HSBC Holdings plc
Annual Report and Accounts 2018
Connecting customers
to opportunities
HSBC aims to be where the growth is,
enabling businesses to thrive and economies
to prosper, and ultimately helping people to
fulfil their hopes and realise their ambitions.
Cover image
Our global marketing campaign
explores how HSBC helps people
prosper. The Group’s iconic hexagon
becomes a lens through which to
look at the world, showing how we
help individuals, businesses and
communities to grow and flourish.
This includes our commitment to
the development of renewable
energy sources that can support
the global transition to a low-carbon
economy. We have pledged to
provide $100 billion in sustainable
financing and investments by 2025.
Inside front cover image
We are investing in digital
technology to improve the service
we provide to our customers. Our
award-winning mobile apps are
one of the ways we help them
manage their money more quickly,
conveniently and safely. This picture
was taken by Terry Tam, who works
for HSBC as an IT developer.
Employee photos
All the photos on the inside pages
of this report, with the exception
of Board and executive profiles,
were taken by people working for
HSBC in locations including the UK,
China, India, Malta and Bangladesh.
Many more employees across the
Group’s international network have
contributed to HSBC Now Photo,
an ongoing project that allows
them to demonstrate their talent
as photographers and show the
diversity of the world around them.
Contents
This Strategic Report was approved
by the Board on 19 February 2019.
Mark E Tucker
Group Chairman
Strategic Report
An overview of how we are structured, what we do
and where, our strategic priorities, 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 priorities
14 Financial overview
18 Global businesses
22 How we do business
30 Risk overview
32 Remuneration
None of the websites referred
to in this Annual Report and
Accounts (including where a link
is provided), and none of the
information contained on such
websites, are incorporated by
reference in this report.
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 alternative
performance measures
used by management
internally. These measures
are highlighted with the
following symbol:
Further explanation may be
found on page 34.
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.
34 Financial summary
47 Global businesses and
geographical regions
65 Other information
69 Risk
148 Capital
Corporate Governance
Details of our Board of Directors and senior
management, and our approach to corporate
governance and remuneration.
152 Corporate governance report
153 Biographies of Directors and
senior management
157 Board of Directors
158 Board committees
164 Internal control
165 Going concern and viability
166 Share capital and other
disclosures
169 Employees
172 Directors’ remuneration report
206 Directors’ responsibility
statement
Financial Statements
Our financial statements and related notes
and reports.
207 Report of the independent
auditors
214 Financial statements
224 Notes on the financial
statements
Additional 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/investors.
310 Shareholder information
314 Forward-looking statements /
Certain defined terms
316 Abbreviations
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1
HSBC Holdings plc Annual Report and Accounts 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report
Strategic Report
Highlights
Our international network, access to high-growth
markets and balance sheet strength help us deliver
long-term value for our stakeholders.
For year ended 31 Dec 2018
Reported profit before tax
($bn)
Adjusted profit before tax
($bn)
Reported revenue
($bn)
2018
2017
2016
$19.9bn
(2017: $17.2bn)
At 31 Dec 2018
19.9
17.2
7.1
2018
2017
2016
21.7
21.1
18.9
2018
2017
2016
$21.7bn
(2017: $21.1bn)
$53.8bn
(2017: $51.4bn)
Reported risk-weighted assets
($bn)1
Common equity tier 1 ratio
(%)1
Total assets
($bn)
2018
2017
2016
$865bn
(2017: $871bn)
865
871
857
2018
2017
2016
14.0%
(2017: 14.5%)
14.0
14.5
13.6
2018
2017
2016
$2,558bn
(2017: $2,522bn)
53.8
51.4
48.0
2,558
2,522
2,375
About HSBC
Strategy highlights
Awards
With assets of $2.6tn at
31 December 2018, HSBC is
one of the world’s largest
banking and financial
services organisations.
More than
39 million
customers bank with us
We employ around
235,000
people around the world2
We have around
200,000
shareholders in 130 countries
and territories
For footnotes, see page 67.
2
In June 2018, we set out eight
strategic priorities against which
we committed to tracking our
performance until the end of 2020.
Below is a selection of highlights
from our progress in 2018.
growth in Asia
11% adjusted revenue
14% revenue growth in
2 percentage point
transaction banking
improvement in employee
engagement to 66%
6 of 8 HSBC ‘scale markets’
improved by two
ranks or maintained
a top-three rank in
customer satisfaction
for RBWM
Selected awards and recognitions
Euromoney Trade Finance Survey 2019
Top Global Trade Finance Bank
Euromoney Cash Management
Survey 2018
Best Global Cash Manager for Corporates
Best Global Cash Manager for Financial
Institutions
Euromoney Awards for Excellence 2018
World’s Best Bank for Transaction Services
World’s Best Bank for Corporates
North America’s Best Bank for Transaction
Services
Asia’s Best Bank for Sustainable Finance
Middle East’s Best Bank for Financing
Insurance Asset Management
Awards 2018
Best Emerging Markets Manager of the Year
The Banker Investment Banking
Awards 2018
Most Innovative Investment Bank of the Year
PWM/The Banker Global Private Banking
Awards 2018
Best Private Bank in Hong Kong
Best Private Bank in the UK
GroupHSBC Holdings plc Annual Report and Accounts 2018
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, compliance, legal, marketing and human resources.
Retail Banking and
Wealth Management
(‘RBWM’)
We help 38 million customers
across the world to manage
their finances, buy their
homes, and save and invest
for the future.
Our HSBC Premier and
Advance propositions are
aimed at mass affluent and
emerging affluent customers
who value international
connectivity. For customers
with simpler banking needs,
we offer a full range of
products and services
reflecting local requirements.
Adjusted profit before tax
Commercial Banking
(‘CMB’)
Global Banking and
Markets (‘GB&M’)
Global Private
Banking (‘GPB’)
We support approximately
1.5 million business customers
in 53 countries and territories,
ranging from small enterprises
focused primarily on their
domestic markets, through
to large companies operating
globally.
Our services include working
capital, term loans, payment
services and international
trade facilitation, as well as
expertise in mergers and
acquisitions, and access to
financial markets.
We serve approximately
4,100 clients in more than 50
countries and territories. We
support 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.
We serve high net worth
and ultra high net worth
individuals and families,
including those with
international banking needs.
Services provided include
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.
$7.1bn
(2017: $6.5bn)
$7.7bn
(2017: $6.8bn)
$6.1bn
(2017: $5.8bn)
$0.3bn
(2017: $0.3bn)
Adjusted risk-weighted assets
$126.9bn $321.2bn $281.0bn $16.8bn
(31 Dec 2017: $118.1bn)
(31 Dec 2017: $289.8bn)
(31 Dec 2017: $293.2bn)
(31 Dec 2017: $15.8bn)
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 tangible
equity
Adjusted
jaws
Dividends per ordinary
share in respect of 2018
8.6%
Target: >11% by 2020
(2017: 6.8%)
(1.2)%
Target: positive
$0.51
Target: sustain
For further details, see page 17.
3
Our global businessesDelivery against Group financial targetsHSBC Holdings plc Annual Report and Accounts 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report
Strategic Report
Group Chairman’s
statement
Our ability to meet our targets depends on being able to help
our customers manage the present uncertainty and capture
the opportunities that unquestionably exist.
This performance allows us to approve a fourth
interim dividend of $0.21, bringing the total
dividend for 2018 to $0.51.
The Board of Directors
There were a number of Board changes in 2018.
Jonathan Symonds became Deputy Group
Chairman. Iain Mackay left the business after
11 years, with the last eight spent as Group Finance
Director. My thanks go to Iain for his dedicated
service to the Group, and in particular for the
integral role he played in executing the Group
strategy and improving the quality of our financial
reporting. Ewen Stevenson joined the Board
as Group Chief Financial Officer on 1 January
this year.
We said goodbye to Phillip Ameen, Joachim Faber
and John Lipsky, all of whom retired from the
Board. I am very grateful to each of them for their
invaluable advice and counsel. Their departures led
to a reduction in the size of the Board as part of our
ongoing work to simplify, clarify and strengthen
governance arrangements.
We also cut the number of Board committees from
seven to five and simplified subsidiary governance.
I believe this creates clearer and stronger lines of
authority and accountability, enabling the Board
to devote more time to priority areas.
We welcome the new UK Corporate Governance
Code, which places greater emphasis on how the
Board considers the interests of all stakeholders in
its discussions and decision making, and promotes
a strong internal culture.
Mark E Tucker Group Chairman
HSBC is in a strong position. Our performance in
2018 demonstrated the underlying health of the
business and the potential of the strategy that John
Flint, our Group Chief Executive, announced in June.
“ The fundamentals for growth in Asia
remain strong in spite of a softer regional
economic outlook.”
Despite a challenging external environment in
the fourth quarter, all of our global businesses
delivered increased profits and the Group achieved
a higher return on tangible equity in 2018. Asia
again contributed a substantial portion of the
Group’s profits, notably in Retail Banking and
Wealth Management and Commercial Banking.
Overall, the Group delivered reported profit before
tax of $19.9bn, up 16% on 2017, and adjusted profit
before tax of $21.7bn, up 3%.
4
HSBC Holdings plc Annual Report and Accounts 2018 Group Chairman’s statement
We see the new Code as an opportunity
to further enhance our existing stakeholder
engagement, ensuring that the business as a
whole can continue to develop constructive
and considerate relationships with all those
with whom we work. We will include details
of this in the Annual Report and Accounts 2019.
“ The Board fully endorses the Group’s
commitment to develop and support our people
and we offer the Group Management Board our
wholehearted support in realising that ambition.”
Connecting customers to opportunities
The financial targets that John announced in
June remain appropriate, even as the global
economic outlook becomes less predictable.
Our ability to meet them depends on being
able to help our customers manage the present
uncertainty and capture the opportunities
that unquestionably exist.
The system of global trade remains subject to
political pressure, and differences between
China and the US will likely continue to inform
sentiment in 2019. However, the conclusion
of major trade agreements – including the
Comprehensive and Progressive Agreement
for Trans-Pacific Partnership; the EU’s landmark
bilateral agreements with Japan and Singapore;
and the potential ratification of the US-Mexico-
Canada Agreement in 2019 – provide important
counterweights that could give impetus to
international trade in the year ahead.
The fundamentals for growth in Asia remain strong
in spite of a softer regional economic outlook. The
structural and financial reforms underway across
the region should continue to support economic
development. China remains subject to domestic
and external pressures, but we expect it to maintain
strong growth. We also expect further financial
liberalisation to form part of China’s response to
changing external conditions. This will benefit
domestic and international customers and investors.
The US economy and the influence of the Federal
Reserve remain central to global sentiment. We
expect policymakers to adopt a more cautious
stance in 2019, even as the economy continues
to grow. A slowdown in the pace of US interest
rate rises could carry positive implications for
Asian economies and businesses, as well as
for US growth. Both the Mexican and Canadian
economies are poised to grow at a steady pace.
Many of our UK customers are understandably
cautious about the immediate future, given the
prolonged uncertainty surrounding the UK’s exit
from the European Union. HSBC UK, our new
UK ring-fenced bank, has an important role in
supporting our customers as they prepare for a
range of possible outcomes. Our universal banking
business in France will also help provide continuity
to our customers in the UK and the rest of Europe.
In Europe, as elsewhere, we are confident in our
ability to help customers make the most of the
opportunities they see.
There are more risks to global economic growth
than this time last year, and we remain alive and
responsive to all possibilities. Our strong balance
sheet and revenue base equip us to navigate these
risks and, most importantly, enable us to help our
customers negotiate their own paths.
5
HSBC Holdings plc Annual Report and Accounts 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report Strategic Report | Group Chairman’s statement
Fulfilling our potential
Many thanks
Enabling our people to do their jobs to the best
of their ability is a priority for the Board, and for
me personally. They are essential to our present
and future success. The Board fully endorses the
Group’s commitment to develop and support our
people and we offer the Group Management
Board our wholehearted support in realising
that ambition.
My thanks go to John and each of the 235,000
people who work for HSBC. Their hard work,
commitment and talent has been key to the
Group’s progress in 2018. Our challenge and
shared purpose is to build on that good work
through the rest of 2019 and beyond. I have
every confidence we can do so.
“ Our strong balance sheet and revenue base
equip us to navigate these risks and, most
importantly, enable us to help our customers
negotiate their own paths.”
Mark E Tucker
Group Chairman
19 February 2019
I had the honour of officially opening the new
headquarters of HSBC UK in Birmingham in
December. As well as providing a new home for
the UK ring-fenced bank, One Centenary Square
houses the European hub of HSBC University,
our global learning and development centre.
Since then, we have opened new HSBC University
hubs at our new premises in Dubai, and in Mexico
City. These cutting-edge facilities form part of
our response to the complex challenges our
employees now face working for a global bank
in an unpredictable environment. HSBC University
aims not only to equip them with the right skills,
but also to help them understand the culture that
will continue to make HSBC a unique organisation.
6
HSBC Holdings plc Annual Report and Accounts 2018 Group Chief Executive’s
review
Helping our people be at their best is the critical enabler
of our business strategy and fundamental to delivering
our financial targets.
John Flint Group Chief Executive
In June 2018, I set out a plan to get HSBC growing
again and to create value for shareholders. While
this targets clear financial outcomes, it has our
customers at its centre. We want to bring more
of HSBC to more people and to serve them in the
best possible way.
“ We want to bring more of HSBC to
more people and to serve them in the
best possible way.”
The eight strategic priorities that I outlined
in June are the key to achieving these aims.
We are seeking to connect more customers
to our international network and high-growth
markets. We are working to improve our capital
efficiency and to turn our US business around.
We are investing in technology and our digital
capabilities to serve our customers better and
stay competitive. We are also taking steps to
support our people more effectively and help
them be at their best.
I am encouraged by our progress so far. We
are growing customer numbers and capturing
market share in our scale markets and from our
international network. Our US business is short
of where we want it to be, but is moving in the
right direction. Our investment in technology is
making our business simpler, safer, and easier
for our customers to use. We have launched new
products and made strategic hires in mainland
China and Hong Kong that are materially improving
our service to international clients. We have also
established our UK ring-fenced bank.
These were important factors in our 2018 financial
performance. Revenue growth in our four global
businesses helped deliver higher Group reported
and adjusted profit before tax. Group return on
tangible equity – our headline measure – was also
up significantly from 6.8% in 2017 to 8.6%. This is
a good first step towards meeting our return on
tangible equity target of more than 11% by 2020.
Engaging our people
HSBC has a strong and proud culture. We
understand our role and our purpose, and that
HSBC exists to serve others. As Group Chief
Executive, I have a responsibility to nurture and
preserve those aspects of our culture that serve
us well. I also recognise that I have a responsibility
to improve aspects of our behaviours that may
be impeding our performance.
In my first year in this role, I started a conversation
throughout the bank about how we help our
people be the best version of themselves. This is
part of a broader ambition to create what we call
the healthiest human system in our industry.
7
HSBC Holdings plc Annual Report and Accounts 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report Strategic Report | Group Chief Executive’s review
There is more that we can do to create an
environment that is sufficiently supportive,
protective and engaging. We need to have more
open and honest conversations. This is the least
that our people should be able to expect. If we
cannot provide it, it hurts our ability to serve not
just our customers, but all the stakeholder groups
on whom our success depends. It also impedes
our ability to deliver our strategy and our targets.
We have started by signalling to our people
that creating a safe and supportive working
environment is a strategic priority for the business.
Leaders are being encouraged to model the right
behaviours and provide direction on the type of
behaviour we expect. We are also opening
conversations around issues like mental
health, well-being, bullying and harassment.
We are making material changes to the
organisation that allow us to support our people
more effectively. Our governance procedures
are being simplified and strengthened to reduce
complexity and make it easier for people to do their
jobs. We are also helping our people work more
flexibly. On learning and development, we have
opened new HSBC University hubs around the
world and improved access to digital training.
“ HSBC has a strong and proud culture.
We understand our role and our purpose,
and that HSBC exists to serve others.”
At an individual level, every person at HSBC
is being encouraged to think about how we
create the healthiest human system in our
industry, and to play an active role in doing so.
We are regularly collecting feedback from our
people and it is informing the action we are taking.
The early signs are positive. In 2018, 66% of our
employees said they would recommend HSBC
as a great place to work, up from 64% the previous
year. While this demonstrates an improvement in
a relatively short space of time, it also shows that
we have much further to go. This work will
continue into 2019 and beyond. If we are
successful, then we will materially improve
all aspects of HSBC’s performance, including
delivery of our strategy.
Business performance
All four global businesses grew adjusted
revenue in 2018.
Retail Banking and Wealth Management had
a very good year. Higher interest rates, rising
customer numbers, and growth of more than
$20bn in our UK and Hong Kong mortgage book
all contributed to a strong rise in Retail Banking
adjusted revenue. Despite a good performance
in the first three quarters of the year, Wealth
Management adjusted revenue fell slightly in
2018 due to the effects of market volatility in
the fourth quarter.
Commercial Banking had an excellent 2018,
delivering double-digit adjusted revenue growth
on the back of an outstanding performance in
Global Liquidity and Cash Management. Credit
and Lending generated adjusted revenue growth
from higher balances, despite lower margins from
increased competition. Solid performances in Asia
and Europe enabled Global Trade and Receivables
Finance to grow adjusted revenue despite an
increasingly difficult environment for trade.
Global Banking and Markets grew adjusted
revenue in spite of considerably reduced market
activity in the fourth quarter. Our market-leading
transaction banking franchises generated strong
increases in adjusted revenue, which exceeded
the reduction in markets-related revenue from
Rates, Credit, and Equities.
Global Private Banking returned to growth in 2018
on the back of new business won in Hong Kong.
Adjusted revenue from deposits also increased on
the back of interest rate rises.
Adjusted jaws was negative for 2018. While
adjusted costs were broadly as we expected for
the full year, adjusted revenue fell short due to
market weakness in the fourth quarter. Positive
jaws remains an important discipline in delivering
our financial targets and we remain committed
to it in 2019.
8
HSBC Holdings plc Annual Report and Accounts 2018 Group Chief Executive’s review
Expected credit losses were slightly higher than
loan impairment charges in 2017, reflecting the
uncertain economic outlook in the UK
and heightened downside risks.
We plan to achieve positive adjusted jaws in 2019
and remain focused on achieving a return on
tangible equity of over 11% by 2020, while
maintaining a stable dividend.
Our common equity tier 1 ratio of 14% was lower
than at the same point in 2017, due mainly to
adverse foreign exchange movements and the
impact of higher lending.
“ Despite more challenging market conditions at
the end of year and a weaker global economic
outlook, we are committed to the targets we
announced in June.”
John Flint
Group Chief Executive
19 February 2019
We returned a total of $2bn to shareholders
through share buy-backs in 2018, reflecting our
desire to neutralise the impact of scrip dividends
over the medium term. We remain committed
to this policy, subject to regulatory approval.
Outlook
We have made a good start to 2019. Our Group
revenue performance in January was ahead of our
plan for the month and actual credit performance
remained robust, albeit with some softening of
credit performance in the UK. We continue to
prepare for the UK’s departure from the EU in
order to provide continuity for our customers in
the UK and mainland Europe. Our well-established
universal bank in France gives us a major
advantage in this regard. Our immediate priority
is to help our customers manage the present
uncertainty.
Despite more challenging market conditions at
the end of the year and a weaker global economic
outlook, we are committed to the targets we
announced in June. We remain alert to the
downside risks of the current economic
environment, especially those relating to the UK
economy, global trade tensions and the future path
of interest rates. We will be proactive in managing
costs and investment to meet the risks to revenue
growth where necessary, but we will not take
short-term decisions that harm the long-term
interests of the business.
9
HSBC Holdings plc Annual Report and Accounts 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report Strategic Report
Strategic Report
Our strategy
Our strategy enables us to connect customers to opportunities. It is
supported by long-term global trends and our strong combination of
strategic advantages.
Long-term trends
Our industry continues to be affected by several long-term and global trends.
The world is expected to continue to become more connected as global flows
of trade, finance and data continue to grow.
Global services exports
($tn)
Source: Oxford Economics, Bilateral Trade in Services (2018).
2030
2018
12.3
5.6
Global trade growth is expected to continue and trade within regions is expected
to be a key driver, accounting for over 40% of goods volume growth.
Global trade volume growth of goods,
2017–2025 ($tn)
Source: McKinsey & Company.
Within regions growth
Across regions growth
4.7
6.6
Half of the world’s population is now considered middle class or wealthier,
and this proportion is expected to grow to approximately two-thirds by 2030.
Almost nine in 10 of the next billion middle-class consumers will be Asian.
Global population by income segment
(% of total)
2030
33
Source: Brookings, A Global Tipping point: Half the world is now middle class or wealthier (2018).
2018
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 2ºC.
Source: OECD, Investing in Climate, Investing in Growth (2017); BP, Statistical Review
of World Energy; HSBC analysis.
50
Key
Vulnerable or poor
Middle class or wealthier
Renewables share of megawatts
installed capacity for plants in
operation in G20 countries
(%)
2050 requirement
2017
67
50
71
33
Client examples
Imagination:
creative agency, UK
Euroimmun:
medical diagnostics, Germany
CLP Holdings Limited (‘CLP’):
power and utilities, Hong Kong
Imagination, a creative agency
and fast-growing global authority
on brand experience, found
itself outgrowing its banking
relationship and constrained
by its bank’s local focus. HSBC
provided Imagination with the
benefits of a robust international
network including greater access
to debt and liquidity, an optimised
banking experience across 10
countries through HSBCnet, and
an integration with Imagination’s
enterprise resource planning
system for holistic viewing of
transactions and account details.
Euroimmun was acquired by a
US medical technology company.
Both companies were long-standing
CMB clients, so HSBC was
mandated with settlement of the
consideration. An introduction to
HSBC’s GPB business in Germany
led to Euroimmun’s largest
shareholder and its Chief Financial
Officer placing the majority of sale
proceeds with GPB. Through
collaboration between our CMB,
GB&M and GPB businesses, we
were able to provide multi-product
solutions during critical events for
the client.
CLP, a Hong Kong-listed pan-Asian
power business, is committed
to supporting the Hong Kong
government’s target to reduce carbon
intensity by 65–70% by 2030 from
2005 levels. HSBC has assisted CLP
as Sole Adviser in establishing the
‘CLP climate action finance framework’
to attract qualified investments in
the transitioning to a low-carbon
economy. Under this framework, HSBC
acted as a joint bookrunner on the
debut $500m Reg S Energy Transition
Bond issued by Castle Peak Power
Company Limited, to help finance
the development of a new gas-fired
generation unit in Hong Kong.
10
HSBC Holdings plc Annual Report and Accounts 2018 Our strategy
Our strategy
The long-term trends outlined on the previous page reinforce our
strategic advantages as a leading international bank with exceptional
access to the fastest growing markets and robust balance sheet strength.
Strategic advantages
Leading international bank
– More than 50% of Group client
revenue linked to international clients
– ‘World’s Best Bank for Transaction
Services’3
– Chosen by large corporates across
regions as their lead international
bank4
International client revenue5
(% of total)
2018
2017
Transaction banking revenue
($bn)
2018
2017
54.3
54.2
16.6
14.5
Exceptional access to
high-growth markets
– Wide breadth of access to high-
Geographical revenue mix6
growth developing markets in Asia,
the Middle East and Latin America
– Investment aligned to high-growth
markets to deliver shareholder value
– Committed to enhanced customer
service and investments in
technology to help capture growth
opportunities
5.2%
11.5%
2018 revenue:
$53.9bn
30.2%
48.6%
Balance sheet strength
– Continue to maintain strong capital,
funding and liquidity position with
diversified business model
– Conservative approach to credit risk
and liquidity management
– Low earnings volatility
– Foundation for sustained dividend;
strong capacity for distribution to
shareholders
For footnotes, see page 67.
4.5%
Key
North America
Europe
Middle East and North Africa
Asia
Latin America
Common equity tier 1 ratio
(%)
2018
2017
14.0
14.5
ECL/LICs as % of average gross loans
and advances to customers
(bps)
2018
2017
Liquidity coverage ratio
(%)
2018
2017
18
19
154
142
11
HSBC Holdings plc Annual Report and Accounts 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report Strategic Report
Strategic priorities
We entered the next phase of our strategy in 2018, focused on growth and
creating value for our stakeholders.
Return to growth and value creation
In our June 2018 Strategy Update,
we outlined eight strategic priorities
to deliver growth, improve returns,
empower our people, and enhance our
customer experience. Each priority has
a target or set of targeted outcomes
by 2020. The table opposite contains
a summary of our progress, with
additional details provided below.
purchasing of homes, as we grew our
mortgage market share to 6.6%8. For
our corporate clients, we launched our
largest ever dedicated SME fund, with
£12bn of funding, including £1bn of
funding to help UK companies grow
overseas. While HSBC UK has seen
initial growth in retail customers (up
by 251,000, a growth of 2%), we are
still driving initiatives to grow our
commercial customer base.
Growth from areas of strength
Strategic priority 1: We made a strong
start in accelerating growth from our
Asian franchise after making select
investments in areas such as Hong
Kong and our wealth business. Overall,
Asia adjusted revenue was 11% higher
than the previous year with double-
digit growth in Hong Kong, mainland
China and the Pearl River Delta.
Despite some market uncertainty, we
continued to support customers as
we increased loan balances by 9%.
Our wealth business in Asia7 gained
positive momentum with double-digit
revenue growth in Private Banking and
Asset Management, and 4% growth in
RBWM Wealth distribution. However,
Asia Insurance manufacturing revenue
was down 11% versus 2017 due to
adverse market conditions.
We continue to support clients and
economies through the China-led Belt
and Road Initiative, and FinanceAsia
recognised our market leadership by
awarding us the ‘Best Belt and Road
Bank’ in Asia for the second
consecutive year.
In sustainable finance, our goal is
to be a leading partner for our clients
to help the world’s transition to a
low-carbon economy. We have made
good progress with our ambition
to provide $100bn of sustainable
financing, facilitation and investment
by 2025, with a cumulative total of
$28.5bn delivered in 2017 and 2018.
For further details on our sustainable
finance commitment, see page 27.
Strategic priority 2: We completed
the set-up of our UK ring-fenced bank,
HSBC UK, six months ahead of the
legal deadline, and we opened our
new UK head office in Birmingham.
We supported our retail customers’
12
Strategic priority 3: We continue to
make investments to enable growth in
our international network. In Global Trade
and Receivables Finance (‘GTRF’), we
are investing in a transformation of our
operating model to help clients and
colleagues conduct trade and manage
capital more efficiently. In Securities
Services, we are developing our digital
proposition across many products.
We are on track to achieve our target
of mid to high single-digit revenue
growth by 2020. International client
revenue was up 7% compared with
2017; transaction banking revenue
grew 14%, driven by double-digit
growth across Global Liquidity and
Cash Management (‘GLCM’), Foreign
Exchange and Securities Services.
GTRF revenue grew by 2%, reflecting
the subdued global trade environment.
Turnaround of low-return
businesses
Strategic priority 4: The US turnaround
is our most challenging strategic priority.
Our US return on tangible equity (‘RoTE’)
increased from 0.9% to 2.7%, supported
by favourable expected credit losses, and
capital released to HSBC Holdings.
However, significant improvement is
required to achieve our 2020 targeted
outcome of greater than 6% RoTE in the US.
Investments in our platforms and products
are supporting organic growth. Our active
customer base in RBWM increased by
nearly 200,000 to 1.3 million people. We
grew CMB revenue by 7% and transaction
banking revenue in GB&M by 9%.
Strategic priority 5: To enhance returns for
our shareholders, we have committed to
improving our capital efficiency. In 2018,
our revenue over risk-weighted assets
(‘RWAs’) ratio grew by 0.3 percentage
points to 6.2%, driven by broad-based
revenue growth across our four global
businesses. We continue to redeploy
RWAs to higher-return businesses.
Putting the customer at the centre
Strategic priority 6: We aim to create
the capacity to invest in growth and
technology through a combination of
cost discipline and revenue growth. We
did not achieve our target of positive
adjusted jaws in 2018, in part due to
unexpected market volatility in the last
two months of the year, which impacted
revenue. However, we remain committed
to the discipline of positive adjusted jaws.
Our revenue growth helped support
$4.1bn in investment for business growth,
productivity, regulatory and mandatory
purposes. We are already seeing results,
with approximately 45% of retail
customers now digitally active and
more than 30% of sales through digital
channels9. In CMB, we halved the
onboarding time to an average of
11 days for clients.
Strategic priority 7: We exist, at our
core, to serve our customers and we
made a commitment in June 2018 to
improve customer service in our eight
‘scale markets’10. We are measuring
our performance against customer
satisfaction indices. In 2018, six markets
in RBWM and three markets in CMB
sustained a top-three rank and/or
improved by two ranks in customer
satisfaction.
Empower our people
Strategic priority 8: We have committed
to simplifying the organisation and
investing in the future skills of our
employees. We continue to improve our
employee engagement, as reflected in the
improvement of our employee advocacy
by two percentage points to 66%. Our
ESG rating is derived from the impact we
have on our wider stakeholders. We are
currently rated an ‘Average performer’,
and we are driving several initiatives
to achieve an ‘Outperformer’ rating.
Information on how we are empowering
our people can be found in the ‘How we
do business’ section on pages 22 to 29,
with additional details in our ESG Update
in April 2019.
HSBC Holdings plc Annual Report and Accounts 2018 Strategic priorities
Progress on our strategic priorities
Strategic priorities
1 Accelerate growth
from our Asia
franchise; be the
leading bank to
support drivers of
global investment:
China-led Belt and
Road Initiative and
the transition to a
low-carbon economy
Deliver
growth
from areas
of strength
Targets by end of
2020
– High single-digit
revenue growth p.a.
from Asia franchise
– Market share
gains in eight
scale markets10
– No. 1 international
bank for Belt and
Road Initiative
– $100bn in sustainable
financing and
investment11
Performance in
2018 (vs prior
period)
– Asia adjusted
revenue: +11%
– Hong Kong: +14%
– Pearl River Delta:
Highlights
– Wealth in Asia7 revenue, excluding market impacts
in Insurance12, improved 13%
– Five of eight scale markets10 gained loan and/or deposit
market share13
+31%
– Belt and Road Initiative: Awarded ’Best Belt and
– ASEAN: +3%
– Wealth in Asia7: +1%
Road Bank’ in Asia for the second consecutive year
by FinanceAsia
– Sustainable financing
– Pearl River Delta: Launched co-brand credit card
and investment
(global): $28.5bn
cumulative (+$17.4bn
in 2018)
with JD Finance
– Awarded ’Asia’s Best Bank for Sustainable Finance’
by Euromoney
2 Complete the
establishment
of UK ring-fenced
bank and grow
market share
– Market share gains
– Market share in
mortgages: 6.6%
(+0.5 percentage
points)
– Completed set-up of UK ring-fenced bank and opened
new UK head office in Birmingham in October 2018
– Launched dedicated SME fund with £12bn of funding,
including £1bn of funding to help UK companies
grow overseas
– Launched Connected Money app to enable retail banking
customers to view balances and transactions from their
UK bank accounts, including those with other providers,
in one place
3 Gain market
share and deliver
growth from our
international
network
– Mid to high
single-digit revenue
growth per annum
from international
network14
– Market share gains in
transaction banking
– International client
revenue: +7%
– Transaction banking15
revenue: +14%
– GLCM revenue +21%; FX revenue +10%; Securities
Services revenue +11%; GTRF revenue +2% despite
subdued global trade environment
– Market share gains in GLCM, GTRF and FX16; GTRF
market share in Singapore and Hong Kong up by three
and one percentage points, respectively
4 Turn around
our US business
– US return on tangible
equity >6%
– US RoTE: 2.7% (+1.8
percentage points)
– US adjusted revenue of $4.8bn up 1% vs 2017
– Adjusted profit before tax of $1.0bn up 32% vs 2017
– Nearly 200,000 more active retail customers
– Completed multi-year core banking system upgrade,
paving the way for significantly enhanced client digital
experience
– Continue to redeploy RWAs to higher-return businesses
– Jaws impacted by negative market environment in the
last quarter of 2018
– Revenue growth helped support $4.1bn in investment for
growth, productivity, regulatory and mandatory purposes
Turnaround
of low-return
businesses
5 Improve capital
efficiency
– Increase in asset
– Revenue / average
– Overall capital efficiency improvement driven by 4%
productivity
RWA: 6.2% (+30bps)
revenue growth
6 Create capacity
for increasing
investments in
growth and
technology through
efficiency gains
– Positive adjusted
jaws, on an annual
basis, each financial
year
– Adjusted jaws:
negative 1.2%
Build a bank
for the future
that puts the
customer at
the centre
Empower
our people
7 Enhance customer
centricity and
customer service
– Improve customer
satisfaction17 in eight
scale markets10
– Markets that sustained
top-three rank and/or
improved by two ranks
in customer satisfaction:
– RBWM: six markets18
– CMB: three markets19
– Improved digital capabilities and customer journeys
– RBWM: circa 45% of customers now digitally
active and more than 30% of sales are through
digital channels20
– CMB: simplified online journeys on HSBCnet for
41,000 clients across 36 countries
8 Simplify the
organisation and
invest in future skills
– Improved employee
– Employee
– Made governance more efficient, simplified policies,
engagement
– ESG rating:
‘Outperformer’21
engagement:
66% (+2%)
– ESG rating:
‘Average’ performer
and streamlined processes
– Actively promoted learning and development
opportunities for employees with the set-up of
the HSBC University Online and additional online
training courses
For footnotes, see page 67.
13
HSBC Holdings plc Annual Report and Accounts 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report
Strategic Report
Financial overview
Reported results
This table shows our reported results for
the last three years ended 31 December
2018, 2017 and 2016.
HSBC adopted the requirements
of IFRS 9 ‘Financial Instruments’ on
1 January 2018, with the exception of
the provisions relating to the presentation
of gains and losses on financial liabilities
designated at fair value, which were
adopted on 1 January 2017.
Under IFRS 9, the recognition and
measurement of expected credit losses
differs from the approach under IAS 39.
The change in expected credit losses
relating to financial assets under IFRS 9 is
recorded in the income statement under
‘change in expected credit losses and
other credit impairment charges’ (‘ECL’).
As prior periods have not been restated,
changes in impairment of financial assets
in the comparative periods remain in
accordance with IAS 39 and are
recorded in the income statement under
‘loan impairment charges and other
credit risk provisions’ (‘LICs’) and are
therefore not necessarily comparable
to ECL recorded for the current period.
All commentary in this financial overview
compares the 2018 results with 2017,
unless otherwise stated.
Reported profit before tax
Reported profit before tax of $19.9bn was
$2.7bn or 16% higher, mainly reflecting
growth in revenue. Operating expenses
fell by $0.2bn, as increases, mainly
associated with investments to grow the
business, were more than offset by a net
favourable movement in significant items,
which included the non-recurrence of our
costs to achieve programme.
Reported profit before tax included a net
favourable movement of significant items
of $2.1bn, which is described in more detail
on page 34. Excluding these items and
a favourable effect of foreign currency
translation differences of $0.1bn, profit
before tax increased by $0.6bn or 3%.
Reported revenue
Reported revenue of $53.8bn was
$2.3bn or 5% higher, which reflected
revenue growth in all global businesses,
although revenue fell in Corporate
Centre. The increase in reported revenue
included a favourable effect of foreign
14
Reported results
Net operating income before change in expected
credit losses and other credit impairment charges
(‘revenue’)
ECL/LICs
Net operating income
Total operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
2018
$m
2017
$m
2016
$m
53,780
51,445
47,966
(1,767)
(1,769)
(3,400)
52,013
49,676
44,566
(34,659)
(34,884)
(39,808)
17,354
14,792
2,536
19,890
2,375
17,167
4,758
2,354
7,112
currency translation differences of
$0.1bn, broadly offset by a net adverse
movement in significant items of $0.1bn.
Significant items included:
– a net loss on disposals, acquisitions and
investment in new businesses of $0.1bn
in 2018, compared with a net gain of
$0.3bn in 2017.
This was partly offset by:
– a net release of provisions related to
customer redress programmes in the
UK of $0.1bn in 2018, compared with
net charges of $0.1bn in 2017; and
– lower adverse fair value movements
on financial instruments (up $0.1bn).
Excluding significant items and foreign
currency translation differences, revenue
increased by $2.3bn or 4%.
Reported ECL/LICs
movement in significant items of $2.1bn.
Significant items included:
– the non-recurrence of costs to achieve,
which were $3.0bn in 2017; and
– customer redress programme costs of
$0.1bn in 2018, compared with $0.7bn
in 2017.
These were partly offset by:
– settlements and provisions in
connection with legal and regulatory
matters of $0.8bn in 2018. This
compared with a net release of
$0.2bn in 2017;
– a provision in relation to past service
costs of guaranteed minimum pension
benefits equalisation of $0.2bn in
2018; and
– the non-recurrence of gains on
the partial settlement of pension
obligations of $0.2bn in 2017.
In 2018, reported ECL of $1.8bn related
mainly to RBWM ($1.2bn), notably in
Mexico, the UK and Asia, as well as
CMB ($0.7bn).
Excluding significant items and adverse
foreign currency translation differences
of $0.1bn, operating expenses increased
by $1.8bn or 6%.
In 2017, reported LICs were $1.8bn,
notably in RBWM ($1.0bn) as well as
in CMB ($0.5bn) and GB&M ($0.5bn).
This was partly offset by net releases
in Corporate Centre of $0.2bn.
Foreign currency translation differences
between the periods were $0.1bn
favourable.
Reported operating expenses
Reported operating expenses of $34.7bn
were $0.2bn or 1% lower, as an increase
in operating expenses from near- and
medium-term investments to grow
the business, together with higher
performance-related pay, were more
than offset by a net favourable
Reported share of profit in
associates and joint ventures
Reported share of profit in associates
of $2.5bn was $0.2bn or 7% higher,
primarily reflecting an increase in income
from Bank of Communications Co.,
Limited (‘BoCom’).
Excluding the favourable effect of foreign
currency translation differences of $41m,
share of profit in associates increased
by $0.1bn.
Dividends
On 19 February 2019, the Board
announced a fourth interim dividend
of $0.21 per ordinary share.
HSBC Holdings plc Annual Report and Accounts 2018 Financial overview
Adjusted performance
Our reported results are prepared in
accordance with IFRSs as detailed in
the Financial Statements on page 224.
Alternative performance measures
are highlighted with the following
symbol:
For reconciliations of our reported results
to an adjusted basis, including lists of
significant items, see page 49.
We also present alternative
performance measures. Adjusted
performance is an alternative
performance measure used 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.
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,
which are excluded in order to improve
understanding of the underlying trends
in the business.
Adjusted results
This table shows our adjusted results
for 2018 and 2017. These are discussed
in more detail on the following pages.
Adjusted results
2018
$m
2017
$m
Adverse
$m
Favourable
$m
Net operating income before change in expected credit
losses and other credit impairment charges (‘revenue’)
53,940
51,661
2,279
ECL/LICs
Total operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
(1,767)
(1,713)
(54)
(32,990)
(31,231)
(1,759)
19,183
2,536
21,719
18,717
2,416
21,133
466
120
586
(%)
4%
(3)%
(6)%
2%
5%
3%
Adjusted profit before tax
On an adjusted basis, profit before
tax of $21.7bn was $0.6bn or 3% higher,
reflecting revenue growth from all
global businesses, although revenue
fell in Corporate Centre. Operating
expenses increased, primarily reflecting
the impact of investments to grow the
business. In addition, ECL in 2018 were
$1.8bn compared with LICs of $1.7bn
in 2017.
From 1 July 2018, Argentina was
deemed a hyperinflationary economy
for accounting purposes. The impact
of applying IAS 29 ‘Financial Reporting
in Hyperinflationary Economies’ from
1 July 2018 and presenting in accordance
with IAS 21 ‘The Effects of Changes in
Foreign Exchange Rates’ resulted in a
$160m reduction in profit before tax.
The effects of hyperinflation accounting
in Argentina have not been deemed
a significant item and are therefore
included within adjusted results.
Reconciliation of reported to adjusted
profit before tax
Adjusted profit before tax
Currency translation
Significant items:
– costs of structural reform
– costs to achieve
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– fair value movements on financial instruments
– gain on partial settlement of pension obligation
– past service costs of guaranteed minimum pension
benefits equalisation
– restructuring and other related costs
– settlements and provisions in connection with legal and regulatory
matters22
– currency translation on significant items
2018
$m
2017
$m
21,719
21,133
—
87
1,829
3,879
361
—
93
165
100
—
228
66
816
—
420
3,002
763
(221)
245
(188)
—
—
(198)
56
Reported profit before tax
19,890
17,167
15
HSBC Holdings plc Annual Report and Accounts 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report
Strategic Report | Financial overview
Adjusted performance continued
Adjusted revenue
Adjusted revenue of $53.9bn increased by
$2.3bn or 4%, reflecting revenue growth
in all global businesses, partly offset by
lower revenue in Corporate Centre.
– In RBWM, revenue increased by $1.7bn
or 8%, driven by growth in Retail
Banking, reflecting deposit and lending
balance growth, and the benefit of
wider deposit margins in Hong Kong.
These factors were partly offset by
margin compression on mortgages
in Hong Kong and the UK. Revenue
in Wealth Management decreased,
as a result of lower life insurance
manufacturing revenue, partly offset by
higher investment distribution revenue.
– In CMB, revenue rose $1.6bn or 12%,
notably in Global Liquidity and Cash
Management (‘GLCM’) as we benefited
from wider deposit margins, primarily in
Hong Kong, and growth in average
balances mainly in the UK. In addition,
revenue increased in Credit and Lending
(‘C&L’), notably in the UK and Hong
Kong due to higher average balances.
– In GB&M, revenue was $0.2bn or 1%
higher mainly due to growth in GLCM
and Securities Services from interest
rate rises and higher average balances.
These increases were partly offset by
lower revenue in Global Markets as
revenue growth in Foreign Exchange
was more than offset by reductions
in Rates and Credit due to subdued
client activity and spread compression.
– In GPB, revenue was $0.1bn or 4%
higher, mainly in Hong Kong from
higher deposit revenue as we benefited
from wider margins, and from higher
investment revenue. This increase was
partly offset by lower revenue resulting
from client repositioning.
– In Corporate Centre, negative adjusted
revenue of $0.2bn compared with
adjusted revenue of $1.2bn in 2017.
This reduction was largely in Central
Treasury, and included the adverse
effects of hyperinflation accounting
in Argentina of $231m. Revenue from
our legacy portfolios also decreased,
mainly due to losses on portfolio
disposals.
Movement in adjusted revenue compared
with 2017
Retail Banking and Wealth Management
Commercial Banking
Global Banking and Markets
Global Private Banking
Corporate Centre
Total
2018
$m
21,935
14,885
15,512
1,785
(177)
2017
$m
Variance
$m
20,220
13,247
15,285
1,723
1,186
1,715
1,638
227
62
53,940
51,661
2,279
4%
(1,363)
(115)%
%
8%
12%
1%
4%
Adjusted ECL/LICs
In 2018, adjusted ECL were $1.8bn. These
included charges in RBWM ($1.2bn),
notably against our unsecured lending
balances in Mexico, the UK and Asia. In
the UK, ECL also included charges related
to the current economic uncertainty.
In CMB, ECL of $0.7bn reflected charges
in most regions, including a charge in
the UK relating to the current economic
uncertainty, partly offset by releases
in North America.
These charges were partly offset by
a net release in Corporate Centre of
$0.1bn related to the legacy credit
portfolio in the UK.
In 2017, adjusted LICs of $1.7bn mainly
related to RBWM ($1.0bn). These
included LICs in Mexico, the UK and
Hong Kong against unsecured lending
balances. In CMB, LICs of $0.5bn in 2017
included charges in Asia, the UK, Mexico
and the UAE, partly offset by net releases
in North America.
Adjusted operating expenses
new capabilities and functionalities
for Global Markets, Global Banking and
Securities Services, and also continued
to invest in the HSBC Qianhai Securities
joint venture in mainland China. We also
increased our investment in productivity
programmes (up $0.3bn), mainly in
Technology and Operations.
Performance-related pay increased
by $0.2bn and volume-related growth
increased by $0.2bn.
The cost savings from our productivity
programmes absorbed the impact of
inflation. Our UK bank levy charge
remained broadly unchanged.
The number of employees expressed
in full-time equivalent (‘FTE’) staff at
31 December 2018 was 235,217, an
increase of 6,530 from 31 December
2017. This increase reflected
investments in business growth
programmes across RBWM, GB&M
and CMB. Additionally, the number
of contractors as at 31 December
2018 was 10,854, a decrease of
2,040 from 31 December 2017.
Adjusted operating expenses of $33.0bn
were $1.8bn or 6% higher. This mainly
reflected near- and medium-term
investments to grow the business (up
$0.9bn). In RBWM, these were primarily
to grow our franchise through front-line
recruitment, marketing and developing
digital capabilities, including products
and customer propositions. In GB&M,
we made strategic hires and invested in
The effect of hyperinflation accounting
in Argentina reduced adjusted operating
expenses by $63m.
Adjusted share of profit in
associates and joint ventures
Adjusted share of profit in associates of
$2.5bn was $0.1bn or 5% higher than in
2017, reflecting an increase in income
from BoCom.
Adjusted operating expenses^
($bn)
2017
$31.2bn
2018
$33.0bn
0.9
30.3
7.2
7.3
7.5
0.9
7.6
7.8
7.8
7.6
0.9
8.0
Adjusted operating expenses
by year
($bn)
1.0
32.0
Key
UK bank levy
Adjusted
operating
expenses
(excluding UK
bank levy)
* UK bank levy charge
for 2018 included
$41m incurred in 1Q18.
^Quarterly adjusted
operating expenses
are presented at
average 4Q18
exchange rates.
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
2017
2018*
16
HSBC Holdings plc Annual Report and Accounts 2018
Financial overview
Balance sheet and capital
Balance sheet strength
Total reported assets of $2.6tn
were $36.4bn or 1% higher than at
31 December 2017 on a reported basis,
and 5% higher on a constant currency
basis. We continued our targeted
asset growth, notably in Asia.
