Bay Road, George Town, Grand Cayman, Cayman Islands, KY1-1102 Florida 229, 10°, Ciudad de Buenos Aires, Argentina, C1005AAE 1 Queen's Road Central, Hong Kong 3rd Floor, Merchantile Bank Chamber 16, Veer Nariman Road, Fort, Mumbai, India, 400001 Isidora Goyenechea 2800, 23rd floor, Las Condes, Santiago, Chile, 7550647 HSBC Building Shanghai ifc, 8 Century Avenue, Pudong, Shanghai, China, 200120 6th floor, HSBC Centre, 18, Cybercity, Ebene, Mauritius 2 Paveletskaya square, building 2, Moscow, Russian Federation, 115054 13F-14F, 333 Keelung Road, Sec.1, Taipei, 110 Rincon 391, Montevideo, Uruguay, 11000 The Metropolitan 235 Dong Khoi Street, District 1, Ho Chi Minh City, Vietnam Esentepe mah. Büyükdere Caddesi No.128 Istanbul 34394, Turkey Florida 201, 10°, Ciudad de Buenos Aires, Argentina, C1005AAE 66 Teryan street, Yerevan, Armenia, 0009 885 West Georgia Street Suite 300, Vancouver, British Columbia, Canada, V6C 3E9 306 Corniche El Nil, Maadi, Egypt, 11728 HSBC House Esplanade, St. Helier, Jersey, JE1 1HS 116 Archbishop Street, Valletta, Malta Level 1, Building No. 8, Gate Village Dubai International Financial Centre, PO Box 502601, United Arab Emirates Tour Crystal 1 10EME Etage BD Al Mohades, Casablanca, Morocco Al Khuwair Office PO Box 1727 PC111 CPO Seeb, Muscat, Oman Rondo ONZ 1, Warsaw, Poland, 00-124 1800 Tysons Boulevard Suite 50, McLean, Virginia, United States, 22102 Rua Funchal, nº 160, SP Corporate Towers, Torre Norte, 19° andar, cj 191A - Parte, São Paulo, Brazil, 04551-060 300, 885 West Georgia Street, Vancouver, British Columbia, Canada, V6C 3E9 c/o Kross Border Trust Services Limited St. Louis Business Centre, Cnr Desroches & St Louis Streets, Port Louis, Mauritius 49 avenue J.F. Kennedy, Luxembourg, Luxembourg, 1855 4-17/F, Office Tower 2 TaiKoo Hui, No. 381 Tian He Road, Tian He District, Guangzhou, Guangdong, China Suite 1005, 10th Floor, Wisma Hamzah Kwong Hing No. 1, Leboh Ampang, Kuala Lumpur, Malaysia, 50100 HSBC, Filinvest One Bldg, Northgate Cyberzone, Filinvest Corporate City, Alabang, Muntinlupa City, Philippines HSBC House Plot No.8, Survey No.64 (Part), Hightec City Layout Madhapur, Hyderabad, India, 500081 439, Sri Jayawardenapura Mawatha Welikada, Rajagiriya, Colombo, Sri Lanka HSBC Holdings plc Annual Report and Accounts 2017 259 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Notes on the Financial Statements Registered Offices Registered Offices 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 Smart Village 28th Km Cairo- Alexandria Desert Road Building, Cairo, Egypt 16 Boulevard d'Avranches, Luxembourg, L-1160 HSBC Chambers, Corner of Jalan Sultan / Jalan Pemancha , Bandar Seri Begawan, Brunei Darussalam, BS8811 Suite 300, 3381 Steeles Avenue East, Toronto, Ontario, Canada, M2H 3S7 Centre Ville 1341 Building - 4th Floor Patriarche Howayek Street (facing Beirut Souks), PO Box Riad El Solh, Lebanon, 9597 3rd Floor, HSBC Bank Middle East Limited Building Al Souq Road, Bur Dubai, PO Box 4604, Dubai, United Arab Emirates World Trade Center Montevideo Avenida Luis Alberto de Herrera 1248, Torre 1, Piso 15, Oficina 1502, Montevideo, Uruguay, CP 11300 Level 12, HSBC Building 37, Chilpae-ro, Jung-gu, Seoul, Korea, Republic of 17 avenue d'Ostende, Monaco, 98000 2910 Virtual Way, Vancouver, British Columbia, Canada, V5M 0B2 Immeuble Coeur Défense 110, Esplanade du Général de Gaulle- La défense 4, Courbevoie, France, 92400 HSBC House Esplanade, St. Helier, Jersey, JE4 8WP HSBC Building 11-1, Nihonbashi 3-chome, Chuo-ku, Tokyo, Japan, 103-0027 80 Mill Street, Qormi, Malta, QRM 3101 Gartenstrasse 26, Zurich, Switzerland 24th Fl., 99, Sec.2, Tunhwa S. Rd., Taipei, Taiwan, Province of China 452 Fifth Avenue 7th floor, New York NY10018, United States Mareva House 4 George Street, Nassau, Bahamas Breite Str. 29/31, Düsseldorf, Germany, 40213 37 Front Street, Hamilton, Bermuda, HM 11 1 Grand Canal Square Grand Canal Harbour, Dublin 2, D02 P820, Ireland HSBC Centre