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
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o
p
e
R
c
g
e
t
a
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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.
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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.
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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
•
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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.
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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.
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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
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‘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
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14
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18
19
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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
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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
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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
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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.
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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
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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.
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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.
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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.
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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.
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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).
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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.
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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.
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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.
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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.
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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
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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.
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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
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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.
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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
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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
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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
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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
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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
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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.
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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.
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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
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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
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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
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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.
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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
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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.
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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.
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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
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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
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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
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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.
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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
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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
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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.
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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
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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
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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
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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).
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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
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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.
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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.
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Non-financial performance
The table below provides an overview of the non-financial performance achieved by each executive Director.
Stuart Gulliver
Global Standards including risk and
compliance
• 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.
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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
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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.
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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
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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’.
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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
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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.
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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
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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.
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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
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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
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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
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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
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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).
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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
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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
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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
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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.
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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
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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
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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.
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Net investment hedge
Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. 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
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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
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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
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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:
$15.2bn (restated)). First loss protection is provided by the originator of the assets, and not by HSBC, through transaction-specific credit
enhancements. A layer of secondary loss protection is provided by HSBC in the form of programme-wide enhancement facilities.
Securitisations
HSBC uses structured entities to securitise customer loans and advances it originates in order to diversify its sources of funding for asset
origination and capital efficiency purposes. The loans and advances are transferred by HSBC to the structured entities for cash or
synthetically through credit default swaps, and the structured entities issue debt securities to investors.
HSBC managed funds
HSBC has established a number of money market and non-money market funds. Where it is deemed to be acting as principal rather than
agent in its role as investment manager, HSBC controls these funds.
HSBC Holdings plc Annual Report and Accounts 2017
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Strategic ReportFinancial Review Corporate Governance Shareholder Information Financial Statements
Notes on the Financial Statements
Other
HSBC has also entered into a number of transactions in the normal course of business which include asset and structured finance
transactions where it has control of the structured entity. In addition, HSBC is deemed to control a number of third-party managed funds
through its involvement as a principal in the funds.
Unconsolidated structured entities
The term ‘unconsolidated structured entities’ refers to all structured entities not controlled by HSBC. The Group enters into transactions
with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment
opportunities.
Nature and risks associated with HSBC interests in unconsolidated structured entities
Securitisations
HSBC
managed funds
Non-HSBC
managed funds
Other
Total
Total asset values of the entities ($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
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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.
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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.
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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
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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.
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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.
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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
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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
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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.
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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
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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.
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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
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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
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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
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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
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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