Distributable reserves
The distributable reserves of HSBC
Holdings at 31 December 2018 were
$30.7bn, compared with $38.0bn
at 31 December 2017. The decrease
was primarily driven by distributions
to shareholders of $10.1bn, which
were higher than distributable profits
generated of $5.7bn, as well as share
buy-backs of $2.0bn, partly offset by
gains from IFRS 9 transitional adjustments
of $1.0bn and fair value gains net of tax
due to movements in our own credit risk
of $0.9bn. A decrease of $3.0bn arose
from the re-presentation of the 2017
share buy-back.
Capital strength
We manage our capital in an effort to
ensure we exceed current regulatory
requirements and are well placed to
meet those expected in the future.
We monitor our position using capital
ratios. These measure capital relative
to a regulatory assessment of risks taken.
We quantify how these risks relate to
our businesses using RWAs.
Details of these risks are included on page 148.
Our CET1 ratio at 31 December 2018
was 14.0%, down from 14.5% at
31 December 2017. This decrease was
primarily driven by foreign currency
translation differences, the share
buy-back and an increase in RWAs
due to balance sheet growth.
Further details on movements in capital are
included on page 150.
Adoption of IFRS 9
HSBC adopted the requirements of IFRS 9
on 1 January 2018, 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
adoption of IFRS 9 reduced our net
assets at 1 January 2018 by $1.6bn.
Delivery against Group financial targets
Return on tangible equity
(%)
2018
2017
2016
Return on tangible equity
Our target is to achieve a reported return on tangible equity (‘RoTE’)
of more than 11% by the end of 2020. We intend to do this while
maintaining a common equity tier 1 (‘CET1’) ratio of greater than 14%.
8.6
6.8
2.6
RoTE is calculated as reported profit attributable to ordinary shareholders
less changes in goodwill and the present value of in-force long-term
insurance business, divided by average tangible shareholders’ equity.
A targeted reported RoTE of 11% in 2020 is broadly equivalent to a
reported return on equity (‘RoE’) of 10%.
In 2018, we achieved a RoTE of 8.6% compared with 6.8% in 2017.
Adjusted revenue up
4.4% Adjusted jaws
(1.2)%
Adjusted operating
expenses up
5.6%
Adjusted jaws
Adjusted jaws measures the difference between the rates of change
in adjusted revenue and adjusted operating expenses.
Our target is to maintain positive adjusted jaws on an annual basis,
while noting the sensitivity of the impact on adjusted jaws of
unexpected movements in revenue or operating expenses growth.
Positive jaws occurs when the figure for the percentage change in
revenue is higher than, or less negative than, the corresponding rate
for operating expenses.
In 2018, adjusted revenue increased by 4.4% and our adjusted operating
expenses increased by 5.6%. Adjusted jaws was therefore negative 1.2%.
Total dividends declared in respect of the year
($bn)
2018
2017
2016
Dividends
10.2
10.2
10.1
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.
To achieve these financial targets by 2020, we aim to deliver mid-single-digit growth in revenue, low- to mid-single-digit growth in
operating expenses, and approximately 1–2% annual growth in RWAs. Given the current economic environment, we will seek to
offset some or all of any possible weaker-than-planned revenue growth with actions to manage operating expenses and investments.
17
HSBC Holdings plc Annual Report and Accounts 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report Strategic Report
Global businesses
We manage our products and services globally through our global businesses.
Retail Banking and Wealth Management
Key events
– In RBWM, we grew active customers
by 1.2 million in 2018 through our
continued investments in strategic
initiatives to drive growth in key
markets and through lending products.
We grew our mortgage book by over
$20bn in the UK and Hong Kong,
strengthening our position in these
markets. We increased credit card
issuances by 24%, notably in the
UK, Mexico, the US and Hong Kong.
– We upgraded our wealth proposition
in Asia through the launch of HSBC
Life in Hong Kong, the improvement
of our wealth investment capability
for mobile banking in China, and the
enhancement of our wealth product
offering in Hong Kong for high net
worth investors.
– We listened to our customers and have
acted on feedback to improve product
features and have made it easier for
customers to bank with us through
digital transformation. The PayMe app
in Hong Kong processes three million
transactions per month and the
Connected Money app in the UK has
had more than 200,000 downloads
since its launch in May 2018.
Financial performance
Adjusted profit before tax of $7.1bn
was $0.6bn or 9% higher, reflecting
revenue growth, partly offset by
higher operating expenses.
Adjusted revenue of $21.9bn was
$1.7bn or 8% higher, with an increase
in Retail Banking partly offset by
Wealth Management. Revenue
growth was strong in Hong Kong
and the UK in particular, with notable
increases in India and mainland China,
and in our Latin American markets.
In Retail Banking, revenue was
up $1.8bn or 13%. This reflected
improved deposit margins from rising
interest rates, together with deposit
balance growth of $21bn or 3% and
lending balance growth of $31bn or
9%. These factors were partly offset
by mortgage margin compression
2018 vs 2017
Management view of adjusted
revenue
2018
$m
2017
$m
2016
$m
$m
Retail Banking
15,262
13,456
12,690
1,806
– current accounts, savings and
deposits
– personal lending
mortgages
credit cards
other personal lending23
Wealth Management
– investment distribution24
– life insurance manufacturing
– asset management
Other25
8,534
6,296
5,186
2,238
6,728
1,937
2,880
1,911
6,104
3,383
1,656
1,065
569
7,160
2,372
2,886
1,902
6,215
3,279
1,870
1,066
549
7,504
2,585
3,018
1,901
5,230
2,902
1,362
966
563
(432)
(435)
(6)
9
(111)
104
(214)
(1)
20
Net operating income26
21,935
20,220
18,483
1,715
Adjusted RoRWA (%)27
RoTE excluding significant items and
UK bank levy (%)
5.8
21.0
5.6
21.6
4.7
16.3
%
13
36
(6)
(18)
—
—
(2)
3
(11)
—
4
8
For footnotes, see page 67.
from higher funding costs, primarily in
Hong Kong and the UK.
In Wealth Management, revenue was
down $0.1bn or 2% due to net adverse
movements in market impacts of
$0.6bn in life insurance manufacturing.
In Wealth Management:
– life insurance manufacturing revenue
decreased by $0.2bn or 11%, reflecting
adverse movements in market impacts
of $0.3bn in 2018, compared with a
favourable movement of $0.3bn in 2017.
This was partly offset by growth in the
value of new business written ($0.2bn)
and favourable actuarial assumption
changes and experience variances
($0.2bn); and
– investment distribution revenue
increased by $0.1bn due to higher sales
of insurance products and bonds.
Revenue from the sale of equity and
mutual funds was stable as strong
trading conditions in the first half of the
year were offset by a slowdown in the
second half of the year.
In 2018, the credit quality of our loan
portfolio remained stable at 34 basis
points of average gross loans. Adjusted
ECL of $1.2bn mainly related to charges
in Mexico, the UK and Asia, notably
against unsecured lending. In the UK,
ECL also included charges related to
the current economic uncertainty. This
compared with adjusted LICs of $1.0bn
in 2017, notably related to charges in
Mexico, the UK and Hong Kong against
unsecured lending balances.
Adjusted operating expenses of $13.7bn
were $0.9bn or 7% higher. This primarily
reflected a $0.6bn increase relating to
investments, including $0.4bn in
marketing and digital capabilities to help
deliver improved customer service, and
$0.1bn in staff to support business
growth, particularly in the UK, Hong
Kong, mainland China (including the
Pearl River Delta) and the US.
Adjusted profit before tax
($bn)
2018
2017
2016
7.1
6.5
5.3
Change in adjusted profit before tax
+9%
18
HSBC Holdings plc Annual Report and Accounts 2018
Global businesses
Commercial Banking
Key events
– In CMB, we achieved double-digit
growth in revenue and profit before
tax. Growth was broadly based, with
revenue increases across all major
products and regions.
– We continued to improve customer
experience and satisfaction, surveying
over 18,000 customers across 40
markets in 2018 through the ‘Moments
of Truth’ programme. Through this
programme we improved global scores
across key customer interactions and
have driven improvements through
more than 100 actions taken to address
customer feedback. Through these
client surveys we have seen a 17%
year-on-year increase in customers
reporting they have had a good or
better onboarding experience.
– We continued to invest in our digital
capabilities and we simplified online
journeys on HSBCnet for around 41,000
clients across 36 countries. We also
halved average onboarding times for
our relationship-managed customers,
and completed landmark trade
transactions on the Voltron and
we.trade platforms.
– We increased sustainable financing
through both facilitation (green bonds
and equity capital markets) and growth
in financing (green loans and leases).
In 2018, CMB contributed over $4bn
towards the Group’s sustainable
financing target.
Financial performance
Adjusted profit before tax of $7.7bn
was $0.8bn or 12% higher, driven by
increased revenue, partly offset by higher
operating expenses. ECL of $0.7bn in
2018 compared with LICs of $0.5bn
in 2017.
Adjusted revenue of $14.9bn was
$1.6bn or 12% higher with increases
in all products, most notably GLCM.
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.
Commentary is on an adjusted basis, which is consistent with
how we assess the performance of our global businesses.
Management view of adjusted
revenue
Global Trade and Receivables
Finance
Credit and Lending
Global Liquidity and Cash
Management
Markets products, Insurance and
Investments and Other28
2018 vs 2017
2018
$m
1,865
5,342
5,802
2017
$m
1,821
5,101
4,775
2016
$m
1,833
5,053
4,249
$m
44
241
1,027
1,876
1,550
1,521
326
%
2
5
22
21
12
Net operating income26
14,885
13,247
12,656
1,638
Adjusted RoRWA (%)27
RoTE excluding significant items and
UK bank levy (%)
2.5
14.0
2.4
14.0
2.2
13.0
For footnotes, see page 67.
– In GLCM, revenue was $1.0bn or 22%
higher, with growth across all regions.
The increase was mainly in Hong Kong
from wider margins, and in the UK from
wider margins and average balance
sheet growth. In C&L, revenue growth
of $0.2bn or 5% reflected average
balance sheet growth in the UK and
Hong Kong, partly offset by margin
compression. In addition, revenue
increased by $44m or 2% in GTRF
despite challenging market conditions,
with growth reflecting higher average
balances in Asia and the UK.
– Revenue growth was primarily in Asia
(up 18%), mainly from increases in
Hong Kong (up 21%) and mainland
China (up 22%), as well as in the UK
(up 10%). There was also notable
revenue growth in the US (up 7%),
Canada (up 8%), Latin America (up
20%) and MENA (up 5%).
– Corporate customer value from our
international subsidiary banking
proposition grew by 19%*.
Adjusted ECL were $0.7bn in 2018,
reflecting charges across most regions,
including a charge in the UK related to
uncertainty in the economic outlook,
partly offset by releases in North
America. This compared with adjusted
LICs of $0.5bn in 2017, which reflected
charges in Asia, the UK, Mexico and
the UAE, partly offset by net releases
in North America.
Adjusted operating expenses of $6.5bn
were $0.5bn or 9% higher, reflecting
increased staff costs (up $0.2bn),
including higher performance-related
pay. In addition, we continued to
increase our investment in digital
capabilities (up $0.1bn), improvements
in operational efficiency and customer
experience, as well as regulatory and
compliance.
Adjusted profit before tax
($bn)
2018
2017
2016
7.7
6.8
5.9
Change in adjusted profit before tax
+12%
* 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 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report
Strategic Report | Global businesses
Global Banking and Markets
Key events
– In GB&M, we are making good
progress with our strategic plan,
increasing revenue and profit before
tax while reducing risk-weighted
assets by 4%. In 2018, performance
was particularly strong in transaction
banking products, with continued
growth in GLCM (up 20%) and
Securities Services (up 11%). We have
continued to expand the product
offerings and capabilities from our
securities joint venture in China.
– We acted as the sole green
structuring adviser on a $1.25bn
green sukuk bond for the Republic of
Indonesia, the first ever international
offering of green securities by an
Asian sovereign.
Financial performance
Adjusted profit before tax of $6.1bn
was $0.2bn or 4% higher, reflecting
increased revenue and a $26m release
of ECL in 2018, compared with LICs of
$0.4bn in 2017. This was partly offset
by higher operating expenses as we
continued to invest in the business.
We have continued to deliver RWA
savings, with net reductions of 4%
($12bn), including savings from
management initiatives of $30bn
during 2018. This reduction was partly
offset by targeted lending growth.
With effect from the fourth quarter
of 2018, interest earned on capital
deployed, which was previously
disclosed within ‘Other’ revenue,
has been allocated to product lines.
The 2017 comparatives have been
re-presented on the new basis, with
no effect on total adjusted revenue.
Adjusted revenue of $15.5bn was
$0.2bn or 1% higher, and included
a net favourable movement of
$0.1bn on credit and funding valuation
adjustments. The increase in revenue
primarily reflected the strength of our
transaction banking franchises, which
more than offset the effects of
economic uncertainty and reduced
client activity.
– GLCM recorded double-digit growth
(up $0.4bn or 20%) as we increased
average balances by 4% through
continued momentum in winning client
mandates, and from favourable interest
rate movements, notably in Asia.
Management view of adjusted
revenue
Global Markets
– FICC
Foreign Exchange
Rates
Credit
– Equities
Securities Services
Global Banking
Global Liquidity and Cash
Management
2018
$m
6,490
5,271
3,022
1,482
767
1,219
1,973
4,115
2,645
2017
$m
7,009
5,714
2,622
2,147
945
1,295
1,772
4,048
2,213
2016
$m
6,731
5,720
2,777
2,148
795
1,011
1,577
3,819
1,884
Global Trade and Receivables Finance
Principal Investments
Credit and funding valuation
adjustments29
809
224
(183)
757
327
(262)
689
221
(55)
Other30,31
(561)
(579)
(59)
Net operating income26,31
15,512
15,285
14,807
Adjusted RoRWA (%)27
RoTE excluding significant items and
UK bank levy (%)
2.1
10.5
2.0
10.6
1.8
10.2
2018 vs 2017
$m
(519)
(443)
400
(665)
(178)
(76)
201
67
432
52
(103)
79
18
227
%
(7)
(8)
15
(31)
(19)
(6)
11
2
20
7
(31)
30
3
1
For footnotes, see page 67.
– Securities Services revenue rose
$0.2bn or 11% as we grew average
assets under management and
average assets under custody from
increased client mandates, growth
in equity markets early in 2018, and
higher interest rates.
– Global Banking revenue increased
$67m or 2% as growth in secured
lending balances, gains on corporate
lending restructuring and lower adverse
movements on portfolio hedges were
partly offset in our capital markets
businesses, due to challenging market
conditions and narrower spreads.
– GTRF revenue grew by 7% as we grew
average lending balances while also
reducing risk-weighted assets.
This was partly offset by:
– Global Markets revenue decreased by
$0.5bn or 7% as economic uncertainty
and reduced primary issuance led to
subdued client activity and spread
compression, which resulted in lower
revenue in Rates (down $0.7bn or 31%)
and Credit (down $0.2bn or 19%). This
was partly offset by higher revenue
in Foreign Exchange (up $0.4bn or
15%), from increased volatility in
emerging markets.
– Principal Investments revenue fell
by $0.1bn or 31% from lower gains
on mark-to-market revaluation of
investments, and on asset sales,
compared with 2017.
Net adjusted ECL releases of $26m in
2018 related to releases against a small
number of clients in the US and Europe,
notably in the oil and gas sector, partly
offset by charges in the UK against
exposures in the retail and construction
sectors.
In 2017, adjusted LICs of $0.4bn were
primarily against two large corporate
exposures in Europe.
Adjusted operating expenses increased
$0.5bn or 5%, as cost-saving initiatives
were more than offset by investment
in business growth and efficiency
initiatives, and in regulatory programmes.
We also incurred higher revenue-related
taxes and costs.
Adjusted profit before tax
($bn)
2018
2017
2016
6.1
5.8
5.5
Change in adjusted profit before tax
+4%
20
HSBC Holdings plc Annual Report and Accounts 2018
Global businesses
Global Private Banking
Key events
– In GPB, revenue increased by 10%
in key markets targeted for growth,
mostly in Asia (up 18%). We have
added 101 new revenue generating
employees globally, with 71 in Asia.
– We were named Best Private Bank
in both Hong Kong and the UK at the
PWM/The Banker Private Banking
awards 2018.
– We had net new money inflows of
$15bn in key markets targeted for
growth, of which almost 60% came
from collaboration with our other
global businesses. In 2018, one in
every three new GPB client
relationships was introduced by CMB.
Financial performance
Adjusted profit before tax of $344m was
$48m or 16% higher, reflecting revenue
growth and a net release of ECL. This was
partly offset by higher operating expenses.
Management view of adjusted
revenue
Investment revenue
Lending
Deposit
Other
2018
$m
717
391
497
180
2017
$m
700
393
404
226
2016
$m
738
420
345
267
Net operating income26
1,785
1,723
1,770
Adjusted RoRWA (%)27
RoTE excluding significant items and
UK bank levy (%)
2.1
9.9
1.9
7.1
1.7
5.6
2018 vs 2017
$m
17
(2)
93
(46)
62
%
2
(1)
23
(20)
4
For footnotes, see page 67.
higher deposit revenue as margins
widened following interest rate rises,
and from higher investment revenue
from strong mandate flows. Other
income decreased including lower
revenue following client repositioning.
In 2018, there was a net release of
adjusted ECL of $8m. This compared
with adjusted LICs of $16m in 2017.
staff costs, reflecting investment
to support growth, mainly in Asia.
Adjusted profit before tax
($m)
2018
2017
2016
344
296
286
Change in adjusted profit before tax
Adjusted revenue of $1.8bn increased by
$62m or 4%, mainly in Hong Kong from
Adjusted operating expenses of $1.4bn
were $38m or 3% higher, due to higher
+16%
Corporate Centre32
Financial performance
Adjusted profit before tax of $0.5bn
was $1.1bn or 67% lower, reflecting
lower revenue and higher ECL, partly
offset by lower operating expenses.
We recorded negative adjusted revenue
of $0.2bn in 2018 compared with
adjusted revenue of $1.2bn in 2017. This
reduction reflected lower revenue in
Central Treasury and legacy portfolios,
and a reduction in Other income.
Central Treasury revenue was $1.1bn
lower, reflecting:
– higher interest expense on debt issued
by HSBC Holdings (up $0.4bn), from
an increase in issuances and higher
average cost of debt issued;
– lower revenue in Balance Sheet
Management (‘BSM’) (down $0.3bn),
mainly from de-risking activities
undertaken during 2017 in anticipation
of interest rate rises, lower reinvestment
yields and lower gains on disposals;
– adverse fair value movements
of $0.3bn in 2018 compared with
favourable movements of $0.1bn in
2017, relating to the economic hedging
Management view of adjusted
revenue
Central Treasury33
Legacy portfolios
Other34
Net operating income26
RoTE excluding significant items and
UK bank levy (%)
For footnotes, see page 67.
2018 vs 2017
2018
$m
662
(93)
(746)
(177)
2017
$m
1,728
(26)
(516)
2016
$m
1,706
26
(188)
$m
(1,066)
(67)
(230)
1,186
1,544
(1,363)
(5.7)%
(5.2)%
(1.9)%
%
(62)
>(100)
45
(115)
of interest rate and exchange rate risk
on our long-term debt with long-term
derivatives; and
– a $0.2bn loss arising from adverse
swap mark-to-market movements
following a bond reclassification
under IFRS 9 ‘Financial Instruments’.
Adjusted operating expenses of $1.9bn
were $0.2bn or 9% lower due to the
favourable impact of hyperinflation
accounting in Argentina and lower
costs in relation to the run-off of the
CML portfolio, which was completed
during 2017.
Revenue from legacy portfolios was down
$0.1bn, reflecting losses on disposals.
Other income decreased by $0.2bn,
mainly from the adverse effects of
hyperinflation accounting in Argentina.
Adjusted ECL releases of $0.1bn in 2018
and net adjusted LICs releases of $0.2bn
in 2017 were both primarily related to our
legacy credit portfolio.
Adjusted income from associates
increased by $0.1bn or 4%. Our
associate, The Saudi British Bank,
announced a merger agreement with
Alawwal Bank in Saudi Arabia. The
merger, subject to shareholder and
regulatory approval, is expected to be
completed in 2019 and would dilute
HSBC’s shareholding in the merged
bank from 40% to 29.2%.
21
HSBC Holdings plc Annual Report and Accounts 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report
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 create value by providing the
products and services our customers
need, and aim to do so in a way that fits
seamlessly into their lives. This helps us
to build long-lasting relationships with
our customers. We maintain trust by
striving to protect our customers’ data
and information, and delivering fair
outcomes for them – and if things go
wrong, we need to address complaints
in a timely manner. Operating with high
standards of conduct is central to our
long-term success and underpins our
ability to serve our customers.
In this section, we focus on RBWM,
our largest global business by number
of customers, and on our two largest
markets – the UK and Hong Kong. We
measure and report on customer data
for all of our global businesses within
our ESG Update.
For footnotes, see page 67.
Overview
Our purpose is to be where the
growth is, connecting customers
to opportunities. We help enable
businesses to thrive and economies
to prosper, helping people to fulfil
their hopes and dreams and realise
their ambitions.
To achieve our purpose, we need
to build strong relationships with
all of our stakeholders – including
customers, employees and the
communities in which we operate.
This will help enable us to deliver
our strategy and operate our
business in a way that is sustainable.
In this section, we provide information
about our customers, employees and
our approach to creating a responsible
business culture. We also provide an
update on our sustainability strategy,
including progress towards our $100bn
sustainable finance commitment and
our second disclosure for the Task
Force on Climate-related Financial
Disclosures (‘TCFD’).
Our Environmental, Social and
Governance (‘ESG’) Update will be
published in April 2019 and will be
available on our website at www.hsbc.
com/our-approach/measuring-our-
impact. It will provide further detail
on the topics covered in this section.
Our largest global business
RBWM
Supports approximately 38 million
customers worldwide
Our largest markets
UK
$399bn in total customer accounts
Hong Kong
$485bn in total customer accounts
Customer recommendation index†
RBWM
UK
2018
2017
Hong Kong
75%
72%
2018
2017
71%
72%
† The index uses the 0-10 rating scale for the customer
recommendation question to create a 100 point index.
Surveys are based on a relevant and representative
subset of the market. Data provided by Kantar.
Complaint resolution35
Time taken to resolve complaints (excluding
payment protection insurance complaints)
RBWM
14%
9%
15%
10%
77%
75%
2018
2017
Key
Same day or next working day
Between 2–5 days
Longer than 5 days
22
HSBC Holdings plc Annual Report and Accounts 2018 How we do business
Acting on feedback in RBWM
We listen to our customers, and know that asking their
opinion on our service is core to understanding their needs
and concerns. Their feedback has helped us to become
more accessible through improved digital experiences
and our overall customer service. We continue to focus on
simplifying our processes and will launch our new mobile
banking app into more markets. We are working to make
things easy, personable and transparent.
Senior leaders have ultimate responsibility for customer
service standards and monitor these through key metrics
aligned to performance objectives. These include:
– how customers feel about recommending us; and
– the speed and quality of complaint resolution.
What our
customers
are telling us
Make
banking more
accessible
Make it easy
to understand
our fees and
charges
Make our
processes
easier
Our response
– We simplified our login process by rolling out
biometrics (Apple’s Touch ID and HSBC Voice
ID) to 18 markets.
– In the UK, we trained our front-line employees
to become ‘Digital Experts’. In branch or on
the phone, they teach our customers how to
complete their task digitally. In 2018, 85% of
new customers opened accounts through a
supported digital experience.
– In Singapore, we simplified our mortgage
application forms and offer letters, so
customers can be clear about their repayment
schedule, terms and conditions, and fees
and charges.
– Through digital messaging we are raising
customer awareness around overdrafts. In
the UK, we expanded the volume of overdraft
alerts, which we first introduced in 2017,
sending more than 26 million alerts in 2018.
– In the UK, we have continued to simplify
our mortgage process. Through automatic
valuations, improved credit policies and
increased underwriter availability, applications
can be approved within 10 days.
– To make investing more accessible, we
equipped our branch employees in Hong Kong,
China and Singapore with tablets and launched
an online financial health check. Customers can
now understand their investment options in their
own time, without a specialist appointment.
Complaints are recorded and analysed so that we can learn
what went wrong and why. Complaint resolution remains a
priority for us and in 2018 we saw a slight improvement in
the percentage of complaints resolved within the same or
next working day.
In the charts and tables on page 22, we outline our 2018
performance on customer recommendation for our UK
and Hong Kong markets, and complaint resolution for our
10 largest markets.
In the following table, we have highlighted some examples
of how customer feedback has driven improvements for
our RBWM customers.
Digital
As part of our strategy, we are committed to using
technology to enhance our customers' experience. In 2018,
we focused efforts on improving the online and mobile
banking experience for our customers and building upon
machine learning. This will help enable us to analyse our
customers’ speech, language and tone to better understand
their queries and respond with the right solution more quickly.
Globally,
44%
of RBWM customers are digitally active
Taking responsibility for the service we deliver
We define conduct as delivering fair outcomes for customers
and supporting the orderly and transparent operation of
financial markets. This is central to our long-term success
and ability to serve customers. We have clear policies,
frameworks and governance in place to protect them. 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. For further information on conduct,
see page 66.
23
HSBC Holdings plc Annual Report and Accounts 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report
Strategic Report | How we do business
Gender diversity statistics
Holdings Board
Group Management
Board
64%
36%
9
5
17
2
11%
Combined executive
committee and
direct reports*
148
51
26%
Senior
leadership
6,887
2,701
28%
Senior leadership
RBWM
Senior leadership
CMB
752
331
652
226
31%
26%
Senior leadership
GB&M
2,398
608
20%
89%
74%
72%
69%
74%
80%
Senior leadership
GPB
Senior leadership
HOST
All employees
387
174
645
245
31%
28%
69%
72%
115,391
125,276
48%
52%
Key
Male
Female
* Combined executive committee and direct
reports includes HSBC executive Directors,
Group Managing Directors, and their direct
reports (excluding administrative staff) plus
Company Secretary.
Our employees
Our people are critical to our success, and
we have made a commitment to build the
healthiest human system in our industry
to enable them to thrive. As we work
towards this, we are focused on fostering
a culture in which our employees feel
valued, empowered to share their views,
and able to fulfil their potential.
Listening to our people
Understanding how our people feel
about HSBC is vital. It helps us ensure
that we are giving them the right support
to achieve their potential and to serve
our customers well.
We capture the views of our people on
a range of topics, such as our strategy,
culture and working environment, through
our employee survey, Snapshot. Results
are presented to the Group Management
Board and relevant executive
committees. This means that we can
take action based on the feedback.
We track employee advocacy by asking
whether they would recommend HSBC
as a great place to work. Currently, 66%
would recommend HSBC, an increase
from 64% in 2017. Analysis in 2018
showed us that trust in leadership,
career development and recognising
our people for their behaviour and
performance are what drives a
positive response to this question.
HSBC Exchange provides a forum for
employees to share their open and
honest views. Typically, these are
meetings held without an agenda,
meaning people can discuss what
matters most to them. We know from
Snapshot that when people participate
in Exchange meetings, they feel more
able to speak up, have more trust in
leadership and report higher levels
of well-being. More than half of our
employees took part in an Exchange
meeting during 2018. For example, our
Global Banking and Markets global
business hosted a series of Exchanges
on the subject of culture and conduct,
24
and Exchanges were held Group-wide
as part of the conversation around the
healthiest human system.
Snapshot and Exchange provide robust
feedback that we use to improve the
employee experience. For instance, our
people fed back that mental well-being is
important. We already provide employee
assistance lines in every country, and in
2019 we will provide additional mental
health education and support to line
managers. Our focus will be on spotting
the signs of mental ill-health, having
open conversations and signposting
where to find support.
Employee retention
85.5%
(2017: 85.7%)
Enabling a diverse and inclusive
environment for all
Our commitment
We are committed to a thriving
environment where people are valued,
respected and supported to fulfil
their potential. By building upon
the extraordinary range of ideas,
backgrounds, styles and perspectives
of our employees, we can drive better
outcomes for our stakeholders including
customers, communities, suppliers and
shareholders.
Gender balance at senior levels
Gender balance in leadership is an area
where we are making progress but
we recognise the need to improve. In
2018, we signed up to the 30% Club
campaign commitment to reach 30%
women in senior leadership roles
(classified as 0–3 in our global career
band structure) by 2020. In order to
achieve that aspirational target, we set
an objective that more than 27.6% of our
senior leadership should be women by
the end of 2018. We achieved 28.2%.
HSBC Holdings plc Annual Report and Accounts 2018 How we do business
Our employees continued
Employees (’FTEs’) by region
9%
7%
4%
25%
55%
Key
Asia
Europe
Middle East and North Africa
North America
Latin America
Female share of HSBC senior leadership
headcount
(%)
30
25
20
15
2012
2013 2014
2015
2016
2017
2018
Cases raised (subject to investigation)
2018
2017
Substantiated closed cases
2018
2017
2,068
1,585
34%
30%
HSBC does not condone or tolerate any
acts of retaliation against those who
raise concerns, and has a strict policy
prohibiting any such acts. The outcomes
of allegations of retaliation are reported
to senior management. Making
malicious or false claims is incompatible
with our values.
The Group Audit Committee has
responsibility for oversight of the
Group’s whistleblowing arrangements
and receives regular updates on the
status of whistleblowing arrangements
and outcomes.
We promoted the Group’s whistleblowing
arrangement through a training and
awareness campaign in 2018 and this
is reflected in the increase in the number
of cases compared with 2017.
Employee networks
We have seven global employee
networks as well as our HSBC
Communities, which include common
interest groups. They provide spaces
for colleagues to speak up about
internal and commercial issues and
opportunities, make connections, and
learn from each other. The networks
focus on gender, age, ethnicity, LGBT+,
faith, working parents, carers, and
ability. Our HSBC Communities focus
on a variety of topics, including flexible
working, military and veterans, and
Chinese culture.
More information about our diversity
and inclusion activity and our UK
Gender Pay Gap Report is available
at www.hsbc.com/our-approach/
measuring-our-impact.
Whistleblowing
We think it is important to have a
culture where our people feel able to
speak up. Individuals are encouraged
to raise concerns about wrongdoing
or unethical conduct through the usual
reporting and escalation channels.
However, we understand that there are
circumstances where people need to
raise concerns more discreetly. HSBC
Confidential is a global whistleblower
platform that enables all of our people
to raise issues in confidence and
without fear of retaliation.
Whistleblowing concerns are investigated
thoroughly and independently. Some of
the common themes that have been
referred to HSBC Confidential include
behaviour and conduct, allegations of
fraud, and weaknesses with information
security. Remedial activity has been
undertaken where appropriate, including
disciplinary action, dismissal, as well as
adjustments to variable pay, performance
ratings and behaviour ratings. Processes
have also been enhanced where needed.
25
HSBC Holdings plc Annual Report and Accounts 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report Strategic Report | How we do business
A responsible business culture
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. During 2018, we continued
to strengthen our approach to managing
operational risk as set out in the
operational risk management
framework (‘ORMF’). The approach sets
out governance, appetite and provides
a single view of non-financial risks
that matter the most and associated
controls. It incorporates a risk
management system to enable active
risk management. The enhancement
and embedding of the risk appetite
framework for non-financial risk and
improving the consistency of the
adoption of the end-to-end risk and
control assessment processes has
been a particular focus and while there
remains more to do, progress has been
made in 2018 to strengthen the control
environment and the management of
non-financial risk.
For further details on our non-financial
risks and the ‘Top and emerging risks’,
see pages 30 and 31.
Cybersecurity
Cybersecurity continues to be a focus
area for HSBC and is routinely reported
at the Board level to ensure appropriate
visibility, governance and executive
support for our ongoing cybersecurity
activities. We continue to strengthen
and invest significantly in both business
and technical controls in order to
prevent, detect and respond to an
increasingly hostile cyber threat
environment. These include enhancing
controls to protect against advanced
malware, data leakage, infiltration
of payments systems and denial of
service attacks.
For additional information, please see
the ‘Top and emerging risks’ section on
page 30.
Financial crime compliance
In order to help protect the integrity
of the global financial system, we have
made, and continue to make, significant
investments in our ability to detect,
deter and prevent financial crime.
We have exited customers, products
and countries where we deemed the
financial crime risk too high to manage.
We are also working with governments
and other banks to advance our
collective interests in this area. These
steps are enabling us to reduce the risk
of financial crime much more effectively.
Our risk appetite has been set formally.
Further details may be found in the Risk
section on page 30.
Anti-bribery and corruption
We are committed to high standards
of ethical behaviour and operate a
zero-tolerance approach to bribery and
corruption, which we consider unethical
and contrary to good corporate
governance. We require compliance
with all anti-bribery and corruption laws
in all markets and jurisdictions in which
we operate. We have a global anti-
bribery and corruption policy, which
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 2018, 98%
of our workforce were trained via a
mandatory e-learning course and more
than 12,000 employees, who undertake
activities with a high risk of bribery,
received targeted role-based training.
Tax
We are committed to applying both
the letter and spirit of the law in all
territories where we operate. We aim to
have open and transparent relationships
with all tax authorities, ensuring that any
areas of uncertainty or dispute are
agreed and resolved in a timely manner.
As a consequence, we believe that we
pay our fair share of tax in the
jurisdictions in which we operate.
We have adopted the UK Code of
Practice on Taxation for Banks, which
was introduced in 2009, and manage
tax risk in accordance with a formal
tax risk management framework.
26
Taxes paid by region
($bn)
0.3
0.4
0.2
2.7
$7.0bn
2.7
0.7
Key
UK
Rest of Europe
Asia
Middle East and North Africa
North America
Latin America
We apply a number of tax initiatives
introduced after the global financial
crisis with the aim of increasing
transparency. These initiatives address
both the tax positions of companies and
of their customers. These include:
– the US Foreign Account Tax
Compliance Act (‘FATCA’);
– the OECD Standard for Automatic
Exchange of Financial Account
Information (the ‘Common Reporting
Standard’);
– the Capital Requirements (Country
by Country Reporting) Regulations;
– the OECD Base Erosion and Profit
Shifting (‘BEPS’) initiative; and
– the UK legislation on the corporate
criminal offence (‘CCO’) of failing to
prevent the facilitation of tax evasion.
Human rights
HSBC’s commitment to respecting
human rights, principally as they apply
to our employees, our suppliers and
through our lending, is set out in our
2015 Statement on Human Rights. This
statement, along with our ESG Updates
and our statements under the UK’s
Modern Slavery Act (‘MSA’), which
include further information, is available
on www.hsbc.com/our-approach/
measuring-our-impact. Our next MSA
statement will be published in April 2019.
Other matters
Information on our corporate
governance is on page 152, and
information on legal proceedings
and regulatory matters can be found
on page 289.
HSBC Holdings plc Annual Report and Accounts 2018 How we do business
Supporting sustainable growth
We recognise our wider obligations to
the communities where we operate, and
understand economic growth must also
be sustainable. Our sustainable growth
initiatives are set out in an integrated
strategy aligned to our Group strategy
and our global business operations.
In 2018, we contributed $105m
to charitable programmes and our
employees volunteered 264,000 hours
to community activities during the
working day. We continued our
flagship environmental partnership,
the HSBC Water Programme.
Sustainable finance
We define sustainable finance as any
form of financial service that integrates
ESG criteria into business or investment
decisions. Sustainable finance covers
the financing and investment activities
needed to support the United Nations
Sustainable Development Goals
(‘SDGs’) and the Paris Agreement. The
Paris Agreement aims to limit the risk
of an increase in temperatures to 2ºC
above pre-industrial levels.
To achieve the Paris Agreement and
facilitate the transition to a low-carbon
world, over $100tn of infrastructure
investment will be required in the next
15 years36. We recognise the critical role
finance has to play in this transition.
Our sustainable finance commitments
reflect our ambition to be a leading
global partner to the public and private
sectors in helping with the transition
to a low-carbon economy, achieving
the SDGs, and supporting positive
societal impacts.
For footnotes, see page 67.
HSBC’s sustainable finance commitments
In November 2017, we published five sustainable finance commitments. In
this section, we summarise the progress update against these commitments:
For our full commitments, see our ESG Supplement released in November 2017.
Provide and facilitate $100bn of sustainable financing
and investment by 2025
– We have provided $28.5bn of
financing, investing, and facilitation
since 1 January 2017 (see details
on page 28).
Source 100% of our electricity from renewable sources
by 2030, with an interim target of 90% by 2025
– We signed renewables power
purchase agreements that cover 29%
of our electricity consumption, which is
up two percentage points from 2017,
and decreased energy consumption
per FTE by 19% since 2011 (details on
our carbon dioxide emissions can be
found on page 66).
Reduce our exposure to thermal coal and actively manage
the transition path for other high-carbon sectors
– We rolled out a framework to measure
transition risks across our six higher-
transition risk sectors in our loan
portfolio. Further information can
be found in the ‘Risk management’
section of our TCFD disclosure on
page 29.
– We updated our energy policy to
align lending guidelines to science-
based climate change-related targets
(see additional details on page 87).
Adopt the recommendations of the TCFD
to improve transparency
– Further details of our second TCFD
disclosure are on page 29.
Lead and shape the debate around sustainable finance
and investment
– We published 25 articles on
HSBC’s Centre of Sustainable Finance
(www.sustainablefinance.hsbc.com).
This included ‘Managing financial
system stability and climate change –
a preliminary guide’, which was
the product of collaboration and
engagement with individuals in
various businesses, functions and
geographies across HSBC.
– We intensified engagement with
leading regulatory and industry
bodies to promote sustainable
finance, for example by leading
a capital markets workstream of
UK Green Finance Taskforce.
– We provided forums for client
engagement and dialogue through
proprietary events, including a
breakfast at the World Economic
Forum in 2018 called ’Financing
the sustainable silk road’.
27
HSBC Holdings plc Annual Report and Accounts 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report Strategic Report | How we do business
Progress towards $100bn sustainable finance commitment
As part of our drive to deliver growth from areas of strength, we are committed to helping our clients transition
to a low-carbon economy, supporting the achievement of the SDGs, and supporting positive societal impacts.
Cumulative progress through 2018
Since the start of 2017, we have achieved $28.5bn of our commitment to provide and facilitate $100bn of sustainable
financing and investment by 2025. A data dictionary, including detailed definitions of contributing activities, may be
found on our website www.hsbc.com/our-approach/measuring-our-impact.
Facilitation
Financing
Investments
We provide advisory services to
facilitate the flow of capital and to
provide access to capital markets.
Products include: green, social,
and sustainable bonds; debt capital
markets; and equity capital markets.
We provide lending for specific finance
activities. Products include project
finance (e.g. financing of renewable
infrastructure projects), and green loans
(e.g. financing of eligible green products).
We provide investments into defined
socially responsible investment (‘SRI’)
and low-carbon funds.
Cumulative progress*
($bn)
Cumulative progress*
($bn)
Cumulative progress*
($bn)
21.4
2018
2017
5.8
11.1
10.3
2018
2017
1.3
5.3
0.5
2018
2017
1.1
0.2
2018 highlights
2018 highlights
2018 highlights
– HSBC ranked number two in Dealogic’s
green, social and sustainability bonds
league table and number one in the
sustainability bonds table.
– HSBC Malaysia issued the world’s first
SDG sukuk bond, aligned to the United
Nations SDG principles.
– Impact reporting for our green and
SDG Bonds can be found on our website
www.hsbc.com/investors/fixed-income-
investors/green-and-sustainability-bonds.
– HSBC participated in the development
of the green loan principles, published
by the Loan Markets Association (‘LMA’)
in March 2018.
– HSBC provided the first ever green loan
in Singapore aligned to the LMA green
loan principles.
– HSBC created two Global Lower
Carbon funds.
– We achieved a rating of A+/A using
United Nations Principles of Responsible
Investment (‘UN PRI’). This covers all
of our funds, of which SRI represents
approximately 1% of our total assets
under management.
Geographical breakdown of
our progress
Awards
3%
13%
28%
Key
Europe
Asia
Americas
Middle East, North Africa and Turkey
GlobalCapital Sustainable and
Responsible Capital Markets
Awards 2018:
Most Impressive Financial Institution
Green/SRI Bank Issuer
Most Impressive Investment Bank for
Asia Pacific Green/SRI Capital Markets
56%
Euromoney Awards 2018:
Asia’s Best Bank for Sustainable Finance
Extel Awards 2018:
No.1 Provider of Integrated Climate Change
Other transition activities
– Margin-linked loans: We have
provided $1.1bn of committed
facilities where the loan margin is
linked to sustainability indicators.
– We are working with clients on a
sustainable supply chain finance
solution.
– Since January 2017, we have advised
on more than $2bn of mergers and
acquisitions transactions for renewable
energy customers.
* PwC provided limited assurance over progress towards the $100bn sustainable finance commitment as at 31 December 2018 in accordance with International
Standard on Assurance Engagement 3000 (Revised) ’Assurance Engagements other than Audits and Reviews of Historical Financial Information’. This can be
found on our website www.hsbc.com/our-approach/measuring-our-impact. Further information on the external assurance of our contribution to sustainable
finance and our overall ESG assurance planning will be included in our next ESG Update and on our website at www.hsbc.com.
28
HSBC Holdings plc Annual Report and Accounts 2018
How we do business
Task Force on Climate-related Financial Disclosures (‘TCFD’)
We all have a role to play in limiting
climate change and supporting the
transition to a low-carbon economy,
and we are a signatory to the disclosure
recommendations by the Financial
Stability Board’s task force. This
represents our second disclosure
under the framework.
Governance
Mitigating climate change is a key
priority for our senior leadership, with
sustainable finance metrics included
in the Group’s strategic priorities. In
2018, there were two presentations
on sustainability to the HSBC
Holdings Board, two to the Group
Audit Committee, four to the Group
Risk Committee, and two to the
HSBC Group Management Board.
Senior leadership have engaged with
regulators, industry associations and
non-governmental organisations on
this topic, such as through the Bank of
England consultation on climate change,
the Group Chairman’s participation in
the One Planet Summit and the Group
Chief Executive’s designation as a
World Economic Forum climate
leader. A summarised list of HSBC’s
sustainability-related memberships is
available at: www.hsbc.com/our-
approach/measuring-our-impact/
sustainability-memberships.
Strategy
Supporting the transition to a low-
carbon economy is a key part of HSBC's
strategy, and new products have been
offered to facilitate this, along with a
pledge to provide $100bn of sustainable
finance by 2025. To date, we have
reached $28.5bn of that goal. For
further information, see page 28. We
recognise many clients across sectors
are making significant shifts towards the
low-carbon economy. During 2019, we
intend to develop new metrics to help
measure these activities, with an aim
to publish in next year’s disclosure.
We believe education of our people
is crucial on this topic. We gave
sustainability training to more than
2,300 employees during 2018 and
launched a sustainability online learning
programme for all employees globally,
with content developed in collaboration
with the University of Cambridge
Institute for Sustainability Leadership.
We report on the emissions of our own
operations via CDP (formerly the Carbon
Disclosure Project). This is available, as
well as other information related to the
sustainability of our own operations, at:
www.hsbc.com/our-approach/
measuring-our-impact.
Risk management
We are increasingly incorporating
climate-related risk, both physical and
transition, into how we manage and
oversee risks internally and with our
customers. Climate risk is now included
as a theme in our ‘Top and emerging
risks report’ to ensure that it receives
monthly management oversight via the
Risk Management Meeting of the Group
Management Board (‘RMM’) (see page
30). In addition, our Board-approved
risk appetite statement contains a
qualitative statement on our approach
to sustainability, which will be further
expanded in 2019 to include climate
risk explicitly.
We have a number of sustainability risk
policies covering specific sectors. In
2018, we updated our energy policy
to limit the financing of high-carbon-
intensity energy projects, while still
supporting energy customers on their
transition to a low-carbon economy.
From the release of the new energy policy
in April 2018 until the end of 2018, HSBC
financed no new coal-fired power plants.
Transition risk, in the context of
climate change, is the possibility that a
customer’s ability to meet its financial
obligations will deteriorate due to the
global movement from a high-carbon
to a low-carbon economy. HSBC is
working to embed transition risk into
its day-to-day credit risk management.
The aim is that over time, each
wholesale counterparty will receive a
client transition risk rating based on
their susceptibility to, and ability to
manage transition risk.
We have identified six higher transition
risk sectors based on their contribution
to global carbon dioxide emissions.
These sectors are: oil and gas; building
and construction; chemicals;
automotive; power and utilities; and
metals and mining. Over time we may
identify additional sectors as having
higher transition risk depending on a
variety of factors, including country-
level carbon dioxide reduction plans
per the Paris Agreement.
The table below presents our exposure
to the six higher transition risk sectors.
These figures capture all lending
activity, including environmentally
responsible customers and sustainable
financing. Further details on our
approach to the quantification of
exposures can be found in footnote
37 on page 67. This is expected to
evolve over time as we develop new
climate-related metrics.
Next steps
HSBC’s TCFD disclosures will
continue to evolve and expand
over time. In line with TCFD
recommendations, our Annual Report
and Accounts will start to disclose
the additional climate risk-related
metrics relating to our portfolio for
specific sectors, as the availability
of sufficient, reliable and relevant
customer data permits.
Sector
Oil and gas
Building and construction
Chemicals
Automotive
Power and utilities
Metals and mining
Total
% of total wholesale loans and advances
to customers and banks in 201837
≤ 3.9%
≤ 3.8%
≤ 3.9%
≤ 3.4%
≤ 3.0%
≤ 2.8%
≤ 20.8%
Total wholesale loans and advances to customers and banks amount to $668bn.
For footnotes, see page 67.
29
HSBC Holdings plc Annual Report and Accounts 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report Strategic Report
Risk overview
We actively manage risk to help 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.
HSBC’s risk appetite defines our
desired forward-looking risk profile,
and informs the strategic and financial
Top and emerging risks
Our top and emerging risks framework
helps enable us to identify forward-
looking risks so that we may take
action either to 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 any
of these risks were to occur, they could
have a material effect on HSBC.
30
planning process. It is articulated in our
risk appetite statement, which is approved
by the Board. Key elements include:
– risks that we accept as part of doing
business, such as credit risk and
market risk;
– risks that we incur as part of doing
business, such as operational risk,
which are actively managed to remain
below an acceptable tolerance; and
– risks for which we have zero tolerance,
such as knowingly engaging in activities
where foreseeable reputational risk has
not been considered.
We operate a wide-ranging stress testing
programme undertaking both internal
and regulatory stress tests. In 2018, we
participated in the Bank of England’s
(‘BoE’) annual stress test, which showed
that our capital ratios, after taking
account of CRD IV restrictions and
strategic management actions, exceeded
the BoE’s requirements.