Eighteen, Cybercity, Ebene, Mauritius 18th Floor, Tower 1 HSBC Centre, 1 Sham Mong Road, Kowloon, Hong Kong Level 32, HSBC Main Building 1 Queen's Road Central, Hong Kong 452 Fifth Avenue, New York NY10018, United States 9th Floor, HSBC Centre 3058 Fifth Avenue West, Bonifacio Global City, Taguig City, Philippines 16F 369 Zhongxiao East Road, Section 7 , Nangang District , Taipei, Taiwan, Province of China, 115 1 More London Place, London, United Kingdom, SE1 2AF HSBC Building Minet El Hosn, Riad el Solh, Beirut 1107-2080, PO Box 11-1380, Lebanon 300 Delaware Avenue Suite 1400, Wilmington, Delaware, United States, 19801 Craigmuir Chambers, PO Box 71, Road Town, Tortola, British Virgin Islands Woodbourne Hall, Road Town PO Box 916, Tortola, British Virgin Islands 9-11 Floors, NESCO IT Park Building No. 3 Western Express Highway, Goregaon (East), Mumbai, India, 400063 1441 Brickell Avenue, Miami, Florida, United States 33131 MB&H Corporate Services Ltd Mareva House, 4 George Street, Nassau, Bahamas 21 Farncombe Road, Worthing, United Kingdom, BN11 2BW 3303 Express Drive North, Islandia, New York, United States, 11749 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 Precinct Building 4, Level 3 Dubai International Financial Centre, Dubai, United Arab Emirates, PO BOX 506553 HSBC Bank Middle East Building - level 5, building 5, Emaar, Dubai, United Arab Emirates, 502601 HSBC House Level 9, One Queen Street, Auckland, New Zealand, 1010 Büyükdere Cad. No.122 D Blok Esentepe Sisli Istanbul, Turkey c/o The Corporation Trust Incorporated 351 West Camden Street, Baltimore, Maryland, United States, 21201 HSBC House Esplanade, St. Helier, Jersey, JE1 1GT Quai des Bergues 9-17, Geneva, Switzerland, 1201 Paseo de la Reforma 359, 6th Floor, Mexico, 06500 Büyükdere Cad. No.128 D Blok Esentepe Sisli Istanbul, Turkey Block 27 A&B, Qianhai Enterprise Dream Park No. 63 Qianwan Yi Road, Shenzhen-Hong Kong Cooperation Zone, Shenzhen, China, 518052 St Nicholas House, 10th Floor Catholic Mission St Lagos, Nigeria Unit 1 GF The Commercial Complex Madrigal Avenue Ayala Alabang Village, Muntinlupa City, Philippines, 1770 70 York Street 7th Floor, Toronto, Ontario, Canada, M5J 1S9 7/F The Enterprise Centre - Tower I, 6766 Ayala Avenue corner Paseo De Roxas, Makati City, Philippines 151 2 Exchange Square 85 Maude Street, Sandown, Sandton, South Africa, 2196 260 HSBC Holdings plc Annual Report and Accounts 2017 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180 181 182 183 184 186 187 188 189 190 191 192 195 196 197 198 199 200 201 203 Palm Grove House PO Box 438, Road Town, Tortola, British Virgin Islands The Corporation Trust Company 820 Bear Tavern Road, West Trenton, New Jersey, United States, 08628 Kapelanka 42A, Krakow, Poland, 30-347 Suite 2400, 745 Thurlow Street, Vancouver, Canada, BC V6E 0C5 L22, Office Tower 2, Taikoo Hui, 381 Tianhe Road, Tianhe District, Guangzhou, Guangdong, China HSBC Centre River Side, West Avenue, 25B Raheja woods, Kalyaninagar, Pune, India, 411006 Level 19, HSBC Building, Shanghai ifc 8 Century Avenue Pudong, Shanghai, China Yorckstraße 21 - 23 40476, Duesseldorf, Germany 300 Delaware Avenue Suite 1401, Wilmington, Delaware, United States, 19801 PO Box 484, Ground Floor, HSBC House 68 West Bay Road, Grand Cayman, KY1-1106, Cayman Islands c/o HSBC Bank (Mauritius) Limited 6th Floor, HSBC Centre, 18 Cyber City, Ebene, Mauritius Bouchard 680, 11°, Ciudad de Buenos Aires, Argentina, 1106 No. 56, Yu Rong Street, Macheng, China, 438300 No. 205, Lie Shan Road Suizhou, Hubei, China Building 3, Yin Zuo Di Jing Wan Tianmen New City,Tianmen, Hubei Province, China RM101, 102 & 106 Sunshine Fairview, Sunshine Garden, Pedestrian Walkway, Pingjiang, China 6 rue Adolphe, Luxembourg, L-1116 Kings Meadow Chester Business Park, Chester, United Kingdom, CH99 9FB World Trade Center 1, Floor 8-9 Jalan Jenderal Sudirman Kavling 29-31, Jakarta, Indonesia, 12920 4th Floor, World Trade Center, J1, Jend. Sudirman Kav. 29-31, Jakarta, Indonesia, 