Internal stress tests are an important
element in our risk management and
capital management frameworks. They
assess the impacts of potential adverse
macroeconomic, geopolitical and other
HSBC-specific events. 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 Group is exposed.
Key risk appetite metrics
Component
Measure
Returns
Capital
Return on tangible equity (‘RoTE’)*
CET1 ratio – CRD IV end point basis
Change in
expected credit
losses and other
credit impairment
charges
Change in expected credit losses
and other credit impairment charges
as a % of advances: RBWM
Risk
appetite
≥11.0%
≥13.5%
≤0.50%
2018
8.6%
14.0%
0.34%
Change in expected credit losses and other
credit impairment charges as a % of advances:
wholesale (CMB, GB&M and GPB)
≤0.45%
0.12%
* Our target is to achieve a reported RoTE of more than 11% by the end of 2020.
Our risk management framework and risks associated with our banking and insurance manufacturing
operations are described on pages 73 and 86, respectively.
During 2018, we made five changes
to our top and emerging risks to reflect
our assessment of their potential effects
on the Group. Firstly, ‘Libor replacement’
(now renamed ‘Interbank offered rate
transition’ or ‘Ibor transition’) was
added as a new risk due to the ongoing
effort by global regulators to reform
benchmark rates and the work required
to evaluate the impact of this transition
on HSBC’s products and services.
Secondly, ‘Climate-related risk’ has also
been added, to help monitor and mitigate
the impacts of climate change on the
Group and our customers, as well as
support our commitment to Sustainable
Finance. Thirdly, ‘Execution risk’ was
removed following the successful
completion of a number of high-priority
programmes. In addition, two thematic
risks were renamed to better reflect the
challenges facing the Group. The new
names are used in the table that follows,
which details our current 13 top and
emerging risks.
Our current top and emerging risks are
summarised on the next page and discussed
in more detail on page 69.
Our approach to identifying and monitoring
top and emerging risks is described on page 74.
HSBC Holdings plc Annual Report and Accounts 2018
Risk overview
Risk heightened during 2018
Risk remained at the same level as 2017
Thematic risk renamed during 2018
•
Risk
Trend Mitigants
Externally driven
Economic outlook
and capital flows
Geopolitical risk
The credit cycle
Cyber threat and
unauthorised access
to systems
• Regulatory developments
including conduct, with
adverse impact on business
model and profitability
Financial crime risk
environment
• Ibor transition
Climate-related risks
Internally driven
IT systems infrastructure
and resilience
• Risks associated with
workforce capability, capacity
and environmental factors with
potential impact on growth
Risks arising from the receipt
of services from third parties
Enhanced model risk
management expectations
We actively monitor our credit and trading portfolios, including undertaking stress tests, to identify sectors and
clients that may come under stress due to: escalating tariffs and other trade restrictions; an economic slowdown in
the eurozone and mainland China; and adverse outcomes of negotiations concerning the UK’s exit from the EU.
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 undertake detailed reviews of our portfolios and are assessing proactively customers and sectors likely to come
under stress as a result of geopolitical or macroeconomic events, reducing limits where appropriate.
We continue to strengthen our cyber-control framework and improve our resilience and cybersecurity capabilities,
including threat detection and analysis, access control, payment systems controls, data protection, network
controls and back-up and recovery.
We engage with regulators to help ensure new regulatory requirements are effectively implemented, and work with
them in relation to their investigations into historical activities.
We have integrated the majority of our Global Standards reforms into our day-to-day operations, and expect to
complete the transition to business and function management in 2019. We continue to enhance our financial crime
risk management capabilities and we are investing in the next generation of tools to fight financial crime through
the application of advanced analytics and artificial intelligence.
We are evaluating the impact of the replacement of Ibor (including Libor) with alternative risk-free rates on HSBC’s
products, services and processes as the industry accord evolves, with the intention of minimising disruption
through appropriate mitigating actions.
We are committed to helping finance the transition to a low-carbon economy and continue to make progress in this
area (see the Group’s TCFD year-two response on page 29). We regularly review our sustainability risk policies to
ensure they remain fit-for-purpose while still supporting customers.
We continue to monitor and improve service resilience across our technology infrastructure, enhancing our
problem diagnosis/resolution and change execution capabilities to reduce service disruption to our customers.
We continue to monitor workforce capacity and capability requirements in line with HSBC’s published growth
strategy and any emerging issues in the markets in which we operate. These issues can include changes to
immigration and tax rules as well as industry-wide regulatory changes.
We continue to strengthen 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 life cycle.
We have evolved our capability and practice for model risk management by enhancing the second line of
defence Model Risk Management function, strengthening the model oversight committee structure through
the chairmanship of the Group Chief Risk Officer and attendance of global business CEOs, and evolving our
model risk governance framework.
Data management
We continue to improve our insights, data aggregation, reporting and decisions through ongoing improvement
of our data governance, data quality, data privacy, data infrastructure and architecture framework.
UK withdrawal from the European Union
The UK is due to formally leave the
European Union (‘EU’) in March 2019.
However, there is no certainty on the
future relationship between the UK and
the EU or indeed an implementation
period. This creates market volatility and
economic risk, particularly in the UK. Our
Group’s global presence and diversified
client base should help to mitigate the
impact of the UK’s withdrawal from the
EU. While there may be some changes to
the provision of products and services for
our clients and employees based in the
UK and EU, we are taking mitigating
actions to help minimise any potential
disruption. These include expanding
our product offerings available in our
European entities, migrating customers
where necessary and transferring some
of our European branch network from
HSBC Bank plc to our subsidiary in
France. Our existing footprint in the EU,
and in particular our subsidiary in France,
has provided a strong foundation for
us to build upon. As part of our stress
testing programme, a number of internal
macroeconomic and event-driven
scenarios were considered alongside
a scenario set by the Bank of England to
support our planning for, and assessment
of, the impact of the UK’s withdrawal
from the EU. The results confirmed that
we are well positioned in the event of
potential shocks.
For further details, please refer to our top and
emerging risks on page 69.
Our approach to the UK’s withdrawal from
the European Union is described in more detail
in ‘Areas of special interest’ on page 73.
31
HSBC Holdings plc Annual Report and Accounts 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report
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
– Reward inappropriate or excessive
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
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
their unvested or retained awards
– Offer employment contracts with a
notice period of more than 12 months
– Have pre-arranged individual
– Apply our employee recognition
severance agreements
and conduct framework to strengthen
the alignment between risk and reward
across the Group
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
mechanisms to reinforce our values.
32
Mechanisms
Outcomes
Behavioural rating
for all employees
– Subject to compliance with local labour laws, 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.
Performance
management
Conduct
recognition
– Performance objectives define what our employees need to achieve,
how and when, in line with business and role priorities. Objectives are
initially created by our employees at the start of the year. Objectives
are then tracked and updated by employees throughout the year as
priorities change.
– Performance management for all our employees is underpinned by our
‘Everyday Performance and Development’ programme. This approach
involves frequent, holistic and meaningful conversations throughout
the year between a manager and employee. The conversations provide
an opportunity to discuss progress, provide feedback and recognise
behaviours, identify any support that may be needed, and address any
issues that could be affecting the employee’s sense of well-being.
– The employee recognition and conduct framework provides a set of
guidelines designed to reward exceptional conduct and handle any
conduct breaches consistently across the Group.
– Rewarding positive conduct may take the form of use of our global
recognition programme ‘At Our Best’, or via positive adjustments to
performance and behaviour ratings and variable pay.
– The framework also provides guidance on applying negative adjustments
to performance and behaviour ratings and to variable pay, alongside
disciplinary sanctions, where conduct breaches have been identified.
HSBC Holdings plc Annual Report and Accounts 2018 Remuneration
How we set our variable pay pool
When deciding on the variable pay pool, the Group Remuneration
Committee considers a number of factors, which are set out in the
following table:
Our variable pay pool was $3,473m, an increase of
5.1% compared with 2017.
Performance and risk
appetite statement
– Our variable pay pool takes into account our
performance in the context of our risk appetite.
Countercyclical
funding methodology
Distribution of profits
Commerciality and
affordability
– To dampen effects of economic cycles, the variable
pay pool’s size has a floor and a ceiling, and we also
limit the payout ratio as performance increases to
prevent the risk of inappropriate behaviour.
– Our funding methodology ensures that the distribution
of post-tax profit between capital, shareholders and
variable pay is appropriate, and that the majority of
post-tax profit is allocated to capital and shareholders.
– We face challenges arising from being headquartered
in the UK, which has more stringent reward practices.
We take into account these challenges in determining
the size of the variable pay pool to help ensure we can
continue to attract and retain talent in key markets.
Variable pay pool
($m)
Group
Of which Global
Banking and Markets
3,473
3,303
1,098
1,063
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 186 for
further details.
Remuneration for our executive Directors
Our remuneration policy for executive Directors was approved at our 2016 Annual General Meeting (‘AGM’) and is intended to
apply for three performance years until the AGM in 2019. We will be putting forward a new remuneration policy for shareholder
approval at the AGM. Details of the proposed policy can be found on page 175.
The table below shows the amount our executive Directors earned in 2018. For details of Directors’ pay and performance for
2018, see the Directors’ remuneration report on page 172.
(in £000)
Base
salary
Fixed pay
allowance
Cash in
lieu of
pension
Annual
incentive
AML
DPA
Award38
LTI39 Sub-total
Taxable
benefits
Non-
taxable
benefits
Notional
returns
John Flint40
2018 1,028
1,459
308
1,665
Stuart
Gulliver41,43
2017
2018
—
171
—
241
2017
1,250
1,700
Iain
Mackay42,43
2018
2017
Marc Moses 2018
2017
700
700
700
700
950
950
950
950
—
51
375
210
210
210
210
For footnotes, see page 67.
—
—
—
282
1,530
2,127
—
1,088
1,057
1,334
1,324
1,358
—
695
—
—
—
—
—
—
—
—
—
4,460
—
2,275
5,452
4,005
3,194
3,879
3,218
40
—
65
500
80
64
13
16
28
—
6
71
44
37
38
38
54
—
41
63
33
42
33
42
Total
4,582
—
2,387
6,086
4,162
3,337
3,963
3,314
33
HSBC Holdings plc Annual Report and Accounts 2018Additional InformationFinancial StatementsCorporate GovernanceFinancial ReviewStrategic Report Report of the Directors | Financial summary
Financial summary
Use of non-GAAP financial measures
Changes to presentation from 1 January 2018
Critical accounting estimates and judgements
Consolidated income statement
Group performance by income and expense item
Net interest income
Net fee income
Net income from financial instruments measured at fair value through
profit or loss
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
Change in expected credit losses and other credit impairment charges/
Loan impairment charges and other credit risk provisions
Operating expenses
Share of profit in associates and joint ventures
Tax expense
Consolidated balance sheet
Balance sheet commentary compared with 1 January 2018
Page
34
34
35
36
37
37
38
39
40
40
41
41
42
42
43
44
44
45
Use of non-GAAP financial measures
Our reported results are prepared in accordance with IFRSs
as detailed in the Financial Statements starting on page 214.
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 47 to 55
are presented on an adjusted basis in accordance with IFRS 8
‘Operating Segments’, as detailed in ‘Basis of preparation’ on
page 47.
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.
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.
Significant items
‘Significant items’ refers collectively to the items that
management and investors would ordinarily identify and consider
separately to improve the understanding of the underlying trends
in the business.
The tables on pages 50 to 53 and pages 57 to 63 detail the effects
of significant items on each of our global business segments and
geographical regions in 2018, 2017 and 2016.
Foreign currency translation differences
Foreign currency translation differences reflect the movements of
the US dollar against most major currencies during 2018.
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.
34
HSBC Holdings plc Annual Report and Accounts 2018
Foreign currency translation differences
Foreign currency translation differences for 2018 are computed by
retranslating into US dollars for non-US dollar branches, subsidiaries, joint
ventures and associates:
• the income statements for 2017 and 2016 at the average rates of
exchange for 2018; and
• the balance sheets at 31 December 2017 and 31 December 2016 at the
prevailing rates of exchange on 31 December 2018.
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. The constant currency data of HSBC’s Argentinian subsidiaries
has not been adjusted further for the impacts of hyperinflation. When
reference is made to foreign currency translation differences in tables or
commentaries, comparative data reported in the functional currencies of
HSBC’s operations has been translated at the appropriate exchange
rates applied in the current period on the basis described above.
Changes to presentation from 1 January 2018
IFRS 9
HSBC adopted the requirements of IFRS 9 ‘Financial Instruments’
on 1 January 2018, with the exception of the provisions relating to
the presentation of gains and losses on financial liabilities
designated at fair value, which were adopted on 1 January 2017.
The impact of transitioning to IFRS 9 at 1 January 2018 on the
consolidated financial statements of HSBC was a decrease in net
assets of $1.6bn, arising from:
• a decrease of $2.2bn from additional impairment allowances;
• a decrease of $0.9bn from our associates reducing their net
assets;
• an increase of $1.1bn from the remeasurement of financial
assets and liabilities as a consequence of classification
changes, mainly from revoking fair value accounting
designations for certain long-dated issued debt instruments;
and
• an increase in net deferred tax assets of $0.4bn.
The effect of IFRS 9 on the carrying value of investments in
associates has been updated from the effect disclosed in our
Annual Report and Accounts 2017 and in our Report on Transition
to IFRS 9 ‘Financial Instruments’ 1 January 2018 as a result of
those entities publicly reporting their expected transition impacts.
This resulted in a further decrease in net assets of $0.6bn, net of
tax.
Refer to ‘Standards applied during the year ended
31 December 2018’ on page 224 and Note 37 ‘Effects of
reclassification and remeasurement upon adoption of IFRS 9’ for
further detail.
Income statement presentation
The classification and measurement requirements under IFRS 9,
which was adopted from 1 January 2018, is based on an entity’s
assessment of both the business model for managing the assets
and the contractual cash flow characteristics of the assets. The
standard contains a classification for items measured mandatorily
at fair value through profit and loss as a residual category. Given
its residual nature, the presentation of the income statement has
been updated to separately present items in this category which
are of a dissimilar nature or function, in line with IAS 1
‘Presentation of Financial Statements’ requirements. Comparative
data has been re-presented. There is no net impact on total
operating income.
Prior to 2018, foreign exchange exposure on some financial
instruments designated at fair value was presented in the same
line in the income statement as the underlying fair value
movement on these instruments. In 2018, we grouped the entire
effect of foreign exchange exposure in the profit and loss and
presented it within ‘Net trading activities’ in ‘Net income from
financial instruments held for trading or managed on a fair value
basis’. Comparative data has been re-presented. There is no net
impact on total operating income and the impact on ‘changes in
fair value of long-term debt and related derivatives’ in 2017 was
$(517)m (2016: $1,978m; 2015: $110m; 2014: $130m).
IAS 29
From 1 July 2018, Argentina was deemed a hyperinflationary
economy for accounting purposes.
The results of HSBC’s operations with a functional currency of the
Argentine peso have been prepared in accordance with IAS 29
‘Financial Reporting in Hyperinflationary Economies’ as if the
economy had always been hyperinflationary. The results of those
operations for the year ended 31 December 2018 are stated in
terms of current purchasing power using the Indice de Precios al
Consumidor at 31 December 2018, with the corresponding
adjustment presented in other comprehensive income (‘OCI’). In
accordance with IAS 21 ‘The Effects of Changes in Foreign
Exchange Rates’, the results have been translated and presented
in US dollars at the prevailing rate of exchange on 31 December
2018. The Group’s comparative information presented in US
dollars has not been restated.
The impact of applying IAS 29 and the hyperinflation provisions of
IAS 21 in the current year was a decrease in the Group’s profit
before tax of $160m, comprising a decrease in revenue of $231m,
offset by a decrease in expected credit losses of $8m, and a
decrease in operating expenses of $63m.
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 amortised cost financial assets and financial
assets measured at fair value through other comprehensive
income (‘FVOCI’): The most significant judgements relate to
defining what is considered to be a significant increase in credit
risk, determining the lifetime and point of initial recognition of
revolving facilities, and in making assumptions and estimates
to incorporate relevant information about past events, current
conditions and forecasts of economic conditions. A high degree
of uncertainty is involved in making estimations using
assumptions that are highly subjective and very sensitive to the
risk factors. See Note 1.2(i) on page 230.
• Hedge accounting and the replacement of major interest rate
reference rates: The financial markets are going through a
significant reform and replacement of the major interest rate
reference rates. These interbank offered rates (‘Ibors’), such as
Libor and Euribor, are currently widely used as benchmarks for
a large volume and broad range of financial products and
contracts. This results in significant accounting judgement
being involved in determining whether certain hedge
accounting relationships that hedge variability of cash flows
and interest rate risk due to changes in Ibors continue to qualify
for hedge accounting as at 31 December 2018. See Note 1.2(h)
on page 234.
• Deferred tax assets: The most significant judgements relate to
those made in respect of expected future profitability. See Note
1.2(l) on page 234.
• 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 228.
•
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. The most
significant judgements relate to the impairment testing of our
investment in Bank of Communications Co., Limited (‘BoCom’).
See Note 1.2(a) on page 226.
• 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 226.
• Provisions: Significant 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(m) on page 234.
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.
HSBC Holdings plc Annual Report and Accounts 2018
35
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Financial summary
Consolidated income statement
Summary consolidated income statement
Net interest income
Net fee income
Net income from financial instruments held for trading or managed on a fair value basis
44, 45
Net income/(expense) from assets and liabilities of insurance businesses, including
related derivatives, measured at fair value through profit or loss
Change in fair value of long-term debt and related derivatives
Changes in fair value of other financial instruments mandatorily measured at fair value
through profit or loss
45
44
45
Footnotes
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 change in expected credit losses and other
credit impairment charges/Loan impairment charges and other credit risk
provisions
Change in expected credit losses and other credit impairment charges
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
Return on average tangible equity
2018
$m
30,489
12,620
9,531
(1,488)
(97)
695
218
75
10,659
885
2017
$m
28,176
12,811
8,426
2,836
155
N/A
1,150
106
9,779
337
2016
$m
29,813
12,777
7,521
1,262
(1,997)
N/A
1,385
95
9,951
(971)
63,587
63,776
(9,807)
(12,331)
59,836
(11,870)
2015
$m
32,531
14,705
8,717
565
973
N/A
2,068
123
10,355
1,055
71,092
2014
$m
34,705
15,957
6,730
1,865
638
N/A
1,335
311
11,921
1,131
74,593
(11,292)
(13,345)
26
53,780
51,445
47,966
59,800
61,248
(1,767)
N/A
52,013
N/A
(1,769)
49,676
N/A
(3,400)
44,566
N/A
(3,721)
56,079
N/A
(3,851)
57,397
(34,659)
(34,884)
(39,808)
(39,768)
(41,249)
17,354
2,536
19,890
(4,865)
15,025
12,608
90
1,029
1,298
14,792
2,375
17,167
(5,288)
11,879
9,683
90
1,025
1,081
15,025
11,879
2018
$
0.63
0.63
0.51
%
81.0
0.6
2.3
7.7
8.6
2017
$
0.48
0.48
0.51
%
106.3
0.5
2.0
5.9
6.8
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
2.6
16,311
2,556
18,867
(3,771)
15,096
16,148
2,532
18,680
(3,975)
14,705
12,572
13,115
90
860
1,574
15,096
90
483
1,017
14,705
2015
$
0.65
0.64
0.50
%
76.5
0.6
1.6
7.2
8.1
2014
$
0.69
0.69
0.49
%
71.0
0.5
1.5
7.3
8.5
Footnotes
46
47
48
For footnotes, see page 67.
Unless stated otherwise, all tables in the Annual Report and Accounts 2018 are presented on a reported basis.
For a summary of our financial performance in 2018, see page 14.
For further financial performance data for each global business and geographical region, see pages 48 to 53 and 55 to 63, respectively.
36
HSBC Holdings plc Annual Report and Accounts 2018
%
2.46
(0.87)
1.59
1.73
Yield
%
0.74
3.38
0.73
1.68
5.68
2.46
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 67.
Summary of interest income by type of asset
Footnotes
49
50
51
2018
$m
49,609
(19,120)
30,489
2017
$m
40,995
(12,819)
28,176
2016
$m
42,414
(12,601)
29,813
1,839,346
1,726,120
1,723,702
%
2.70
(1.21)
1.49
1.66
%
2.37
(0.88)
1.49
1.63
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
and otherwise mandatorily measured at fair value
through profit or loss
Trading assets and financial assets designated at
fair value
Expected credit losses provision
Impairment allowance
Non-interest-earning assets
Year ended 31 Dec
For footnotes, see page 67.
2018
2017
Average
balance
Interest
income
Yield
Average
balance
Interest
income
Footnotes
$m
$m
%
$m
$m
233,637
2,475
972,963
33,285
205,427
386,230
41,089
3,739
9,166
944
1,839,346
49,609
1.06
3.42
1.82
2.37
2.30
2.70
236,126
2,030
902,214
173,760
389,807
24,213
28,751
2,191
7,440
583
1,726,120
40,995
2016
Average
balance
Interest
income
$m
$m
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
Yield
%
0.86
3.19
1.26
1.91
2.41
2.37
52,53
195,922
5,215
2.66
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
186,673
4,245
(7,816)
N/A
N/A
N/A
584,524
N/A
N/A
(7,841)
616,688
2.27
N/A
179,780
3,897
N/A
N/A
(9,127)
653,115
2.17
N/A
2,611,976
54,824
2.10
2,521,640
45,240
1.79
2,547,470
46,311
1.82
Summary of interest expense by type of liability and equity
Deposits by banks
Financial liabilities designated at fair value – own
debt issued
Customer accounts
Repurchase agreements – non-trading
Debt securities in issue
Other interest-bearing liabilities
Total interest-bearing liabilities
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 67.
Footnotes
54
55
56
2018
Average
balance
Interest
expense
$m
44,530
50,840
1,138,620
161,204
132,594
53,731
$m
506
1,421
8,287
3,409
4,254
1,243
1,581,519
19,120
Cost
%
1.14
2.80
0.73
2.11
3.21
2.31
1.21
2017
Average
balance
Interest
expense
$m
47,337
60,566
1,094,920
136,561
108,677
7,009
Cost
%
0.95
2.08
0.49
1.22
2.88
$m
451
1,261
5,405
1,665
3,130
907
12.94
2016
Average
balance
Interest
expense
$m
49,782
62,042
1,074,661
118,789
114,343
22,387
$m
342
942
5,492
626
2,807
2,392
1,455,070
12,819
0.88
1,442,004
12,601
Cost
%
0.69
1.52
0.51
0.53
2.45
10.68
0.87
142,184
3,524
2.48
153,776
2,325
1.51
138,486
1,986
1.43
211,815
676,458
197,104
715,690
184,016
782,964
2,611,976
22,644
0.87
2,521,640
15,144
0.60
2,547,470
14,587
0.57
HSBC Holdings plc Annual Report and Accounts 2018
37
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Financial summary
Significant items and currency translation
Significant items
– customer redress programmes
– currency translation on significant items
Currency translation
Year ended 31 Dec
2018
$m
53
53
53
2017
$m
(105)
(108)
3
99
(6)
Net interest income of $30.5bn increased by $2.3bn or 8%
compared with 2017. This included the minimal effects of
significant items and foreign currency translation differences.
Net interest margin of 1.66% was 3 basis points (‘bps’) higher than
in 2017. This included the minimal effects of significant items and
foreign currency translation differences. The rise in net interest
margin mainly reflected the effect of rate rises on asset yields,
notably on term lending in Asia and on surplus liquidity in most
regions. This was partly offset by the higher cost of customer
accounts, notably in Asia and Europe, and the higher cost of debt
issued to meet regulatory requirements.
The increase in net interest margin in 2018 includes the fourth-
quarter impact of increased liquidity requirements in Europe and
the increased cost of customer accounts in Asia.
Interest income
Interest income increased by $8.6bn compared with 2017. This
included the minimal adverse effects of significant items and
foreign currency translation. The increase in interest income was
mainly driven by higher income from lending, surplus liquidity and
reverse repurchase agreements.
Interest income on loans and advances to customers increased by
$4.5bn compared with 2017. This included the minimal favourable
effects of customer redress programmes and foreign currency
translation differences, and reflected increases in all regions,
notably:
•
•
in Asia, where growth was mainly due to central bank rate rises
resulting in higher yields on term lending and mortgages, and
volume growth; and
in Europe, where growth was mainly in the UK, reflecting
higher yields on term lending following a central bank rate rise
and growth in mortgage balances, although yields decreased.
Interest income on short-term funds and financial investments
increased by $2.2bn compared with 2017, which included the
adverse effects of customer redress programmes and foreign
currency translation differences of $0.1bn. This increase was
across all regions, but mainly in Asia and North America, primarily
on debt securities, following central bank rate rises.
Interest income on reverse repurchase agreements increased by
$1.5bn compared with 2017, notably in North America and
Europe, following central bank rate rises.
Interest expense
Reported interest expense increased by $6.3bn, which included
the favourable effects of significant items and foreign currency
translation differences of $0.1bn. Excluding these impacts, interest
expense was $6.4bn higher, primarily due to increases in interest
expense on customer accounts, repurchase agreements and debt.
Interest expense on customer accounts was $2.9bn higher. This
included the favourable effects of customer redress programmes
and foreign currency translation differences of $0.1bn, and
reflected average balance growth in most regions. The net
increase also reflected changes in interest rates in key markets,
including:
• central bank rate rises in Asia, notably in Hong Kong, as well as
a change in portfolio mix;
• the 2018 increase in the UK base rate; and
• rate rises in Latin America and North America.
Interest expense on repurchase agreements increased by $1.7bn,
broadly in line with the increase in interest income on reverse
repurchase agreements, notably in North America and Europe,
reflecting increased balances and higher market rates.
Interest expense on debt securities in issue and own debt at fair
value was $1.3bn higher. The increase reflected a rise in the
external cost of debt, together with an increase in debt issued by
HSBC Holdings to meet regulatory requirements.
Net fee income
Funds under management
Account services
Cards
Credit facilities
Broking income
Unit trusts
Remittances
Global custody
Underwriting
Imports/exports
Insurance agency commission
Other
Fee income
Less: fee expense
Year ended 31 Dec
Significant items and currency translation
Significant items
Currency translation
Year ended 31 Dec
38
HSBC Holdings plc Annual Report and Accounts 2018
2018
$m
2,221
2,177
1,956
1,723
1,210
1,038
778
736
723
709
404
2,369
16,044
(3,424)
12,620
2017
$m
2,188
2,244
1,994
1,718
1,191
1,010
759
692
829
736
410
2,082
15,853
(3,042)
12,811
2018
$m
—
—
2016
$m
2,076
2,417
1,970
1,795
1,060
863
766
662
705
820
419
2,116
15,669
(2,892)
12,777
2017
$m
—
(76)
(76)
Net fee income of $12.6bn was $0.2bn lower compared with 2017
and included the favourable effects of foreign currency translation
differences of $0.1bn. This decrease was mainly due to lower fee
income from underwriting and corporate finance (disclosed within
‘other’) in GB&M and an increase in fee expense.
Fee income from underwriting and corporate finance decreased by
$0.2bn as a result of lower volumes in investment banking
products and reduced client activity, mainly in Europe and North
America.
Fee income from cards also decreased, partly due to a
reclassification from cards to interbank and clearing fees. This was
partly offset by an increase in cards volumes, notably in Hong
Kong and the US, from new product launches and campaigns,
together with increased activity.
In addition, fee expense increased by $0.4bn, in part from cards
due to increased customer activity in Hong Kong.
These factors were partly offset by an increase in Other fee income
due in part to an increase in interbank and clearing fees in the UK
and Mexico, following the reclassification of interchange fee
income from cards with effect from 1 January 2018.
Net income from financial instruments measured at fair value through profit or loss
Trading activities
Other trading income – hedge ineffectiveness
– on cash flow hedges
– on fair value hedges
Fair value movement on non-qualifying hedges
Other instruments designated and managed on a fair value basis and related derivatives
Net income from financial instruments held for trading or managed on a fair value basis
Financial assets held to meet liabilities under insurance and investment contracts
Liabilities to customers under investment contracts
Net income from assets and liabilities of insurance businesses, including related derivatives,
measured at fair value through profit or loss
Changes in fair value of long-term debt and related derivatives
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or
loss
Footnotes
44
57
44
Year ended 31 Dec
For footnotes, see page 67.
Significant items and currency translation
Significant items
– disposals, acquisitions and investment in new businesses
– fair value movement on financial instruments
– currency translation on significant items
Currency translation
Year ended 31 Dec
For footnotes, see page 67.
2018
$m
7,234
(45)
(8)
(37)
(207)
2,549
9,531
(1,585)
97
(1,488)
(97)
695
8,641
Footnotes
57
2017
$m
8,131
(1)
(5)
4
106
190
8,426
3,211
(375)
2,836
155
N/A
11,417
2018
$m
(108)
(8)
(100)
(108)
2016
$m
8,110
18
(5)
23
(655)
48
7,521
1,480
(218)
1,262
(1,997)
N/A
6,786
2017
$m
(258)
—
(245)
(13)
(123)
(381)
Net income from financial instruments measured at fair value of
$8.6bn was $2.8bn lower than in 2017. This included favourable
effects of foreign currency translation differences and significant
items relating to favourable fair value movements on financial
instruments, including non-qualifying hedges and debit valuation
adjustments.
‘Net income from financial instruments held for trading or
managed on a fair value basis’ increased by $1.1bn. This
included favourable foreign currency translation differences
($0.1bn), and a favourable movement in significant items ($0.1bn).
The increase also included a number of accounting
reclassifications under IFRS 9, which comprised:
‘Net expense from assets and liabilities of insurance
businesses, including related derivatives, measured at fair
value through profit or loss’ was $1.5bn, compared with net
income of $2.8bn in 2017. This decrease primarily reflected
unfavourable equity market performance in 2018 compared with
2017 in Hong Kong and France, resulting in revaluation losses on
the equity and unit trust assets supporting insurance and
investment contracts.
Corresponding movements were recorded in the liabilities to
customers, reflecting the extent to which they participate in the
investment performance of the associated assets. For investment
contracts, the offsetting movements are recorded in ‘Liabilities to
customers under investment contracts’, and for insurance
contracts in ‘Net insurance claims and benefits paid and
movement in liabilities to policyholders’.
‘Changes in fair value on long-term debt and related
derivatives’ were $0.1bn adverse in 2018, compared with
favourable movements of $0.2bn in 2017. These movements were
driven by changes in interest rates between the periods, notably in
US dollars and pounds sterling.
• a reclassification from 1 January 2018 of net income related to
structured notes from ‘trading activities’ to ‘other instruments
designated and managed on a fair value basis and related
derivatives’;
• a change in accounting treatment on 1 January 2018 of issued
debt securities, which resulted in the fair value movements
relating to changes in credit spreads on structured liabilities
being reported in other comprehensive income. This compared
with an expense of $0.5bn recognised in ‘trading activities’ in
2017;
• a reclassification on 1 January 2018 of stock lending and
borrowing instruments in Hong Kong from ‘amortised cost’ to
‘held for trading’. This resulted in the income relating to these
instruments no longer being recognised in net interest income,
and instead being recognised in ’trading activities’. See Note 37
on the Financial Statements for further details.
The favourable effect of these reclassifications, as well as
revaluation gains on US dollar-denominated capital in mainland
China, were partly offset by a decrease in revenue from trading
activities in GB&M. This decrease was primarily in Europe, as our
HSBC Holdings plc Annual Report and Accounts 2018
39
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Financial summary
Global Markets business experienced lower client activity, notably
in Rates and Credit, which was partly offset by an increase in the
US from higher metals and emerging markets trading activity.
reflecting fair value gains on underlying equities in GB&M and on
disposal of investments, notably in Principal Investments, as well
as fair value gains on debt securities.
We also recorded net adverse movements on derivatives, as well
as on the revaluation of foreign exchange positions in France.
‘Changes in fair value of other financial instruments
mandatorily measured at fair value through profit or loss’
– a new financial statement line item under IFRS 9 – recorded
revenue of $0.7bn in 2018. This revenue was mainly in the UK,
Gains less losses from financial investments
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 45.
Net gains from disposal of
– 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
– disposals, acquisitions and investment in new businesses
– currency translation on significant items
Currency translation
Year ended 31 Dec
Gains less losses from financial investments of $0.2bn decreased
by $0.9bn compared with 2017. Following the implementation of
IFRS 9, ‘net gains on the disposal of equity securities’ and
‘impairment of available-for-sale equity securities’ are no longer
reported within ‘gains less losses from financial investments’.
These are now reported within ‘net income/(expense) from
financial instruments measured at fair value through profit or loss’.
Net gains from the disposal of equity securities were $0.8bn in
2017 and included disposals, acquisitions and investment in new
businesses of $0.4bn. This comprised a gain on the disposal of our
Net insurance premium income
Gross insurance premium income
Reinsurance premiums
Year ended 31 Dec
Significant items and currency translation
Significant items
Currency translation
Year ended 31 Dec
2018
$m
218
220
N/A
(2)
N/A
218
2017
$m
1,248
403
838
7
(98)
1,150
2018
$m
—
—
—
2016
$m
1,421
357
1,058
6
(36)
1,385
2017
$m
434
434
—
(17)
417
membership interest in Visa Inc. in the US of $0.3bn and gains on
the disposal of our investment in Vietnam Technological and
Commercial Joint Stock Bank (‘Techcombank’) of $0.1bn. The
remaining balance in 2017 included net gains from the disposal of
equity securities in GB&M, mainly in the UK, France and the US.
Net gains from the disposal of debt securities were $0.2bn lower.
This reduction was mainly in Corporate Centre and related to net
losses on disposals in legacy credit, as well as lower gains on
disposals in Balance Sheet Management.
2018
$m
11,338
(679)
10,659
2017
$m
10,802
(1,023)
9,779
2018
$m
—
—
2016
$m
10,588
(637)
9,951
2017
$m
—
(68)
(68)
Net insurance premium income was $0.9bn higher than in 2017,
and included the effects of foreign currency translation
differences.
The increase in insurance premiums was driven by higher new
business volumes, particularly in Hong Kong and France, and
lower reinsurance ceded in Hong Kong.
40
HSBC Holdings plc Annual Report and Accounts 2018
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
– disposals, acquisitions and investment in new businesses
– currency translation on significant items
Currency translation
Year ended 31 Dec
2018
$m
152
12
82
33
681
(75)
885
2018
$m
1,117
(719)
292
(9)
681
2017
$m
171
214
48
46
24
(166)
337
2017
$m
919
(599)
(280)
(16)
24
2018
$m
(107)
(107)
(107)
2016
$m
157
(1,949)
4
35
902
(120)
(971)
2016
$m
900
(532)
513
21
902
2017
$m
(154)
(160)
6
(19)
(173)
Other operating income of $0.9bn in 2018 increased by $0.5bn
compared with 2017. This was primarily due to a higher favourable
change in the present value of in-force long-term insurance
business (‘PVIF’) in 2018 (up $0.7bn).
This increase in PVIF reflected a favourable movement in
‘assumption changes and experience variances’ of $0.6bn, from
the future sharing of investment returns with policyholders,
primarily in Hong Kong. In addition, the value of new business
written increased by $0.2bn during 2018 to $1.1bn. For further
details, please see Note 21 on the Financial Statements.
Gains on assets held for sale were $0.2bn lower, mainly as gains in
2017 included the sale of our holding in VocaLink in the UK and
the sale of our operations in Lebanon.
In Other, we recorded lower losses related to the early redemption
of subordinated debt linked to the US run-off portfolio ($0.1bn). In
addition, 2018 included the adverse effects of hyperinflation
accounting in Argentina ($0.1bn), while 2017 included a $0.1bn
charge arising from the opportunity to increase our investment in
new businesses.
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
Currency translation
Year ended 31 Dec
2018
$m
10,221
(414)
9,807
2017
$m
13,208
(877)
12,331
2018
$m
—
—
2016
$m
12,508
(638)
11,870
2017
$m
—
68
68
Net insurance claims and benefits paid and movement in liabilities
to policyholders were $2.5bn lower than 2017.
This decrease was primarily due to lower returns on financial
assets supporting contracts where the policyholder is subject to
part or all of the investment risk. This reflected unfavourable equity
market performance in Hong Kong and France compared with
favourable performance in 2017 as well as higher claims and
benefits paid.
These decreases were partly offset by the impact of higher new
business volumes in Hong Kong and France and lower reinsurance
ceded in Hong Kong.
The gains or losses recognised on the financial assets measured at
fair value through profit and loss that are held to support these
insurance contract liabilities are reported in ‘Net income from
assets and liabilities of insurance businesses, including related
derivatives, measured at fair value through profit or loss’ on
page 39.
HSBC Holdings plc Annual Report and Accounts 2018
41
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Financial summary
Change in expected credit losses and other credit impairment charges/Loan impairment charges and
other credit risk provisions58
Loans and advances to banks and customers
– new allowances net of allowance releases
– recoveries of amounts previously written off
Loan commitments and guarantees
Other financial assets
Debt instruments measured at fair value through other comprehensive income
Available-for-sale-debt securities
2018
$m
1,896
2,304
(408)
(3)
(21)
(105)
N/A
2017
$m
1,992
2,636
(644)
(50)
17
N/A
(190)
2016
$m
3,350
3,977
(627)
63
50
N/A
(63)
Change in expected credit losses and other credit impairment charges/Loan impairment charges and
other credit risk provisions
1,767
1,769
3,400
For footnotes, see page 67.
Significant items and currency translation
Significant items
Currency translation
Year ended 31 Dec
Changes in expected credit losses and other credit impairment
charges (‘ECL’) of $1.8bn in 2018 mainly reflected charges in
RBWM and CMB. These were partly offset by net releases in
Corporate Centre and GB&M.
In 2017, loan impairment charges and other credit risk provisions
(‘LICs’) of $1.8bn were primarily in RBWM, CMB and GB&M,
partly offset by releases in Corporate Centre. The effects of
currency translation between the periods were minimal.
ECL in 2018
In 2018, ECL in RBWM of $1.2bn primarily comprised new
allowances in Mexico ($0.4bn), the UK ($0.4bn) and Asia ($0.3bn),
and related to unsecured lending balances. The charge in the UK
also included charges relating to the current economic
uncertainty. The overall allowance for ECL remained broadly
unchanged compared with 1 January 2018, as these new
allowances broadly offset releases, mainly from write-offs and
derecognition of assets.
In CMB, ECL of $0.7bn were predominantly against a small
number of specific exposures across various sectors. In Asia,
charges of $0.3bn were mainly in Hong Kong, mainland China and
Indonesia. In Europe, the charge was primarily in the UK ($0.2bn)
against a small number of customers, and reflected the current
economic uncertainty. In Middle East and North Africa (‘MENA’),
ECL of $0.2bn were against a small number of customers in
Turkey and the UAE, as well as charges reflecting the challenging
economic conditions in Turkey. In Latin America, charges of
$0.1bn were driven by Mexico and Argentina. These charges were
partly offset by net releases of $0.1bn in North America across
various sectors.
Operating expenses
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
42
HSBC Holdings plc Annual Report and Accounts 2018
2018
$m
—
—
2017
$m
—
56
56
In GB&M, a net ECL release of $26m was driven by the US
($0.2bn) relating to a small number of clients, notably within the
oil and gas, construction and mining sectors. These releases were
partly offset by charges against two large corporate exposures in
the UK in the retail and construction sectors.
In Corporate Centre, a net ECL release of $0.1bn related to legacy
credit in the UK.
LICs in 2017
In 2017, LICs in RBWM were $1.0bn, of which the largest portion
of the charge was in Mexico ($0.4bn), reflecting our strategic
growth in unsecured lending, together with an associated rise in
delinquency. LICs in the UK were $0.1bn, and in Hong Kong were
$0.1bn, primarily relating to our unsecured lending exposure. LICs
in RBWM also included charges in MENA of $0.1bn.
In CMB, LICs of $0.5bn were driven by an increase in allowances
in Hong Kong ($0.2bn) and in the UK ($0.1bn), related to a small
number of clients across various sectors. These charges were
partly offset by releases in North America.
In GB&M, LICs of $0.5bn were primarily in the UK ($0.4bn) against
specific customers in the construction and retail sectors, and in
Hong Kong ($0.1bn) against a small number of exposures. These
charges were partly offset by releases in the US, particularly in the
oil and gas sector.
In Corporate Centre, a net release of LICs of $0.2bn was mainly
related to our legacy credit portfolio in the UK.
2018
$m
17,373
3,422
11,931
32,726
1,119
814
—
2017
$m
17,315
3,530
12,177
33,022
1,166
696
—
34,659
34,884
2016
$m
18,089
3,758
12,715
34,562
1,229
777
3,240
39,808
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
Significant items and currency translation
Significant items
– costs to achieve
– costs of structural reform
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– gain on partial settlement of pension obligation
– past service costs of guaranteed minimum pension benefits equalisation
– restructuring and other related costs
– settlements and provisions in connection with legal and regulatory matters
– currency translation on significant items
Currency translation
Year ended 31 Dec
2018
2017
2016
133,644
129,402
124,810
44,805
48,500
6,819
1,449
44,871
45,725
7,250
1,439
44,712
46,659
8,054
10,940
235,217
228,687
235,175
2018
$m
1,669
—
361
146
52
—
228
66
816
1,669
2017
$m
3,796
3,002
420
655
53
(188)
—
—
(198)
52
(143)
3,653
Reported operating expenses of $34.7bn were $0.2bn lower than
in 2017. This reflected a net favourable movement in significant
items of $2.1bn, which included:
Performance-related pay was higher by $0.2bn, and Operations
and transaction volume-related operating expenses increased by
$0.2bn.
• the non-recurrence of costs to achieve, which were $3.0bn in
2017; and
• customer redress programme costs of $0.1bn in 2018,
compared with $0.7bn in 2017.
These items were partly offset by:
• settlements and provisions in connection with legal and
regulatory matters of $0.8bn in 2018, compared with a net
release of $0.2bn in 2017;
• a provision in relation to past service costs in connection with
guaranteed minimum pension benefits equalisation of $0.2bn;
and
• the non-recurrence of gains on the partial settlement of pension
obligations of $0.2bn in 2017.
The reduction in reported operating expenses also included an
adverse effect of foreign currency translation differences of
$0.1bn.
Excluding significant items and foreign currency translation
differences, operating expenses of $33.0bn were $1.8bn higher
than in 2017. This increase mainly reflected near- and medium-
term investments to grow the business ($0.9bn), primarily in
RBWM and GB&M. We also increased our investment in
productivity programmes ($0.3bn), mainly in Technology and
Operations.
Share of profit in associates and joint ventures
The cost savings from our productivity programmes absorbed the
impact of inflation. Our UK bank levy charge remained broadly
unchanged, at $964m.
We maintained our momentum in growing the business during
2018.
•
•
•
In RBWM, we made investments to develop digital capabilities
and recruit front-line staff to deliver improved customer service,
as well as to grow the business, particularly in the UK, Hong
Kong, mainland China (including the Pearl River Delta) and the
US.
In GB&M, we made strategic hires in Global Markets and
Global Banking, and continued to invest in mainland China as
well as in new digital capabilities and functionalities for
Securities Services and Global Liquidity and Cash Management
businesses.
In CMB, we invested in digital offerings to improve customer
journeys, such as on-boarding and credit, as well as market-
leading innovations including landmark trade transactions on
the Voltron and we.trade platforms.
The number of employees expressed in FTEs at 31 December 2018
was 235,217, an increase of 6,530 since 31 December 2017. This
was primarily driven by investments in business growth
programmes across RBWM, GB&M and CMB. The number of
contractors as at 31 December 2018 was 10,854, a decrease of
2,040 from 31 December 2017.
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
2018
$m
2,519
2,032
421
66
17
2017
$m
2,349
1,863
422
64
26
2016
$m
2,326
1,892
415
19
28
2,536
2,375
2,354
HSBC Holdings plc Annual Report and Accounts 2018
43
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Financial summary
Our share of profit in associates and joint ventures was $2.5bn, an
increase of $161m or 7% compared with 2017, and included the
favourable effects of foreign currency translation differences of
$41m.
Excluding the effects of foreign currency translation differences,
our share of profit in associates and joint ventures increased by
$120m compared with 2017. This primarily reflected an increase in
income from Bank of Communications Co., Limited (‘BoCom’).
At 31 December 2018, we performed an impairment review
of our investment in BoCom and concluded that it was not
impaired, based on our value-in-use (‘VIU’) calculation (for more
information on the key assumptions in our VIU calculation,
including the sensitivity of the VIU to each key assumption (see
Note 18 on the Financial Statements).
Tax expense
Profit before tax
Tax expense
Profit after tax for the year ended 31 Dec
Effective tax rate
As discussed in Note 18 on the Financial Statements, in future
periods the VIU may increase or decrease depending on the effect
of changes to model inputs. It is expected that the carrying
amount will increase due to retained profits earned by BoCom. At
the point where the carrying amount exceeds the VIU, impairment
would be recognised. We would continue to recognise our share
of BoCom’s profit or loss, but the carrying amount would be
reduced to equal the VIU, with a corresponding reduction in
income. An impairment review would continue to be performed at
each subsequent reporting period, with the carrying amount and
income adjusted accordingly.
2018
$m
19,890
(4,865)
15,025
24.5%
2017
$m
17,167
(5,288)
11,879
30.8%
2016
$m
7,112
(3,666)
3,446
51.5%
The effective tax rate for 2018 of 24.5% is lower than the 30.8%
for 2017 as 2017 included 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%.
This charge increased the 2017 effective tax rate by 7.5%.
Further detail is provided in Note 8 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 and otherwise mandatorily measured at fair
value through profit or loss
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
Footnotes
59
2018
$m
162,843
238,130
41,111
N/A
207,825
72,167
981,696
242,804
407,433
204,115
2017
$m
180,624
287,995
N/A
29,464
219,818
90,393
962,964
201,553
389,076
159,884
2016
$m
128,009
235,125
N/A
24,756
290,872
88,126
861,504
160,974
436,797
148,823
2015
$m
98,934
224,837
N/A
23,852
288,476
90,401
924,454
146,255
428,955
183,492
2014
$m
129,957
304,193
N/A
29,037
345,008
112,149
974,660
161,713
415,467
161,955
2,558,124
2,521,771
2,374,986
2,409,656
2,634,139
56,331
69,922
59,939
54,371
77,426
1,362,643
1,364,462
1,272,386
1,289,586
1,350,642
165,884
84,431
148,505
205,835
85,342
87,330
167,574
130,002
184,361
94,429
216,821
64,546
85,667
113,690
88,958
153,691
86,832
279,819
65,915
75,273
109,595
80,400
141,614
66,408
281,071
88,949
69,938
139,801
107,432
190,572
76,153
340,669
95,947
73,861
121,459
2,363,875
2,323,900
2,192,408
2,212,138
2,434,161
186,253
7,996
194,249
190,250
7,621
197,871
175,386
7,192
182,578
188,460
9,058
197,518
190,447
9,531
199,978
Total liabilities and equity at 31 Dec
2,558,124
2,521,771
2,374,986
2,409,656
2,634,139
For footnotes, see page 67.
A more detailed consolidated balance sheet is contained in the Financial Statements on page 216.
44
HSBC Holdings plc Annual Report and Accounts 2018
Five-year selected financial information
Called up share capital
Capital resources
Undated subordinated loan capital
Preferred securities and dated subordinated loan capital
Risk-weighted assets
Total shareholders’ equity
Less: preference shares and other equity instruments
Total ordinary shareholders’ equity
Less: goodwill and intangible assets (net of tax)
Tangible ordinary shareholders’ equity
Financial statistics
Loans and advances to customers as a percentage of customer accounts
Average total shareholders’ equity to average total assets
Net asset value per ordinary share at year-end ($)
Tangible net asset value per ordinary share at year-end ($)
Number of $0.50 ordinary shares in issue (millions)
Basic number of $0.50 ordinary shares outstanding (millions)
Basic number of $0.50 ordinary shares outstanding and dilutive potential
ordinary shares (millions)
Closing foreign exchange translation rates to $:
$1: £
$1: €
For footnotes, see page 67.
Footnotes
60
61
62
2018
$m
10,180
173,238
1,969
35,014
865,318
186,253
(23,772)
162,481
(22,425)
140,056
72.0%
7.16%
8.13
7.01
20,361
19,981
2017
$m
10,160
182,383
1,969
42,147
871,337
190,250
(23,655)
166,595
(21,680)
144,915
70.6%
7.33%
8.35
7.26
20,321
19,960
2016
$m
10,096
172,358
1,967
42,600
857,181
175,386
(18,515)
156,871
(19,649)
137,222
67.7%
7.37%
7.91
6.92
20,192
19,838
2015
$m
9,842
189,833
2,368
42,844
2014
$m
9,609
190,730
2,773
47,208
1,102,995
1,219,765
188,460
(16,517)
171,943
(24,626)
147,317
71.7%
7.31%
8.77
7.51
19,685
19,604
190,447
(12,937)
177,510
(26,196)
151,314
72.2%
7.01%
9.28
7.91
19,218
19,119
20,059
20,065
19,933
19,744
19,209
0.783
0.873
0.740
0.834
0.811
0.949
0.675
0.919
0.642
0.823
Balance sheet commentary compared with
1 January 2018
The effect of the adoption of IFRS 9 ‘Financial Instruments’ on 1
January 2018 was a reduction in our total assets of $3.3bn from
31 December 2017, and the reclassification of certain items within
the balance sheet. The commentary that follows compares our
balance sheet at 31 December 2018 with that at 1 January 2018.
At 31 December 2018, our total assets were $2.6tn, an increase of
$40bn or 2% on a reported basis and $118bn or 5% on a constant
currency basis. The increase reflected targeted lending growth,
notably in Asia.
Our ratio of customer advances to customer accounts was 72%,
up from 70% at 1 January 2018.
Assets
Cash and balances at central banks decreased by $18bn or 10%
and included an adverse effect of foreign currency translation
differences of $7bn. Excluding this, cash and balances at central
banks decreased by $11bn, mainly in Europe, reflecting the
redeployment of our commercial surplus.
Trading assets decreased by $16bn or 6%, mainly driven by an
adverse effect of foreign currency translation differences of $10bn.
Excluding this, trading assets decreased by $6bn, reflecting a
reduction in equity security holdings, notably in the UK. This was
partly offset by increased debt securities and government bonds
held in the US and Hong Kong.
Derivative assets decreased by $12bn or 5%, mainly reflecting an
adverse effect of foreign currency translation differences of $10bn.
Excluding this, derivative assets decreased by $2bn, which is
consistent with the decrease in derivative liabilities, since the
underlying risk is broadly matched.
‘Reverse repurchase agreements – non-trading’ increased by
$41bn or 20%, notably in the UK and France, mainly driven by
customer demand in our Global Markets business. This was partly
offset by a reduction in the US, reflecting a decrease in the
commercial surplus due to lower customer deposits and the
repayment of long-term debt.
Financial investments increased by $24bn or 6%, mainly in Hong
Kong due to an increase in investments in government bonds and
debt securities. Financial investments were also higher in the US,
reflecting increased investment in mortgage-backed securities and
corporate bonds.
Loans and advances to customers
Loans and advances to customers increased by $32bn or 3% on a
reported basis. This included an adverse effect of foreign currency
translation differences of $34bn, resulting in growth of $66bn or
7% on a constant currency basis.
Loans and advances to customers increased by $69bn or 8%, after
excluding the effects of foreign currency translation differences,
and a reduction in corporate current account balances of $4bn
relating to CMB and GB&M customers in the UK that settled their
overdraft and deposit balances on a net basis.
This growth was primarily in Asia (up $38bn). The increase in Asia
was notably in RBWM (up $15bn) as we continued to increase
personal lending, primarily in Hong Kong (up $12bn), reflecting our
strategy to maintain our leading position in mortgages and
personal lending. Customer lending was also higher in CMB (up
$13bn) and GB&M (up $11bn), reflecting higher term lending in
Hong Kong resulting from our continued strategic focus on loan
growth in the region, as well as from an increase in customer
demand.
In Europe, customer lending increased by $20bn, notably in the
UK from growth in mortgage balances (up $11bn), due to our
focus on broker-originated mortgages. We also grew balances in
CMB in the UK (up $6bn), driven by business growth aligned to the
Group strategy, which resulted in higher term lending and
overdraft balances, primarily to mid-market and commercial real
estate clients.
In North America, loans and advances to customers increased by
$6bn, primarily in Canada ($5bn) in CMB ($4bn), mainly from new
to bank client acquisition and higher facility utilisation on term
lending, and in RBWM ($1bn) from increased residential mortgage
lending.
Liabilities
‘Repurchase agreements – non-trading’ increased by $36bn or
28%, primarily in the US and France, mainly driven by the
increased use of repurchase agreements for funding in our Global
Markets business.
Debt securities in issue increased by $19bn or 28%, notably
relating to an increase in commercial paper issuances, primarily
US dollar-denominated. In addition, there was an increase in
senior MREL issuances in the period as well as sterling- and euro-
denominated medium term notes, primarily in the UK.
HSBC Holdings plc Annual Report and Accounts 2018
45
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Financial summary | Global businesses
Derivative liabilities fell by $11bn or 5%, mainly reflecting the
adverse effect of foreign currency translation differences of $9bn.
Excluding this, derivative liabilities decreased by $2bn, which is
consistent with the decrease in derivative assets, since the
underlying risk is broadly matched.
Customer accounts
Customer accounts increased by $2bn on a reported basis,
including the adverse effect of foreign currency translation
differences of $43bn, resulting in growth of $45bn or 3% on a
constant currency basis.
Customer accounts rose by $49bn, after excluding the impacts of
foreign currency translation differences and a reduction in
corporate current account balances of $4bn, relating to CMB and
GB&M customers in the UK that settled their overdraft and deposit
balances on a net basis.
This growth in customer accounts was notably in Europe (up
$29bn). GB&M balances rose by $11bn as we targeted balance
growth to support funding in the non-ring-fenced bank, mainly in
GLCM in the UK. CMB balances increased by $9bn, notably
reflecting growth in GLCM within the UK ring-fenced bank.
Customer accounts were also higher in RBWM (up $8bn) mainly in
the UK, from higher current accounts and savings balances.
In Asia, we grew customer accounts by $18bn, notably in RBWM
(up $10bn) and in GB&M (up $9bn) primarily in savings, reflecting
higher customer inflows due to competitive rates.
Customer accounts increased in Latin America (up $4bn), notably
in Argentina and Mexico, reflecting higher savings and term
deposits, and the impact of currency devaluation on foreign
currency deposits booked on our Argentina balance sheet.
Customer accounts by country/territory
These increases were partly offset in North America (down $5bn),
notably in CMB (down $2bn) due to balance outflows in Bermuda
and a reduction in savings deposits in the US. GB&M balances fell
by $2bn driven by a decrease in demand deposits in the US.
Equity
Total shareholders’ equity of $186bn decreased by $2bn or 1%.
The effects of profits generated in the period ($14bn) and
favourable changes in fair value attributable to changes in own
credit risk ($3bn) were more than offset by an increase in
accumulated foreign exchange losses ($7bn) and dividends paid to
shareholders ($12bn).
Risk-weighted assets
Risk-weighted assets (‘RWAs’) were $865.3bn at 31 December
2018. Excluding the $0.8bn impact of IFRS 9 implementation on 1
January 2018 and foreign currency translation differences, RWAs
increased by $16.6bn in 2018. This comprised growth of $27.6bn
from asset size and $2.9bn from changes in asset quality. This was
partly offset by a $10.0bn fall from changes to methodology and
policy and a $3.9bn decrease due to model updates.
Asset size movements principally included:
• a $41.5bn growth predominantly in corporate and mortgage
lending across CMB, RBWM and GB&M, most significantly in
Asia; and
• a $11.3bn decrease in Corporate Centre RWAs, predominantly
due to reductions in legacy portfolios.
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
46
HSBC Holdings plc Annual Report and Accounts 2018
2018
$m
503,154
399,487
45,169
16,713
6,315
35,470
664,824
484,897
45,712
42,323
20,649
13,904
13,602
14,210
3,810
25,717
35,408
16,583
4,169
4,493
10,163
133,291
82,523
43,898
6,870
25,966
19,936
6,030
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
1,362,643
1,364,462
Loans and advances, Deposits by currency
$m
Loans and advances to banks
Loans and advances to customers
Total loans and advances
Deposits by banks
Customer accounts
Total deposits
For footnotes, see page 67.
USD
23,469
176,907
200,376
17,802
348,741
366,543
GBP
4,351
243,541
247,892
5,777
340,244
346,021
At
31 Dec 2018
EUR
3,462
86,583
90,045
15,923
116,095
132,018
HKD
3,241
220,458
223,699
3,748
290,748
294,496
CNY
7,418
29,973
37,391
4,065
49,596
53,661
Others63
30,226
224,234
254,460
9,016
217,219
226,235
Total
72,167
981,696
1,053,863
56,331
1,362,643
1,418,974
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/territory
Page
48
49
50
53
55
57
63
Summary
(Audited)
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. 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 2017 and 2016 adjusted performance
information is presented on a constant currency basis as described on
page 34.
As required by IFRS 8, reconciliations of the total adjusted global business
results to the Group reported results are presented on page 48.
Supplementary reconciliations from reported to adjusted results by global
business are presented on pages 50 to 52 for information purposes.
Global business performance is also assessed using return on tangible
equity (‘RoTE’), excluding significant items and the UK bank levy. A
reconciliation of global business RoTE, excluding significant items and the
UK bank levy to the Group’s RoTE is provided in the reconciliations of
non-GAAP financial measures at 31 December 2018.
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 global
businesses and geographical regions. While such allocations have been
made on a systematic and consistent basis, they necessarily involve a
degree of subjectivity. Costs that are not allocated to global businesses
are included in 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 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 Limited, HSBC Bank plc, HSBC UK Bank plc, HSBC Bank
Middle East Limited 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.
HSBC Holdings plc Annual Report and Accounts 2018
47
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Global businesses
Analysis of adjusted results by global business
(Audited)
HSBC adjusted profit before tax and balance sheet data
2018
Retail
Banking and
Wealth
Management
Commercial
Banking
Global
Banking and
Markets
Footnotes
$m
$m
$m
Global
Private
Banking
$m
Corporate
Centre
$m
Net operating income before change in expected
credit losses and other credit impairment charges
26
– external
– inter-segment
of which: net interest income/(expense)
Change in expected credit losses and other credit
impairment charges
Net operating income/(expense)
Total operating expenses
Operating profit/(loss)
Share of profit in associates and joint ventures
Adjusted profit before tax
Share of HSBC’s adjusted profit before tax
Adjusted cost efficiency ratio
Adjusted balance sheet data
Loans and advances to customers (net)
Interests in associates and joint ventures
Total external assets
Customer accounts
Adjusted risk-weighted assets (unaudited)
Net operating income before loan impairment charges
and other credit risk provisions
– external
– inter-segment
of which: net interest income/(expense)
Loan impairment charges and other credit risk provisions/
(recoveries)
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
64
26
Adjusted risk-weighted assets (unaudited)
64
For footnotes, see page 67.
21,935
17,270
4,665
15,822
(1,177)
20,758
(13,711)
7,047
33
7,080
%
32.6
62.5
$m
14,885
14,652
233
10,666
(739)
14,146
(6,477)
7,669
—
7,669
%
35.3
43.5
$m
15,512
17,986
(2,474)
5,259
26
15,538
(9,460)
6,078
—
6,078
%
28.0
61.0
$m
1,785
1,497
288
888
8
1,793
(1,449)
344
—
344
%
1.6
81.2
$m
361,872
333,162
244,978
39,217
397
476,784
640,924
126,865
—
360,216
357,596
321,244
—
1,012,272
290,914
281,021
—
43,790
64,658
16,824
20,220
17,024
3,196
13,927
(969)
19,251
(12,786)
6,465
14
6,479
%
30.6
63.2
$m
13,247
13,378
(131)
9,060
(465)
12,782
(5,953)
6,829
—
6,829
%
32.3
44.9
$m
2017
15,285
16,557
(1,272)
4,851
(446)
14,839
(8,991)
5,848
—
5,848
%
27.7
58.8
$m
332,261
305,213
244,476
363
451,516
621,092
118,131
—
336,163
351,617
289,824
—
946,747
273,080
293,135
1,723
1,453
270
825
(16)
1,707
(1,411)
296
—
296
%
1.4
81.9
$m
39,597
—
46,247
64,957
15,795
48
HSBC Holdings plc Annual Report and Accounts 2018
Total
$m
53,940
53,940
—
30,436
(1,767)
52,173
(32,990)
19,183
2,536
21,719
%
100.0
61.2
$m
981,696
22,407
(177)
2,535
(2,712)
(2,199)
115
(62)
(1,893)
(1,955)
2,503
548
%
2.5
(1,069.5)
$m
2,467
22,010
665,062
2,558,124
8,551
1,362,643
118,550
864,504
1,186
3,249
(2,063)
(481)
183
1,369
(2,090)
(721)
2,402
1,681
%
8.0
176.2
$m
7,294
21,656
662,364
10,883
128,795
51,661
51,661
—
28,182
(1,713)
49,948
(31,231)
18,717
2,416
21,133
%
100.0
60.5
$m
928,841
22,019
2,443,037
1,321,629
845,680
HSBC adjusted profit before tax and balance sheet data (continued)
2016
Retail
Banking and
Wealth
Management
Commercial
Banking
Global
Banking and
Markets
Footnotes
$m
$m
$m
Global
Private
Banking
$m
Corporate
Centre
$m
Net operating income before loan impairment charges
and other credit risk provisions
26
– external
– inter-segment
of which: net interest income
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 (unaudited)
64
For footnotes, see page 67.
18,483
16,050
2,433
12,906
(1,101)
17,382
(12,144)
5,238
20
5,258
%
27.8
65.7
$m
12,656
12,656
—
8,506
(986)
11,670
(5,747)
5,923
—
5,923
%
31.3
45.4
$m
14,807
17,488
(2,681)
4,800
(461)
14,346
(8,846)
5,500
—
5,500
%
29.1
59.7
$m
312,393
285,253
230,171
391
421,559
595,765
111,617
—
309,905
346,746
276,705
—
949,732
261,949
301,728
1,770
1,512
258
813
—
1,770
(1,484)
286
—
286
%
1.5
83.8
$m
36,222
—
43,663
71,389
15,418
Total
$m
49,260
49,260
—
28,201
(2,572)
46,688
(30,147)
16,541
2,365
18,906
%
100.0
61.2
$m
1,544
1,554
(10)
1,176
(24)
1,520
(1,926)
(406)
2,345
1,939
%
10.3
124.7
$m
12,331
19,635
692,740
14,344
149,680
876,370
20,026
2,417,599
1,290,193
855,148
Reconciliation of reported and adjusted items
(Audited)
Adjusted results reconciliation
2018
Significant
Adjusted
items Reported Adjusted
Footnotes
$m
$m
$m
$m
26
53,940
(1,767)
N/A
(160)
53,780
51,661
—
N/A
(1,767)
N/A
N/A
(1,713)
Revenue
ECL
LICs
Operating expenses
(32,990)
(1,669)
(34,659)
(31,231)
Share of profit in associates
and joint ventures
2,536
—
2,536
2,416
Profit/(loss) before tax
21,719
(1,829)
19,890
21,133
2017
2016
Currency
translation
Significant
items
Reported Adjusted
Currency
translation
Significant
items
Reported
$m
(133)
N/A
(56)
143
(41)
(87)
$m
(83)
N/A
—
$m
$m
51,445
49,260
N/A
N/A
(1,769)
(2,572)
(3,796)
(34,884)
(30,147)
—
2,375
2,365
(3,879)
17,167
18,906
$m
803
N/A
(24)
(361)
(10)
408
$m
$m
(2,097)
47,966
N/A
(804)
N/A
(3,400)
(9,300)
(39,808)
(1)
(12,202)
2,354
7,112
For footnotes, see page 67.
Adjusted balance sheet reconciliation
Loans and advances to customers (net)
Interests in associates and joint ventures
Total external assets
Customer accounts
2018
Reported and
adjusted
$m
981,696
22,407
2,558,124
1,362,643
2017
Currency
translation
$m
34,123
725
78,734
42,833
Adjusted
$m
928,841
22,019
2,443,037
1,321,629
Reported
Adjusted
$m
962,964
22,744
2,521,771
1,364,462
$m
876,370
20,026
2,417,599
1,290,193
2016
Currency
translation
$m
(14,866)
3
(42,613)
(17,807)
Reported
$m
861,504
20,029
2,374,986
1,272,386
HSBC Holdings plc Annual Report and Accounts 2018
49
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Global businesses
Adjusted profit reconciliation
Year ended 31 Dec
Adjusted profit before tax
Significant items
– customer redress programmes (revenue)
– disposals, acquisitions and investment in new businesses (revenue)
– fair value movements on financial instruments
– costs of structural reform
– costs to achieve
– customer redress programmes (operating expenses)
– disposals, acquisitions and investment in new businesses (operating expenses)
– disposals, acquisitions and investment in new businesses (LICs)
– gain on partial settlement of pension obligation
– impairment of GPB – Europe goodwill
– past service costs of guaranteed minimum pension benefits equalisation
– restructuring and other related costs
– settlements and provisions in connection with legal and other regulatory matters
Footnotes
65, 66
– disposals, acquisitions and investment in new businesses (share of profit in associates and joint ventures)
– currency translation on significant items
Currency translation
Reported profit before tax
For footnotes, see page 67.
Reconciliation of reported and adjusted items – global businesses
Supplementary unaudited analysis of significant items by global business is presented below.
2018
$m
21,719
(1,829)
53
(113)
(100)
(361)
—
(146)
(52)
—
—
—
(228)
(66)
(816)
—
19,890
2017
$m
21,133
(3,879)
(108)
274
(245)
(420)
(3,002)
(655)
(53)
—
188
—
—
—
198
—
(56)
(87)
17,167
2016
$m
18,906
(12,202)
2
264
(2,453)
(223)
(3,118)
(559)
(1,087)
(748)
—
(3,240)
—
—
(1,025)
(1)
(14)
408
7,112
Retail Banking
and Wealth
Management
Commercial
Banking
2018
Global
Banking and
Markets
Global
Private
Banking
Corporate
Centre
$m
$m
$m
$m
$m
Total
$m
Footnotes
26
Revenue
Reported
Significant items
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– fair value movements on financial instruments
65
Adjusted
Change in expected credit losses and other credit
impairment charges
Reported
Adjusted
Operating expenses
Reported
Significant items
– costs of structural reform
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– past service costs of guaranteed minimum pension benefits
equalisation
– restructuring and other related costs
– settlements and provisions in connection with legal and
regulatory matters
Adjusted
Share of profit in associates and joint ventures
Reported
Adjusted
Profit/(loss) before tax
Reported
Significant items
– revenue
– operating expenses
Adjusted
Loans and advances to customers (net)
Reported
Adjusted
Customer accounts
Reported
Adjusted
For footnotes, see page 67.
50
HSBC Holdings plc Annual Report and Accounts 2018
21,928
14,938
15,634
1,790
(510)
53,780
7
—
7
—
(53)
(53)
—
—
(122)
—
—
(122)
(5)
—
(5)
—
333
—
111
222
160
(53)
113
100
21,935
14,885
15,512
1,785
(177)
53,940
(1,177)
(1,177)
(739)
(739)
(13,902)
(6,480)
191
2
173
—
—
—
16
3
8
(5)
—
—
—
—
26
26
(9,348)
(112)
41
(22)
—
—
—
(131)
8
8
115
115
(1,767)
(1,767)
(1,550)
(3,379)
(34,659)
101
—
—
52
—
7
42
1,486
310
—
—
228
59
889
1,669
361
146
52
228
66
816
(13,711)
(6,477)
(9,460)
(1,449)
(1,893)
(32,990)
33
33
—
—
—
—
—
—
2,503
2,503
2,536
2,536
6,882
7,719
6,312
248
(1,271)
19,890
198
7
191
(50)
(53)
3
(234)
(122)
(112)
7,080
7,669
6,078
96
(5)
101
344
1,819
333
1,486
548
1,829
160
1,669
21,719
361,872
361,872
333,162
333,162
244,978
244,978
39,217
39,217
2,467
2,467
981,696
981,696
640,924
640,924
357,596
357,596
290,914
290,914
64,658
64,658
8,551 1,362,643
8,551 1,362,643
Reconciliation of reported and adjusted items (continued)
Revenue
Reported
Currency translation
Significant items
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– fair value movements on financial instruments
65
– currency translation on significant items
Adjusted
LICs
Reported
Currency translation
Adjusted
Operating expenses
Reported
Currency translation
Significant items
– costs of structural reform
– costs to achieve
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– gain on partial settlement of pension obligation
– settlements and provisions in connection with legal and
regulatory matters
– currency translation on significant items
Adjusted
Share of profit in associates and joint ventures
Reported
Currency translation
Adjusted
Profit/(loss) before tax
Reported
Currency translation
Significant items
– revenue
– operating expenses
Adjusted
Loans and advances to customers (net)
Reported
Currency translation
Adjusted
Customer accounts
Reported
Currency translation
Adjusted
For footnotes, see page 67.
2017
Retail
Banking and
Wealth
Management
Commercial
Banking
Global
Banking and
Markets
$m
$m
$m
Global
Private
Banking
$m
Corporate
Centre
$m
Total
$m
Footnotes
26
20,519
13,120
14,617
1,723
1,466
51,445
(67)
(232)
3
(235)
—
—
27
100
103
—
—
(3)
181
487
2
99
373
13
21
(21)
—
(20)
—
(1)
(29)
(251)
—
(118)
(128)
(5)
133
83
108
(274)
245
4
20,220
13,247
15,285
1,723
1,186
51,661
(980)
11
(969)
(496)
31
(465)
(459)
13
(446)
(16)
—
(16)
182
1
183
(1,769)
56
(1,713)
(13,734)
(6,001)
(8,723)
(1,586)
(4,840)
(34,884)
38
910
6
270
637
—
(26)
—
23
(6)
54
3
44
16
—
(9)
—
—
(112)
(156)
8
240
2
—
(9)
(376)
(21)
(18)
193
—
3
—
31
(3)
164
(2)
(45)
2,795
403
2,445
—
22
(141)
14
52
(143)
3,796
420
3,002
655
53
(188)
(198)
52
(12,786)
(5,953)
(8,991)
(1,411)
(2,090)
(31,231)
18
(4)
14
5,823
(22)
678
(232)
910
6,479
346,148
(13,887)
332,261
639,592
(18,500)
621,092
—
—
—
6,623
52
154
100
54
6,829
316,533
(11,320)
305,213
362,908
(11,291)
351,617
—
—
—
5,435
82
331
487
(156)
5,848
252,474
(7,998)
244,476
283,943
(10,863)
273,080
—
—
—
121
3
172
(21)
193
296
40,326
(729)
39,597
66,512
(1,555)
64,957
2,357
45
2,402
(835)
(28)
2,544
(251)
2,795
1,681
2,375
41
2,416
17,167
87
3,879
83
3,796
21,133
7,483
962,964
(189)
(34,123)
7,294
928,841
11,507
1,364,462
(624)
(42,833)
10,883
1,321,629
HSBC Holdings plc Annual Report and Accounts 2018
51
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Global businesses
Reconciliation of reported and adjusted items (continued)
Revenue
Currency translation
Reported
Currency translation
Significant items
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– fair value movements on financial instruments
65, 66
– currency translation on significant items
Adjusted
LICs
Reported
Currency translation
Significant items
– disposals, acquisitions and investment in new businesses
– currency translation on significant items
Adjusted
Operating expenses
Reported
Currency translation
Significant items
– costs of structural reform
– costs to achieve
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– impairment of GPB – Europe goodwill
– settlements and provisions in connection with legal and
regulatory matters
– currency translation on significant items
Adjusted
Share of profit in associates and joint ventures
Reported
Currency translation
Significant items
– disposals, acquisitions and investment in new businesses
– 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
Loans and advances to customers (net)
Reported
Currency translation
Adjusted
Customer accounts
Reported
Currency translation
Adjusted
For footnotes, see page 67.
52
HSBC Holdings plc Annual Report and Accounts 2018
2016
Retail
Banking and
Wealth
Management
Commercial
Banking
Global
Banking and
Markets
$m
$m
$m
Global
Private
Banking
$m
Corporate
Centre
$m
Footnotes
26
Total
$m
47,966
(803)
2,097
(2)
(264)
2,453
(90)
49,260
20,338
(374)
(1,481)
—
(1,413)
—
(68)
13,405
15,213
1,745
(214)
(535)
—
(518)
—
(17)
(89)
(317)
—
(268)
(26)
(23)
14
11
(2)
14
—
(1)
18,483
12,656
14,807
1,770
(2,735)
(140)
4,419
—
1,921
2,479
19
1,544
(1,633)
(1,272)
(471)
33
499
462
37
(1,101)
(4)
290
272
18
(986)
(5)
15
14
1
(461)
(14,138)
(6,087)
(9,302)
249
1,745
2
393
497
805
—
—
48
83
257
1
62
34
155
—
—
5
16
440
—
233
28
82
—
94
3
1
(1)
—
—
—
—
(5,074)
(19)
3,609
—
6
—
18
3,240
341
4
(25)
(3,400)
1
—
—
—
24
804
748
56
(24)
(2,572)
(5,207)
(39,808)
32
3,249
220
2,424
—
27
—
590
(12)
361
9,300
223
3,118
559
1,087
3,240
1,025
48
(12,144)
(5,747)
(8,846)
(1,484)
(1,926)
(30,147)
20
—
—
—
—
20
4,587
(92)
763
(1,481)
499
1,745
—
5,258
306,056
6,337
312,393
590,502
5,263
595,765
—
—
—
—
—
—
6,046
(135)
12
(535)
290
257
—
—
—
—
—
—
—
5,440
(78)
138
(317)
15
440
—
5,923
5,500
281,930
3,323
285,253
341,729
5,017
346,746
225,855
4,316
230,171
256,095
5,854
261,949
—
—
—
—
—
—
(3,328)
(6)
3,620
11
—
3,609
—
286
35,456
766
36,222
69,850
1,539
71,389
2,334
2,354
10
1
1
—
10
1
1
—
2,345
2,365
(5,633)
(97)
7,669
4,419
—
3,249
1
7,112
(408)
12,202
2,097
804
9,300
1
1,939
18,906
12,207
861,504
124
14,866
12,331
876,370
14,210
1,272,386
134
17,807
14,344
1,290,193
Reconciliation of reported and adjusted risk-weighted assets
At 31 Dec 2018
Retail
Banking and
Wealth
Management
Commercial
Banking
Global
Banking and
Markets
Global Private
Banking
Corporate
Centre
Footnotes
$bn
$bn
$bn
126.9
321.2
281.0
—
—
—
—
—
—
64
126.9
321.2
281.0
At 31 Dec 2017
121.5
(3.4)
—
—
—
301.0
(11.2)
—
—
—
299.3
(6.1)
—
—
—
$bn
16.8
—
—
16.8
16.0
(0.2)
—
—
—
$bn
119.4
(0.8)
(0.8)
118.6
133.5
(2.0)
(2.7)
(2.6)
(0.1)
64
118.1
289.8
293.2
15.8
128.8
At 31 Dec 2016
Total
$bn
865.3
(0.8)
(0.8)
864.5
871.3
(22.9)
(2.7)
(2.6)
(0.1)
845.7
115.1
275.9
300.4
(0.1)
(3.4)
(3.2)
(0.2)
2.2
(1.4)
(1.0)
(0.4)
2.0
(0.7)
(0.7)
—
15.3
0.1
—
—
—
150.5
857.2
(0.1)
(0.7)
(0.2)
(0.5)
4.1
(6.2)
(5.1)
(1.1)
64
111.6
276.7
301.7
15.4
149.7
855.1
Risk-weighted assets
Reported
Disposals
– operations in Brazil
Adjusted
Risk-weighted assets
Reported
Currency translation
Disposals
– operations in Brazil
– operations in Lebanon
Adjusted
Risk-weighted assets
Reported
Currency translation
Disposals
– operations in Brazil
– operations in Lebanon
Adjusted
For footnotes, see page 67.
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.
RBWM – adjusted profit before tax data
Year ended 31 Dec 2018
Net operating income before change in expected credit losses and other
credit impairment charges
26
Footnotes
– net interest income
– net fee income/(expense)
– other income
ECL
Net operating income
Total operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
Year ended 31 Dec 2017
Net operating income before loan impairment charges and other credit risk
provisions
26
– net interest income
– net fee income/(expense)
– other income
LICs
Net operating income
Total operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
Total
RBWM
$m
21,935
15,822
5,198
915
(1,177)
20,758
(13,711)
7,047
33
7,080
20,220
13,927
5,150
1,143
(969)
19,251
(12,786)
6,465
14
6,479
Consists of
Banking
operations
Insurance
manufacturing
Asset
management
$m
$m
$m
19,053
13,759
4,723
571
(1,175)
17,878
(12,517)
5,361
2
5,363
17,182
11,914
4,628
640
(969)
16,213
(11,681)
4,532
4
4,536
1,816
2,063
(579)
332
(2)
1,814
(472)
1,342
31
1,373
1,971
2,013
(498)
456
—
1,971
(403)
1,568
10
1,578
1,066
—
1,054
12
—
1,066
(722)
344
—
344
1,067
—
1,020
47
—
1,067
(702)
365
—
365
For footnotes, see page 67.
RBWM insurance manufacturing adjusted revenue of $1,816m (2017: $1,971m) was disclosed within the management view of adjusted revenue on page 18, as follows:
Wealth Management $1,656m (2017: $1,870m) and Other $160m (2017: $101m).
HSBC Holdings plc Annual Report and Accounts 2018
53
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Global businesses | Geographical regions
RBWM Insurance manufacturing adjusted results
The following table shows the results of our insurance
manufacturing operations by income statement line item. It shows
the results of insurance manufacturing operations for RBWM and
for all global business segments in aggregate, and separately the
insurance distribution income earned by HSBC bank channels.
Adjusted results of insurance manufacturing operations and insurance distribution income earned by HSBC bank channels67
2018
2017
Footnotes
Net interest income
Net fee income
– fee income
– fee expense
Net income from financial instruments held for trading or managed on a fair value basis
Net income/(expense) from assets and liabilities of insurance businesses, including related
derivatives, measured at fair value through profit or loss
Gains less losses from financial investments
Net insurance premium income
Other operating income
Of which: PVIF
Total operating income
Net insurance claims and benefits paid and movement in liabilities to policyholders
Net operating income before change in expected credit losses and other credit
impairment charges
Change in expected credit losses and other credit impairment charges
Net operating income
Total operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax of insurance manufacturing operations
68
Annualised new business premiums of insurance manufacturing operations
Insurance distribution income earned by HSBC bank channels
RBWM
$m
2,063
(579)
182
(761)
216
All global
businesses
$m
2,227
(567)
275
(842)
204
(1,562)
(1,578)
59
58
10,235
10,716
712
640
11,144
(9,328)
1,816
(2)
1,814
(472)
1,342
31
1,373
3,173
945
766
681
11,826
(9,786)
2,040
(2)
2,038
(491)
1,547
31
1,578
3,252
1,067
RBWM
$m
2,013
(498)
233
(731)
(37)
2,878
23
9,470
61
11
All global
businesses
$m
2,193
(485)
330
(815)
13
2,837
31
9,895
97
21
13,910
(11,939)
14,581
(12,391)
1,971
—
1,971
(403)
1,568
10
1,578
2,666
908
2,190
—
2,190
(434)
1,756
10
1,766
2,725
1,033
For footnotes, see page 67.
Insurance manufacturing
The following commentary, unless otherwise specified, relates to
the ‘All global businesses’ results.
HSBC recognises the present value of long-term in-force insurance
contracts and investment contracts with discretionary
participation features (‘PVIF’) as an asset on the balance sheet.
The overall balance sheet equity, including PVIF, is therefore a
measure of the embedded value in the insurance manufacturing
entities, and the movement in this embedded value in the period
drives the overall income statement result.
Adjusted profit before tax of $1.6bn decreased by $0.2bn or 11%.
This was mainly due to adverse market impacts of $0.3bn in 2018,
which primarily reflected unfavourable equity market performance.
This compared with favourable market impacts of $0.3bn in 2017.
This reduction was partly offset by a $0.2bn increase in the value
of new business written, as well as favourable actuarial
assumptions and methodology updates of $0.1bn (2017: $0.1bn
adverse).
Adjusted revenue was $0.2bn or 6.8% lower than 2017. This
reflected the following:
•
‘Net expense from assets and liabilities of insurance
businesses, including related derivatives, measured at fair value
through profit or loss’ of $1.6bn in 2018 compared with net
income of $2.8bn in 2017, due to unfavourable equity market
performance in Hong Kong and France in 2018 compared with
2017, resulting in revaluation losses on equity and unit trust
assets supporting insurance and investment contracts. This
negative movement resulted in a corresponding movement in
liabilities to policyholders and PVIF (see ‘Other operating
income’ below), reflecting the extent to which policyholders
participate in the investment performance of the associated
asset portfolio.
• Net insurance premium income of $10.7bn was $0.8bn higher.
This was driven by higher new business volumes, particularly in
Hong Kong and France, and lower reinsurance ceded in Hong
Kong.
54
HSBC Holdings plc Annual Report and Accounts 2018
• Other operating income of $0.8bn increased by $0.7bn, mainly
from favourable movements in PVIF. This reflected an increase
in ‘assumption changes and experience variances’ of $0.6bn,
primarily in Hong Kong, from the future sharing of investment
returns with policyholders. In addition, the value of new
business written increased by $0.2bn to $1.1bn. For further
details, please see Note 21 on the Financial Statements.
• Net insurance claims and benefits paid and movement in
liabilities to policyholders of $9.8bn were $2.6bn lower than
2017. This was primarily due to lower returns on financial
assets supporting contracts where the policyholder is subject
to part or all of the investment risk, partly offset by the impact
of higher new business volumes in Hong Kong and France, and
lower reinsurance ceded in Hong Kong.
Adjusted operating expenses of $0.5bn increased by $0.1bn or
13% compared with 2017, reflecting investment in core insurance
functions and capabilities.
Annualised new business premiums (‘ANP’) is used to assess new
insurance premium generation by the business. It is calculated as
100% of annualised first year regular premiums and 10% of single
premiums, before reinsurance ceded. Growth in ANP during the
period reflected new business growth, mainly in Hong Kong.
Insurance distribution income from HSBC channels included
$663m (2017: $642m) on HSBC manufactured products, for which
a corresponding fee expense is recognised within insurance
manufacturing, and $404m (2017: $391m) products manufactured
by third-party providers. The RBWM component of this distribution
income was $588m (2017: $571m) from HSBC manufactured
products and $357m (2017: $337m) from third-party products.
For GPB, a key measure of business performance is client assets, which is presented below.
GPB – reported client assets69
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 footnotes, see page 67.
Analysis of reported results by geographical regions
HSBC reported profit/(loss) before tax and balance sheet data
2018
$bn
330
10
15
(17)
—
(14)
309
2017
$bn
298
—
15
21
(10)
21
330
2016
$bn
349
(17)
2
(1)
(24)
(9)
298
Footnotes
70
2018
2017
2016
$bn
149
124
36
—
—
309
$bn
161
130
39
—
—
330
$bn
147
108
40
3
—
298
Net interest income
Net fee income
Net income from financial instruments held for
trading or managed on a fair value basis
Net income from assets and liabilities of insurance
businesses, including related derivatives, measured
at fair value through profit and loss
Changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss
Other income
Net operating income before change in
expected credit losses and other credit
impairment charges/recoveries
Change in expected credit losses and other credit
impairment charges/recoveries
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
For footnotes, see page 67.
Footnotes
Europe
$m
6,841
3,996
Asia
$m
16,108
5,676
MENA
$m
1,763
607
2018
North
America
$m
3,521
1,854
Latin
America
Intra-HSBC
items
$m
2,020
498
$m
236
(11)
Total
$m
30,489
12,620
3,942
4,134
285
728
736
(294)
9,531
71
26
72
(789)
(717)
—
—
601
3,113
(26)
3,609
(1)
33
36
586
18
27
(237)
(5,171)
58
695
1,933
—
(1,488)
17,704
28,784
2,687
6,725
3,062
(5,182)
53,780
(609)
(602)
17,095
28,182
(17,934)
(12,466)
(839)
24
(815)
%
(4.1)
101.3
$m
15,716
2,074
17,790
%
89.5
43.3
$m
373,073
450,545
1,150,235
1,047,636
503,154
298,056
664,824
363,894
(209)
2,478
(1,357)
1,121
436
1,557
%
7.8
50.5
$m
28,824
57,455
35,408
56,689
223
6,948
(6,149)
(570)
2,492
(1,935)
799
—
799
%
4.0
91.4
$m
108,146
390,410
133,291
131,582
557
2
559
%
2.8
63.2
$m
21,108
51,923
25,966
38,341
—
(1,767)
(5,182)
5,182
—
—
—
$m
—
52,013
(34,659)
17,354
2,536
19,890
%
100.0
64.4
$m
981,696
(139,535)
2,558,124
— 1,362,643
—
865,318
HSBC Holdings plc Annual Report and Accounts 2018
55
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Geographical regions
HSBC reported profit/(loss) before tax and balance sheet data (continued)
Net interest income
Net fee income
Net income from financial instruments held for
trading or managed on a fair value basis
Net income from assets and liabilities of insurance
businesses, including related derivatives, measured
at fair value through profit and loss
Changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss
Other income/(expense)
45, 71
Footnotes
Europe
$m
6,970
4,161
Asia
$m
14,153
5,631
MENA
America Latin America
$m
1,752
619
$m
3,441
1,880
$m
2,098
520
2017
North
Intra-HSBC
items
$m
(238)
—
Total
$m
28,176
12,811
44, 45
4,066
2,929
180
527
486
238
8,426
769
2,003
—
—
64
—
2,836
N/A
1,454
N/A
1,090
N/A
109
N/A
865
N/A
57
N/A
(4,379)
N/A
(804)
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
Loans and advances to customers (net)
Total assets
Customer accounts
Risk-weighted assets
Net interest income
Net fee income
Net income from financial instruments held for
trading or managed on a fair value basis
Net income from assets and liabilities of insurance
businesses, including related derivatives, measured
at fair value through profit and loss
Changes in fair value of other financial instruments
mandatorily measured at fair value through profit or
loss
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
Share of profit/(loss) in associates and joint ventures
Profit 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
For footnotes, see page 67.
26
17,420
25,806
2,660
6,713
3,225
(4,379)
51,445
(658)
16,762
(18,665)
(1,903)
39
(1,864)
%
(10.8)
107.1
$m
(570)
25,236
(11,790)
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
72
(207)
2,453
(1,394)
1,059
442
1,501
%
8.7
52.4
$m
28,050
57,469
34,658
59,196
8,346
4,247
12,490
5,200
1,831
709
189
6,902
(5,305)
1,597
4
1,601
%
9.3
79.0
$m
107,607
391,292
143,432
131,276
2016
4,220
1,898
(523)
2,702
(2,109)
593
7
600
%
3.5
65.4
$m
19,789
48,413
23,795
36,372
3,006
723
44, 45
3,018
3,127
385
462
449
—
(4,379)
4,379
—
—
—
$m
—
(1,769)
49,676
(34,884)
14,792
2,375
17,167
%
100.0
67.8
$m
962,964
(153,416)
2,521,771
—
—
1,364,462
871,337
(80)
—
80
29,813
12,777
7,521
454
445
—
—
363
—
1,262
45, 71
N/A
(549)
N/A
2,058
N/A
44
N/A
485
N/A
N/A
N/A
(1,855)
(3,590)
(3,407)
26
15,516
23,320
2,969
7,065
2,686
(3,590)
47,966
(446)
15,070
(21,845)
(6,775)
1
(6,774)
%
(95.2)
140.8
$m
336,670
1,068,446
446,615
298,384
(677)
22,643
(10,785)
11,858
1,921
13,779
%
193.7
46.2
$m
365,430
965,730
631,723
333,987
(316)
2,653
(1,584)
1,069
434
1,503
%
21.1
53.4
$m
30,740
60,472
34,766
59,065
(732)
6,333
(6,147)
186
(1)
185
%
2.6
87.0
$m
111,710
409,021
138,790
150,714
(1,229)
1,457
(3,037)
(1,580)
(1)
(1,581)
%
(22.2)
113.1
$m
16,954
43,137
20,492
34,341
—
(3,590)
3,590
—
—
—
$m
—
(3,400)
44,566
(39,808)
4,758
2,354
7,112
%
100.0
83.0
$m
861,504
(171,820)
2,374,986
—
—
1,272,386
857,181
72
56
HSBC Holdings plc Annual Report and Accounts 2018
Reconciliation of reported and adjusted items – geographical regions
Reconciliation of reported and adjusted items
Revenue
Reported
Significant items
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– fair value movements on financial instruments
Adjusted
Change in expected credit losses and other credit impairment
charges
Reported
Adjusted
Operating expenses
Reported
Significant items
– costs of structural reform
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– past service costs of guaranteed minimum pension benefits equalisation
– restructuring and other related costs
– settlements and provisions in connection with legal and regulatory matters
Adjusted
Share of profit in associates and joint ventures
Reported
Adjusted
Profit/(loss) before tax
Reported
Significant items
– revenue
– operating expenses
Adjusted
Loans and advances to customers (net)
Reported
Adjusted
Customer accounts
Reported
Adjusted
For footnotes, see page 67.
Footnotes
Europe
$m
Asia
$m
MENA
$m
North
America*
Latin
America†
$m
$m
Total
$m
2018
26
73
65
73
17,704
28,784
2,687
6,725
3,062
53,780
98
(53)
(5)
156
(38)
—
—
(38)
(1)
—
—
(1)
95
—
103
(8)
6
—
15
(9)
160
(53)
113
100
17,802
28,746
2,686
6,820
3,068
53,940
(609)
(609)
(602)
(602)
(209)
(209)
223
223
(570)
(570)
(1,767)
(1,767)
73
(17,934)
(12,466)
(1,357)
(6,149)
(1,935)
(34,659)
677
352
146
52
228
46
(147)
16
9
—
—
—
7
—
—
—
—
—
—
—
—
976
—
—
—
—
13
963
—
—
—
—
—
—
—
1,669
361
146
52
228
66
816
73
(17,257)
(12,450)
(1,357)
(5,173)
(1,935)
(32,990)
24
24
2,074
2,074
436
436
(815)
17,790
1,557
775
98
677
(22)
(38)
16
(1)
(1)
—
—
—
799
1,071
95
976
2
2
2,536
2,536
559
19,890
6
6
—
1,829
160
1,669
74
(40)
17,768
1,556
1,870
565
21,719
373,073
450,545
28,824
108,146
373,073
450,545
28,824
108,146
21,108
21,108
981,696
981,696
503,154
664,824
35,408
133,291
25,966 1,362,643
503,154
664,824
35,408
133,291
25,966 1,362,643
HSBC Holdings plc Annual Report and Accounts 2018
57
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Geographical regions
Reconciliation of reported and adjusted items (continued)
Revenue
Reported
Significant items
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– fair value movements on financial instruments
Adjusted
Change in expected credit losses and other credit impairment charges
Footnotes
26
65
Reported
Adjusted
Operating expenses
Reported
Significant items
– costs of structural reform
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– past service costs of guaranteed minimum pension benefits equalisation
– restructuring and other related costs
– settlements and provisions in connection with legal and regulatory matters
Adjusted
Share of profit in associates and joint ventures
Reported
Adjusted
Profit/(loss) before tax
Reported
Significant items
– revenue
– operating expenses
Adjusted
Loans and advances to customers (net)
Reported
Adjusted
Customer accounts
Reported
Adjusted
2018
Hong
Kong
Mainland
China
$m
$m
UK
$m
US*
$m
Mexico†
$m
13,597
18,231
2,888
4,741
2,294
109
(53)
—
162
5
—
—
5
(1)
—
—
(1)
97
—
103
(6)
(7)
—
—
(7)
13,706
18,236
2,887
4,838
2,287
(516)
(516)
(214)
(214)
(143)
(143)
199
199
(463)
(463)
(14,502)
(6,539)
(1,920)
(4,987)
(1,303)
531
294
146
—
228
39
(176)
16
9
—
—
—
7
—
—
—
—
—
—
—
—
919
—
—
—
—
11
908
—
—
—
—
—
—
—
(13,971)
(6,523)
(1,920)
(4,068)
(1,303)
25
25
36
36
2,033
2,033
(1,396)
11,514
2,858
640
109
531
21
5
16
(1)
(1)
—
(756)
11,535
2,857
—
—
(47)
1,016
97
919
969
—
—
528
(7)
(7)
—
521
287,144
290,547
287,144
290,547
38,979
38,979
64,011
64,011
17,895
17,895
399,487
484,897
399,487
484,897
45,712
45,712
82,523
82,523
19,936
19,936
* Of which US (excluding CML run-off portfolio): adjusted revenue $4,792m (RBWM: $1,200m; CMB: $1,016m; GB&M $1,924m; GPB: $259m); adjusted ECL $199m;
†
adjusted operating expenses $(3,996)m; adjusted profit before tax (‘PBT’) $996m (RBWM: $(180)m; CMB: $473m; GB&M $618m; GPB: $23m); adjusted RWAs (RBWM:
$10.6bn; CMB: $27.8bn; GB&M $45.5bn; GPB: $4.1bn; Corporate Centre: $10.2bn).