12920 No.198-2, Chengshan Avenue (E), Rongcheng, China, 264300 Woodbourne Hall, Road Town PO Box 3162, Tortola, British Virgin Islands 43 rue de Paris, Saint Denis, 97400 RM 2112, HSBC Building, Shanghai ifc No. 8 Century Road, Pudong, Shanghai, China, 200120 Büyükdere Cad. No 124 kat 9 Oda 2 Esentepe ªiºli Istanbul, Turkey 11 Dr. Roy’s Drive PO Box 694GT, Grand Cayman, Cayman Islands, KY1-1107 Philippe Kaiser Baarerstrasse 8, Zug, Switzerland, 6300 109 avenue des Champs-Elysees, Paris, France, 75008 Suite 8-3A, Menara RA, No. 18, Jalan Dataran SD2,, Dataran SD, PJU 9, Bandar Sri Damansara, 52200, Malaysia 17F, HSBC Building, Shanghai ifc 8 Century Avenue, Pudong, Shanghai, China Maples Corporate Services Limited PO Box 309, Ugland House, South Church Street, George Town, Cayman Islands, KY1-1104 18/F, HSBC Building, 8 Century Avenue China (Shanghai) Pilot Free Trade Zone, China, 200120 c/o MUFG Fund Services (Bermuda) Limited The Belvedere Building, 69 Pitts Bay Road, Pembroke, Bermuda, HM08 21 Garlick Hill, London, United Kingdom, EC4V 2AU c/o Trident Trust Company Trident Chambers, PO Box 146, Tortola, British Virgin Islands No.188, Yin Cheng Zhong Road China (Shanghai) Pilot Free Trade Zone, Shanghai, China 49/F, The Lee Gardens, 33 Hysan Avenue, Hong Kong 13-15 York Buildings, London, United Kingdom, WC2N 6JU Unit No. 208, 2nd Floor, Kanchenjunga Building 18 Barakhamba Road, New Delhi - 110001, India 6th Floor 65 Gresham Street, London EC2V 7NQ Plot No. 89-90 Mbezi Industrial Area Box 347, Dar es Salaam City 37 avenue Henri Lafleur, Nouméa, New Caledonia, BP K3 98849 1101-J46, 11/F, Nansha Financial Building 171 Haibin Road, Nansha District, Guangzhou, China 2-3/F, Unit 21A, Qianhai Enterprise Dream Park, No. 63 Qian Wan Yi Road,, Qianhai Shenzhen-Hongkong Cooperation Zone, Shenzhen, China 66 Wellington Street West, Suite 5300, Toronto, Ontario, Canada, M5K 1E6 35 Great St Helens, London, United Kingdom, EC3A 6AP HSBC Building 7267 Olaya - Al Murrooj, Riyadh, Kingdom of Saudi Arabia, 12283 - 2255 Level 3 Building 4, Gate District, Dubai International Financial Centre, Dubai, United Arab Emirates Registered Offices 204 205 206 210 211 212 213 214 215 216 217 218 219 220 221 222 223 224 225 226 13th Floor, Lulu Center Building Salam Street, PO Box 44505, United Arab Emirates 833 Three Bentall Centre 595 Burrard Street, Vancouver, British Columbia, Canada, V7X 1C4 Jayla Place Wickhams Cay I, PO Box 3190, Road Town, British Virgin Islands c/o Hackwood Secretaries Limited One Silk Street, London, United Kingdom, EC2Y 8HQ Prince Abdulaziz Ibn Mossaad Ibn Jalawi Street, Riyadh, Kingdom of Saudi Arabia 75 Park Lane, Croydon, Surrey, United Kingdom, CR9 1XS Ground Floor, Office Block A Bay Studio Business Park, Fabian Way, Swansea, Wales, United Kingdom, SA1 8QB Ground Floor, Dorey Court, Admiral Park, St Peter Port Guernsey GY1 2HT 32 Rue du Champ de Tir, 44300 NANTES 1020-885 West Georgia Street, Vancouver BC, V6C3E8 11/F, J46 of Room1101,Nansha Financial Mansion, No.171 Haibin Road, Nansha Area, Guangzhou, China Rahejas, 4th Floor, Corner of Main Avenue & V.P Road, Santacruz (West) Mumbai - 400 054 717 Fifth Avenue, New York, NY 10022 10 rue Jean Jaurès BP Q5 Noumea 98845 Nouvelle Calédonie 15 rue Guynemer BP 412 Noumea 98845 Nouvelle Calédonie Herrengasse 1-3, 1010 Wien, Austria 2156 Horse Prairie Drive, Henderson NV 89052 United States 2 North Jackson Street, Suite 605, Montgomery AL, 36104 United States 2222 Grand Avenue, Des Moines IA 50312 United States c/o The Corporation Trust Company, 100 S. 5th Street-Suite 1075 Minneapolis MN 55401, United States 227 545 Washington Blvd., 11th Floor Jersey City NJ 07310 United States HSBC Holdings plc Annual Report and Accounts 2017 261 Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements Shareholder information Shareholder information Fourth interim dividend for 2017 Interim dividends for 2018 2017 Annual General Meeting Earnings Releases and