Of which Mexico: adjusted revenue $2,287m (RBWM: $1,508m; CMB: $378m; GB&M $321m); adjusted ECL $(463)m; adjusted operating expenses $(1,303)m;
adjusted PBT $521m (RBWM: $194m; CMB: $114m; GB&M $189m); adjusted RWAs (RBWM: $7.0bn; CMB: $6.9bn; GB&M $10.6bn; Corporate Centre: $3.0bn).
For footnotes, see page 67.
58
HSBC Holdings plc Annual Report and Accounts 2018
Reconciliation of reported and adjusted items (continued)
Revenue
Reported
Currency translation
Significant items
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– fair value movements on financial instruments
– currency translation on significant items
Adjusted
LICs
Reported
Currency translation
Adjusted
Operating expenses
Reported
Currency translation
Significant items
– costs of structural reform
– costs to achieve
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– gain on partial settlement of pension obligation
– settlements and provisions in connection with legal and regulatory matters
– currency translation on significant items
Adjusted
Share of profit in associates and joint ventures
Reported
Currency translation
Adjusted
Profit/(loss) before tax
Reported
Currency translation
Significant items
– revenue
– operating expenses
Adjusted
Loans and advances to customers (net)
Reported
Currency translation
Adjusted
Customer accounts
Reported
Currency translation
Adjusted
For footnotes, see page 67.
Footnotes
Europe
$m
Asia
$m
MENA
$m
North
America*
Latin
America†
$m
$m
2017
26
73
73
65
73
73
73
Total
$m
51,445
133
83
108
(274)
245
4
17,420
25,806
751
66
108
(98)
54
2
(130)
123
—
(27)
148
2
2,660
(75)
1
—
—
1
—
6,713
—
(93)
—
(130)
37
—
3,225
(403)
(14)
—
(19)
5
—
18,237
25,799
2,586
6,620
2,808
51,661
(658)
17
(641)
(570)
5
(565)
(207)
3
(204)
189
2
191
(523)
29
(494)
(1,769)
56
(1,713)
(18,665)
(11,790)
(1,394)
(5,305)
(2,109)
(34,884)
(565)
2,876
420
1,908
655
36
—
(215)
72
65
634
—
623
—
—
—
17
(6)
60
28
—
34
—
—
—
—
(6)
—
201
—
371
—
17
(188)
—
1
287
57
—
66
—
—
—
—
(9)
(143)
3,796
420
3,002
655
53
(188)
(198)
52
73
(16,354)
(11,091)
(1,306)
(5,104)
(1,765)
(31,231)
39
—
39
1,883
45
1,928
(1,864)
15,329
203
2,942
66
2,876
1,281
(15)
757
123
634
442
—
442
1,501
(12)
29
1
28
4
—
4
1,601
2
108
(93)
201
16,071
1,518
1,711
7
(4)
3
600
(91)
43
(14)
57
552
2,375
41
2,416
17,167
87
3,879
83
3,796
21,133
381,547
425,971
(19,881)
361,666
(8,138)
417,833
505,182
657,395
(26,838)
478,344
(8,991)
648,404
28,050
(1,177)
26,873
34,658
(1,112)
33,546
107,607
(3,194)
104,413
143,432
(3,619)
139,813
19,789
(1,733)
18,056
962,964
(34,123)
928,841
23,795
1,364,462
(2,273)
21,522
(42,833)
1,321,629
HSBC Holdings plc Annual Report and Accounts 2018
59
Strategic ReportCorporate Governance Financial Statements Additional 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
– disposals, acquisitions and investment in new businesses
– fair value movements on financial instruments
– currency translation on significant items
Adjusted
LICs
Reported
Currency translation
Adjusted
Operating expenses
Reported
Currency translation
Significant items
– costs of structural reform
– costs to achieve
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– gain on partial settlement of pension obligation
– settlements and provisions in connection with legal and regulatory matters
– currency translation on significant items
Adjusted
Share of profit in associates and joint ventures
Reported
Currency translation
Adjusted
Profit/(loss) before tax
Reported
Currency translation
Significant items
– revenue
– operating expenses
Adjusted
Loans and advances to customers (net)
Reported
Currency translation
Adjusted
Customer accounts
Reported
Currency translation
Adjusted
Footnotes
26
65
UK
$m
Hong
Kong
$m
2017
Mainland
China
$m
US*
$m
Mexico†
$m
12,922
16,117
2,379
4,876
550
55
108
(78)
24
1
(91)
(51)
—
(126)
75
—
58
101
—
99
2
—
—
(99)
—
(130)
31
—
2,160
(45)
5
—
—
5
—
13,527
15,975
2,538
4,777
2,120
(492)
14
(478)
(396)
3
(393)
(67)
(3)
(70)
108
—
108
(473)
9
(464)
(15,086)
(6,131)
(1,687)
(4,267)
(1,297)
(424)
2,537
410
1,766
655
—
—
(362)
68
34
306
—
291
—
—
—
17
(2)
(35)
71
—
69
—
—
—
—
2
—
119
—
290
—
17
(188)
—
—
25
45
—
46
—
—
—
—
(1)
(12,973)
(5,791)
(1,651)
(4,148)
(1,227)
38
—
38
8
—
8
1,863
45
1,908
(2,618)
9,598
2,488
140
2,592
55
2,537
114
(54)
255
(51)
306
65
172
101
71
9,799
2,725
—
—
—
717
—
20
(99)
119
737
—
—
—
390
(11)
50
5
45
429
295,538
268,966
(16,216)
(582)
279,322
268,384
401,733
477,104
(22,062)
(1,033)
379,671
476,071
40,686
(2,194)
38,492
45,991
(2,481)
43,510
65,168
15,172
—
27
65,168
15,199
89,887
17,809
—
32
89,887
17,841
* Of which US (excluding CML run-off portfolio): 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 $2,120m (RBWM: $1,413m; CMB: $342m; GB&M $277m); adjusted LICs $(464)m; adjusted operating expenses $(1,227)m;
adjusted PBT $429m (RBWM: $143m; CMB: $103m; GB&M $158m); adjusted RWAs (RBWM: $7.0bn; CMB: $5.9bn; GB&M $8.3bn; Corporate Centre: $2.8bn).
For footnotes, see page 67.
60
HSBC Holdings plc Annual Report and Accounts 2018
Reconciliation of reported and adjusted items (continued)
Revenue
Reported
Currency translation
Significant items
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– fair value movements on financial investments
– currency translation on significant items
Adjusted
LICs
Reported
Currency translation
Significant items
– disposals, acquisitions and investment in new businesses
– currency translation on significant items
Adjusted
Operating expenses
Reported
Currency translation
Significant items
– costs of structural reform
– costs to achieve
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– impairment of GPB – Europe goodwill
– settlements and provisions in connection with legal and regulatory matters
– currency translation on significant items
Adjusted
Share of profit in associates and joint ventures
Reported
Currency translation
Significant items
– disposals, acquisitions and investment in new businesses
– 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
Loans and advances to customers (net)
Reported
Currency translation
Adjusted
Customer accounts
Reported
Currency translation
Adjusted
For footnotes, see page 67.
2016
Europe
$m
Asia
$m
MENA
$m
North
America*
Latin
America†
$m
$m
Footnotes
26
73
73
65, 66
15,516
23,320
96
1,774
(2)
(547)
2,289
34
(166)
(10)
—
(6)
(4)
2,969
(448)
(7)
—
(11)
—
4
7,065
37
155
—
21
134
—
73
17,386
23,144
2,514
7,257
Total
$m
47,966
(803)
2,097
(2)
(264)
2,453
(90)
49,260
2,686
(336)
185
—
273
36
(124)
2,535
(446)
(677)
(316)
(732)
(1,229)
(3,400)
—
—
—
—
1
—
—
—
59
—
—
—
(5)
—
—
—
(31)
804
748
56
24
804
748
56
(446)
(676)
(257)
(737)
(456)
(2,572)
73
73
(21,845)
(10,785)
(1,584)
(6,147)
(3,037)
(39,808)
(109)
6,638
223
2,098
559
28
3,240
484
6
72
418
—
476
—
—
—
(46)
(12)
225
71
—
103
—
—
—
—
(32)
(20)
990
—
402
—
—
—
587
1
207
1,183
—
39
—
1,059
—
—
85
361
9,300
223
3,118
559
1,087
3,240
1,025
48
73
(15,316)
(10,295)
(1,288)
(5,177)
(1,647)
(30,147)
1
—
—
—
—
1
1,921
434
10
—
—
—
—
—
—
—
1,931
434
(6,774)
13,779
(13)
8,412
1,774
—
6,638
—
(83)
408
(10)
—
418
—
1,503
(164)
64
(7)
—
71
—
(1)
—
—
—
—
(1)
185
12
1,145
155
—
990
—
1,625
14,104
1,403
1,342
(1)
—
1
1
—
—
(1,581)
(160)
2,173
185
804
1,183
1
432
2,354
10
1
1
—
2,365
7,112
(408)
12,202
2,097
804
9,300
1
18,906
336,670
365,430
30,740
111,710
16,954
861,504
17,113
(481)
(1,370)
697
(1,093)
14,866
353,783
364,949
29,370
112,407
15,861
876,370
446,615
631,723
34,766
138,790
20,492
1,272,386
21,775
(1,617)
(1,450)
842
(1,743)
17,807
468,390
630,106
33,316
139,632
18,749
1,290,193
HSBC Holdings plc Annual Report and Accounts 2018
61
Strategic ReportCorporate Governance Financial Statements Additional 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
– disposals, acquisitions and investment in new businesses
– fair value movements on financial instruments
– currency translation on significant items
Adjusted
LICs
Reported
Currency translation
Adjusted
Operating expenses
Reported
Currency translation
Significant items
– costs of structural reform
– costs to achieve
– customer redress programmes
– settlements and provisions in connection with legal and regulatory matters
– currency translation on significant items
Adjusted
Share of profit in associates and joint ventures
Reported
Currency translation
Adjusted
Profit/(loss) before tax
Reported
Currency translation
Significant items
– revenue
– operating expenses
Adjusted
Loans and advances to customers (net)
Reported
Currency translation
Adjusted
Customer accounts
Reported
Currency translation
Adjusted
UK
$m
Hong
Kong
$m
10,893
14,014
(209)
1,834
(2)
(441)
2,238
39
(133)
(1)
—
—
(1)
—
2016
Mainland
China
$m
2,343
(10)
—
—
—
—
—
Footnotes
26
65, 66
US*
$m
5,239
—
148
—
21
127
—
Mexico†
$m
1,963
(56)
—
—
—
—
—
12,518
13,880
2,333
5,387
1,907
(245)
12
(233)
(321)
3
(318)
(121)
—
(121)
(631)
—
(631)
(452)
13
(439)
(14,562)
(5,646)
(1,507)
(5,079)
(1,264)
106
2,660
223
1,838
559
50
(10)
54
181
—
229
—
(46)
(2)
(6)
54
—
54
—
—
—
—
879
—
292
—
587
—
36
29
—
30
—
—
(1)
(11,796)
(5,411)
(1,459)
(4,200)
(1,199)
1
—
1
(3,913)
(91)
4,494
1,834
2,660
490
264,098
11,660
275,758
361,278
15,691
376,969
22
—
22
1,892
10
1,902
8,069
2,607
(76)
180
(1)
181
(6)
54
—
54
8,173
2,655
230,629
(2,181)
228,448
461,626
(4,370)
457,256
33,303
133
33,436
46,576
185
46,761
—
—
—
(471)
—
1,027
148
879
556
74,596
—
74,596
88,751
—
88,751
—
—
—
247
(7)
29
—
29
269
12,876
548
13,424
14,423
613
15,036
* Of which US (excluding CML run-off portfolio): 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 $1,907m (RBWM: $1,256m; CMB: $330m; GB&M $214m; GPB: $13m); adjusted LICs $(439)m; adjusted operating expenses
$(1,199)m; adjusted PBT $269m (RBWM: $97m; CMB: $83m; GB&M $78m; GPB: $5m); adjusted RWAs (RBWM: $6.4bn; CMB: $6.3bn; GB&M $6.7bn; Corporate
Centre: $1.7bn).
For footnotes, see page 67.
62
HSBC Holdings plc Annual Report and Accounts 2018
Analysis of reported results by country/territory
Profit/(loss) before tax by country/territory 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
75
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
440
476
(644)
(56)
14
(1)
7
6,190
5,951
115
20
(1)
(200)
130
75
55
45
182
34
112
—
36
(96)
(205)
55
54
166
194
(28)
$m
2,289
1,901
(428)
170
85
5
128
4,176
3,114
120
143
13
262
82
98
23
321
108
54
58
—
(4)
968
473
455
40
178
114
64
$m
690
409
(394)
8
99
(1)
175
3,773
1,670
185
387
91
566
132
230
117
395
733
202
296
—
235
738
624
139
(25)
378
197
181
Year ended 31 Dec 2018
6,882
7,719
6,312
Europe
– UK
of which: HSBC Holdings
75
– 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
(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
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
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
(122)
23
(77)
16
8
(100)
(69)
353
333
(1)
—
—
(4)
—
25
—
—
7
—
7
—
—
11
23
—
(12)
(1)
—
(1)
248
(231)
(23)
(89)
5
9
(192)
(30)
285
257
(1)
—
—
(4)
—
34
(1)
—
—
—
—
—
—
67
66
—
1
—
—
—
$m
(4,112)
(4,205)
(888)
(101)
(5)
20
179
3,298
446
44
275
1
Total
$m
(815)
(1,396)
(2,431)
37
201
(77)
420
17,790
11,514
463
825
104
2,234
2,858
30
63
30
175
527
43
—
436
48
(822)
(962)
116
24
(162)
23
(185)
374
491
225
936
1,557
333
473
436
315
799
(47)
765
81
559
528
31
(1,271)
19,890
(4,150)
(4,149)
(3,308)
(156)
39
2
114
3,143
485
35
374
30
1,988
28
64
40
99
565
46
48
441
30
(374)
(444)
43
27
(19)
(12)
(7)
(1,864)
(2,618)
(5,166)
269
271
(184)
398
15,329
9,598
365
916
180
2,488
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
HSBC Holdings plc Annual Report and Accounts 2018
63
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Geographical regions | Other information
Profit/(loss) before tax by country/territory 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
75,76
Footnotes
– France
– Germany
– Switzerland
– other
Asia
– Hong Kong
– Australia
– India
– Indonesia
– mainland China
– Malaysia
– Singapore
– Taiwan
– other
Middle East and North Africa
– Egypt
– UAE
– Saudi Arabia
– other
North America
– US
– Canada
– other
Latin America
– Mexico
– other
– of which: Brazil
Year ended 31 Dec 2016
For footnotes, see page 67.
$m
524
338
(676)
147
23
—
16
4,115
3,796
108
15
(9)
(72)
65
107
24
81
20
58
83
1
(122)
64
(28)
46
46
(136)
94
(230)
(281)
4,587
$m
2,129
1,834
(379)
198
68
9
20
2,920
2,191
74
123
66
68
65
43
10
280
290
104
94
—
92
648
336
292
20
59
84
(25)
(139)
6,046
$m
1,009
385
(425)
289
142
—
193
3,211
1,298
156
355
110
456
172
170
102
392
652
213
298
—
141
259
86
155
18
309
79
230
176
$m
(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)
$m
(6,741)
(6,556)
(3,748)
(53)
13
(7)
(138)
3,265
563
31
240
11
2,158
53
77
13
119
541
79
5
434
23
(876)
(932)
47
9
(1,822)
(15)
(1,807)
(1,836)
(5,633)
Total
$m
(6,774)
(3,913)
(5,291)
590
253
(491)
(3,213)
13,779
8,069
369
743
178
2,607
355
439
148
871
1,503
454
480
435
134
185
(471)
540
116
(1,581)
247
(1,828)
(2,076)
7,112
64
HSBC Holdings plc Annual Report and Accounts 2018
Other information
Funds under management and assets held in custody
Taxes paid by region and country/territory
Conduct-related matters
Carbon dioxide emissions
Funds under management and assets held
in custody
Page
65
65
66
66
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 2018, the value of assets held under
administration by the Group amounted to $3.5tn, which was 2%
lower than the $3.6tn held at 31 December 2017. This decrease
was mainly driven by adverse foreign exchange movements which
were partly offset by a net inflow of new assets in Europe and
Asia.
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 footnotes, see page 67.
2018
$bn
2017
$bn
Footnotes
77
943
22
(37)
(29)
—
899
444
241
4
210
899
831
2
77
33
—
943
462
258
4
219
943
Funds under management (‘FuM’) represents assets managed,
either actively or passively, on behalf of our customers. At
31 December 2018, FuM amounted to $899bn, a decrease of 5%
primarily reflecting adverse market performance together with
adverse foreign exchange movements.
Global Asset Management FuM decreased by 4% to $444bn
compared with 31 December 2017. The reduction primarily
reflected adverse foreign exchange movements, together with
adverse market performance of $14bn. This was partly offset by
net new money, primarily from money market solutions across all
regions.
GPB FuM decreased by 7% to $241bn compared with
31 December 2017. The reduction reflected adverse market
movements of $17bn, together with adverse foreign exchange.
This was partly offset by positive net new money, mainly in Hong
Kong.
Other FuM, of which the main element is a corporate trust
business in Asia, decreased by 4% to $210bn.
Assets held in custody77 and under administration
Custody is the safekeeping and servicing of securities and other
financial assets on behalf of clients. At 31 December 2018, we
held assets as custodian of $7.4tn, 4% lower than the $7.7tn held
at 31 December 2017. This decrease was mainly driven by adverse
foreign exchange movements in Europe and Asia together with
adverse market movements in Asia, which was partly offset by
incremental assets under custody in North America.
Taxes paid by region and country/territory
The following table reflects a geographical view of HSBC’s
operations.
Taxes paid by HSBC relate to HSBC’s own tax liabilities including
tax on profits earned, employer taxes, bank levy and other
duties/levies such as stamp duty. Numbers are reported on a cash
flow basis.
Taxes paid by country/territory
Europe
– UK
of which: HSBC Holdings
– 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
2018
$m
3,398
2,693
832
536
111
13
45
2017
$m
3,340
2,654
1,078
530
140
(67)
83
2,742
1,398
2,277
1,043
140
235
384
44
94
88
53
306
234
—
67
104
63
399
162
240
(3)
281
90
191
28
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
7,054
6,796
7,440
HSBC Holdings plc Annual Report and Accounts 2018
65
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review 2018
$m
53
53
(780)
(634)
(146)
(727)
2017
$m
(108)
(108)
(457)
198
(655)
(565)
1,759
1,136
1,526
872
654
8
2,595
1,248
1,347
20
2016
$m
2
2
(1,584)
(1,025)
(559)
(1,582)
2,265
3,056
2,060
996
106
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
2018
559,000
437,000
122,000
Carbon dioxide emissions in tonnes per FTE
Total
From energy
From travel
2018
2.39
1.87
0.52
2017
580,000
473,000
107,000
2017
2.49
2.03
0.46
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 due to improved business
travel data collection.
Our greenhouse gas reporting year runs from October to
September. For the year from 1 October 2017 to 30 September
2018, carbon dioxide emissions from our global operations were
559,000 tonnes. Independent assurance of our carbon dioxide
emissions will be available in the first half of 2019 on our website.
Report of the Directors | Other information
Conduct-related matters
Conduct-related costs included in significant items
Income statement
Net interest income/(expense)
– customer redress programmes
Operating expenses
– legal proceedings and regulatory matters
– customer redress programmes
Total charge for the year relating to significant items
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
included in significant items (see pages 38 and 43).
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 the HSBC Values. The Board oversight of conduct
matters was transitioned to the Group Risk Committee following
the demise of the Conduct & Values Committee during the first
half of 2018. Additionally the Remuneration Committee also
considers conduct and compliance-related matters relevant to
remuneration. These committees’ reports may be found on
pages 161 to 164. For information on initiatives implemented in
2018 to raise our standards in relation to the conduct of our
business, see page 84 under ‘Conduct of business’.
Provisions relating to significant items raised for conduct costs in
2018 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
$634m and customer remediation costs mainly in respect of the
mis-selling of payment protection insurance of $172m. For further
details on payment protection insurance and legal proceedings
and regulatory matters, see Notes 27 and 35 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 2018, we collected data on energy use and business travel for
our operations in 28 countries and territories, which accounted for
approximately 93% of our full-time employees (‘FTEs’). To estimate
the emissions of our operations in countries and territories where
we have operational control and a small presence, we scale up the
emissions data from 93% to 100%.
66
HSBC Holdings plc Annual Report and Accounts 2018
Footnotes to strategic report, financial
summary, global businesses, geographical
regions and other information
1
The Group has adopted the EU’s regulatory transitional arrangements for
IFRS 9 ‘Financial Instruments’. These apply to reported and adjusted RWAs,
regulatory capital and related ratios for 2018 throughout the Annual Report
and Accounts, unless otherwise stated.
2
3
4
5
6
7
8
9
10
11
12
Full-time equivalent staff.
Recognised by Euromoney Awards for Excellence 2018.
Source: Greenwich Associates – Large Corporate Banking; percentage of
large corporates choosing HSBC as their lead international bank.
Revenue from international clients is derived from an allocation of adjusted
revenue based on internal management information. International clients are
businesses and individuals with an international presence.
Adjusted basis, geographical view; Group total and regional percentage
composition excludes Holdings; regional percentage composition calculated
with regional figures that include intra-Group revenue.
Our wealth business in Asia includes our asset management business in
Asia, our insurance business in Asia, our private banking business Asia and
the wealth portion of our RBWM business in Asia.
Source for market data is Bank of England mortgage data.
Both digital metrics include the following markets: the UK (excluding M&S
Bank and John Lewis Finance customers), Hong Kong (excluding Hang
Seng customers), Mexico, Malaysia, Singapore, UAE, mainland China,
Canada, Australia, the US, France, India, Indonesia, Turkey, Egypt,
Argentina, and Taiwan. Digital sales also include M&S Bank customers in
the UK. Digitally active customers are defined as percentage of customers
who have logged on to HSBC digital channels at least once in the last 90
days. Percentage of sales include the sales of loans and deposits through
digital channels.
Eight scale markets are UK, Hong Kong, Pearl River Delta, Singapore,
Malaysia, Mexico, UAE and Saudi Arabia.
Commitment by 2025.
Excluding market impact in Insurance, which constitutes P&L impacts
resulting from changes in financial market factors as compared with
economic conditions in place at the start of the year.
13 Market shares: Saudi Arabia as of September 2018; UAE as of October
2018; HK, Mexico, PRD and Singapore as of November 2018; UK and
Malaysia as of December 2018.
Revenue growth from international network includes transaction banking
revenue growth and international client revenue growth.
14
15
Transaction banking includes GLCM, GTRF, Securities Services, and FX.
16 Market share data is as of 3Q 2018.
17
18
19
20
21
22
Top-three rank or improvement by two ranks; measured by customer
recommendation for RBWM and customer satisfaction for CMB among
relevant competitors.
Customer satisfaction metrics for Pearl River Delta will be available from
2019, therefore they have been excluded from the assessment. Surveys are
based on a relevant and representative subset of the market. Data provided
by Kantar.
Customer satisfaction metrics for Pearl River Delta will be available from
2019, therefore they have been excluded from the assessment. In HK,
Singapore, Malaysia, Mexico and UAE, 2017 CMB performance is based on
the bank that the customer defines as their main bank, whereas 2018 CMB
performance for these markets is based on the bank that the customer
defines as the most important. Surveys are based on a relevant and
representative subset of the market. Data provided by RFi Group, Kantar
and another third-party vendor.
Both digital metrics include the following markets: the UK (excluding M&S
Bank and John Lewis Finance customers), Hong Kong (excluding Hang
Seng customers), Mexico, Malaysia, Singapore, UAE, mainland China,
Canada, Australia, the US, France, India, Indonesia, Turkey, Egypt,
Argentina, and Taiwan. Digital sales also include M&S Bank customers in
the UK. Digitally active customers are defined as percentage of customers
who have logged on to HSBC digital channels at least once in the last 90
days. Percent of sales include the sales of loans and deposits through digital
channels.
Based on Sustainalytics.
Costs relating to ‘Settlements and provisions in connection with legal and
regulatory matters’, a significant item in 2018 includes a 1Q18 provision in
relation to the US Department of Justice’s (‘DoJ’) civil claims relating to its
investigation of HSBC’s legacy residential mortgage-backed securities
origination and securitisation activities from 2005 to 2007. Refer to Note 35
‘Legal proceedings and regulatory matters’ for further details.
23
‘Other personal lending’ includes personal non-residential closed-end loans
and personal overdrafts.
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
‘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.
Net operating income before change in expected credit losses and other
credit impairment charges/Loan impairment charges and other credit risk
provisions, also referred to as revenue.
Adjusted return on average risk-weighted assets (‘Adjusted RoRWA’) is a
measure used to assess 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.
From 1 January 2018, the qualifying components according to IFRS 7
‘Financial Instruments: Disclosures’ of fair value movements relating to
changes in credit spreads on structured liabilities, were recorded through
other comprehensive income. The residual movements remain in credit and
funding valuation adjustments, and comparatives have not been restated.
‘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’.
Under the old revenue allocation, the 2017 results would have been: Global
Markets: $6,840m; FICC: $5,555m; FX: $2,587m; Rates:$2,037m; Credit:
$931m; Equities: $1,285m; Securities Services: $1,762m; Global Banking:
$3,858m; GLCM: $2,199m; GTRF: $703m; Principal Investments: $322m;
Credit and funding valuation adjustments: $(267)m; Other revenue:
$(132)m. 2016 numbers have not been re-presented on the new basis.
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.
Central Treasury includes revenue relating to BSM of $2.5bn (2017: $2.7bn;
2016: $3.0bn), interest expense of $1,267m (2017: $888m; 2016: $707m)
and adverse valuation differences on issued long-term debt and associated
swaps of $313m (2017: gain of $120m; 2016: loss of $271m). 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.
Complaint figures for 2017 restated and weighted by country volumes.
OECD, IEA, Investing in Climate, Investment in Growth, July 2017. The
OECD estimates that for infrastructure to be consistent with a 2°C scenario,
investment needs to amount to $6.9tn per year in the next 15 years, an
increase of about 10% in total infrastructure investment from the reference
estimate of $6.3tn.
Amounts shown in table include green and other sustainable finance loans,
which support the transition to the low-carbon economy. The methodology
for the quantification of our exposure to higher transition risk sectors will
evolve over time as more data becomes available and is incorporated in our
risk management systems and processes.
Counterparties are allocated to the higher transition risk sectors via a two-
step approach:
1 - Where the main business of a group of connected counterparties is in a
higher transition risk sector all lending to the group is included irrespective
of the sector of each individual obligor within the group.
2 - Where the main business of a group of connected counterparties is not
in a higher transition risk sector only lending to individual obligors in the
higher transition risk sectors is included.
60% of the 2012 annual incentive for Stuart Gulliver and Iain Mackay
disclosed in the 2012 Directors’ remuneration report was deferred for five
years. The vesting of these awards was subject to a service condition and
satisfactory completion of the five-year deferred prosecution agreement
('AML DPA') with the US Department of Justice ('DoJ'). The AML DPA
condition was satisfied in March 2018 and the awards were released to the
executive Directors. For Marc Moses the value of the award attributable to
services provided as an executive Director between 1 January 2014 and the
vesting date has been included in the table.
HSBC Holdings plc Annual Report and Accounts 2018
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40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
The first long-term incentive (‘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 of remuneration table for the financial year
ending 31 December 2019.
John Flint succeeded Stuart Gulliver as Group Chief Executive with effect
from 21 February 2018 and his remuneration in the single figure table of
remuneration is in respect of services provided as an executive Director. For
services rendered between 1 January 2018 and 20 February 2018, he
received salary of £97,138, fixed pay allowance of £130,236, cash in lieu of
pension of £27,999 and an annual incentive award of £272,000.
Stuart Gulliver stepped down from the Board on 20 February 2018 and
retired from the Group on 11 October 2018. His remuneration in the single
figure table of remuneration is in respect of services provided as an
executive Director.
Iain Mackay stepped down as executive Director and Group Finance
Director on 31 December 2018.
To meet regulatory deferral requirements for 2018, 60% of the annual
incentive award of Stuart Gulliver and Iain Mackay will be deferred in
awards linked to HSBC’s shares and and will vest in five equal instalments
between the third and seventh anniversary of the grant date. On vesting, the
awards will be subject to a one-year retention period. The deferred awards
are subject to the executive Director maintaining a good leaver status during
the deferral period.
Prior to 2018, foreign exchange exposure on some financial instruments
designated at fair value was presented in the same line in the income
statement as the underlying fair value movement on these instruments. In
2018, we grouped the entire effect of foreign exchange exposure in the
profit and loss and presented it within ‘Net trading activities’ in ‘Net income
from financial instruments held for trading or managed on a fair value
basis’. Comparative data has been re-presented. There is no net impact on
total operating income and the impact on ‘changes in fair value of long-term
debt and related derivatives’ in 2017 was $(517)m, 2016: $1,978m, 2015:
$110m and 2014: $130m.
The classification and measurement requirements under IFRS 9, which was
adopted from 1 January 2018, are based on an entity’s assessment of both
the business model for managing the assets and the contractual cash flow
characteristics of the assets. The standard contains a classification for items
measured mandatorily at fair value through profit or loss as a residual
category. Given its residual nature, the presentation of the income statement
has been updated to separately present items in this category, which are of
a dissimilar nature or function, in line with IAS 1 ‘Presentation of financial
statements’ requirements. Comparative data has been re-presented. There is
no net impact on total operating income.
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
liabilities.
Net interest margin is net interest income expressed as an annualised
percentage of AIEA.
Interest income on trading assets is reported as ‘Net income/(expense) from
financial instruments held for trading or managed on a fair value basis’ in
the consolidated income statement.
Interest income on financial assets designated and otherwise mandatorily
measured 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 up until
May 2016 to economically hedge 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.
58
2018 ECL are prepared on an IFRS 9 basis and 2017/2016 LICs are
prepared on an IAS 39 basis and are not comparable.
68
HSBC Holdings plc Annual Report and Accounts 2018
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60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
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Net of impairment allowances.
Capital resources are regulatory capital, the calculation of which is set out
on page 148.
Including perpetual preferred securities, details of which can be found in
Note 28 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. The comparative for 2015 have been re-
presented to align with this definition.
Others include items with no currency information available ($10,351m for
loans to banks, $64,999m for loans to customers, nil for deposits by banks
and $29m for customer accounts).
Adjusted risk-weighted assets are calculated using reported risk-weighted
assets adjusted for the effects of currency translation differences and
significant items.
Excludes items where there are substantial offsets in the income statement
for the same year.
‘Fair value movements on financial instruments’ 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 (‘own
credit spread’). 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,
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
HSBC Holdings plc Annual Report and Accounts 2017 ‘Compliance with
International Financial Reporting Standards’ on page 186 for further detail.
The results presented for insurance manufacturing operations are shown
before elimination of intercompany transactions with HSBC non-insurance
operations.
The effect on the Insurance manufacturing operations of applying
hyperinflation accounting in Argentina resulted in a reduction in adjusted
revenue in 2018 of $29m and a reduction in PBT in 2018 of $27m. These
effects are recorded in ‘all global businesses’, within Corporate Centre.
‘Client assets’ are translated at the rates of exchange applicable for their
respective period-ends, with the effects of currency translation reported
separately. The components of client assets were funds under management
($241bn at 31 December 2018), which were not reported on the Group’s
balance sheet, and customer deposits ($68bn at 31 December 2018), of
which $65bn was reported on the Group’s balance sheet and $3bn were
off-balance sheet deposits.
Client assets related to our Middle East clients are booked across to various
other regions, primarily in Europe.
‘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.
Risk-weighted assets are non-additive across geographical regions due to
market risk diversification effects within the Group.
Amounts are non-additive across geographical regions due to intercompany
transactions within the Group.
Europe’s adjusted 2018 loss of $40m 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/territory
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 20 on the Financial
Statements).
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 2018
Key developments in 2018
Credit risk profile
Liquidity and funding risk profile
Market risk profile
Operational risk profile
Insurance manufacturing operations risk profile
Page
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143
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.
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
• Ambition and capability to generate returns in line with a
conservative risk appetite and strong risk management
capability.
• Ambition and capability to deliver sustainable earnings and
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.
Enterprise-wide application
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.
Top and emerging risks
Our approach to identifying and monitoring top and emerging
risks is described on page 76. During 2018, we made a number of
changes to our top and emerging risks 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
Economic activity diverged across the global economy during
2018. The US benefited from a fiscal stimulus that helped to drive
GDP growth above its long-term trend. The growth rate in trade-
dependent regions like the European Union (‘EU’) declined on the
back of a slowing Chinese economy, and trade and geopolitical
tensions. Tightening global financial conditions alongside the
tapering off of fiscal stimulus in the US is expected to lead to more
moderate growth in global economic activity in 2019. Oil prices
will likely remain volatile as contrasting supply and demand
factors prevail in turn.
The stand-off between the US and China on a variety of economic
and technological issues is likely to continue in 2019, although
further liberalising initiatives in a vein similar to the
Comprehensive and Progressive Agreement for Trans-Pacific
Partnership (‘CPTPP’) and the EU-Japan trade deal, as well as
some re-organisation of global supply chains, could partly offset
rising protectionism. Nevertheless, the net impact on trade flows
could be negative, and may damage HSBC’s traditional lines of
business.
Emerging markets are set to face challenging cross-currents. The
reduction in global liquidity and consequent increase in the cost of
external funding could expose vulnerabilities that spread more
broadly. However, China has pledged to enact some stimulus to
offset the effects of tariff hikes. This should help emerging markets
achieve reasonable growth rates even in the face of headwinds,
though downside risks abound.
US midterm elections brought in a divided Congress, while two of
Latin America’s largest economies, Mexico and Brazil, elected new
presidents. In Europe, populist parties have made political gains
and could make further breakthroughs. In conjunction with
continuing significant uncertainty around the ultimate shape of the
UK’s exit from the EU, as well as developments in countries such
as Italy, severe bouts of economic and financial turbulence could
spread beyond Europe. We believe HSBC’s strong UK and
European franchises are well placed to weather risks, but would
nevertheless be affected by severe shocks.
Mitigating actions
• 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 76.
• We have carried out detailed reviews and stress tests of our
wholesale credit, retail 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.
HSBC Holdings plc Annual Report and Accounts 2018
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Geopolitical risk remained heightened throughout 2018. The
growing presence of populist parties means political systems
across Europe are increasingly fragmented, volatile and less
predictable. Political uncertainty remains high in the UK as its
departure from the EU continues to dominate the political agenda
in 2019 (see ‘Process of UK withdrawal from the European Union’
on page 73).
In the Middle East, the US has reinstated components of its Iran
sanctions regime that were previously lifted to implement the Iran
Nuclear Deal. The US is also putting pressure to end the war in
Yemen and the boycott of Qatar. In Turkey, which has local
elections in March 2019, the president may face increasing
pressure to solve economic challenges after the Turkish lira came
under pressure in 2018.
In Asia, US-China competition and confrontation across multiple
dimensions will likely continue, including concerning economic
power and technology leadership. US investment and export
restrictions on Chinese imports could disrupt investment
decisions, leading to a slow decoupling of the US and Chinese
technology sectors.
Key presidential votes in HSBC markets Mexico and Brazil have
changed the political status quo. A major source of uncertainty for
Mexico was removed with the negotiation of the United States-
Mexico-Canada Agreement (‘USMCA’), which replaces NAFTA as
a key driver of the Mexican economy, but still must be ratified. In
Argentina, elections due in October 2019 will be shaped by
economic factors and potential further market volatility. Corruption
and security dynamics will continue to shape voter preferences.
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.
• We continue to carry out contingency planning for the UK’s exit
from the EU and we are assessing the potential impact on our
portfolios, operations and staff. This includes the increased
possibility of an exit with no transition agreement.
• 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
Steadily rising US interest rates and the looming end of the ECB’s
quantative easing programme, alongside the uncertainty caused
by trade and geopolitical tensions, caused a correction in stock
indices and a widening in corporate bond spreads in the fourth
quarter of 2018. The Bank for International Settlements (‘BIS’)
estimates that 80% of US leveraged loans are ’covenant-lite’.
Pressures in this segment could come to a head and spill over to
other asset classes. The International Monetary Fund deems that
thin liquidity coverage ratios (‘LCRs’) and stable funding ratios
(‘SFRs’) for international banks’ US dollar positions could cause
offshore dollar liquidity to tighten abruptly during periods of high
volatility, possibly affecting HSBC’s positions.
After reining in excess leverage during 2018, China has pledged
renewed stimulus in 2019 to counter various adverse effects on
economic activity. This could lead to renewed global concerns
about Chinese debt levels. In addition, debt-servicing burdens are
high in some emerging markets, making them vulnerable to
shocks.
Mitigating actions
• We closely monitor economic developments in key markets
and sectors and undertake scenario analysis. This helps enable
us to take portfolio actions where necessary, including
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HSBC Holdings plc Annual Report and Accounts 2018
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.
• We undertake regular reviews of key portfolios 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 organisations continue to operate in an
increasingly hostile cyber threat environment, which requires
ongoing investment in business and technical controls to defend
against these threats.
Key threats include unauthorised access to online customer
accounts, advanced malware attacks and distributed denial of
service (‘DDOS’) attacks.
Destructive malware (including ransomware), DDOS attacks and
organised cyber criminals targeting payments are increasingly
dominant threats across the industry. In 2018, the Group was
subjected to a small number of DDOS attacks on our external
facing websites, which were successfully mitigated across the
Group with no destructive malware (including ransomware) or
payment infrastructure attacks reported.
Mitigating actions
• We continue to strengthen and significantly invest in both
business and technical controls in order to prevent, detect and
respond to an increasingly hostile cyber threat
environment. We continually evaluate the threat environment
for the most prevalent attack types and their potential
outcomes to determine the most effective controls to mitigate
those threats.
• Specifically, we continue to enhance our controls to protect
against advanced malware, data leakage, infiltration of
payment systems and denial of service attacks as well as
enhance our ability to quickly detect and respond to
increasingly sophisticated cyber-attacks. Ensuring our staff
continue to be ‘cyber aware’ is a key element of our defence
strategy.
• Cyber risk is a priority area for the Board and is routinely
reported at Board level to ensure appropriate visibility,
governance and executive support for our ongoing
cybersecurity programme.
Regulatory 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. This would include the loss of passporting
rights and free movement of services, which are likely to arise in
the event of the UK leaving the EU without an exit deal. Changes
to business models and structures will be necessary to
accommodate any such restrictions. For further details, see page
73.
Additionally, as described in Note 35 on the Financial Statements,
we continue to be subject to a number of material legal
proceedings, regulatory actions and investigations, including, for
example, our January 2018 deferred prosecution agreement with
the US DoJ arising from its investigation into HSBC’s historical
foreign exchange activities (the ‘FX DPA’).
Mitigating actions
Ibor transition
• We are fully engaged, wherever possible, 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 are
overseen by the Group Change Committee.
• We hold regular meetings with all relevant authorities to
discuss strategic contingency plans covering a wide range of
scenarios relating to the UK’s exit from the EU. In the absence
of an agreement on the terms of the UK’s withdrawal from the
EU, these discussions increasingly focus on no deal scenarios
and our plans to navigate the restrictions that are likely to arise
regarding our ability to access EU markets and customers from
the UK if passporting rights are withdrawn.
• 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 our activities in global markets.
These included enhancements to trade, voice and audio
surveillance and the implementation of algorithmic trading for
benchmark orders. For further details, see ‘Regulatory
compliance risk management’ on page 84.
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 highly speculative, volatile
and opaque nature of virtual currencies, as well as the pace of
new currencies and associated technological developments,
create challenges in effectively managing financial crime risks. The
evolving regulatory environment continues to present execution
challenge. An increasing trend towards greater data privacy
requirements may affect our ability to effectively manage financial
crime risks.
In December 2012, among other agreements, HSBC Holdings plc
(‘HSBC Holdings’) consented to a cease-and-desist order with the
US Federal Reserve Board (‘FRB’) and agreed to an undertaking
with the UK Financial Conduct Authority (‘FCA’) to comply with
certain forward-looking anti-money laundering (‘AML’) and
sanctions-related obligations. HSBC Holdings also agreed to retain
an independent compliance monitor – who is for FCA purposes a
‘Skilled Person’ under section 166 of the Financial Services and
Markets Act, and for FRB purposes an ‘Independent Consultant’ –
to produce periodic assessments of the Group’s AML and
sanctions compliance programme. In December 2012, HSBC
Holdings also entered into an agreement with the Office of Foreign
Assets Control (‘OFAC’) regarding historical transactions involving
parties subject to OFAC sanctions. The Skilled Person/Independent
Consultant will continue to conduct country reviews and provide
periodic reports for a period of time at the FCA’s and FRB’s
discretion. The role of the Skilled Person/Independent Consultant
is discussed on page 85.
Mitigating actions
• We continued to enhance our financial crime risk management
capabilities. We are investing in the next generation of tools to
fight financial crime through the application of advanced
analytics and artificial intelligence.
• We are developing procedures and controls to manage the
risks associated with direct and indirect exposure to virtual
currencies.
• We continue to work with jurisdictions and relevant
international bodies to address data privacy challenges through
international standards, guidance, and legislation to enable
effective management of financial crime risk.
• We continue to take steps designed to ensure that the reforms
we have put in place are both effective and sustainable over the
long term.
Interbank offered rates (‘Ibors’) are used to set interest rates on
hundreds of trillions of US dollars’ worth of different types of
financial transactions and are used extensively for valuation
purposes, risk measurement and performance benchmarking.
Following the recommendations of the Financial Stability Board, a
fundamental review and reform of the major interest rates
benchmarks, including Ibors, are underway across the world’s
largest financial markets. In some cases, the reform will include
replacing interest rate benchmarks with alternative risk-free rates
(‘RFRs’). This replacement process is at different stages, and is
progressing at different speeds, across several major currencies.
There is therefore uncertainty as to the basis, method and timing
of transition and their implications on the participants in the
financial markets.
HSBC has identified a number of potential prudential, conduct and
systemic risks associated with the transition.
Mitigating actions
• We have established a global programme across all of our
global businesses to coordinate HSBC’s transition activities and
to assess the potential risks and impacts of any transition.
• We will continue to engage with industry participants and the
official sector to support an orderly transition.
Climate-related risks
Climate change can create physical risks such as severe weather
events of increasing severity and/or frequency. The move to a low-
carbon economy also creates transition risks both at idiosyncratic
and systemic levels, such as through policy, regulatory and
technological changes. These physical and transition risks create
potential financial impacts for HSBC through higher risk-weighted
assets (‘RWAs), greater transactional losses and increased capital
requirements.
There is potential for a rapid deterioration of credit quality in
sectors and/or countries most exposed to transition risks,
particularly if policy changes are radical or quickly enacted. HSBC
could be significantly impacted by increased credit RWAs and
losses through exposure to pools of stranded assets if the Group
does not adequately respond to the changing landscape.
Physical risks from natural disasters, such as floods and
hurricanes, could also impact credit RWAs, while the financial
losses caused by these events could impair asset values and the
creditworthiness of customers.
Mitigating actions
• We are increasingly incorporating climate-related risk, both
physical and transition, into how we manage and oversee risks
internally and with our customers.
• A programme of work to measure and monitor the transition
risk of our portfolio is underway. This includes identifying those
customers that need to adapt most rapidly to a transition to a
low-carbon economy and integrating climate change risk
considerations into credit risk analysis, decision making and
credit policies.
• We have a number of sustainability risk policies covering
sectors that have particular risks and/or public exposure. In
2018, we updated our energy policy to limit the financing of
high-carbon intensity energy projects, while still supporting
energy customers on their transition to a low-carbon economy.
• We continue to expand our thinking with regards to stress
testing of climate risks. Over time, we will articulate narratives
for a baseline and a number of alternative scenarios, as well as
undertake portfolio-specific sensitivity tests. We expect to learn
more about the impacts of climate risk as scenario analysis and
stress testing evolves.
• Our enterprise risk management framework continues to be
enhanced to develop and embed the measurement, monitoring
and management of climate-related risks.
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• An internal Climate Risk Council provides oversight by seeking
to develop policy and limit frameworks in order to achieve
desired portfolios over time, and protect the Group from
climate-related risks that are outside of risk appetite.
Internally driven
IT systems infrastructure and resilience
We continue 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
• We continue to invest in transforming how software solutions
are 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. We have
enhanced the security features of our software development life
cycle and improved our testing processes and tools.
• We continue to upgrade our IT systems, simplify our service
provision and replace older IT infrastructure and applications.
Enhancements have led to continued global improvements in
service availability for both our customers and employees.
Risks associated with workforce capability, capacity
and environmental factors with potential impact on
growth
Our success in delivering our strategic priorities, as well as
proactively managing the regulatory environment, depends on the
development and retention of our leadership and high-performing
employees. 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,
particularly as our business lines execute their strategic business
outlooks. This may be affected by external and environmental
factors, such as the UK’s exit from the EU, changes to immigration
policies and regulations and tax reforms in key markets that
require active responses. Although potential people impacts
related to the UK’s exit from the EU have not yet materialised, we
continue to monitor retention trends and the recruitment of key
roles.
Mitigating actions
risks arising from the use of third parties could affect our ability to
meet strategic, regulatory or client expectations.
Mitigating actions
• We continued to embed our delivery model in the first line of
defence through a dedicated team. Processes, controls and
technology to assess third-party service providers against key
criteria and associated control monitoring, testing and
assurance have been deployed.
• A dedicated oversight forum in the second line of defence
monitors the embedding of policy requirements and
performance against risk appetite. In the fourth quarter of 2018,
regional second line of defence oversight capabilities were
established in the major markets.
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 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 model oversight by reconfiguring the
Global Model Oversight Committee, which is chaired by the
Group Chief Risk Officer and attended by CEOs of the global
businesses.
• We incorporated model risk-specific metrics within the Group
risk appetite statement as part of the embedding of model risk
as a risk discipline.
• We enhanced our model risk governance framework while
partnering with the business to help enable more effective
management of model risk in a commercial context. As we
adopt new modelling technologies, we are updating our model
risk management framework and governance standards to help
drive the evolution of the overall governance framework to
ensure best practice.
• HSBC University is focused on developing opportunities and
• We are refreshing the existing model risk controls to enable
tools for current and future skills, personal skills and leaders to
create an environment for success.
• We continue to develop succession plans for key management
roles, with actions agreed and reviewed on a regular basis by
the Group Management Board.
• We actively respond to immigration changes through the global
immigration programme. Other political and regulatory
challenges are being closely monitored to minimise the impact
on the attraction and retention of talent and key performers.
• HSBC is building the healthiest human system where
colleagues can thrive. A number of initiatives have been
launched to improve our ways of working and encourage an
open and positive culture (e.g. simplifying processes and
governance, and adopting new behaviours). We also promote a
diverse and inclusive workforce and provide active support
across a wide range of health and well-being activities.
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 we have appropriate risk management
policies, processes and practices. These should include 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
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HSBC Holdings plc Annual Report and Accounts 2018
better understanding of control objectives and to provide the
modelling areas with implementation guidance to enhance
effectiveness.
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.
Mitigating actions
• We continue to improve data quality across a large number of
systems globally. Our data management, aggregation and
oversight 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 have achieved our objectives of meeting a ’largely
compliant’ rating in support of the Basel Committee for
Banking Supervision (BCBS 239) principles.
• Through our global data management framework, we have
commenced embedding governance processes to monitor
proactively the quality of critical customer, product and
transaction data and resolving associated data issues in a
Employees
The migration of EEA-incorporated clients will require us to
strengthen our local teams in the EU, and France in particular. We
expect the majority of roles to be filled through hires and we have
started a recruitment process. Throughout, our objective is to
minimise the level of change for our people and ensure any
transition is as smooth as possible.
Given the scale and capabilities of our existing business in France,
we are well prepared to take on additional roles and activities.
Looking beyond the transfer of roles to the EU, we are also
providing support to our UK employees resident in EEA countries
and EEA employees resident in the UK (e.g. on settlement
applications).
Nevertheless, London will continue to be an important global
financial centre and the best location for our global headquarters.
As at 31 December 2018, HSBC employed approximately 39,000
people in the UK.
Across the programme, we have made good progress in terms of
ensuring we are prepared for the UK leaving the EU in the first
quarter of 2019 under the terms described above. However, there
remain execution risks, many of them linked to the uncertain
outcome of negotiations and potentially tight timelines to
implement significant changes to our UK and European operating
models. If these risks materialise, HSBC’s clients and employees
are likely to be affected. The exact impact on our clients will
depend on their individual circumstances and, in a worst case
scenario, could include disruption to the provision of products and
services.
We have carried out detailed reviews of our credit portfolios to
determine those sectors and customers most vulnerable to the
UK’s exit from the EU. For further details, please see ‘Impact of UK
economic uncertainty on ECL’ on page 98.
Risk management
This section describes the enterprise-wide risk management
framework, and the significant policies and practices employed by
HSBC in managing its material risks, both financial and non-
financial.
Our risk management framework
We use an enterprise-wide risk management framework across
the organisation and across all risk types, underpinned by our risk
culture.
The framework fosters continuous monitoring, promotes risk
awareness and encourages sound operational and strategic
decision making. 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.
timely manner. We continue to implement controls to improve
the reliability of data used by our customers and staff.
• We are leveraging our investment in the GDPR initiative to roll
out and implement a global and consistent data privacy
framework.
Areas of special interest
During 2018, a number of areas have been identified and
considered as part of our top and emerging risks because of the
effect they may have on the Group. We have placed particular
focus on the UK withdrawal from the European Union (‘EU’) in this
section.
Process of UK withdrawal from the
European Union
The UK is due to formally leave the EU in March 2019. Before
then, the UK and the EU have to finalise the Article 50 Withdrawal
Agreement, which will need to be approved by their respective
parliaments. A comprehensive trade deal will not be concluded
within this time frame. A period of transition until 31 December
2020 has been agreed between the UK and the EU. However,
there will be no legal certainty until this is enshrined in the
Withdrawal Agreement. To ensure continuity of service,
independent of the outcome of negotiations, our contingency plan
is based on the assumption of a scenario whereby the UK exits the
EU without the existing passporting or regulatory equivalence
framework that supports cross-border business.
Our programme to manage the impact of the UK leaving the EU
was set up in 2017 and now has in excess of 1,000 employees
covering all businesses and functions. It focuses on four main
components: legal entity restructuring; product offering; customer
migrations; and employees.
Legal entity restructuring
The Group currently has branches in seven European Economic
Area (‘EEA’) countries (Belgium, the Netherlands, Luxembourg,
Spain, Italy, Ireland and Czech Republic), which rely on
passporting out of the UK. Assuming a UK departure from the EU
without the existing passporting or regulatory equivalence
framework that supports cross-border business, this will no longer
be possible. As a result, we have now completed the
establishment of new branches of HSBC France (‘HBFR’), our
primary banking entity authorised in the EU, after receiving
regulatory approval in 2018. We are on track to complete the
business transfer in the first quarter of 2019, and are making good
progress on the operational integration of our EEA branch network
into HBFR.
Product offering
To accommodate for customer migrations and new business after
the UK’s departure from the EU, we are expanding and enhancing
our existing product offering in France, the Netherlands and
Ireland. HBFR’s euro clearing capabilities are now available and
further product launches are planned during the first quarter of
2019.
Customer migrations
The UK’s departure from the EU is likely to have an impact on our
clients’ operating models, including their working capital
requirements, investment decisions and financial markets
infrastructure access. Our priority is to provide continuity of
service, and while our intention is to minimise the level of change
for our customers, we will be required to migrate some EEA-
incorporated clients from the UK to HBFR, or another EEA entity.
We are in active dialogue with affected clients to make the
transition as smooth as possible. We are organising client events
and communications to provide clients with a better
understanding of these implications.
HSBC Holdings plc Annual Report and Accounts 2018
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Key components of our risk management framework
HSBC Values and risk culture
Risk governance
Non-executive risk governance
Executive risk governance
Roles and
responsibilities
Three lines of defence model
Risk appetite
Processes and tools
Enterprise-wide risk management tools
Active risk management: identification/assessment,
monitoring, management and reporting
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 and the Financial System Vulnerabilities Committee (see
page 158).
Our executive risk governance structure is responsible for the enterprise-
wide management of all risks, including key policies and frameworks for
the management of risk within the Group (see pages 75 and 77).
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 75).
The Group has several processes to identify/assess, monitor, manage
and report risks to ensure we remain within our risk appetite (see pages
74 to 77).
Policies and procedures
Policies and procedures define the minimum requirements for the
controls required to manage our risks.
Internal controls
Control activities
Systems and infrastructure
The operational risk management framework defines minimum
standards and processes for managing operational risks and internal
controls (see page 84).
The Group has systems and/or processes that support the identification,
capture and exchange of information to support risk management
activities.
Our risk culture
Risk governance
Systems and tools
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’) and the Financial System Vulnerabilities Committee
(‘FSVC’).
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
Chief Compliance Officer. He is supported by the Financial Crime
Risk Management Meeting, as described under ‘Financial crime
risk management’ on page 85.
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 in the following commentary, under 'Our
responsibilities’.
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.
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 to 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 25.
For details on the governance of our whistleblowing procedures,
see page 158.
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 172.
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HSBC Holdings plc Annual Report and Accounts 2018
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 Chief Financial Officer
All other Group Managing Directors
• Supporting the Group Chief Risk Officer in exercising Board-delegated risk
management authority
• Overseeing the implementation of risk appetite and the enterprise 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
Global Risk Management
Board
Group Chief Risk Officer
Chief Risk Officers of HSBC’s
global businesses and regions
Heads of Global Risk sub-functions
• 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
Global business/regional
risk management meetings
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 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 158.
Our responsibilities
All employees are responsible for identifying and managing
risk within the scope of their role as part of the three lines of
defence model.
Three lines of defence
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 as
follows:
Risk appetite
The risk appetite statement (‘RAS’) sets out the aggregate level
and types of risk that HSBC is willing to accept to achieve its
business objectives. It provides a benchmark for business
decisions that are based on balancing risk and return, and making
the best use of our capital. The Group RAS is interlinked with the
Group’s strategic and financial plans, as well as remuneration, and
is therefore forward-looking in describing the Group’s desired risk
appetite profile. The RAS consists of qualitative statements and
quantitative metrics, covering financial and non-financial risks and
is formally approved by the Board every six months on the
recommendation of the GRC. It is fundamental to the development
of business line strategies, strategic and business planning, and
senior management balanced scorecards.
At a Group level, performance against the RAS is reported to the
GRMM on a monthly basis so that any actual performance that
falls outside the approved risk appetite is discussed and
appropriate mitigating actions are determined. 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. 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. 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 77.
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
HSBC Holdings plc Annual Report and Accounts 2018
75
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review 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 14.6% at the end of 2017, the BoE’s 2018 stress test
results showed a projected minimum stressed CET1 ratio of 9.1%
on an IFRS 9 transitional basis, 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
2018
%
14.6
9.1
5.5
2017
%
13.6
8.9
4.7
2016
%
11.9
9.1
2.8
Source: Bank of England.
Data is presented in terms of the minimum CET1 ratio on an IFRS 9 transitional
basis, reached net of strategic management actions.
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 that 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 Group 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.
A particular area of focus during the year has been the analysis of
the potential impact of a range of outcomes relating to the UK’s
exit from the EU. As part of our internal stress testing programme,
a number of internal macroeconomic and event-driven scenarios
were considered to support management’s planning for, and
assessment of, the impact of the UK’s exit. In addition, the BoE
judged the severity of the 2018 ACS sufficient to encompass
outcomes based on a disorderly departure from the EU.
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.
Report of the Directors | Risk
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 69.
Stress testing
HSBC operates a wide-ranging 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 Bank of England (‘BoE’),
the Federal Reserve Board (‘FRB’) and the Hong Kong Monetary
Authority (‘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 2018
The annual cyclical scenario (‘ACS’) used in the BoE’s 2018 stress
test was the same as that used in 2017 to allow the BoE to isolate
the impact on the stress results of the introduction of IFRS 9 in
2018. The scenario 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 2017.
We estimated that the economic shock to global GDP in this
scenario was about as severe as in the global financial crisis of
2007–2009, but with a greater impact on emerging markets. In
this scenario for example, there was a 1.2% contraction in the
Chinese economy in the first year. In addition, 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.
UK
US
Mainland China
Hong Kong
2017
2018
2019
2020
%
1.6
2.5
6.8
3.3
%
(4.7)
(3.5)
(1.2)
(7.9)
%
0.7
0.7
3.7
1.1
%
1.4
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
In 2018, 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
on both an IFRS 9 transitional and non-transitional basis.
This outcome reflected our strong capital position, conservative
risk appetite and diversified geographical and business mix.
76
HSBC Holdings plc Annual Report and Accounts 2018
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 79)
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 80)
Liquidity risk is the risk that we do
not have sufficient financial
resources to meet our obligations
as they fall due or that we can only
do so at an excessive cost.
Funding risk is the risk that funding
considered to be sustainable, and
therefore used to fund assets, is
not sustainable over time.
Liquidity risk arises from
mismatches in the timing
of cash flows.
Funding risk arises when
illiquid asset positions
cannot be funded at the
expected terms and when
required.
Liquidity and funding risk is:
• measured using a range of metrics, including liquidity coverage ratio and net stable
funding ratio;
• 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.
Market risk (see page 81)
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 84)
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.
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 145.
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 is also 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 84)
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.
Financial crime risk (see page 85)
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.
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 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.
HSBC Holdings plc Annual Report and Accounts 2018
77
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Description of risks – banking operations (continued)
Risks
Arising from
Measurement, monitoring and management of risk
Other material risks
Reputational risk (see page 86)
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.
Pension risk (see page 87)
Pension risk is the risk of increased
costs to HSBC from offering post-
employment benefit plans to its
employees.
Sustainability risk (see page 87)
Sustainability risk is the risk that
financial services provided to
customers by the Group indirectly
result in unacceptable impacts on
people or the environment.
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 that
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 145)
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 146)
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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HSBC Holdings plc Annual Report and Accounts 2018
Credit risk management
The principal objectives of our credit risk management are:
Details of changes in our credit risk profile in 2018 can be found on page 88,
in ‘Key developments and risk profile in 2018’.
• to maintain across HSBC a strong culture of responsible
lending, and robust risk policies and control frameworks;
• to both partner and challenge our businesses in defining,
implementing and continually re-evaluating our risk appetite
under actual and scenario conditions; and
• to ensure there is independent, expert scrutiny of credit risks,
their costs and their mitigation.
Concentration of exposure
(Audited)
Concentrations of credit risk arise when a number of
counterparties or exposures have comparable economic
characteristics, or such counterparties are engaged in similar
activities or operate in the same geographical areas or industry
sectors so that their collective ability to meet contractual
obligations is uniformly affected by changes in economic, political
or other conditions. We use a number of controls and measures to
minimise undue concentration of exposure in our portfolios across
industries, countries and global businesses. These include portfolio
and counterparty limits, approval and review controls, and stress
testing.
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 the calculation of our minimum credit regulatory capital
requirement.
The five credit quality classifications each encompass a range of
granular internal credit rating grades assigned to wholesale and
retail lending businesses, and the external ratings attributed by
external agencies to debt securities.
For debt securities and certain other financial instruments,
external ratings have been aligned to the five quality classifications
based upon the mapping of related customer risk rating (‘CRR’) to
external credit rating.
Wholesale lending
The 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 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.
Retail lending
Previously, we disclosed retail lending credit quality under IAS 39,
which was based on expected-loss percentages. Now, retail
lending credit quality is disclosed on an IFRS 9 basis, which is
based on a 12-month point-in-time (‘PIT’) probability-weighted
probability of default (‘PD’).
There were no material changes to the policies and practices
for the management of credit risk in 2018.
Adoption of IFRS 9 ‘Financial Instruments’
HSBC adopted the requirements of IFRS 9 ‘Financial Instruments’
on 1 January 2018, with the exception of the provisions relating to
the presentation of gains and losses on financial liabilities
designated at fair value, which were adopted on 1 January 2017.
The adoption of IFRS 9 did not result in any significant change to
HSBC's business model, or that of our four global businesses. This
included our strategy, country presence, product offerings and
target customer segments.
We have established credit risk management processes and we
actively assess the impact of economic developments in key
markets on specific customers, customer segments or portfolios. If
we foresee changes in credit conditions, we take mitigating action,
including the revision of risk appetites or limits and tenors, as
appropriate. In addition, we continue to evaluate the terms under
which we provide credit facilities within the context of individual
customer requirements, the quality of the relationship, local
regulatory requirements, market practices and our local market
position.
As a result of IFRS 9 adoption, management has additional insight
and measures not previously utilised which, over time, may
influence our risk appetite and risk management processes.
IFRS 9 process
The IFRS 9 process comprises three main areas: modelling and
data; implementation; and governance.
Modelling and data
Prior to the implementation of IFRS 9, the Risk function had pre-
existing Basel and behavioural scorecards in most geographies.
These were then enhanced or supplemented to address the IFRS 9
requirements, with the appropriate governance and independent
review.
Implementation
A centralised impairment engine performs the expected credit loss
(‘ECL’) calculation using data, which is subject to a number of
validation checks and enhancements, from a variety of client,
finance and risk systems. Where possible, these checks and
processes are performed in a globally consistent and centralised
manner.
Governance
A series of regional management review forums has been
established in key sites and regions in order to review and approve
the impairment results. Regional management review forums have
representatives from Credit Risk and Finance. The key site and
regional approvals are reported up to the global business
impairment committee for final approval of the Group’s ECL for
the period. Required members of the committee are the global
heads of Wholesale Credit, Market Risk, and Retail Banking and
Wealth Management ('RBWM') Risk, as well as the global
business CFOs and the Group Chief Accounting Officer.
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.
HSBC Holdings plc Annual Report and Accounts 2018
79
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Credit quality classification
Quality classification
Strong
Good
Satisfactory
Sub-standard
Credit impaired
For footnotes, see page 147.
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 Basel
probability of
default %
Internal credit
rating
12 month
probability-
weighted PD %
1,2
BBB and above
A- and above
CRR 1 to CRR 2
0 – 0.169
Band 1 and 2
0.000 - 0.500
BBB- to BB
BBB+ to BBB-
CRR 3
0.170 – 0.740
Band 3
0.501 - 1.500
BB- to B and
unrated
BB+ to B and
unrated
CRR 4 to CRR 5
0.741 – 4.914
Band 4 and 5
1.501 - 20.000
B- to C
Default
B- to C
CRR 6 to CRR 8
4.915 – 99.999
Band 6 20.001 - 99.999
Default CRR 9 to CRR 10
100
Band 7
100
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.
• ‘Credit-impaired’ exposures have been assessed as described on Note 1.2(d) on the Financial Statements.
Renegotiated loans and forbearance
Impairment assessment
(Audited)
(Audited)
‘Forbearance’ describes concessions made on the contractual
terms of a loan in response to an obligor’s financial difficulties.
For details of our impairment policies on loans and advances and
financial investments, see Note 1.2(d) on the Financial Statements.
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.
For details of our policy on derecognised renegotiated loans, see
Note 1.2(d) on the Financial Statements.
Credit quality of renegotiated loans
On execution of a renegotiation, the loan will also be classified as
credit impaired if it is not already so classified. In wholesale
lending, all facilities with a customer, including loans that have not
been modified, are considered credit impaired following the
identification of a renegotiated loan.
Those loans that are considered credit impaired retain this
classification for a minimum of one year. Renegotiated loans will
continue to be disclosed as credit 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 is no other objective evidence of credit
impairments. For retail lending generally, renegotiated loans retain
this classification until maturity or write-off.
Renegotiated loans and recognition of expected credit
losses
(Audited)
For retail lending, unsecured renegotiated loans are generally
segmented from other parts of the loan portfolio. Renegotiated
expected credit loss assessments 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 future non-payment inherent in renegotiated loans.
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HSBC Holdings plc Annual Report and Accounts 2018
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 secured facilities, write-off should occur upon repossession of
collateral, receipt of proceeds via settlement, or determination that
recovery of the collateral will not be pursued.
Any secured assets maintained on the balance sheet beyond 60
months of consecutive delinquency-driven default require
additional monitoring and review to assess the prospect of
recovery.
There are exceptions 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. 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.
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 31 December 2018.
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 Chief Financial Officer, 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 the following elements:
• stand-alone management of liquidity and funding by operating
Market risk management
entity;
• minimum liquidity coverage ratio (‘LCR’) requirement;
• minimum net stable funding ratio (‘NSFR’) requirement;
•
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;
Risk types
•
liquidity funds transfer pricing; and
• forward-looking funding assessments.
Risk governance and oversight
Details of changes in our market risk profile in 2018 can be found on page 88,
in ‘Key developments and risk profile in 2018’.
There were no material changes to our policies and practices for
the management of market risk in 2018.
Market risk in global businesses
The following diagram summarises the main business areas where
trading and non-trading market risks reside, and the market risk
measures used to monitor and limit exposures.
Trading risk
Non-trading risk
• Foreign exchange and
commodities
• Interest rates
• Credit spreads
• Equities
• Structural foreign
exchange
• Interest rates3
• Credit spreads
Global business
GB&M and BSM4
GB&M, BSM4, GPB, CMB
and RBWM
The elements of the LFRF are underpinned by a robust governance
framework, the two major elements of which are:
Risk measure
VaR | Sensitivity | Stress
testing
VaR | Sensitivity | Stress
testing
• Group, regional and entity level Asset and Liability
For footnotes, see page 147.
Management Committees (‘ALCOs’).
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.
• 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. 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 2018.
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 funds in the debt capital markets to meet the
Group’s minimum requirement for own funds and eligible
liabilities. HSBC Holdings uses this liquidity to meet its obligations,
including interest and principal repayments on external debt
liabilities, operating expenses and collateral on derivative
transactions.
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 2018, 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.
HSBC Holdings currently has sufficient liquidity to meet its present
requirements.
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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 VaR (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 twice 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 (which are only allowed in offices with
appropriate levels of product expertise), and robust control systems.
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, VaR 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, which are calculated with
reference to foreign exchange rates, commodity prices, interest
rates, equity prices and the associated volatilities;
• potential market movements utilised for VaR, which are
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.
• 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.
Risk factors are reviewed on a regular basis and are 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 approach is included in the overall VaR calculation but
excluded from the VaR measure used for regulatory back-testing.
In addition, a stressed VaR RNIV is 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.
calculated with reference to data from the past two years; and
Stress testing
• VaR measures, which are calculated to a 99% confidence level
and use a one-day holding period.
Stress testing is an important procedure that is integrated into our
market risk management framework to evaluate the potential
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HSBC Holdings plc Annual Report and Accounts 2018
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 designed to identify
vulnerabilities in our portfolios by looking for scenarios that lead to
loss levels considered severe for the relevant portfolio. These
scenarios may be quite local or idiosyncratic in nature, and
complement the systematic top-down stress testing.
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
revenue 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 VaR at various levels of our Group entity
hierarchy.
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 139.
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,
specifically loans, deposits and financial instruments that are not
held for trading intent or that are held in order to hedge positions
held with trading intent. This risk is monitored and controlled by
the ALCM function. Interest rate risk in the banking book is
transferred to and managed by Balance Sheet Management
(‘BSM’), and also monitored by Wholesale Market Risk, Product
Control and ALCM functions with reference to established risk
appetites.
Governance and structure
The ALCM function monitors and controls 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. The ALCM
function is also responsible for maintaining and updating the
transfer pricing framework, informing the ALCO of the Group’s
overall banking book interest rate risk exposure and managing the
balance sheet in conjunction with BSM.
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, with Risk acting as a second line of defence. The global
businesses can only transfer non-trading assets and liabilities to
BSM provided BSM can economically hedge the risk it receives.
Hedging is generally executed through interest rate derivatives or
fixed-rate government bonds. Any interest rate risk that BSM
cannot economically hedge is not transferred and will remain
within the global business where the risks originate.
Measurement of interest rate risk in the banking book
The ALCM function uses a number of measures to monitor and
control interest rate risk in the banking book, including:
• non-traded VaR;
• net interest income 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 that 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 (‘NII’)
under varying interest rate scenarios (i.e. 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.
Projected net interest income sensitivity figures represent the
effect of pro forma movements in projected yield curves based on
a static balance sheet size and structure. The exception to this is
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 that 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 of anticipated differences in
changes between interbank and internally determined interest
rates, where 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 139.
Economic value of equity
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. This equates
to the current book value of equity plus the present value of future
net interest income in this scenario. EVE can be used to assess the
economic capital required to support interest rate risk in the
banking book (‘IRRBB’). An EVE sensitivity is the extent to which
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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
As a financial services holding company, HSBC Holdings has
limited market risk activities. Its activities predominantly involve
maintaining sufficient capital resources to support the Group’s
diverse activities; allocating these capital resources across the
Group’s businesses; earning dividend and interest income on its
investments in the 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 2018 can be found on page 142, in
‘Operational risk exposures in 2018’.
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 2018
During 2018, we continued to strengthen our approach to
managing operational risk, as set out in the operational risk
management framework (‘ORMF’). The approach sets out the
governance, appetite and provides a single view of non-financial
risks that matter the most and associated controls. It incorporates
a risk management system to help active risk management. The
enhancement and embedding of the risk appetite framework for
non-financial risk and the improvement of the consistency of the
adoption of the end-to-end risk and control assessment processes
were a particular focus in 2018. While there remains more to do,
we made progress in strengthening the control environment and
the management of non-financial risk.
Activity to strengthen the three lines of defence model continued
to be a key focus in 2018. 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 73.
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.
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.
Key risk management processes
Business managers throughout the Group are responsible
for maintaining an acceptable level of internal control
commensurate with the scale and nature of operations, and
for identifying and assessing risks, designing controls and
monitoring the effectiveness of these controls. The ORMF helps
managers to fulfil these responsibilities by defining a standard risk
assessment methodology and providing a tool for the systematic
reporting of operational loss data.
A 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.
Continuity of business operations
Every department within the organisation undertakes business
continuity management, which incorporates the development of a
plan including a business impact analysis assessing risk when
business disruption occurs.
The Group maintains a number of dedicated work area recovery
sites globally. Regular testing of these facilities is carried out with
representation from each business and support function, to ensure
business continuity plans remain accurate, relevant and fit for
purpose. Where possible, the Group has ensured that its critical
business systems are not co-located with business system users,
thereby reducing concentration risk.
Regulatory compliance risk management
Overview
The Regulatory Compliance sub-function 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 2018
There were no material changes to the policies and practices for
the management of regulatory compliance risk in 2018, except for
the following:
• The Board oversight of conduct matters was transitioned to the
Group Risk Committee following the demise of the Conduct &
Values Committee during the first half of 2018.
• 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’.
• The reporting line of the Global Head of Regulatory Compliance
was changed from reporting to the Group Chief Risk Officer to
reporting to the Group Chief Compliance Officer from 1
November.
Governance and structure
We have a dedicated Global Operational Risk sub-function within
our Global Risk function. It is responsible for establishing and
maintaining the ORMF, monitoring the level of operational losses
and the internal control environment supported by their second
line of defence functions. It supports the Group Chief Risk Officer
Regulatory Compliance and Financial Crime Risk were integrated
into a new Compliance function from 1 November, which is
headed by the Group Chief Compliance Officer. Regulatory
Compliance continues to be structured as a global function with
regional and country Regulatory Compliance teams, which
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HSBC Holdings plc Annual Report and Accounts 2018
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 Regulatory
Compliance. 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 Group
Risk Committee.
Conduct of business
In 2018, we continued to highlight conduct requirements as a
global principle and elsewhere within the risk management
framework, reflecting the individual responsibility and
accountability we have for the delivery of fair conduct outcomes
for customers and market integrity. Other key activities in 2018
included:
• the inclusion of an annual conduct objective in performance
management scorecards for executive Directors, Group
Managing Directors, Group general managers and country
CEOs across all regions, business lines, global functions and
HSBC Operations Services and Technology. Executive Directors
are also now subject to a new separate conduct-focused long-
term incentive measure;
• further development of digital products and supporting
processes to ensure our digital offerings deliver fair outcomes
for customers. Governance and controls continue to be
strengthened to ensure they remain fit for purpose as new
technology is introduced;
• enhanced global policy requirements helping customers who
are, or may become, vulnerable. Business line-led initiatives in
specific markets have addressed support for appointed
representatives of vulnerable customers, customers in financial
distress, financial inclusion, and a pilot programme of training
to help customers with or affected by cancer or dementia; and
• the delivery of our fourth annual global mandatory training
course on conduct for all employees. This is complemented by
an ongoing programme of newsletter, intranet and live-
streamed communications, internal surveys of staff sentiment
regarding progress in delivering good conduct, and conduct
awareness campaigns.
The Board maintains oversight of conduct matters through the
Group Risk Committee.
Further details can be found under the ‘Our conduct’ section of
www.hsbc.com/our-approach/risk-and-responsibility. For conduct-related
costs relating to significant items, see page 66.
Financial crime risk management
Overview
HSBC continued to embed a sustainable financial crime risk
management capability across the Group. We are making good
progress with enhancing our financial crime control framework,
with the three-year programme that began in 2017 to further
strengthen the management of anti-bribery and corruption risk.
We continue to take further steps to refine and strengthen our
defences against financial crime by applying advanced analytics
and artificial intelligence.
Key developments in 2018
During 2018, HSBC continued to increase its efforts to strengthen
its ability to combat financial crime. We integrated into our day-to-
day operations the majority of the financial crime risk core
capabilities delivered through the Global Standards programme,
which we set up in 2013 to enhance our risk management
policies, processes and systems. The programme infrastructure is
expected to close in 2019.
We began several initiatives to define the next phase of financial
crime risk management. We invested in the use of artificial
intelligence and advanced analytics techniques to develop an
intelligence-led financial crime risk management framework for
the future.
Working in partnership with the public and private sector is vital to
managing financial crime risk. HSBC is a strong proponent of
public-private partnerships and information-sharing initiatives.
During 2018, we created new alliances in Hong Kong and
Singapore and continued to develop existing partnerships, which
include UK Joint Money Laundering Intelligence Task Force, US
AML Consortium, and partnerships in Australia and Canada in
order to bring further benefit to the Group by enhancing the
understanding of financial crime risks.
Key risk management processes
At a Group level, the Financial System Vulnerabilities Committee
continues to report to the Board on matters relating to financial
crime. Throughout 2018, the committee, which is attended by the
Group Chief Compliance Officer, received regular reports on
actions being taken to address issues and vulnerabilities. We
established an anti-bribery and corruption transformation
programme to further enhance the policies and controls around
identifying and managing the risks of bribery and corruption
across our business. We also introduced a transformation
programme to strengthen the anti-fraud capabilities of the Group,
and have deployed anti-tax-evasion controls. We continue to
strengthen our governance and policy frameworks, and improve
our management information on standardised financial crime
controls. We are investing in the next generation of capabilities to
fight financial crime by applying advanced analytics and artificial
intelligence. Our commitment to enhance our risk assessment
capabilities remains, aiming to deliver more proactive risk
management and improve the customer experience.
Skilled Person/Independent Consultant
Following expiration in December 2017 of the anti-money
laundering deferred prosecution agreement entered into with the
with the DoJ, the then Monitor has continued to work in his
capacity as a Skilled Person under Section 166 of the Financial
Services and Markets Act under the Direction issued by the UK
Financial Conduct Authority (‘FCA’) in 2012. He has also continued
to work in his capacity as an Independent Consultant under the
2012 Cease and Desist Order issued by the US Federal Reserve
Board (‘FRB’). The Skilled Person and the Independent Consultant
will continue working for a period of time at the FCA’s and FRB’s
discretion.
The Skilled Person has assessed HSBC’s progress towards being
able to effectively manage its financial risk on a business-as-usual
basis. The Skilled Person issued five country reports and two
quarterly reports in 2018. The Skilled Person has noted that HSBC
continues to make material progress towards its financial crime
risk target end state in terms of key systems, processes and
people. Nonetheless, the Skilled Person has identified some areas
that require further work before HSBC reaches a business-as-usual
state.
The Independent Consultant completed his fifth annual
assessment. The Independent Consultant concluded that HSBC
continues to make significant strides toward establishing an
effective sanctions compliance programme, commending HSBC
on a largely successful affiliates remediation exercise. He has,
however, determined that certain areas within HSBC’s sanctions
compliance programme require further work. The Independent
Consultant has commenced his sixth annual assessment, which is
due to conclude in March 2019.
Throughout 2018, the FSVC received regular reports on HSBC’s
relationship with the Skilled Person and Independent Consultant.
The FSVC received regular updates on the Skilled Person’s and
Independent Consultant’s reviews and has received the Skilled
Person’s country and quarterly reports and the Independent
Consultant’s fifth annual assessment report.
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Insurance manufacturing operations risk
management
Details of changes in our insurance manufacturing operations risk profile in
2018 can be found on page 143, 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 2018.
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 73. 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 and Market Risk, Operational Risk,
Information Security Risk, and 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 that specify the investment instruments in which they
are permitted to invest and the maximum quantum of market risk
that 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:
• We are able to adjust bonus rates to manage the liabilities to
policyholders for products with discretionary participating
features (‘DPF’). The effect is that a significant portion of the
market risk is borne by the policyholder.
• We use 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, 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.
• We use derivatives to protect against adverse market
movements to better match liability cash flows.
86
HSBC Holdings plc Annual Report and Accounts 2018
• For new products with investment guarantees, we consider the
cost when determining the level of premiums or the price
structure.
• We periodically review products identified as higher risk, such
as those that contain investment guarantees and embedded
optionality features linked to savings and investment products,
for active management.
• We design new products to mitigate market risk, such as
changing the investment return sharing portion between
policyholders and the shareholder.
• We exit, to the extent possible, investment portfolios whose
risk is considered unacceptable.
• We reprice 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 a number of 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. Sensitivities to credit spread risk are assessed and
monitored regularly.
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 complete quarterly liquidity
risk reports 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:
• a 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. Any material lapse in standards of integrity,
compliance, customer service or operating efficiency may
represent a potential reputational risk. Stakeholder expectations
constantly evolve, and so reputational risk is dynamic and varies
between geographical regions, groups and individuals. We have
an unwavering commitment to operate at the high standards we
set for ourselves in every jurisdiction.
Key developments in 2018
Governance and structure
In the second half of 2018, as part of a revised enterprise risk
management framework, it was agreed that reputational risk
would be considered as a single risk type that spans both financial
and non-financial risk categories. The oversight of reputational risk
as a single risk type was transitioned to the Group Chief Risk
Officer. He is supported by the Group Reputational Risk
Committee and a new reputational risk framework, which will be
embedded during 2019. The governance structure, however,
remains unchanged.
Governance and structure
The development of policies and an effective control environment
for the identification, assessment, management and mitigation of
reputational risk, are considered by the Group Reputational Risk
Committee, which is chaired by the Group Chief Risk Officer. The
focus of the Group Reputational Risk Committee is to consider
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.
Key risk management processes
Our Reputational Risk and Client Selection team oversees the
identification, management and control of 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
central team supported by teams in each of the global businesses
and regions. Each global business has an established reputational
risk management governance process. 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 85 and ‘Regulatory compliance risk
management’ on page 84 respectively.
Further details can be found under the ‘Reputational risk’ section of
www.hsbc.com/our-approach/risk-and-responsibility.
Sustainability risk management
Overview
Assessing the environmental and social impacts of providing
finance to our customers is integral to our overall risk
management processes.
Key developments in 2018
We periodically review our Sustainability Risk policies. In 2018, we
issued a revised energy policy to further support the transition to a
low-carbon economy in line with the global ambition of the 2015
Paris Agreement of limiting climate change. We seek to ensure
that our customers continue to have access to the capital required
to develop their businesses, invest in more efficient technology
and reduce their greenhouse gas emissions, although there are
certain specific long-term assets that HSBC may choose not to
finance.
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, mining and metals,
UNESCO World Heritage Sites and the Ramsar Convention on
Wetlands; undertaking 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, and improving the
efficiency of the sustainability risk review process. We also aim
to capture management information to measure and report on
the effect of our lending and investment activities on
sustainable development; and
• providing training and capacity building within our operating
companies to ensure sustainability risks are identified and
mitigated consistently to appropriate standards.
Pension risk management
There were no material changes to our policies and practices
for the management of pension risk in 2018.
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;
• 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.
HSBC Holdings plc Annual Report and Accounts 2018
87
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Credit risk profile
Credit risk in 2018
Summary of credit risk
Credit exposure
Measurement uncertainty and sensitivity analysis of ECL estimates
Reconciliation of changes in gross carrying/nominal amount and
allowances for loans and advances to banks and customers including
loan commitments and financial guarantees
Credit quality
Wholesale lending
Personal lending
Supplementary information
HSBC Holdings
Securitisation exposures and other structured products
Selected 2017 credit risk disclosures
Page
89
89
93
94
99
100
104
114
119
121
121
122
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 other products such as guarantees and credit
derivatives.
Comparative credit tables at 1 January 2018 reflecting the
adoption of IFRS 9 as published in our Report on transition to IFRS
9 ‘Financial Instruments’ 1 January 2018 have been included
where available. Comparative credit tables at 31 December 2017
from our Annual Report and Accounts 2017, which do not reflect
the adoption of IFRS 9, have been disclosed separately on pages
122 to 132 as they are not directly comparable.
Refer to ‘Standards adopted during the year ended 31 December
2018’ on page 224 and Note 37 ‘Effect of reclassification upon
adoption of IFRS 9’ for further details.
There were no material changes to the policies and practices for
the management of credit risk. A summary of our current policies
and practices for the management of credit risk is set out in
‘Credit risk management’ on page 79 of the Annual Report and
Accounts 2018.
Report of the Directors | Risk
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 2018
Key developments in 2018
In 2018, HSBC undertook a number of initiatives to enhance
its approach to the management of risk. These included:
• We continued to strengthen the controls that manage our
operational risks, as described on page 72 under ‘Operational
risk profile’.
• The Board oversight of conduct matters and whistleblowing
arrangements were transitioned from the Conduct & Values
Committee following its demise in the first half of 2018. The
Group Risk Committee was given responsibility for the
oversight of conduct matters and the Group Audit Committee
has the overall responsibility for the Group’s whistleblowing
arrangements. For information on initiatives implemented in
2018 to raise our standards in relation to the conduct of our
business, see page 84 under ‘Conduct of business’. For further
details on whistleblowing, see page 25.
• We integrated into our day-to-day operations the majority of
the financial crime risk core capabilities delivered through the
Global Standards programme, and expect to complete the
transition to business and function management in the first half
of 2019. We continue to take further steps to refine and
strengthen our defences against financial crime by applying
advanced analytics and artificial intelligence.
• We adopted IFRS 9, including the accounting for expected
credit losses, which introduced new concepts and measures
such as significant increase in credit risk and lifetime expected
credit losses. Existing stress testing and regulatory models,
skills and expertise were adapted in order to meet IFRS 9
requirements. Data from various client, finance and risk
systems were integrated and validated. As a result of IFRS 9
adoption, management has additional insight and measures not
previously utilised, which over time may influence our risk
appetite and risk management processes.
88
HSBC Holdings plc Annual Report and Accounts 2018
Credit risk in 2018
Summary of credit risk
Gross loans and advances to customers of $990.3bn, as defined
by IFRS 9, increased from $959.1bn at 1 January 2018. This
increase includes adverse foreign exchange movements of
$34.1bn. Loans and advances to banks of $72.2bn decreased from
$82.6bn at 1 January 2018. This included adverse foreign
exchange movements of $2.7bn. Wholesale and personal lending
movements are disclosed on pages 104 to 118.
The change in expected credit losses and other credit impairment
charges, as it appears in the income statement, for the period was
$1.8bn.
Income statement movements are analysed further on page 42.
Our maximum exposure to credit risk is presented on page 93 and
credit quality on pages 100. While credit risk arises across most of
our balance sheet, losses have typically been incurred on loans
and advances and securitisation exposures and other structured
products. As a result, our disclosures focus primarily on these two
areas.
The following disclosure presents the gross carrying/nominal
amount of financial instruments to which the impairment
requirements in IFRS 9 are applied and the associated allowance
for ECL. Due to the forward-looking nature of IFRS 9, the scope of
financial instruments on which ECL is recognised is greater than
the scope of IAS 39.
The following tables analyse loans by industry sector and the
extent to which they are exposed to credit risks.
The allowance for ECL, as defined by IFRS 9, decreased from
$10.1bn at 1 January 2018 to $9.2bn at 31 December 2018. This
decrease included favourable foreign exchange movements of
$0.4bn.
The allowance for ECL at 31 December 2018 comprised of $8.7bn
in respect of assets held at amortised cost, $0.4bn in respect of
loan commitments and financial guarantees, and $0.1bn in respect
of debt instruments measured at fair value through other
comprehensive income (‘FVOCI’).
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied
(Audited)
Loans and advances to customers at amortised cost
– personal
– corporate and commercial
– non-bank financial institutions
Loans and advances to banks at amortised cost
Other financial assets measured at amortised cost
– cash and balances at central banks
– items in the course of collection from other banks
– Hong Kong Government certificates of indebtedness
– reverse repurchase agreements – non-trading
– financial investments
– prepayments, accrued income and other assets
Total gross carrying amount on-balance sheet
Loans and other credit-related commitments
– personal
– corporate and commercial
– non-bank financial institutions
Financial guarantees
– personal
– corporate and commercial
– non-bank financial institutions
Total nominal amount off-balance sheet
31 Dec 2018
At 1 Jan 2018
Gross carrying/
nominal amount
Allowance for
ECL5
Gross carrying/
nominal amount Allowance for ECL5
Footnotes
6
7
8
9
$m
990,321
394,337
534,577
61,407
72,180
582,917
162,845
5,787
35,859
242,804
62,684
72,938
$m
(8,625)
(2,947)
(5,552)
(126)
(13)
(55)
(2)
—
—
—
(18)
(35)
$m
959,080
375,069
520,137
63,874
82,582
557,864
180,624
6,628
34,186
201,553
59,539
75,334
1,645,418
(8,693)
1,599,526
592,008
207,351
271,022
113,635
23,518
927
17,355
5,236
615,526
2,260,944
(325)
(13)
(305)
(7)
(93)
(1)
(85)
(7)
545,258
196,093
262,391
86,774
25,849
718
19,965
5,166
(418)
(9,111)
571,107
2,170,633
$m
(9,343)
(3,047)
(6,053)
(243)
(23)
(114)
(3)
—
—
—
(16)
(95)
(9,480)
(376)
(14)
(355)
(7)
(97)
(4)
(89)
(4)
(473)
(9,953)
Debt instruments measured at fair value through other comprehensive
income (‘FVOCI’)
For footnotes, see page 147.
The following table provides an overview of the Group’s credit risk
by stage and industry, and the associated ECL coverage. The
financial assets recorded in each stage have the following
characteristics:
• stage 1: unimpaired and without significant increase in credit
risk on which a 12-month allowance for ECL is recognised;
• stage 2: a significant increase in credit risk has been
experienced since initial recognition on which a lifetime ECL is
recognised;
Fair value
$m
343,110
Memorandum
allowance for
ECL10
$m
(84)
Fair value
$m
322,163
Memorandum
allowance for
ECL10
$m
(184)
• stage 3: objective evidence of impairment, and are therefore
considered to be in default or otherwise credit impaired on
which a lifetime ECL is recognised; and
• purchased or originated credit impaired (‘POCI’): purchased or
originated at a deep discount that reflects the incurred credit
losses on which a lifetime ECL is recognised.
HSBC Holdings plc Annual Report and Accounts 2018
89
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review (Audited)
Loans and
advances to
customers at
amortised cost
– corporate
and
commercial
– non-bank
financial
institutions
Loans and
advances to
banks at
amortised cost
Other financial
assets
measured at
amortised cost
Loan and other
credit-related
commitments
– corporate
and
commercial
– financial7
Financial
guarantees8
– personal
– corporate
and
commercial
– financial
At 31 Dec
2018
Report of the Directors | Risk
Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at
31 December 2018
Gross carrying/nominal amount9
Stage 1 Stage 2 Stage 3 POCI11
Allowance for ECL
Total Stage 1 Stage 2 Stage 3 POCI11
ECL coverage %
Total Stage 1 Stage 2 Stage 3 POCI11 Total
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
%
%
%
%
%
915,188 61,786 13,023
324
990,321
(1,276)
(2,108)
(5,047)
(194)
(8,625)
– personal
374,681 15,075
4,581
—
394,337
(534)
(1,265)
(1,148)
— (2,947)
0.1
0.1
3.4
8.4
38.8
25.1
59.9
0.9
— 0.7
481,262 44,779
8,212
324
534,577
(698)
(812)
(3,848)
(194)
(5,552)
0.1
1.8
46.9
59.9
1.0
59,245
1,932
230
—
61,407
(44)
(31)
(51)
—
(126)
0.1
1.6
22.2
— 0.2
71,873
307
—
—
72,180
(11)
(2)
—
—
(13)
—
0.7
—
—
—
581,118
1,673
126
—
582,917
(27)
(6)
(22)
—
(55)
—
0.4
17.5
—
—
– personal
205,183
1,760
569,250 21,839
912
408
251,478 19,034
503
112,589
1,045
1
20,884
2,334
297
920
3
4
15,011
2,053
288
4,953
278
5
7
—
7
—
3
—
3
—
592,008
(143)
(139)
207,351
(12)
(1)
271,022
(126)
(136)
113,635
(5)
(2)
23,518
927
17,355
5,236
(19)
(1)
(16)
(2)
(29)
—
(25)
(4)
(43)
—
(43)
—
(45)
—
(44)
(1)
—
—
—
—
—
—
—
—
(325)
(13)
(305)
(7)
(93)
(1)
(85)
(7)
2,158,313 87,939 14,358
334 2,260,944
(1,476)
(2,284)
(5,157)
(194)
(9,111)
—
—
0.1
—
0.1
0.1
0.1
—
0.1
0.6
0.1
0.7
0.2
1.2
—
1.2
1.4
4.7
—
8.5
—
15.2
—
15.3
20.0
— 0.1
—
—
— 0.1
—
—
— 0.4
— 0.1
— 0.5
— 0.1
2.6
35.9
58.1
0.4
For footnotes, see page 147.
Unless identified at an earlier stage, all financial assets are
deemed to have suffered a significant increase in credit risk when
they are 30 days past due (‘DPD’) and are transferred from stage 1
to stage 2. The following disclosure presents the ageing of stage 2
financial assets. It distinguishes those assets that are classified as
stage 2 when they are less than 30 days past due (1-29 DPD) from
those that are more than 30 DPD (30 and >DPD). Past due
financial instruments are those loans where customers have failed
to make payments in accordance with the contractual terms of
their facilities.
Stage 2 days past due analysis at 31 December 2018
(Audited)
Gross carrying amount
Allowance for ECL
ECL coverage %
Of which:
Of which:
Of which:
Of which:
Of which:
Of which:
Stage 2
$m
61,786
15,075
44,779
1,932
307
1,673
1 to 29
DPD12
$m
30 and >
DPD12
$m
2,554
1,807
737
10
—
10
1,914
1,383
485
46
—
26
Stage 2
$m
(2,108)
(1,265)
(812)
(31)
(2)
(6)
1 to 29
DPD12
$m
(204)
(165)
(39)
—
—
—
30 and >
DPD12
Stage 2
1 to 29
DPD12
30 and >
DPD12
$m
(254)
(220)
(34)
—
—
—
%
3.4
8.4
1.8
1.6
0.7
0.4
%
8.0
9.1
5.3
—
—
—
%
13.3
15.9
7.0
—
—
—
Loans and advances to
customers at amortised cost
– personal
– corporate and commercial
– non-bank financial institutions
Loans and advances to banks at
amortised cost
Other financial assets measured
at amortised cost
For footnotes, see page 147.