Interim Results Shareholder enquiries and communications Stock symbols Investor relations Where more information about HSBC is available Cautionary statement regarding forward-looking statements Certain defined terms Abbreviations Page 262 262 262 262 263 264 264 264 266 267 268 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 2017 The Directors have declared a fourth interim dividend for 2017 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 7 March 2018. The timetable for the dividend is: Announcement Shares quoted ex-dividend in London, Hong Kong, Paris and Bermuda and American Depositary Shares (‘ADS’) quoted ex-dividend in New York Record date – London, Hong Kong, New York, Paris, Bermuda Mailing of Annual Report and Accounts 2017 and/or Strategic Report 2017 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 20 February 2018 22 February 2018 1 23 February 2018 7 March 2018 22 March 2018 26 March 2018 6 April 2018 Interim dividends for 2018 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 2018 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, pounds 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. 2017 Annual General Meeting All resolutions considered at the 2017 Annual General Meeting held at 11.00am on 28 April 2017 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 2018 and 29 October 2018. The interim results for the six months to 30 June 2018 are expected to be issued on 6 August 2018. 262 HSBC Holdings plc Annual Report and Accounts 2017 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 Services Limited Rooms 1712-1716, 17th Floor Hopewell Centre 183 Queen’s Road East HSBC Bank Bermuda Limited 6 Front Street Hamilton HM 11 Bermuda Telephone: +44 (0) 370 702 0137 Hong Kong 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 Shareowner Services PO Box 505000 Louisville, KY 40233-5000 USA Telephone (US): +1 877 283 5786 Telephone (International): +1 201 680 6825 Email: shrrelations@cpushareownerservices.com Website: www.mybnymdr.com Any enquiries relating to shares held through Euroclear France, the settlement and central depositary system for NYSE Euronext Paris, should be sent to the paying agent: CACEIS Corporate Trust 14, rue Rouget de Lisle 92130 Issy-Les-Moulineaux France Telephone: +33 1 57 78 34 28 Email: ct-service-ost@caceis.com Website: www.caceis.com 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 2017 may be obtained by writing to the following departments: For those in Europe, the Middle East and Africa: For those in Asia: Global Communications Communications (Asia) HSBC Holdings plc 8 Canada Square London E14 5HQ United Kingdom Electronic communications The Hongkong and Shanghai Banking Corporation Limited 1 Queen’s Road Central Hong Kong For those in the Americas: 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 2017 263 Strategic ReportFinancial Review Corporate Governance Financial Statements Shareholder Information Shareholder information Chinese translation A Chinese translation of this Annual Report and Accounts 2017 will be available upon request after 7 March 2018 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 Telephone: +44 (0) 20 7991 6590 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 2017, and other information on HSBC, may be downloaded from 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 2017 by 31 December 2018. This information will be available on HSBC’s website: www.hsbc.com/tax. 264 HSBC Holdings plc Annual Report and Accounts 2017 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 UK resident individuals are generally entitled to a tax-free annual allowance in respect of dividends received. The amount of the allowance is currently £5,000, but will be reduced to £2,000 from 6 April 2018. 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 2016 fourth interim dividend and the first, second and third interim dividends for 2017 was set out in the Secretary’s letters to shareholders of 8 March, 2 June, 17 August and 25 October 2017. 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. Capital gains arising on a disposal by a UK company may also be adjusted to take account of indexation allowance. For assets acquired on or before 1 January 2018, legislation proposed in Finance Bill 2017-18 freezes the level of indexation allowance that is given in calculating a company’s chargeable gains at the value that would apply to the disposal of an asset in December 2017. For assets acquired from 1 January 2018 onwards, legislation proposed in Finance Bill 2017-18 removes any indexation allowance on disposal. 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 published 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 accepts that the charge to stamp duty reserve tax at 1.5% on the issue of shares (and transfers integral to capital raising) to a depositary receipt issuer or a clearance service is incompatible with European Union law, and will not be imposed. 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 (‘ADSs’) by a holder that is a US holder, as defined below, 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’ or ‘hedge’) 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. For the purposes of this discussion, a ‘US holder’ is a beneficial holder that is a citizen or resident of the United States, a US domestic corporation or otherwise is subject to US federal income taxes on a net income basis in respect thereof. 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 2017 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. HSBC Holdings plc Annual Report and Accounts 2017 265 Strategic ReportFinancial Review Corporate Governance Financial Statements Shareholder Information Shareholder information Taxation of dividends Currently, no tax is withheld from dividends paid by HSBC Holdings. For US tax purposes, a US holder must include cash dividends paid on the shares or ADSs in ordinary income on the date that such holder or the ADS depositary receives them, translating dividends paid in UK pounds sterling into US dollars using the exchange rate in effect on the date of receipt. A US holder that elects to receive shares in lieu of a cash dividend must include in ordinary income the fair market value of such shares on the dividend payment date, and the tax basis of those shares will equal such fair market value. Subject to certain exceptions for positions that are held for less than 61 days, 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 was not and 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 published HMRC practice, UK stamp duty and/or stamp duty reserve tax will be payable. The stamp duty or stamp duty reserve tax is generally payable on the consideration for the transfer and is payable at the aggregate rate of 1.5%. The amount of stamp duty reserve tax payable on such a transfer will be reduced by any stamp duty paid in connection with the same transfer. No stamp duty will be payable on the transfer of, or agreement to transfer, an ADS, provided that the ADR and any separate instrument of transfer or written agreement to transfer remain at all times outside the UK, and provided further that any such 266 HSBC Holdings plc Annual Report and Accounts 2017 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 taxpayers 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 taxpayers 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. Cautionary statement regarding forward-looking statements The Annual Report and Accounts 2017 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 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. from the current business model and portfolio mix; imposition of levies or taxes designed to change business mix and risk appetite; the practices, pricing or responsibilities of financial institutions serving their consumer markets; expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; changes in bankruptcy legislation in the principal