90
HSBC Holdings plc Annual Report and Accounts 2018
Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at
1 January 2018 (continued)
Gross carrying/nominal amount9
Allowance for ECL
ECL coverage %
Stage 1
Stage 2
Stage 3 POCI11
Total Stage 1
Stage 2
Stage 3 POCI11
Total Stage 1 Stage 2 Stage 3 POCI11
Total
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
%
%
%
%
%
Loans and advances
to customers at
amortised cost
– personal
– corporate and
commercial
– non-bank financial
institutions
Loans and advances
to banks at
amortised cost
Other financial
assets measured at
amortised cost
Loan and other
credit-related
commitments
– personal
– corporate and
commercial
– financial7
Financial
guarantees8
– personal
– corporate and
commercial
– financial
871,566
72,658
13,882
354,305
16,354
4,410
974
—
959,080
(1,309)
(2,201)
(5,591)
(242)
(9,343)
375,069
(581)
(1,156)
(1,310)
— (3,047)
456,837
53,262
9,064
974
520,137
(701)
(1,037)
(4,073)
(242)
(6,053)
0.2
0.2
0.2
3.0
7.1
40.3
29.7
24.8
1.0
— 0.8
1.9
44.9
24.8
1.2
60,424
3,042
408
—
63,874
(27)
(8)
(208)
— (243)
—
0.3
51.0
— 0.4
81,027
1,540
15
—
82,582
(17)
(4)
(2)
—
(23)
—
0.3
13.3
—
—
556,185
1,517
155
7
557,864
(28)
(4)
(82)
— (114)
—
0.3
52.9
—
—
519,883
24,330
194,320
1,314
240,854
20,951
84,709
2,065
22,021
3,619
703
10
16,597
3,164
4,721
445
999
459
540
—
187
5
182
—
46
—
46
—
22
—
22
—
545,258
(126)
(183)
196,093
(13)
(1)
262,391
(108)
(180)
86,774
(5)
(2)
25,849
718
19,965
5,166
(17)
(2)
(14)
(1)
(18)
—
(17)
(1)
(67)
—
(67)
—
(62)
(2)
(58)
(2)
— (376)
—
(14)
— (355)
—
—
—
—
—
(7)
(97)
(4)
(89)
(4)
—
—
—
—
0.1
0.3
0.1
—
0.1
0.8
0.1
0.9
0.1
0.5
—
0.5
0.2
2.3
6.7
—
— 0.1
—
—
12.4
— 0.1
—
—
—
33.2
40.0
— 0.4
— 0.6
31.9
— 0.4
—
— 0.1
38.1
23.1
0.5
At 1 Jan 2018
2,050,682
103,664
15,238
1,049
2,170,633
(1,497)
(2,410)
(5,804)
(242)
(9,953)
For footnotes, see page 147.
Stage 2 days past due analysis at 1 January 2018
Gross carrying amount
Allowance for ECL
ECL coverage %
Stage 2
Of which:
Of which:
Stage 2
Of which:
Of which:
Stage 2
Of which:
Of which:
1 to 29
DPD12
$m
2,393
1,683
684
26
7
133
30 and >
DPD12
$m
$m
2,447
1,428
977
42
66
46
(2,201)
(1,156)
(1,037)
(8)
(4)
(4)
1 to 29
DPD12
$m
(261)
(218)
(42)
(1)
(2)
—
30 and >
DPD12
1 to 29
DPD12
30 and >
DPD12
$m
(261)
(230)
(31)
—
—
(1)
%
3.0
7.1
1.9
0.3
0.3
0.3
%
10.9
13.0
6.1
3.8
28.6
—
%
10.7
16.1
3.2
—
—
2.2
$m
72,658
16,354
53,262
3,042
1,540
1,517
Loans and advances to customers
at amortised cost
– personal
– corporate and commercial
– non-bank financial institutions
Loans and advances to banks at
amortised cost
Other financial assets measured at
amortised cost
For footnotes, see page 147.
HSBC Holdings plc Annual Report and Accounts 2018
91
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Personal gross loans to customers over five years ($bn)
Loan impairment charges by geographical region in 2017 ($bn)
IAS 39
IFRS 9
15
378
12
362
6
334
5
4
371
371
5
390
0.8
0.6
0.5
0.2
(0.1)
2014
2015
2016
2017
1/1/2018 31/12/2018
Europe
Asia
MENA
North
America
Latin
America
Stage 1 and 2/Unimpaired
Stage 3 and POCI/Impaired loans
Loans and advances change in ECL by geographical region in
2018 ($bn)
Wholesale gross loans to customers and banks over five years
($bn)
IAS 39
IFRS 9
0.7
0.6
0.6
14
692
12
12
10
10
9
638
606
674
656
659
0.2
(0.2)
Europe
Asia
MENA
North
America
Latin
America
2014
2015
2016
2017
1/1/2018 31/12/2018
Loans and advances to customers change in ECL in 2018 ($bn)
Stage 1 and 2/Unimpaired
Stage 3 and POCI/Impaired loans
Loans and advances change in ECL/loan impairment charge ($bn)
1.1
IAS 39
IFRS 9
0.8
—
Personal
Corporate and commercial
Non-bank
financial institutions
2.3
1.8
1.8
1.8
1.7
1.6
1.0
1.0
1.1
0.8
2014
2015
2016
2017
2018
Personal
Wholesale
92
HSBC Holdings plc Annual Report and Accounts 2018
Loans and advances to customers loan impairment charges by
industry in 2017 ($bn)
Credit exposure
Maximum exposure to credit risk
(Audited)
1.0
0.9
0.1
Personal
Corporate and commercial
Non-bank
financial institutions
Personal allowance for ECL/loan impairment allowance over five
years ($bn)
IAS 39
IFRS 9
4.6
2.9
2.0
1.7
3.0
2.9
2014
2015
2016
2017
1/1/2018 31/12/2018
Allowance for ECL/loan impairment allowance ($bn)
Wholesale allowance for ECL/loan impairment allowance over
five years ($bn)
IAS 39
IFRS 9
7.8
6.7
5.9
5.8
6.3
5.7
2014
2015
2016
2017
1/1/2018 31/12/2018
Allowance for ECL/loan impairment allowance ($bn)
This section provides information on balance sheet items and their
offsets as well as loan and other credit-related commitments.
Commentary on consolidated balance sheet movements in 2018
is provided on page 45.
The offset on derivatives remains in line with the movements
in maximum exposure amounts.
‘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 other guarantees 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 that
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 the balance sheet and short
positions in securities. In addition, for financial assets held as part
of linked insurance/investment contracts the risk is predominantly
borne by the policyholder. See Note 30 and page 230 on the
Financial Statements for further details of collateral in respect of
certain loans and advances and derivatives.
Collateral available to mitigate credit risk is disclosed in the
Collateral section on page 109.
HSBC Holdings plc Annual Report and Accounts 2018
93
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Maximum exposure to credit risk
(Audited)
Loans and advances to customers held at amortised cost
– personal
– corporate and commercial
– non-bank financial institutions
Loans and advances to banks at amortised cost
Other financial assets held at amortised cost
– cash and balances at central banks
– items in the course of collection from other banks
– Hong Kong Government certificates of indebtedness
– reverse repurchase agreements – non-trading
– financial investments
– prepayments, accrued income and other assets
Derivatives
Total on-balance sheet exposure to credit risk
Total off-balance sheet
– financial and other guarantees
– loan and other credit-related commitments
At 31 Dec 2018
Maximum
exposure
$m
981,696
391,390
529,025
61,281
72,167
585,600
162,843
5,787
35,859
242,804
62,666
75,641
207,825
1,847,288
874,751
94,810
779,941
2018
Offset
$m
(29,534)
(3,679)
(23,421)
(2,434)
—
(21,788)
—
—
—
(21,788)
—
—
(194,306)
(245,628)
—
—
—
Net
$m
952,162
387,711
505,604
58,847
72,167
563,812
162,843
5,787
35,859
221,016
62,666
75,641
13,519
1,601,660
874,751
94,810
779,941
2,722,039
(245,628)
2,476,411
Concentration of exposure
Methodology
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 2018.
For an analysis of:
• financial investments, see Note 16 on the Financial Statements;
• trading assets, see Note 11 on the Financial Statements;
• derivatives, see page 113 and Note 15 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 104 for wholesale lending and page 114 for personal
lending.
Credit deterioration of financial instruments
(Audited)
A summary of our current policies and practices regarding the identification,
treatment and measurement of stage 1, stage 2, stage 3 (credit impaired) and
POCI financial instruments can be found in Note 1.2 on the Financial
Statements.
Measurement uncertainty and sensitivity
analysis of ECL estimates
(Audited)
Expected credit loss impairment allowances recognised in the
financial statements reflect the effect of a range of possible
economic outcomes, calculated on a probability-weighted basis,
based on the economic scenarios described below. The
recognition and measurement of expected credit losses (‘ECL’)
involves the use of significant judgement and estimation. It is
necessary to formulate multiple forward-looking economic
forecasts and incorporate them into the ECL estimates. HSBC uses
a standard framework to form economic scenarios to reflect
assumptions about future economic conditions, supplemented
with the use of management judgement, which may result in
using alternative or additional economic scenarios and/or
management adjustments.
HSBC has adopted the use of three scenarios, representative of
our view of forecast economic conditions, sufficient to calculate
unbiased expected loss in most economic environments. They
represent a ’most likely outcome’ (the Central scenario), and two,
less likely ’outer’ scenarios, referred to as the Upside and
Downside scenarios. Each outer scenario is consistent with a
probability of 10%, while the Central scenario is assigned the
remaining 80%, according to the decision of HSBC’s senior
management. This weighting scheme is deemed appropriate for
the unbiased estimation of ECL in most circumstances. Key
scenario assumptions are set using the average of forecasts of
external economists, helping to ensure that the IFRS 9 scenarios
are unbiased and maximise the use of independent information.
The Central, Upside and Downside scenarios selected with
reference to external forecast distributions using the above
approach are termed the ‘consensus economic scenarios’.
For the Central scenario, HSBC sets key assumptions such as GDP
growth, inflation, unemployment and policy interest rates, using
either the average of external forecasts (commonly referred to as
consensus forecasts) for most economies, or market prices. An
external provider’s global macro model, conditioned to follow the
consensus forecasts, projects the other paths required as inputs to
credit models. This external provider is subject to HSBC’s risk
governance framework, with oversight by a specialist internal unit.
The Upside and Downside scenarios are designed to be cyclical, in
that GDP growth, inflation and unemployment usually revert back
to the Central scenario after the first three years for major
economies. We determine the maximum divergence of GDP
growth from the Central scenario using the 10th and the 90th
percentile of the entire distribution of forecast outcomes for major
economies. While key economic variables are set with reference to
external distributional forecasts, we also align the overall narrative
of the scenarios to the macroeconomic risks described in HSBC’s
‘Top and emerging risks’ on page 69. This ensures that scenarios
remain consistent with the more qualitative assessment of these
risks. We project additional variable paths using the external
provider’s global macro model.
We apply the following to generate the three economic scenarios:
• Economic risk assessment: We develop a shortlist of the upside
and downside economic and political risks, most relevant to
HSBC and the IFRS 9 measurement objective. These include
local and global economic and political risks, which together
affect economies that have a material effect on credit risk for
HSBC, namely the UK, countries in the eurozone, Hong Kong,
94
HSBC Holdings plc Annual Report and Accounts 2018
mainland China and the US. We compile this shortlist by
monitoring developments in the global economy, by reference
to our top and emerging risks, and by consulting external and
internal subject matter experts.
• Scenario generation: For the Central scenario, we obtain a pre-
defined set of economic paths from the average taken from the
consensus survey of professional forecasters. Paths for the two
outer scenarios are benchmarked to the Central scenario and
reflect the economic risk assessment. We select scenarios that
in management’s judgement are representative of the
probability weighting scheme, informed by the current
economic outlook, data analysis of past recessions, and
transitions in and out of recession. The key assumptions made,
and the accompanying paths, represent our ’best estimate’ of a
scenario at a specified probability. Suitable narratives are
developed for the Central scenario and the paths of the two
outer scenarios.
• Variable enrichment: We expand each scenario through
enrichment of variables. This includes the production of more
than 400 variables that are required to calculate ECL. The
external provider expands these scenarios by using as inputs
the agreed scenario narratives and the variables aligned to
these narratives. Scenarios, once expanded, continue to be
benchmarked to latest events and information. Late breaking
events could lead to revision of scenarios to reflect
management judgement.
The Upside and Downside scenarios are generated at the year-end
and are only updated during the year if economic conditions
change significantly. The Central scenario is generated every
quarter. In quarters where only the Central scenario is updated,
outer scenarios for use in wholesale are adjusted such that the
relationship between the Central scenario and outer scenarios in
the quarter is consistent with that observed at the last full scenario
generation. In retail, three scenarios are run annually to establish
the effect of multiple scenarios for each portfolio. This effect is
then applied in each quarter with the understanding that the non-
linearity of response to economic conditions should not change,
unless a significant change in economic conditions occurs.
HSBC recognises that the consensus economic scenario
approach, using three scenarios, will be insufficient in certain
economic environments. Additional analysis may be requested at
management’s discretion. This may result in a change in the
weighting scheme assigned to the three scenarios or the inclusion
of extra scenarios. We anticipate that there will be only limited
instances when the standard approach will not apply. We invoked
this additional step on 1 January 2018, due to the specific
Central scenario (average 2019–2023)
uncertainties facing the UK economy at that time, resulting in the
recognition of additional ECL through a management adjustment
for economic uncertainty (termed a ‘management overlay’ in the
transitional disclosures). During 2018, we maintained additional
ECL impairment allowances for the UK and made a further
adjustment in respect of trade and tariff-related tensions. See
‘Impact of UK economic uncertainty on ECL’ below.
Description of consensus economic scenarios
The economic assumptions presented in this section have been
formed internally by HSBC specifically for the purpose of
calculating expected credit loss.
The consensus Central scenario
Consensus forecasts were stable over the course of 2018 and
HSBC’s Central scenario is one of moderate growth over the
projection period 2019–2023. Global GDP growth is expected to be
2.9% on average over the period, which is marginally higher than
the average growth rate over the period 2013–2017. Across the
key markets, we note:
• Expected average rates of GDP growth over the 2019–2023
period are lower than average growth rates achieved over the
2013–2017 period for the US, UK, mainland China, Hong Kong,
Canada, Mexico and the UAE. For the UK, this reflects
expectations that the long-term impact of current economic
uncertainty will be moderately adverse, while for China, it is
consistent with the theme of ongoing rebalancing from an
export-oriented economy to deeper domestic consumption.
• The average unemployment rate over the projection horizon is
expected to remain at or below the averages observed in the
2013–2017 period across all of our major markets.
•
Inflation is expected to be stable despite steady GDP growth
and strong labour markets and will remain close to central bank
targets in our core markets over the forecast period.
• Major central banks are expected to gradually raise their main
policy interest rate. The US Federal Reserve Board (‘FRB’) will
continue to reduce the size of its balance sheet and the
European Central Bank is expected to raise interest rates from
the second half of 2019. The Chinese Central Bank is expected
to continue to rely on its toolkit of measures to control capital
flows and manage domestic credit growth.
• The West Texas Intermediate oil price is forecast to average $63
per barrel over the projection period.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Central scenario.
GDP growth rate (%)
Inflation (%)
Unemployment (%)
Short-term interest rate (%)
10-year Treasury bond yields (%)
House price growth (%)
Equity price growth (%)
Probability (%)
Note: N/A – not required in credit models.
The consensus Upside scenario
The economic forecast distribution of risks (as captured by
consensus probability distributions of GDP growth) has shown a
marginal increase in upside risks for the US and the eurozone, but
a decrease of the same for the UK over the course of 2018.
Globally, real GDP growth rises in the first two years of the Upside
scenario before converging to the Central scenario. Increased
France
Hong
Kong
Mainland
China
UK
1.7
2.1
4.5
1.2
2.6
2.9
3.2
1.5
1.7
7.8
0.2
2.0
1.7
3.1
2.6
2.3
3.1
2.6
3.1
1.0
3.8
50.0
80.0
80.0
5.9
2.5
4.0
4.0
N/A
5.8
9.6
80.0
UAE
3.4
2.5
2.1
3.2
N/A
3.0
N/A
80.0
US
2.0
2.1
4.0
2.8
3.5
3.4
4.5
Canada
Mexico
1.8
2.0
6.1
2.5
3.3
2.7
3.5
2.4
3.6
3.7
8.0
7.2
5.1
7.1
80.0
80.0
80.0
confidence, de-escalation of trade tensions and removal of trade
barriers, expansionary fiscal policy, positive resolution of economic
uncertainty in the UK, stronger oil prices as well as calming of
geopolitical tensions are the risk themes that support the 2018
year-end Upside scenario.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Upside scenario.
HSBC Holdings plc Annual Report and Accounts 2018
95
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Upside scenario (average 2019–2023)
GDP growth rate (%)
Inflation (%)
Unemployment (%)
Short-term interest rate (%)
10-year Treasury bond yields (%)
House price growth (%)
Equity price growth (%)
Probability (%)
Note: N/A – not required in credit models.
The Downside scenarios
The consensus Downside scenario
France
Hong
Kong
Mainland
China
Canada
Mexico
UK
2.2
2.3
4.2
1.3
2.7
4.1
6.0
1.9
2.0
7.4
0.2
2.0
2.3
7.3
2.9
2.6
2.9
2.6
3.3
1.4
7.1
6.1
2.7
3.7
4.1
N/A
7.3
13.6
10.0
UAE
3.9
2.9
1.7
3.3
N/A
4.4
N/A
10.0
10.0
10.0
10.0
10.0
10.0
US
2.7
2.4
3.6
3.0
3.7
4.7
8.7
US
1.2
1.8
4.6
0.8
1.6
1.0
—
2.1
2.2
5.9
2.5
3.3
3.9
9.2
1.5
1.7
6.5
0.9
1.4
0.3
0.3
2.9
4.0
3.3
8.2
7.5
5.8
10.9
10.0
1.8
3.2
4.2
6.8
5.6
4.4
(0.4)
10.0
Canada
Mexico
The distribution of risks (as captured by consensus probability
distributions of GDP growth) have shown a marginal increase in
downside risks over the course of 2018 for the US, while they
were broadly stable for the eurozone and the UK (but see
discussion on UK economic uncertainty below). Globally, real GDP
growth declines for two years in the Downside scenario before
recovering to the Central scenario. House price growth either stalls
or contracts and equity markets correct abruptly in our major
Downside scenario (average 2019–2023)
markets. The global slowdown in demand drives commodity prices
lower and results in an accompanying fall in inflation. Central
banks remain accommodative. This is consistent with the key risk
themes of the downside, such as an intensification of global
protectionism and trade barriers, faster than expected tightening
of the Fed policy rate, a worsening of economic uncertainty in the
UK, China choosing to rebalance with stringent measures, and
weaker commodity prices.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Downside scenario.
GDP growth rate (%)
Inflation (%)
Unemployment (%)
Short-term interest rate (%)
10-year Treasury bond yields (%)
House price growth (%)
Equity price growth (%)
Probability (%)
UK
1.1
1.7
4.8
0.3
1.6
1.0
(0.2)
—
France
Hong
Kong
Mainland
China
1.1
1.3
8.2
(0.3)
0.9
(1.3)
(2.4)
10.0
2.2
1.9
3.5
0.6
1.6
(0.8)
(1.6)
5.0
5.8
2.2
4.2
3.6
N/A
3.3
2.0
5.0
UAE
2.9
2.2
2.5
1.2
N/A
1.4
N/A
10.0
10.0
10.0
Note: N/A – not required in credit models.
Alternative Downside scenarios for the UK
A number of events occurred over the course of 2018 that led
management to re-evaluate the shape of the consensus
distribution for the UK. Given the challenges facing economic
forecasters in this environment, management was concerned that
this distribution did not adequately represent downside risks for
the UK. The high level of economic uncertainty that prevailed at
the end of 2018, including the lack of progress in agreeing a clear
plan for an exit from the EU and the uncertain performance of the
UK economy after an exit, was a key factor in this consideration. In
management’s view, the extent of this uncertainty justifies the use
of the following Alternative Downside scenarios, used in place of
the consensus Downside, with the assigned probabilities:
Alternative Downside scenario 1 (‘AD1’): Economic uncertainty
could have a large impact on the UK economy resulting in a long
lasting recession with a weak recovery. This scenario reflects the
consequences of such a recession with an initial risk-premium
shock and weaker long-run productivity growth. This scenario has
been used with a 30% weighting.
Alternative Downside scenario 2 (‘AD2’): This scenario reflects the
possibility that economic uncertainty could result in a deep
cyclical shock triggering a steep depreciation in sterling, a sharp
increase in inflation and an associated monetary policy response.
This represents a tail risk and has been assigned a 5% weighting.
Alternative Downside scenario 3 (‘AD3’): This scenario reflects the
possibility that the adverse impact associated with economic
uncertainty currently in the UK could manifest over a far longer
period of time with the worst effects occurring later than in the
above two scenarios. This scenario is also considered a tail risk
and has been assigned a 5% weighting.
96
HSBC Holdings plc Annual Report and Accounts 2018
The table below describes key macroeconomic variables and the
probabilities for each of the Alternative Downside scenarios:
Average 2019–2023
GDP growth rate
Inflation
Unemployment
Short-term interest rate
10-year Treasury bond yields
House price growth
Equity price growth
Probability
Alternative
Downside
scenario 1
Alternative
Downside
scenario 2
Alternative
Downside
scenario 3
%
0.5
2.2
6.5
0.4
1.8
(1.5)
(0.9)
30
%
(0.1)
2.4
8.0
2.5
4.0
(3.3)
(2.3)
5
%
(0.7)
2.7
7.7
2.5
4.0
(4.8)
(7.5)
5
Global trade Downside scenario
Continued escalation of trade- and tariff-related tensions
throughout 2018 resulted in management modelling an additional
Downside scenario for key Asia-Pacific economies. This additional
scenario models the effects of a significant escalation in global
tensions, stemming from trade disputes but going beyond
increases in tariffs to affect non-tariff barriers, cross-border
investment flows and threats to the international trade
architecture. This scenario assumes actions that lie beyond
currently enacted and proposed tariffs and has been modelled as
an addition to the three consensus-driven scenarios for these
economies. This scenario has been assigned a 5% weight, leaving
5% assigned to the consensus Downside scenario, and has been
used in addition to the consensus economic scenarios for eight
Asia-Pacific markets, including HSBC’s major markets of Hong
Kong and mainland China. In management’s judgement, the
impact on the US and other countries is largely captured by the
consensus Downside scenario.
Hong Kong
Key macroeconomic variables are shown in the table below:
Average 2019–2023
GDP growth rate (%)
Inflation (%)
Unemployment (%)
Short-term interest rate (%)
10-year Treasury bond yields (%)
House price growth (%)
Equity price growth (%)
Probability (%)
Hong Kong
Mainland
China
1.5
1.6
4.7
1.0
2.0
(2.0)
(3.5)
5
5.4
2.1
4.3
3.1
N/A
2.9
1.1
5
The conditions that resulted in departure from the consensus
economic forecasts will be reviewed regularly as economic
conditions change in future to determine whether these
adjustments continue to be necessary.
The tables above show the five-year average of GDP growth rate.
The following graphs show the historical and forecasted GDP
growth rate for the various economic scenarios in HSBC’s four
largest markets.
US
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
12
UK
4.0
3.0
2.0
1.0
0.0
‐1.0
‐2.0
‐3.0
‐4.0
‐5.0
‐6.0
13
14
15
16
17
18
19
20
21
22
23
Central
Upside
Downside
12
13
14
15
16
17
18
19
20
21
22
23
Central
Upside
Downside
Alternative Downside 1
Alternative Downside 2
AlternativeDownside 3
5.0
4.0
3.0
2.0
1.0
0.0
‐1.0
12
13
14
15
16
17
18
19
20
21
22
23
Central
Upside
Downside
Global trade Downside
Mainland China
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
12
13
14
15
16
17
18
19
20
21
22
23
Central
Upside
Downside
Global trade Downside
How economic scenarios are reflected in the wholesale
calculation of ECL
HSBC has developed a globally consistent methodology for the
application of forward economic guidance into the calculation of
ECL by incorporating forward economic guidance into the
estimation of the term structure of probability of default (‘PD’) and
loss given default (‘LGD’). For PDs, we consider the correlation of
forward economic guidance to default rates for a particular
industry in a country. For LGD calculations we consider the
correlation of forward economic guidance to collateral values and
realisation rates for a particular country and industry. PDs and
LGDs are estimated for the entire term structure of each
instrument.
For impaired loans, LGD estimates take into account independent
recovery valuations provided by external consultants where
available, or internal forecasts corresponding to anticipated
economic conditions and individual company conditions. In
estimating the ECL on impaired loans that are individually
considered not to be significant, HSBC incorporates forward
economic guidance proportionate to the probability-weighted
outcome and the Central scenario outcome for non-stage 3
populations.
How economic scenarios are reflected in the retail calculation
of ECL
HSBC has developed and implemented a globally consistent
methodology for incorporating forecasts of economic conditions
into ECL estimates. The impact of economic scenarios on PD is
modelled at a portfolio level. Historical relationships between
observed default rates and macroeconomic variables are
integrated into IFRS 9 ECL estimates by leveraging economic
response models. The impact of these scenarios on PD is
modelled over a period equal to the remaining maturity of
underlying asset or assets. The impact on LGD is modelled for
mortgage portfolios by forecasting future loan-to-value (‘LTV’)
profiles for the remaining maturity of the asset by leveraging
national level forecasts of the house price index and applying the
corresponding LGD expectation.
HSBC Holdings plc Annual Report and Accounts 2018
97
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Impact of UK economic uncertainty on ECL
On initial adoption of IFRS 9 on 1 January 2018, additional ECL
impairment allowances of $245m were recognised compared with
those implied by consensus forecasts, due to the specific
uncertainties facing the UK economy at that time. This adjustment
was described as a ‘management overlay for economic
uncertainty’ in the transitional disclosures. While consensus
forecasts for the UK remained broadly stable during 2018,
management remained concerned that the consensus distribution
did not adequately reflect downside risks, particularly towards the
end of 2018 as the level of risk increased. At 31 December 2018,
management determined that its view of the distribution of
possible economic outcomes in the UK was better reflected by
using three additional Downside scenarios in place of the UK
consensus Downside scenarios. This resulted in the recognition of
additional impairment allowances of $410m compared with those
implied by consensus forecasts, an increase of $165m in the
adjustment to the consensus position compared with
1 January 2018, to reflect the increased level of economic
uncertainty in the UK.
We also considered developments after the balance sheet date
and concluded that they did not necessitate any adjustment to the
approach or judgements taken on 31 December 2018.
Economic scenarios sensitivity analysis of ECL estimates
The ECL outcome is sensitive to judgement and estimations made
with regards to the formulation and incorporation of multiple
forward-looking economic conditions described above. As a result,
management assessed and considered the sensitivity of the ECL
outcome against the forward-looking economic conditions as part
of the ECL governance process by recalculating the ECL under
each scenario described above for selected portfolios, applying a
Wholesale analysis
IFRS 9 ECL sensitivity to future economic conditions13
100% weighting to each scenario in turn. The weighting is
reflected in both the determination of significant increase in credit
risk as well as the measurement of the resulting ECL. For
wholesale credit risk exposures, the sensitivity analysis excludes
ECL and financial instruments related to defaulted obligors
because the measurement of ECL is relatively more sensitive to
credit factors specific to the obligor than future economic
scenarios.
The economic scenarios are generated to capture HSBC’s view of
a range of possible forecast economic conditions that is sufficient
for the calculation of unbiased and probability-weighted ECL.
Therefore, the ECL calculated for each of the scenarios represent a
range of possible outcomes that have been evaluated to estimate
ECL. As a result, the ECL calculated for the Upside and Downside
scenarios should not be taken to represent the upper and lower
limits of possible actual ECL outcomes. There is a high degree of
estimation uncertainty in numbers representing tail risk scenarios
when assigned a 100% weighting, and an indicative range is
provided for the UK tail risk sensitivity analysis. A wider range of
possible ECL outcomes reflects uncertainty about the distribution
of economic conditions and does not necessarily mean that credit
risk on the associated loans is higher than for loans where the
distribution of possible future economic conditions is narrower.
The recalculated ECL for each of the scenarios should be read in
the context of the sensitivity analysis as a whole and in
conjunction with the narrative disclosures provided below.
ECL under each scenario is given in dollar terms and as a
percentage of the the gross carrying amount (and, for wholesale
lending, the nominal amount for related-loan commitments and
financial guarantees).
ECL coverage of financial instruments subject
to significant measurement uncertainty at
31 December 201814
Reported ECL
Gross carrying value/nominal amount15
Reported ECL coverage
Coverage ratios by scenario
Consensus Central scenario
Consensus Upside scenario
Consensus Downside scenario
Coverage ratios for alternative scenarios
UK AD 1
Tail risk scenarios (UK AD 2–3)
Trade Downside scenario
ECL amounts for alternative scenarios
UK AD 1
Tail risk scenarios (UK AD 2–3)
Trade Downside scenario
For footnotes see page 147.
UK
US Hong Kong
Mainland
China
Canada
Mexico
UAE
France
$m
906
$m
163
$m
162
$m
83
$m
81
$m
76
$m
74
$m
46
360,637
211,318
407,402
99,379
72,759
31,798
37,546
105,416
%
0.25
0.18
0.17
0.21
0.28
0.46 – 0.52
$m
1,000
1,700 – 1,900
%
0.08
0.08
0.07
0.09
%
0.04
0.04
0.04
0.04
%
0.08
0.08
0.08
0.09
%
0.11
0.11
0.10
0.12
%
0.24
0.24
0.19
0.30
%
0.20
0.20
0.18
0.21
%
0.04
0.04
0.04
0.06
$m
0.13
$m
0.15
$m
$m
$m
$m
$m
500
150
ECL coverage rates reflect the underlying observed credit defaults,
the sensitivity to economic environment, extent of security and the
effective maturity of the book. In certain economies such as the
UK, the book is longer-dated relative to other economies such as
Hong Kong.
The additional scenarios for UK economic uncertainty could, if
they occurred, increase ECL by three to 27 basis points compared
with reported ECL for all wholesale financial instruments, and
four to 42 basis points for loans and advances to customers
including loan commitments and financial guarantees. The
additional scenarios represent the elasticity between
macroeconomic factors such as GDP and the risk of default. Hong
Kong is typically a short-dated book with low defaults, which is
reflected in the low ECL coverage ratio.
98
HSBC Holdings plc Annual Report and Accounts 2018
Retail analysis
The geographies below were selected based on a 76% contribution to overall ECL within our retail lending business.
IFRS 9 ECL sensitivity to future economic conditions16
ECL coverage of loans and advances to
customers at 31 December 201817
Reported ECL
Gross carrying amount
Reported ECL coverage
Coverage ratios by scenario
Consensus Central scenario
Consensus Upside scenario
Consensus Downside scenario
Coverage ratios for alternative scenarios
UK AD1
Tail risk scenarios (UK AD 2–3)
0.83–0.96
Trade Downside scenario
ECL for alternative scenarios
UK AD1
$m
900
$m
Tail risk scenarios (UK AD 2–3)
1100–1300
Trade Downside scenario
For footnotes see page 147.
UK Mexico
$m
705
$m
520
Hong
Kong
$m
341
UAE
France
US Malaysia Singapore Australia
Canada
$m
204
$m
150
$m
102
$m
93
$m
68
$m
58
$m
29
138,026
6,098
92,356
3,453
21,622
15,262
5,906
7,378
14,156
19,992
%
8.53
8.49
7.79
9.25
%
0.51
0.39
0.35
0.46
0.65
%
0.37
0.37
0.35
0.37
0.43
$m
400
%
5.90
5.89
5.66
6.06
%
0.69
0.69
0.69
0.70
%
0.67
0.66
0.61
0.75
%
1.58
1.56
1.39
1.75
%
0.92
0.89
0.82
0.91
%
0.41
0.41
0.38
0.44
%
0.15
0.15
0.14
0.16
$m
$m
$m
1.90
$m
0.98
$m
0.50
$m
$m
110
70
70
The most significant level of retail ECL sensitivity is in the UK and
reflects management’s view on the level of economic uncertainty.
Other key markets show similar relative levels of sensitivity
regardless of differences in underlying levels of credit quality.
Under certain economic conditions, economic factors can
influence ECL in counter-intuitive ways (for example an increase in
GDP growth accompanied by rising interest rates resulting in an
increase in PDs) and it may be necessary to apply management
judgement to the output, which following management review of
the calculated ECL sensitivities, may require modelled output
adjustments.
An example of this is in France, where the ECL sensitivity results
have been adjusted to more accurately reflect management’s
views of ECL sensitivity under an upside and downside scenario
by inverting the Upside and Downside ECL sensitivity.
For all the above sensitivity analyses, as the level of uncertainty,
economic forecasts, historical economic variable correlations or
credit quality changes, corresponding changes in the ECL
sensitivity would occur.
Reconciliation of changes in gross carrying/nominal
amount and allowances for loans and advances to
banks and customers including loan commitments and
financial guarantees
The following disclosure provides a reconciliation by stage of the
Group’s gross carrying/nominal amount and allowances for loans
and advances to banks and customers, including loan
commitments and financial guarantees.
The transfers of financial instruments represents the impact of
stage transfers upon the gross carrying/nominal amount and
associated allowance for ECL. The net remeasurement of ECL
arising from stage transfers represents the increase or decrease
due to these transfers, for example, moving from a 12-month
(stage 1) to a lifetime (stage 2) ECL measurement basis. Net
remeasurement excludes the underlying CRR/PD movements of
the financial instruments transferring stage. This is captured, along
with other credit quality movements in the ‘changes in risk
parameters – credit quality’ line item.
The ‘Net new and further lending/repayments’ represent the gross
carrying/nominal amount and associated allowance ECL impact
from volume movements within the Group’s lending portfolio.
HSBC Holdings plc Annual Report and Accounts 2018
99
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including
loan commitments and financial guarantees8
(Audited)
Non-credit impaired
Credit impaired
Stage 1
Stage 2
Stage 3
POCI
Total
Gross
carrying/
nominal
amount
Allow-
ance for
ECL
Gross
carrying/
nominal
amount
Allow-
ance for
ECL
Gross
carrying/
nominal
amount
Allow-
ance for
ECL
Gross
carrying/
nominal
amount
Allow-
ance for
ECL
Gross
carrying/
nominal
amount
Allow-
ance for
ECL
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
At 1 Jan 2018
1,446,857
(1,469) 102,032
(2,406)
15,083
(5,722)
1,042
(242) 1,565,014
(9,839)
Transfers of financial instruments:
(8,747)
(685)
3,582
1,185
5,165
(500)
– transfers from stage 1 to stage 2
(84,181)
319
84,181
(319)
– transfers from stage 2 to stage 1
– transfers to stage 3
– transfers from stage 3
Net remeasurement of ECL arising from
transfer of stage
77,325
(2,250)
359
—
(999)
(77,325)
(4,439)
1,165
35
(40)
620
999
607
—
—
6,689
(102)
(1,524)
—
(605)
—
—
—
(642)
142
(103)
—
—
—
—
—
—
Net new and further lending/repayments
126,868
(512)
(16,162)
564
(2,902)
733
(587)
Changes in risk parameters – credit quality
Changes to model used for ECL calculation
Assets written off
Foreign exchange
Others
At 31 Dec 2018
—
—
—
(52,983)
(156)
423
—
—
76
98
—
—
—
(2,863)
(348)
1,511,839
(1,449)
86,241
ECL release/(charge) for the period
531
(1,087)
—
—
99
(28)
(2,278)
(1,128)
—
—
(2,238)
—
(2,568)
2,552
(636)
90
14,232
232
(89)
(5,135)
(1,608)
—
—
(1)
(26)
(94)
334
Recoveries
Others
Total change in ECL for the period
For footnotes, see page 147.
—
—
—
—
—
—
—
—
—
—
—
(88)
107,217
827
—
—
(2,953)
—
(2,569)
2,553
—
—
—
—
—
—
42
(51)
—
1
6
50
(56,508)
(508)
(194) 1,612,646
(9)
413
31
(9,056)
(2,214)
408
(87)
(1,893)
As above
Other financial assets measured at amortised cost
Non-trading reverse purchase agreement commitments
Summary of financial instruments to which the impairment requirements in
IFRS 9 are applied/Summary consolidated income statement
Debt instruments measured at FVOCI
Total allowance for ECL/total income statement ECL charge for the period
At 31 Dec 2018
12 months ended
31 Dec 2018
Gross carrying/nominal
amount
Allowance for ECL
ECL charge
$m
1,612,646
582,917
65,381
2,260,944
343,110
n/a
$m
(9,056)
(55)
—
(9,111)
(84)
(9,195)
$m
(1,893)
21
—
(1,872)
105
(1,767)
As shown in the above table, the allowance for ECL for loans and
advances to customers and banks and relevant loan commitments
and financial guarantees decreased $783m during the period from
$9,839m at 1 January 2018 to $9,056m at 31 December 2018.
Credit quality
Credit quality of financial instruments
(Audited)
This decrease was primarily driven by:
• $827m relating to underlying net book volume movements,
which included the ECL allowance associated with new
originations, assets derecognised and net further lending;
• $2,553m of assets written off; and
• foreign exchange and other movements of $444m.
These decreases were partially offset by increases of:
• $2,953m relating to underlying credit quality changes,
including the credit quality impact of financial instruments
transferring between stages; and
• $88m relating to the net remeasurement impact of stage
transfers.
The ECL charge for the period of $2,214m presented in the above
table comprises $2,953m relating to underlying credit quality
changes, including the credit quality impact of financial
instruments transferring between stage, $88m relating to the net
remeasurement impact of stage transfers, partly offset by $827m
relating to underlying net book volume movements. Summary
views of the movement in wholesale and personal lending are
presented on pages 106 and 116.
100
HSBC Holdings plc Annual Report and Accounts 2018
We assess the credit quality of all financial instruments that are
subject to credit risk. The credit quality of financial instruments is
a point-in-time assessment of the probability of default of financial
instruments, whereas IFRS 9 stages 1 and 2 are determined based
on relative deterioration of credit quality since initial recognition.
Accordingly, for non-credit-impaired financial instruments, there is
no direct relationship between the credit quality assessment and
IFRS 9 stages 1 and 2, though typically the lower credit quality
bands exhibit a higher proportion in stage 2.
The five credit quality classifications each encompass a range of
granular internal credit rating grades assigned to wholesale and
personal lending businesses and the external ratings attributed by
external agencies to debt securities, as shown in the table on
page 80. Under IAS 39, personal lending credit quality was
disclosed based on expected-loss percentages. Under IFRS 9,
personal lending credit quality is now disclosed based on a 12-
month point-in-time PD adjusted for multiple economic scenarios.
The credit quality classifications for wholesale lending are
unchanged and are based on internal credit risk ratings.
Distribution of financial instruments by credit quality
(Audited)
In-scope for IFRS 9
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
Cash and balances at central
banks
Items in the course of collection
from other banks
Hong Kong Government
certificates of indebtedness
Reverse repurchase agreements –
non-trading
Financial investments
Prepayments, accrued income and
other assets
– endorsements and acceptances
– accrued income and other
Debt instruments measured at fair
value through other
comprehensive income18
Out-of-scope for IFRS 9
Trading assets
Other financial assets designated
and otherwise mandatorily
measured at fair value through
profit or loss
Derivatives
Assets held for sale
Total gross carrying amount on
balance sheet
Loan and other credit-related
commitments
Financial guarantees
In-scope: Irrevocable loan
commitments and financial
guarantees
Loan and other credit-related
commitments19
Performance and other guarantees
Out-of-scope: Revocable loan
commitments and non-
financial guarantees
For footnotes, see page 147.
Gross carrying/notional amount
Good
Satisfactory
Sub-
standard
Credit
impaired
$m
$m
$m
$m
Allowance for
ECL/ other
credit
provisions
$m
Total
$m
Net
$m
244,199
43,764
181,984
18,451
230,357
27,194
189,357
13,806
16,993
2,182
14,339
472
13,321
4,581
8,510
230
990,321
394,337
534,577
61,407
(8,625)
(2,947)
(5,552)
(126)
981,696
391,390
529,025
61,281
Strong
$m
485,451
316,616
140,387
28,448
60,249
7,371
4,549
160,995
1,508
324
5,765
35,859
200,774
56,031
55,424
1,514
53,910
21
—
29,423
5,703
8,069
4,358
3,711
1
—
12,607
949
9,138
3,604
5,534
11
18
—
—
—
1
181
155
26
319,632
12,454
7,210
2,558
139,484
18,888
16,991
1,871
6,079
169,121
—
2,163
31,225
—
6,683
6,813
—
1,694,864
361,024
295,622
373,302
137,076
9,716
7,400
75,478
5,505
9
625
—
22,267
0.9%
5,233
597
—
—
—
—
—
—
126
3
123
12
—
—
41
—
72,180
(13)
72,167
162,845
(2)
162,843
5,787
35,859
242,804
62,684
72,938
9,634
63,304
—
—
—
(18)
(35)
(11)
(24)
5,787
35,859
242,804
62,666
72,903
9,623
63,280
341,866
(84)
341,782
177,234
—
177,234
14,934
207,825
—
—
—
—
14,934
207,825
—
13,500
2,387,277
(8,777)
2,378,500
0.6%
100%
919
300
592,008
23,518
(325)
(93)
591,683
23,425
383,018
144,476
80,983
5,830
1,219
615,526
(418)
615,108
188,258
26,679
—
—
25,743
16,790
—
1,869
—
403
188,258
71,484
—
(99)
188,258
71,385
214,937
25,743
16,790
1,869
403
259,742
(99)
259,643
HSBC Holdings plc Annual Report and Accounts 2018
101
Percentage of total credit quality
71.0%
15.1%
12.4%
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage
allocation
(Audited)
Gross carrying/notional amount
Strong
Good Satisfactory
Sub-
standard
Credit
impaired
Footnotes
$m
$m
$m
$m
$m
Total
$m
Allowance
for ECL
$m
Net
$m
Loans and advances to customers at
amortised cost
– stage 1
– stage 2
– stage 3
– POCI
Loans and advances to banks at
amortised cost
– stage 1
– stage 2
– stage 3
– POCI
Other financial assets measured at
amortised cost
– stage 1
– stage 2
– stage 3
– POCI
Loan and other credit-related
commitments
– stage 1
– stage 2
– stage 3
– POCI
Financial guarantees
8
– stage 1
– stage 2
– stage 3
– POCI
485,451
244,199
230,357
483,907
233,843
191,851
1,544
10,356
38,506
16,993
5,587
11,380
—
—
60,249
60,199
50
—
—
514,848
514,525
323
—
—
—
—
7,371
7,250
121
—
—
44,724
44,339
385
—
—
373,302
137,076
372,597
132,220
705
—
—
9,716
9,582
134
—
—
4,856
—
—
7,400
6,879
521
—
—
—
—
4,549
4,413
136
—
—
23,019
22,184
835
—
—
75,478
63,457
12,021
—
—
5,505
4,264
1,241
—
—
—
26
11
11
—
—
—
200
70
130
—
—
5,233
976
4,257
—
—
597
159
438
—
—
13,321
990,321
(8,625)
981,696
—
—
13,023
298
—
—
—
—
—
915,188
61,786
13,023
324
72,180
71,873
307
—
—
126
582,917
—
—
126
—
581,118
1,673
126
—
919
592,008
—
—
912
7
300
—
—
297
3
569,250
21,839
912
7
23,518
20,884
2,334
297
3
(1,276)
(2,108)
(5,047)
(194)
(13)
(11)
(2)
—
—
(55)
(27)
(6)
(22)
—
(325)
(143)
(139)
(43)
—
(93)
(19)
(29)
(45)
—
913,912
59,678
7,976
130
72,167
71,862
305
—
—
582,862
581,091
1,667
104
—
591,683
569,107
21,700
869
7
23,425
20,865
2,305
252
3
At 31 Dec 2018
1,443,566
440,770
338,908
23,034
14,666
2,260,944
(9,111)
2,251,833
Debt instruments at FVOCI
18
– stage 1
– stage 2
– stage 3
– POCI
319,623
12,358
9
—
—
96
—
—
6,856
354
—
—
2,218
340
—
—
At 31 Dec 2018
319,632
12,454
7,210
2,558
For footnotes, see page 147.
—
—
8
4
12
341,055
799
8
4
(33)
(50)
(1)
—
341,022
749
7
4
341,866
(84)
341,782
102
HSBC Holdings plc Annual Report and Accounts 2018
Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation
(continued)
Gross carrying/notional amount
Good
Satisfactory Sub-standard
$m
$m
$m
227,146
211,084
16,062
220,089
180,002
40,087
17,922
4,599
13,323
—
—
7,692
7,351
341
—
—
47,347
47,019
328
—
—
121,508
115,008
6,500
—
—
7,086
6,590
496
—
—
—
—
3,890
3,642
248
—
—
39,595
38,929
666
—
—
74,694
64,429
10,265
—
—
7,408
5,500
1,908
—
—
—
—
26
10
16
—
—
862
546
316
—
—
6,431
1,591
4,840
—
—
807
323
484
—
—
Strong
$m
479,067
475,881
3,186
—
—
70,959
70,024
935
—
—
469,898
469,691
207
—
—
341,580
338,855
2,725
—
—
10,339
9,608
731
—
—
Credit
impaired
$m
14,856
—
—
13,882
974
15
—
—
15
—
162
—
—
155
7
1,045
—
—
999
46
209
—
—
187
22
Total
$m
959,080
871,566
72,658
13,882
974
82,582
81,027
1,540
15
—
557,864
556,185
1,517
155
7
545,258
519,883
24,330
999
46
25,849
22,021
3,619
187
22
Allowance for
ECL
$m
(9,343)
(1,309)
(2,201)
(5,591)
(242)
(23)
(17)
(4)
(2)
—
Net
$m
949,737
870,257
70,457
8,291
732
82,559
81,010
1,536
13
—
(114)
557,750
(28)
(4)
(82)
—
(376)
(126)
(183)
(67)
—
(97)
(17)
(18)
(62)
—
556,157
1,513
73
7
544,882
519,757
24,147
932
46
25,752
22,004
3,601
125
22
1,371,843
410,779
345,676
26,048
16,287
2,170,633
(9,953)
2,160,680
297,753
208
—
—
6,678
108
—
—
12,941
147
—
—
2,450
1,826
—
—
297,961
6,786
13,088
4,276
—
—
584
—
584
319,822
2,289
584
—
322,695
(28)
(142)
(14)
—
(184)
319,794
2,147
570
—
322,511
Loans and advances to customers at
amortised cost
Footnotes
– stage 1
– stage 2
– stage 3
– POCI
Loans and advances to banks at
amortised cost
– stage 1
– stage 2
– stage 3
– POCI
Other financial assets measured at
amortised cost
– stage 1
– stage 2
– stage 3
– POCI
Loan and other credit-related
commitments
– stage 1
– stage 2
– stage 3
– POCI
Financial guarantees
– stage 1
– stage 2
– stage 3
– POCI
At 1 Jan 2018
7
8
Debt instruments at FVOCI
18
– stage 1
– stage 2
– stage 3
– POCI
At 1 Jan 2018
For footnotes, see page 147.