markets in which we operate and the consequences thereof; general changes in government policy that may significantly influence investor decisions; extraordinary government actions as a result of current market turmoil; other unfavourable political or diplomatic developments producing social instability or legal uncertainty which in turn may affect demand for our products and services; the costs, effects and outcomes of product regulatory reviews, actions or litigation, including any additional compliance requirements; and the effects of competition in the markets where we operate including increased competition from non- bank financial services companies, including securities firms. • 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; and other risks and uncertainties we identify in ‘top and emerging risks’ on pages 63 to 66. HSBC Holdings plc Annual Report and Accounts 2017 267 Strategic ReportFinancial Review Corporate Governance Financial Statements Shareholder Information Shareholder information Abbreviations Currencies CA$ EGP € HK$ MXN RMB SGD $ A ABS¹ ADR ADS AFS AGM AIEA ALCM ALCO AML AML DPA APE ASEAN AT1 B Basel Basel II¹ Basel III¹ BoCom BoE Bps¹ BSA BSM BVI C C&L CAPM CCAR CDOs CDS¹ CEA CET1¹ CGUs CIUs CMB CMC CML¹ CODM COSO CP¹ CRD¹ CRR¹ 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 Five-year deferred prosecution agreement with the US Department of Justice, entered into in December 2012 Annual Premium Equivalent Association of Southeast Asian Nations Additional tier 1 Basel Committee on Banking Supervision 2006 Basel Capital Accord Basel Committee’s reforms to strengthen global capital and liquidity rules 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 Credit and Lending Capital asset pricing model Federal Reserve Comprehensive Capital Analysis and Review Collateralised debt obligations Credit default swap Commodity 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) Chief Operating Decision Maker 2013 Committee of the Sponsors of the Treadway Commission (US) Commercial paper Capital Requirements Directive Customer risk rating CRR/CRD IV Capital Requirements Regulation and Directive CSA CVA¹ CVC D Credit Support Annex Credit valuation adjustment Conduct & Values Committee 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 268 HSBC Holdings plc Annual Report and Accounts 2017 Dodd-Frank Dodd-Frank Wall Street Reform and Consumer Protection Act (US) DoJ DPF DVA¹ E EAD¹ EBA EC ECB ECL EL¹ ERISA ESG EU Euribor EVE F FCA FCR FFVA US Department of Justice Discretionary participation feature of insurance and investment contracts Debit valuation adjustment Exposure at default European Banking Authority European Commission European Central Bank Expected credit losses Expected loss Employee Retirement Income Security Act of 1974 (US) Environmental, Social and Governance European Union Euro interbank offered rate 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 FSB FSCS FSVC FTE FTSE FuM FVOCI¹ FVPL¹ FX DPA G GAAP GAC GB&M GCC GDP GLCM Federal Reserve Board (US) Financial Stability Board 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 Three-year deferred prosecution agreement with the US Department of Justice, entered into in January 2018 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 GRRC 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 Group Reputational Risk Committee 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 banks HKEx HKMA HMRC HNAH 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 High-quality liquid assets HSBC Holdings together with its subsidiary undertakings HSBC Bank HSBC Bank Middle East 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 ILAAP 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 process 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 The Investor Update in June 2015 IRB¹ IRRBB ISDA K KPMG L LCR LFRF LGBT+ LGD¹ Libor LICs LTI LTV¹ M Internal ratings-based Interest rate risk in the banking book 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 MRT¹ N NGO NII NSFR NYSE O OCC OCI ORMF OTC¹ Material risk taker Non-governmental organisation 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 P PD¹ Performance shares¹ Ping An POCI PPI PRA PRC Probability of default Awards of HSBC Holdings ordinary shares under employee share plans that are subject to corporate performance conditions Ping An Insurance (Group) Company of China, Ltd, the second-largest life insurer in the PRC Purchased or originated credit impaired financial assets 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 RRCS 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 Reputational Risk and Client Selection team Reverse repo Security purchased under commitments to sell RMM RNIV RoE Risk Management Meeting of the Group Management Board Risk not in VaR Return on equity RoRWA Return on risk-weighted assets RoTE RQFII RRCS RWA¹ S SE¹ SEC Return on Tangible Equity 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 Sibor SIC SID SME Solitaire Singapore Interbank Offered Rate Securities investment conduit Senior Independent Director Small- and medium-sized enterprise Solitaire Funding Limited, a special purpose entity managed by HSBC SPE¹ Special purpose entity T T1 T2 TCFD¹ TLAC¹ TSR¹ U UAE UK US US run-off portfolio V VaR¹ VIU Tier 1 Tier 2 Task Force on Climate-related Financial Disclosures Total loss-absorbing capacity Total shareholder return United Arab Emirates United Kingdom United States of America Includes our CML, vehicle finance and Taxpayer Financial Services businesses and insurance, commercial, corporate and treasury activities in HSBC Finance on an IFRSs management basis Value at risk Value in use 1 A full definition is included in the glossary to the Annual Report and Accounts 2017 which is available at www.hsbc.com/investor-relations. HSBC Holdings plc Annual Report and Accounts 2017 269 Strategic ReportFinancial Review Corporate Governance Financial Statements Shareholder Information Shareholder 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.investorcentre.com/hk 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.investorcentre.com/bm ADR Depositary The Bank of New York Mellon Shareowner Services PO Box 505000 Louisville, KY 40233-5000 USA Telephone (US): 1 877 283 5786 Telephone (International): 1 201 680 6825 Email: shrrelations@cpushareownerservices.com Web: www.mybnymdr.com 270 HSBC Holdings plc Annual Report and Accounts 2017 Paying Agent (France) CACEIS Corporate Trust 14, rue Rouget de Lisle 92130 Issy-Les-Moulineaux France Telephone: 33 1 57 78 34 28 Email: ct-service-ost@caceis.com Web: www.caceis.com 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 © Copyright HSBC Holdings plc 2018 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 Superunion (formerly Addison Group), London (Strategic Report) and by Global Finance with Superunion (rest of Annual Report and Accounts) Photography Cover, inside front cover-page 1, page 27: Getty Images Pages 2-3: Terry Tam, The Hongkong and Shanghai Banking Corporation Limited, Hong Kong Pages 4 (Group Chairman), 7 (Group Chief Executive): Charles Best Pages 10-13: David George, HSBC Bank Egypt S.A.E., Cairo, Egypt Pages 18-21: Ramit Soni, The Hongkong and Shanghai Banking Corporation Limited, Mumbai, India Pages 22-23: Arunabha Hajra, The Hongkong and Shanghai Banking Corporation Limited, Mumbai, India Pages 28-29: Global Communications, HSBC Holdings plc Pages 122-125: Directors and Group Company Secretary by Charles Best; Group Chief Executive Designate by Global Communications, HSBC Holdings plc Inside back cover: Laurie Mae Gucilatar, HSBC Electronic Data Processing (Philippines), Inc., Quezon City, Philippines 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® recycled logo identifies a paper which contains 100% post- consumer recycled fibre 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 

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