Credit-impaired loans
(Audited)
HSBC determines that a financial instrument is credit impaired and
in stage 3 by considering relevant objective evidence, primarily
whether:
• contractual payments of either principal or interest are past due
for more than 90 days;
• there are other indications that the borrower is unlikely to pay,
such as when a concession has been granted to the borrower
for economic or legal reasons relating to the borrower’s
financial condition; and
• the loan is otherwise considered to be in default. If such
unlikeliness to pay is not identified at an earlier stage, it is
deemed to occur when an exposure is 90 days past due, even
where regulatory rules permit default to be defined based on 180
days past due. Therefore, the definitions of credit impaired and
default are aligned as far as possible so that stage 3 represents all
loans that are considered defaulted or otherwise credit impaired.
Renegotiated loans and forbearance
The following table shows the gross carrying amounts of the
Group’s holdings of renegotiated loans and advances to
customers by industry sector and by stages. Wholesale
renegotiated loans are classified as stage 3 until there is sufficient
evidence to demonstrate a significant reduction in the risk of non-
payment of future cash flows, observed over a minimum one-year
period, and there are no other indicators of impairment. Personal
renegotiated loans are deemed to remain credit impaired until
repayment or derecognition.
HSBC Holdings plc Annual Report and Accounts 2018
103
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Renegotiated loans and advances to customers at amortised cost by stage allocation
Stage 1
$m
Stage 2
$m
Stage 3
$m
Gross carrying amount
Personal
– first lien residential mortgages
– other personal lending
Wholesale
– corporate and commercial
– non-bank financial institutions
At 31 Dec 2018
Allowance for ECL
Personal
– first lien residential mortgages
– other personal lending
Wholesale
– corporate and commercial
– non-bank financial institutions
At 31 Dec 2018
—
—
—
1,532
1,517
15
1,532
—
—
—
(29)
(29)
—
(29)
Renegotiated loans and advances to customers by geographical region
—
—
—
1,193
1,193
—
1,193
—
—
—
(49)
(49)
—
(49)
2,248
1,641
607
3,845
3,789
56
6,093
(381)
(186)
(195)
(1,461)
(1,438)
(23)
(1,842)
North
America
Latin
America
POCI
$m
—
—
—
270
270
—
270
—
—
—
(146)
(146)
—
(146)
Total
$m
UK
$m
9,088
3,609
Total
$m
2,248
1,641
607
6,840
6,769
71
9,088
(381)
(186)
(195)
(1,685)
(1,662)
(23)
(2,066)
Hong
Kong
$m
305
Europe
$m
4,533
Asia
$m
864
MENA
$m
$m
1,973
1,352
$m
366
Excluding foreign exchange movements, the total wholesale
lending growth was driven by a $32bn increase in corporate and
commercial balances. The primary driver of this increase was Asia
($18.6bn), most notably in Hong Kong ($14bn), India ($1.5bn) and
Australia ($1.1bn). Other notable increases were observed in the
UK ($5.2bn), the UAE ($2.3bn) and Canada ($3.6bn). This growth
was partly offset by a $7.7bn decrease in loans and advances to
banks.
The allowance for ECL attributable to wholesale lending, excluding
off-balance sheet commitments and financial guarantees, of
$5.7bn, decreased from $6.3bn on 1 January 2018. This was
primarily driven by releases related to the Group’s oil and gas
sector and by favourable foreign exchange movements.
At 31 Dec 2018
Wholesale lending
This section provides further detail on the regions, countries and
products driving the movement in wholesale loans and advances
to customers and banks, with the impact of foreign exchange
separately identified. Product granularity is also provided by stage
with geographical data presented for loans and advances to
customers, banks, other credit commitments, financial guarantees
and similar contracts. Additionally, this section provides a
reconciliation of the opening 1 January 2018 to 31 December 2018
closing gross carrying/nominal amounts and the associated
allowance for ECL.
Wholesale lending of $668bn increased by $1bn from $667bn
since the Group transitioned to IFRS 9 on 1 January 2018. This
increase included adverse foreign exchange movements of $23bn.
104
HSBC Holdings plc Annual Report and Accounts 2018
Total wholesale lending for loans and advances to banks and customers by stage distribution
Gross carrying amount
Allowance for ECL
Corporate and commercial
481,262
44,779
8,212
324
534,577
(812)
(3,848)
(194)
(5,552)
Stage 1
Stage 2
Stage 3
$m
$m
$m
POCI
$m
Total
Stage 1
Stage 2
Stage 3
$m
$m
$m
POCI
$m
Total
$m
– agriculture, forestry and fishing
– mining and quarrying
– manufacturing
– electricity, gas, steam and air-
conditioning supply
– water supply, sewerage, waste
management and remediation
5,361
12,094
92,606
1,102
1,717
236
359
2
2
6,701
14,172
11,404
1,569
125
105,704
14,522
1,422
3,335
164
40
24
– construction
12,919
1,116
1,168
– wholesale and retail trade, repair of
motor vehicles and motorcycles
83,751
12,225
1,652
– transportation and storage
– accommodation and food
– publishing, audiovisual and
broadcasting
– real estate
– professional, scientific and technical
activities
– administrative and support services
– public administration and defence,
compulsory social security
– education
– health and care
– arts, entertainment and recreation
– other services
– activities of households
– extra-territorial organisations and
bodies activities
– government
– asset-backed securities
Non-bank financial institutions
Loans and advances to banks
23,327
19,385
19,758
116,132
21,282
22,820
1,425
1,713
3,710
4,326
13,259
770
49
7,905
813
59,245
71,873
1,825
1,889
1,224
5,985
941
1,843
30
102
457
676
411
59
3
168
16
1,932
307
351
270
189
1,115
350
437
8
14
141
39
242
1
7
—
—
230
—
(34)
(51)
(156)
(60)
(2)
(41)
(117)
(94)
(791)
(1)
(2)
(167)
(176)
(83)
(1,162)
(15)
(54)
(147)
(17)
(524)
—
(44)
(115)
(128)
(968)
(24)
(636)
(1,218)
(166)
(168)
(142)
(771)
(171)
(256)
(9)
(24)
(59)
(33)
(202)
—
(1)
(7)
(13)
(126)
(13)
(7)
(1)
(1)
—
—
—
(1)
—
—
—
—
—
—
—
—
—
—
—
(46)
(41)
(16)
(80)
(29)
(48)
(3)
(7)
(16)
(9)
(31)
—
—
(1)
(13)
(31)
(2)
(82)
(83)
(84)
(594)
(113)
(166)
(5)
(6)
(33)
(15)
(140)
—
(1)
—
—
(51)
—
60
16,044
—
51
37
38
3
1
1
—
3
—
—
—
—
1
—
—
—
—
—
—
3,523
15,254
97,665
25,541
21,547
21,172
123,233
22,573
25,103
1,463
1,829
4,308
5,041
13,913
830
59
8,073
829
61,407
72,180
$m
(698)
(15)
(29)
(132)
(18)
(5)
(27)
(37)
(43)
(42)
(97)
(29)
(41)
(1)
(11)
(10)
(9)
(31)
—
—
(6)
—
(44)
(11)
(753)
(366)
(313)
(179)
(99)
(73)
(37)
(98)
At 31 Dec 2018
By geography
Europe
– of which: UK
Asia
– of which: Hong Kong
MENA
North America
Latin America
At 31 Dec 2018
612,380
47,018
8,442
324
668,164
190,387
133,004
314,591
194,186
25,684
62,631
19,087
19,073
15,370
17,729
8,425
2,974
6,928
314
4,233
2,928
1,736
729
1,769
314
390
150
213,843
8
92
69
53
—
29
151,310
334,148
203,409
30,480
69,873
19,820
612,380
47,018
8,442
324
668,164
(753)
(845)
(3,899)
(194)
(5,691)
(529)
(471)
(121)
(54)
(77)
(107)
(11)
(845)
(1,598)
(998)
(1,040)
(413)
(974)
(101)
(186)
(102)
—
(36)
(35)
(46)
—
(10)
(2,595)
(1,782)
(1,376)
(601)
(1,170)
(245)
(305)
(3,899)
(194)
(5,691)
Total wholesale lending for loans and other credit-related commitments and financial guarantees8 by stage distribution
Corporate and commercial
Financial
At 31 Dec 2018
By geography
Europe
– of which: UK
Asia
– of which: Hong Kong
MENA
North America
Latin America
At 31 Dec 2018
For footnotes, see page 147.
Nominal amount
Allowance for ECL
Stage 1
Stage 2
Stage 3
POCI
Total
Stage 1
Stage 2
Stage 3
$m
266,489
117,542
384,031
203,092
82,572
61,206
27,022
5,304
111,494
2,935
$m
21,087
1,323
22,410
9,726
6,378
3,076
1,115
732
8,850
26
$m
791
6
797
614
442
102
89
18
62
1
384,031
22,410
797
$m
10
$m
288,377
— 118,871
10
407,248
10
213,442
—
—
—
—
89,392
64,384
28,226
6,054
— 120,406
—
10
2,962
407,248
$m
(142)
(7)
(149)
(82)
(69)
(39)
(12)
(8)
(17)
(3)
$m
(161)
(6)
(167)
(66)
(57)
(16)
(2)
(10)
(75)
—
(149)
(167)
$m
(87)
(1)
(88)
(53)
(39)
(28)
(27)
(2)
(4)
(1)
(88)
POCI
$m
—
—
—
—
—
—
—
—
—
—
—
Total
$m
(390)
(14)
(404)
(201)
(165)
(83)
(41)
(20)
(96)
(4)
(404)
HSBC Holdings plc Annual Report and Accounts 2018
105
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Wholesale lending – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and
customers including loan commitments and financial guarantees8
(Audited)
Non-credit impaired
Credit impaired
Stage 1
Stage 2
Stage 3
POCI
Total
At 1 Jan 2018
Transfers of financial instruments
Net remeasurement of ECL arising
from transfer of stage
Net new and further lending/
repayments
Changes to risk parameters – credit
quality
Assets written off
Foreign exchange and other
At 31 Dec 2018
Gross
carrying/
nominal
amount
$m
897,529
(4,477)
Gross
carrying/
nominal
amount
Allowance
for ECL
Gross
carrying/
nominal
amount
Allowance
for ECL
Gross
carrying/
nominal
amount
Allowance
for ECL
Gross
carrying/
nominal
amount
Allowance
for ECL
Allowance
for ECL
$m
(873)
(274)
$m
84,354
1,535
$m
$m
$m
$m
$m
$m
$m
(1,249)
10,209
(4,410)
1,042
(242)
993,134
(6,774)
386
2,942
(112)
—
—
—
—
—
—
—
(61)
—
262
—
(231)
—
(92)
74,107
(271)
(13,709)
342
(2,414)
406
(587)
42
57,397
519
—
—
(36,104)
931,055
157
—
97
—
—
(2,777)
(301)
—
(1,041)
—
41
(1,182)
1,172
(316)
90
(902)
69,403
(1,012)
9,239
(3,987)
—
(1)
(120)
334
(51)
1
56
—
(1,236)
(1,183)
(39,317)
1,173
284
(194) 1,010,031
(6,095)
ECL release/(charge) for the period
148
(190)
(727)
(9)
Recoveries
Others
Total change in ECL for the period
For footnotes, see page 147.
As shown in the above table, the allowance for ECL for loans and
advances to customers and banks and relevant loan commitments
and financial guarantees decreased $679m during the period from
$6,774m at 1 January 2018 to $6,095m at 31 December 2018.
This overall decrease was primarily driven by:
•
•
$1,173m of assets written off;
$519m relating to underlying net book volume
movements, which included the ECL allowance
associated with new originations, assets derecognised
and net further lending; and
(778)
118
(69)
(729)
•
foreign exchange and other movements of $284m.
These decreases were partially offset by increases of:
•
•
$1,236m relating to underlying credit quality changes,
including the credit quality impact of financial
instruments transferring between stages; and
$61m relating to the net remeasurement impact of stage
transfers.
Wholesale lending – distribution of financial instruments by credit quality
Gross carrying/nominal amount
Strong
Good Satisfactory
Sub-
standard
Credit
impaired
$m
$m
$m
$m
$m
Total
$m
Allowance
for ECL
$m
By geography
Europe
of which: UK
Asia
of which: Hong Kong
MENA
North America
Latin America
At 31 Dec 2018
60,145
39,840
62,098
46,396
143,864
100,437
82,854
10,393
10,952
3,730
63,564
7,905
31,278
6,088
79,466
56,974
86,065
55,357
9,173
24,708
8,300
229,084
207,806
207,712
Percentage of total credit quality
34.3%
31.1%
31.1%
7,752
5,164
1,977
837
1,186
2,621
1,286
14,822
2.2%
4,382
2,936
1,805
797
1,823
314
416
8,740
1.3%
213,843
151,310
334,148
203,409
30,480
69,873
19,820
668,164
100.0%
Net
$m
211,248
149,528
332,772
202,808
29,310
69,628
19,515
(2,595)
(1,782)
(1,376)
(601)
(1,170)
(245)
(305)
(5,691)
662,473
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 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 PD ranges above are the Basel one-year
PD ranges. The credit quality classifications can be found on
page 79.
106
HSBC Holdings plc Annual Report and Accounts 2018
Corporate &
commercial
– CRR 1
– CRR 2
– CRR 3
– CRR 4
– CRR 5
– CRR 6
– CRR 7
– CRR 8
– CRR 9/10
Non-bank
financial
institutions
– CRR 1
– CRR 2
– CRR 3
– CRR 4
– CRR 5
– CRR 6
– CRR 7
– CRR 8
0.000 to 0.053
0.054 to 0.169
0.170 to 0.740
0.741 to 1.927
1.928 to 4.914
4.915 to 8.860
8.861 to 15.000
15.001 to 99.999
– CRR 9/10
100.000
Banks
– CRR 1
– CRR 2
– CRR 3
– CRR 4
– CRR 5
– CRR 6
– CRR 7
– CRR 8
– CRR 9/10
At 31 Dec
2018
0.000 to 0.053
0.054 to 0.169
0.170 to 0.740
0.741 to 1.927
1.928 to 4.914
4.915 to 8.860
8.861 to 15.000
15.001 to 99.999
100.000
Wholesale lending – credit risk profile by obligor grade for loans and advances at amortised cost
Gross carrying amount
Allowance for ECL
Basel one-year PD
range
Stage 1 Stage 2
Stage
3
POCI
Total
Stage
1
Stage
2
Stage
3
POCI
%
$m
$m
$m
$m
$m
$m
$m
$m
$m
Total
$m
481,262 44,779
8,212
324 534,577
(698)
(812)
(3,848)
(194)
(5,552)
0.000 to 0.053
0.054 to 0.169
45,401
94,002
67
917
0.170 to 0.740
174,260
7,723
0.741 to 1.927
114,007 12,294
1.928 to 4.914
48,258 14,799
4.915 to 8.860
8.861 to 15.000
15.001 to 99.999
100.000
3,787
1,235
312
—
4,419
2,875
1,685
—
—
—
—
—
—
—
—
— 45,468
— 94,919
(4)
(17)
(2)
(4)
— 181,983
(162)
(85)
— 126,301
(231)
(114)
— 63,057
(209)
(252)
22
4
—
8,228
4,114
1,997
8,510
(41)
(22)
(12)
—
(103)
(147)
(105)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(6)
(21)
(247)
(345)
(461)
(144)
(169)
(117)
— 8,212
298
— (3,848)
(194)
(4,042)
47.5
ECL
coverage
Mapped
external rating
%
1.0
— AA- and above
—
0.1
0.3
0.7
1.8
4.1
5.9
A+ to A-
BBB+ to BBB-
BB+ to BB-
BB- to B
B-
CCC+
CCC to C
D
59,245
1,932
230
— 61,407
(44)
(31)
(51)
13,256
15,172
18,024
7,530
5,032
61
169
1
—
71,873
47,680
12,519
7,250
4,032
381
8
1
2
—
—
20
427
789
456
133
23
84
—
307
32
18
121
118
18
—
—
—
—
—
—
—
—
—
—
—
—
230
—
—
—
—
—
—
—
—
—
—
— 13,256
— 15,192
— 18,451
—
—
—
—
—
—
8,319
5,488
194
192
85
230
(1)
(2)
(13)
(10)
(14)
—
(4)
—
—
— 72,180
(11)
— 47,712
— 12,537
—
—
—
—
—
—
—
7,371
4,150
399
8
1
2
—
(3)
(2)
(3)
(3)
—
—
—
—
—
—
—
(1)
(2)
(5)
(2)
(1)
(20)
—
(2)
—
—
(1)
(1)
—
—
—
—
—
—
—
—
—
—
—
—
—
(51)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(126)
0.2
(1)
(2)
(14)
(12)
(19)
(2)
(5)
(20)
(51)
(13)
(3)
(2)
(4)
(4)
—
—
—
—
—
— AA- and above
A+ to A-
BBB+ to BBB-
BB+ to BB-
BB- to B
B-
CCC+
CCC to C
D
—
0.1
0.1
0.3
1.0
2.6
23.5
22.2
—
— AA- and above
—
0.1
0.1
—
—
—
—
—
A+ to A-
BBB+ to BBB-
BB+ to BB-
BB- to B
B-
CCC+
CCC to C
D
612,380 47,018
8,442
324 668,164
(753)
(845)
(3,899)
(194)
(5,691)
0.9
HSBC Holdings plc Annual Report and Accounts 2018
107
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Wholesale lending – credit risk profile by obligor grade for loans and advances at amortised cost (continued)
ECL
coverage
Mapped external
rating
Gross carrying amount
Allowance for ECL
Basel one-year PD
range
Stage 1
Stage 2
Stage
3
POCI
Total
Stage 1
Stage 2
Stage
3
POCI
%
$m
$m
$m
$m
$m
$m
$m
$m
$m
Total
$m
456,837
53,262
9,064
974 520,137
(701)
(1,037)
(4,073)
(242)
(6,053)
0.000 to 0.053
0.054 to 0.169
43,578
96,876
440
1,016
0.170 to 0.740 163,453
10,373
0.741 to 1.927 107,755
16,368
1.928 to 4.914
41,042
14,337
4.915 to 8.860
2,641
8.861 to 15.000
15.001 to 99.999
100.000
881
611
—
6,363
2,528
1,837
—
—
—
—
—
—
—
—
— 44,018
— 97,892
— 173,826
20 124,143
— 55,379
27
—
—
9,031
3,409
2,448
9,991
(7)
(25)
(173)
(256)
(190)
(35)
(6)
(9)
—
(3)
(1)
(86)
(232)
(192)
(272)
(107)
(144)
—
—
—
—
—
—
—
—
—
—
—
—
—
(1)
—
—
(10)
(26)
(259)
(488)
(382)
(308)
(113)
(153)
— 9,064
927
— (4,073)
(241)
(4,314)
43.2
%
1.2
—
—
0.1
0.4
0.7
3.4
3.3
6.3
60,424
3,042
408
— 63,874
(27)
(8)
(208)
0.000 to 0.053
0.054 to 0.169
0.170 to 0.740
0.741 to 1.927
1.928 to 4.914
4.915 to 8.860
8.861 to 15.000
15.001 to 99.999
100.000
0.000 to 0.053
0.054 to 0.169
0.170 to 0.740
0.741 to 1.927
1.928 to 4.914
4.915 to 8.860
8.861 to 15.000
15.001 to 99.999
100.000
14,210
17,831
17,344
6,167
4,451
417
4
—
—
81,027
55,343
14,681
7,351
3,072
570
4
2
4
—
1
144
1,057
1,102
373
345
8
12
—
1,540
529
406
341
47
201
13
1
2
—
—
—
—
—
—
—
—
—
408
15
—
—
—
—
—
—
—
—
15
— 14,211
— 17,975
— 18,401
—
—
—
—
—
—
7,269
4,824
762
12
12
408
— 82,582
— 55,872
— 15,087
—
—
—
—
—
—
—
7,692
3,119
771
17
3
6
15
(1)
(2)
(7)
(4)
(4)
(9)
—
—
—
(17)
(4)
(5)
(5)
(3)
—
—
—
—
—
—
—
—
(2)
(3)
(2)
—
(1)
—
—
—
—
—
—
—
—
— (208)
(4)
—
(2)
(1)
—
(1)
—
—
—
—
(2)
—
—
—
—
—
—
—
—
(2)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(243)
(1)
(2)
(7)
(6)
(7)
(11)
—
(1)
(208)
(23)
(4)
(7)
(6)
(3)
(1)
—
—
—
(2)
598,288
57,844
9,487
974 666,593
(745)
(1,049)
(4,283)
(242)
(6,319)
0.4
—
—
—
0.1
0.1
1.4
—
8.3
51.0
—
—
—
0.1
0.1
0.1
—
—
—
13.3
0.9
AA- and above
A+ to A-
BBB+ to BBB-
BB+ to BB-
BB- to B
B-
CCC+
CCC to C
D
AA- and above
A+ to A-
BBB+ to BBB-
BB+ to BB-
BB- to B
B-
CCC+
CCC to C
D
AA- and above
A+ to A-
BBB+ to BBB-
BB+ to BB-
BB- to B
B-
CCC+
CCC to C
D
Corporate and
commercial
– CRR 1
– CRR 2
– CRR 3
– CRR 4
– CRR 5
– CRR 6
– CRR 7
– CRR 8
– CRR 9/10
Non-bank financial
institutions
– CRR 1
– CRR 2
– CRR 3
– CRR 4
– CRR 5
– CRR 6
– CRR 7
– CRR 8
– CRR 9/10
Banks
– CRR 1
– CRR 2
– CRR 3
– CRR 4
– CRR 5
– CRR 6
– CRR 7
– CRR 8
– CRR 9/10
At 1 Jan 2018
Commercial real estate
Commercial real estate lending
Gross loans and advances
Stage 1
Stage 2
Stage 3
POCI
Europe
$m
27,084
1,587
1,022
—
Asia
$m
70,769
3,176
16
—
At 31 Dec 2018
29,693
73,961
– of which: renegotiated loans
Allowance for ECL
944
(364)
1
(59)
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 and the US. The Group has aligned the definition of
commercial real estate to reflect the internal risk management
view, and the comparatives on pages 122 to 132 have been
re-presented.
Our global exposure is centred largely on cities with economic,
political or cultural significance. 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
108
HSBC Holdings plc Annual Report and Accounts 2018
MENA
$m
1,607
120
209
—
1,936
186
(171)
North
America
$m
Latin
America
$m
Total
$m
UK
$m
Hong Kong
$m
9,129
677
43
—
1,796
110,385
20,443
13
118
14
5,573
1,408
14
990
673
—
55,872
2,032
12
—
9,849
1,941
117,380
22,106
57,916
1
(9)
—
(52)
1,132
(655)
816
(282)
—
(33)
larger, better capitalised developers involved in residential
construction or assets supporting economic expansion.
Commercial real estate lending grew $17.7bn, including foreign
exchange movements, mainly in Hong Kong and, to a lesser
extent, within the UK and Canada.
Refinance risk in commercial real estate
Commercial real estate lending tends to require the repayment of
a significant proportion of the principal at maturity. Typically, a
customer will arrange repayment through the acquisition of a new
loan to settle the existing debt. Refinance risk is the risk that a
customer, being unable to repay the debt on maturity, fails to
refinance it at commercial rates. We monitor our commercial real
estate portfolio closely, assessing indicators for signs of potential
issues with refinancing.
Commercial real estate gross loans and advances maturity analysis
On demand, overdrafts or revolving
< 1 year
1–2 years
2–5 years
> 5 years
At 31 Dec 2018
Europe
$m
13,790
5,850
7,257
2,796
29,693
Asia
$m
MENA
$m
North
America
Latin
America
$m
$m
22,100
13,174
32,894
5,793
73,961
896
305
417
318
1,936
4,942
1,949
2,152
806
9,849
427
117
1,053
344
1,941
Total
$m
42,155
21,395
43,773
10,057
UK
$m
Hong Kong
$m
11,305
5,153
5,232
416
18,094
9,120
26,061
4,641
57,916
117,380
22,106
Collateral and other credit enhancements
(Audited)
Although collateral can be an important mitigant of credit risk, it is
the Group’s practice to lend on the basis of the customer’s ability
to meet their obligations out of cash flow resources rather than
placing primary reliance on collateral and other credit risk
enhancements. Depending on the customer’s standing and the
type of product, facilities may be provided without any collateral or
other credit enhancements. For other lending, a charge over
collateral is obtained and considered in determining the credit
decision and pricing. In the event of default, the Group may utilise
the collateral as a source of repayment.
Depending on its form, collateral can have a significant financial
effect in mitigating our exposure to credit risk. Where there is
sufficient collateral, an expected credit loss is not recognised. This
is the case for reverse repurchase agreements and for certain
loans and advances to customers where the loan to value (‘LTV’) is
very low.
Mitigants may include a charge on borrowers’ specific assets,
such as real estate or financial instruments. Other credit risk
mitigants include short positions in securities and financial assets
held as part of linked insurance/investment contracts where the
risk is predominantly borne by the policyholder. Additionally, risk
may be managed by employing other types of collateral and credit
risk enhancements, such as second charges, other liens and
unsupported guarantees. Guarantees are normally taken from
corporates and export credit agencies (‘ECAs’). Corporates would
normally provide guarantees as part of a parent/subsidiary
relationship and span a number of credit grades. The ECAs will
normally be investment grade.
Certain credit mitigants are used strategically in portfolio
management activities. While single name concentrations arise in
portfolios managed by Global Banking and Corporate Banking, it is
only in Global Banking that their size requires the use of portfolio
level credit mitigants. Across Global Banking, risk limits and
utilisations, maturity profiles and risk quality are monitored and
managed proactively. This process is key to the setting of risk
appetite for these larger, more complex, geographically distributed
customer groups. While the principal form of risk management
continues to be at the point of exposure origination, through the
lending decision-making process, Global Banking also utilises loan
sales and credit default swap (‘CDS’) hedges to manage
concentrations and reduce risk. These transactions are the
responsibility of a dedicated Global Banking portfolio management
team. Hedging activity is carried out within agreed credit
parameters, and is subject to market risk limits and a robust
governance structure. Where applicable, CDSs are entered into
directly with a central clearing house counterparty. Otherwise our
exposure to CDS protection providers is diversified among mainly
banking counterparties with strong credit ratings.
CDS mitigants are held at portfolio level and are not included in
the expected loss calculations. CDS mitigants are not reported in
the following tables.
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 following tables. 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.
The LTV ratios presented are calculated by directly associating
loans and advances with the collateral that individually and
uniquely supports each facility. When collateral assets are shared
by multiple loans and advances, whether specifically or, more
generally, by way of an all monies charge, the collateral value is
pro-rated across the loans and advances protected by the
collateral.
For credit-impaired loans, the collateral values cannot be directly
compared with impairment allowances recognised. The 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 228.
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.
HSBC Holdings plc Annual Report and Accounts 2018
109
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Wholesale lending – commercial real estate loans and advances including loan commitments by level of collateral for key
countries/territories (by stage)
(Audited)
Total
UK
Of which:
Hong Kong
Gross
carrying/
nominal
amount
$m
62,123
87,530
46,983
29,621
5,167
5,759
6,129
3,735
ECL
coverage
%
0.1
0.1
0.1
0.1
0.1
0.1
0.1
Gross
carrying/
nominal
amount
$m
10,557
17,766
8,006
8,174
1,038
548
515
285
ECL
coverage
%
0.2
0.1
0.1
0.1
—
0.2
0.2
Gross
carrying/
nominal
amount
$m
31,224
39,174
25,870
10,452
1,168
1,684
2,130
1,401
ECL
coverage
%
—
—
—
0.1
0.1
0.1
—
US
Gross
carrying/
nominal
amount
$m
—
4,862
3,463
787
519
93
—
—
155,782
0.1
28,838
0.1
72,528
—
4,862
2,249
4,739
2,039
1,430
363
907
261
156
7,249
338
606
412
88
38
68
474
321
1.1
1.3
1.1
0.7
5.0
1.0
1.5
1.2
57.1
12.7
10.0
27.3
2.6
16.2
56.5
1,418
37.9
—
15
13
2
—
—
—
—
15
164,464
—
53.3
61.5
—
—
—
—
53.3
0.5
446
782
394
330
34
24
24
20
2.5
4.5
3.6
1.2
44.1
8.3
12.5
1,140
1,576
795
505
29
247
15
5
1,252
3.9
2,731
61
433
304
58
35
36
261
137
755
—
—
—
—
—
—
—
—
—
30,845
85.2
9.2
9.2
6.9
5.7
16.7
42.9
27.0
—
—
—
—
—
—
—
—
0.9
—
12
2
10
—
—
—
—
12
—
—
—
—
—
—
—
—
—
75,271
0.2
0.4
0.4
0.4
—
—
—
0.3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
439
303
7
129
—
—
—
439
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,301
ECL
coverage
%
—
—
—
—
—
—
—
—
—
0.5
0.7
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.1
Stage 1
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
Stage 2
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
Stage 3
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
POCI
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 2018
110
HSBC Holdings plc Annual Report and Accounts 2018
Wholesale lending – commercial real estate loans and advances including loan commitments by level of collateral for key
countries/territories
(Audited)
Total
UK
Of which:
Hong Kong
Gross
carrying/
nominal
amount
ECL
coverage
Gross
carrying/
nominal
amount
Gross
carrying/
nominal
amount
ECL
coverage
ECL
coverage
US
Gross
carrying/
nominal
amount
ECL
coverage
$m
%
$m
%
$m
%
$m
%
64,324
91,791
6,377
3,879
162,492
49
477
178
269
13
17
13
12
539
338
621
425
90
38
68
474
321
1,433
164,464
0.1
0.1
0.2
0.1
2.0
1.5
1.7
0.4
7.7
11.8
7.7
1.7
57.1
13.5
11.5
26.7
2.6
16.2
56.5
38.0
0.5
11,001
18,112
532
299
29,645
2
435
149
265
7
14
8
6
445
61
433
304
58
35
36
261
137
755
30,845
0.2
0.2
0.6
0.3
—
1.1
1.3
0.4
14.3
14.3
12.5
1.3
85.2
9.2
9.2
6.9
5.7
16.7
42.9
27.0
0.9
32,364
40,747
2,145
1,406
75,256
—
3
3
—
—
—
—
—
3
—
12
2
10
—
—
—
—
12
75,271
—
0.1
—
—
—
33.3
33.3
—
—
—
—
33.3
—
—
—
—
—
—
—
—
—
—
5,282
—
—
5,282
—
19
19
—
—
—
—
—
19
—
—
—
—
—
—
—
—
—
5,301
—
0.1
—
0.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.1
Rated CRR/PD1 to 7
Not collateralised
Fully collateralised
Partially collateralised (A):
– collateral value on A
Total
Rated CRR/PD 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/PD9 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 2018
Other corporate, commercial and financial (non-bank) loans
and advances
Other corporate, commercial and financial (non-bank) loans are
analysed separately in the following table, which focuses on the
countries/territories 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 following table reports values only for customers
with CRR 8–10, recognising that these loans and advances
generally have valuations that are comparatively recent.
HSBC Holdings plc Annual Report and Accounts 2018
111
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Wholesale lending – other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level
of collateral for key countries/territories (by stage)
(Audited)
US
Gross
carrying/
nominal
amount
ECL
coverage
$m
%
Total
UK
Of which:
Hong Kong
Gross
carrying/
nominal
amount
$m
549,536
234,081
60,405
82,590
15,853
75,233
48,877
21,097
ECL
coverage
%
0.1
0.1
0.2
—
0.1
—
0.1
Gross
carrying/
nominal
amount
ECL
coverage
Gross
carrying/
nominal
amount
$m
%
$m
154,059
24,387
4,461
9,510
2,175
8,241
5,551
2,388
0.2
0.2
0.4
0.2
0.2
—
0.1
122,259
36,730
12,032
14,264
4,567
5,867
21,942
10,263
ECL
coverage
%
—
0.1
0.1
0.1
0.1
0.1
—
832,494
0.1
183,997
0.2
180,931
—
124,946
—
—
—
—
—
—
—
—
1.3
1.1
1.4
1.4
0.3
0.9
—
1.1
16.7
9.6
22.1
1.0
—
—
60.0
0.4
0.5
0.4
0.6
0.5
0.4
0.3
1,578
9,713
3,711
810
691
4,501
—
—
0.4
11,291
30,395
93,804
24,922
7,267
4,723
56,892
747
696
6
188
77
103
—
8
5
2
81.2
—
—
—
—
—
15.2
52.7
20.0
—
—
—
—
—
85.7
50.7
0.3
199
11.1
—
—
—
—
—
—
—
—
—
136,436
—
—
—
—
—
—
—
—
0.1
42,053
24,977
11,915
5,344
1,642
6,076
4,993
2,074
1.4
1.0
0.9
1.3
1.5
0.8
0.7
12,364
7,378
5,410
1,042
140
786
381
207
72,023
1.2
20,123
4,990
1,660
596
487
382
195
931
429
52.5
25.2
34.9
10.5
25.4
31.8
44.9
1,775
513
181
172
86
74
179
113
3.1
1.0
0.6
3.5
2.9
0.1
3.1
2.3
42.1
6.2
7.7
1.7
10.5
8.1
22.3
7,581
45.6
2,467
33.2
214
59
12
16
22
9
43
38
316
912,414
69.2
13.6
33.3
25.0
—
—
72.1
59.2
0.6
—
—
—
—
—
—
8
3
8
206,595
—
—
—
—
—
—
—
—
0.8
6,212
3,378
1,421
1,290
391
276
2,287
971
11,877
478
146
11
62
32
41
158
38
782
25
9
—
—
—
9
35
34
69
193,659
Stage 1
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
Stage 2
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
Stage 3
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
POCI
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 2018
112
HSBC Holdings plc Annual Report and Accounts 2018
Wholesale lending – other corporate, commercial and financial (non-bank) loans and advances including loan commitments by level
of collateral for key countries/territories
(Audited)
Total
UK
Of which:
Hong Kong
ECL
coverage
Gross
carrying/
nominal
amount
ECL
coverage
Gross
carrying/
nominal
amount
$m
1,243
1,895
693
292
45
865
212
84
%
5.4
3.6
4.2
2.7
15.6
2.8
2.8
$m
565
74
21
49
2
2
23
14
3,350
4.2
662
5,199
1,719
608
503
405
203
974
466
7,892
11,242
53.2
24.8
36.0
8.7
24.2
31.5
46.1
46.1
33.7
1,775
513
181
172
86
74
187
116
2,475
3,137
Gross
carrying/
nominal
amount
$m
94
11
—
11
—
—
153
49
258
503
155
11
62
32
50
193
73
851
1,109
ECL
coverage
%
7.4
9.1
—
9.1
—
—
1.3
3.9
78.1
—
—
—
—
—
28.0
52.6
41.3
%
6.2
4.1
4.8
2.0
—
—
4.3
6
42.1
6.2
7.7
1.7
10.5
8.1
21.9
33.2
27.4
US
Gross
carrying/
nominal
amount
$m
191
1,621
594
169
20
838
—
—
1,812
6
188
77
103
—
8
5
2
199
2,011
ECL
coverage
%
5.2
3.1
4.2
2.4
—
—
—
3.4
16.7
9.6
22.1
1.0
—
—
60.0
11.1
4.2
Rated CRR/ PD8
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/ PD9 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 2018
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
enhancements provided by government guarantees
that cover the assets.
• Debt securities issued by banks and financial institutions
include asset-backed securities (‘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 122.
• Trading loans and advances mainly pledged against cash
collateral are posted to satisfy margin requirements. There is
limited credit risk on cash collateral posted since in the event of
default of the counterparty these would be set off against the
related liability. Reverse repos and stock borrowing are by their
nature collateralised.
Collateral accepted as security that the Group is permitted to sell or repledge
under these arrangements is described on page 264 of the Financial
Statements.
• The Group’s maximum exposure to credit risk includes financial
guarantees and similar contracts granted, as well as loan and
other credit-related commitments. Depending on the terms of
the arrangement, we may use additional credit mitigation if a
guarantee is called upon or a loan commitment is drawn and
subsequently defaults.
For further information on these arrangements, see Note 33 on the Financial
Statements.
Derivatives
HSBC participates in transactions exposing us to counterparty
credit risk. Counterparty credit risk is the risk of financial loss if the
counterparty to a transaction defaults before satisfactorily settling
it. It arises principally from over-the-counter (‘OTC’) derivatives and
securities financing transactions and is calculated in both the
trading and non-trading books. Transactions vary in value by
reference to a market factor such as an interest rate, exchange
rate or asset price.
The counterparty risk from derivative transactions is taken into
account when reporting the fair value of derivative positions. The
adjustment to the fair value is known as the credit value
adjustment (‘CVA’).
For an analysis of CVAs, see Note 12 on the Financial Statements.
The following table reflects by risk type the fair values and gross
notional contract amounts of derivatives cleared through an
exchange, central counterparty and non-central counterparty.
HSBC Holdings plc Annual Report and Accounts 2018
113
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Notional contract amounts and fair values of derivatives by product type
Foreign exchange
– exchange traded
– central counterparty cleared OTC
– non-central counterparty cleared OTC
Interest rate
– exchange traded
– central counterparty cleared OTC
– non-central counterparty cleared OTC
Equity
– exchange traded
– non-central counterparty cleared OTC
Credit
– central counterparty cleared OTC
– non-central counterparty cleared OTC
Commodity and other
– exchange traded
– non-central counterparty cleared OTC
Total OTC derivatives
2018
Notional
amount
$m
Fair value
Assets
Liabilities
$m
$m
Notional
amount
$m
7,582,431
86,417
83,147
6,244,286
10,139
198,232
173
1,611
38
1,731
13,520
70,719
7,374,060
84,633
81,378
6,160,047
24,753,187
156,373
156,518
19,929,866
236,795
971,529
384
668
1,536,818
17,611,891
49,417
49,974
11,730,237
6,169,767
106,572
105,876
6,662,811
240
114,003
122,552
1,256,550
1,020,423
236,127
346,596
128,912
217,684
74,159
28,489
45,670
10,198
10,750
1,766
8,432
3,414
1,396
2,018
1,134
23
1,111
3,517
7,233
3,776
1,140
2,636
1,355
322
1,033
590,156
313,483
276,673
391,798
107,370
284,428
59,716
5,389
54,327
31,982,343
255,190
251,001
25,346,612
2017
Fair value
Assets
Liabilities
$m
78,517
37
1,312
77,168
9,353
1,104
8,249
4,692
2,715
1,977
886
56
830
328,806
118,030
210,776
1,437
$m
75,768
105
1,394
74,269
233,031
189
115,020
117,822
11,845
2,463
9,382
5,369
2,980
2,389
1,233
47
1,186
324,442
119,394
205,048
2,804
– total OTC derivatives cleared by central counterparties
17,939,035
52,424
52,845
11,908,326
– total OTC derivatives not cleared by central counterparties
14,043,308
202,766
198,156
13,438,286
Total exchange traded derivatives
2,030,580
2,346
4,545
1,869,210
Gross
Offset
At 31 Dec
34,012,923
257,536
255,546
27,215,822
330,243
327,246
(49,711)
(49,711)
207,825
205,835
(110,425)
(110,425)
219,818
216,821
Total personal lending of $394bn increased by $19bn from $375bn
since the Group transitioned to IFRS 9 on 1 January 2018. This
increase included adverse foreign exchange movements of $14bn.
Excluding foreign exchange movements, there was growth of
$33bn primarily driven by Europe ($17bn) and Asia ($15bn).
The allowance for ECL attributable to personal lending, excluding
off-balance sheet commitments and guarantees, remained flat
from 1 January 2018 at $3bn. This was primarily driven by
favourable foreign exchange movements and the stable credit
environment.
Excluding foreign exchange movements, the total personal lending
increase is primarily driven by mortgage balances, which grew by
$26bn. Mortgages in Asia grew by $13bn, notably in Hong Kong
($9bn) and to a lesser extent in Australia ($2.6bn), as a result of
continued business growth initiatives and property market growth.
In Europe, mortgages grew by $12bn, notably in the UK ($11bn),
driven by stronger acquisition performance, including the
expanded use of broker relationships.
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 48%, compared with an estimated 42% for the
overall mortgage portfolio. The average LTV ratio on new lending
in the UK was 65%, compared with an estimated 49% for the
overall mortgage portfolio. In 2018, we aligned our global
approach in relation to LTV reporting. This resulted in Hong Kong
and the UK changing from a simple average to a balance weighted
average. They will no longer be comparable to previously reported
amounts.
Excluding foreign exchange movements, other personal lending
balances increased by $8bn since 1 January 2018. Loans and
overdrafts grew by $5.3bn in the UK and France. Credit cards
increased by $1bn, mainly in the US, Hong Kong and to a lesser
extent China and the UK.
The purposes for which HSBC uses derivatives are described in Note 15 on
the Financial Statements.
The International Swaps and Derivatives Association (‘ISDA’)
master agreement is our preferred agreement for documenting
derivatives activity. It is common, and our preferred practice,
for the parties involved in a derivative transaction 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 284 and Note 30 on the Financial Statements for details regarding
legally enforceable right of offset in the event of counterparty default and
collateral received in respect of derivatives.
Personal lending
This section presents further disclosures related to personal
lending. It provides details of the regions, countries and products
which are driving the change observed in personal loans and
advances to customers, with the impact of foreign exchange
separately identified. Additionally, Hong Kong and UK mortgage
book LTV data is provided.
This section also provides a reconciliation of the opening
1 January 2018 to 31 December 2018 closing gross carrying/
nominal amounts and associated allowance for ECL.
Further product granularity is also provided by stage, with
geographical data presented for loans and advances to customers,
loan and other credit-related commitments and financial
guarantees.
114
HSBC Holdings plc Annual Report and Accounts 2018
Total personal lending for loans and advances to customers at amortised cost by stage distribution
By portfolio
First lien residential mortgages
– of which: interest only (including offset)
– affordability (including US adjustable rate
mortgages)
Other personal lending
– other
– credit cards
– second lien residential mortgages
– motor vehicle finance
At 31 Dec 2018
By geography
Europe
– of which: UK
Asia
– of which: Hong Kong
MENA
North America
Latin America
At 31 Dec 2018
Gross carrying amount
Stage 1
Stage 2
Stage 3
$m
$m
$m
Total
$m
284,103
31,874
16,110
90,578
67,196
20,932
1,022
1,428
6,286
1,324
1,065
8,789
4,400
4,259
100
30
2,944
338
507
1,637
1,121
453
57
6
293,333
33,536
17,682
101,004
72,717
25,644
1,179
1,464
Allowance for ECL
Stage 1
Stage 2
Stage 3
$m
(41)
(3)
(3)
(493)
(214)
(272)
(2)
(5)
$m
(62)
(13)
(4)
(1,203)
(435)
(756)
(9)
(3)
$m
(432)
(92)
(5)
(716)
(465)
(233)
(13)
(5)
Total
$m
(535)
(108)
(12)
(2,412)
(1,114)
(1,261)
(24)
(13)
374,681
15,075
4,581
394,337
(534)
(1,265)
(1,148)
(2,947)
169,782
139,237
155,661
104,909
5,565
38,283
5,390
5,731
4,308
5,413
2,715
350
2,552
1,029
374,681
15,075
2,051
1,315
693
169
411
1,186
240
4,581
177,564
144,860
161,767
107,793
6,326
42,021
6,659
394,337
(105)
(93)
(207)
(71)
(61)
(29)
(132)
(534)
(453)
(421)
(353)
(220)
(70)
(90)
(299)
(1,265)
(450)
(219)
(180)
(39)
(263)
(142)
(113)
(1,008)
(733)
(740)
(330)
(394)
(261)
(544)
(1,148)
(2,947)
Exposure to UK interest-only mortgage loans
The following information is presented for the Group’s HSBC
branded UK interest-only mortgage loans with balances of
$14.4bn. This excludes offset mortgages in First Direct, Private
Bank mortgages, endowment mortgages and other products.
interest-only mortgages that expired in 2016, 84% were repaid
within 12 months of expiry with a total of 92% being repaid within
24 months of expiry. For interest-only mortgages expiring during
2017, 86% were fully repaid within 12 months of expiry.
The profile of maturing UK interest-only loans is as follows:
At the end of 2018, the average LTV ratio in the portfolio was 46%
and 96% of mortgages had an LTV ratio of 75% or less. Of the
UK interest-only mortgage loans
Expired interest-only mortgage loans
Interest-only mortgage loans by maturity
– 2019
– 2020
– 2021
– 2022
– 2023-2027
– Post 2027
At 31 Dec 2018
Total personal lending for loans and other credit-related commitments and financial guarantees8 by stage distribution
Nominal amount
Allowance for ECL
Europe
– of which: UK
Asia
– of which: Hong Kong
MENA
North America
Latin America
At 31 Dec 2018
For footnotes, see page 147.
Stage 1
Stage 2
Stage 3
$m
52,719
50,195
131,333
102,156
3,264
14,469
4,318
$m
291
224
1,034
366
67
312
59
$m
290
285
1
—
23
94
4
Total
$m
53,300
50,704
132,368
102,522
3,354
14,875
4,381
Stage 1
Stage 2
Stage 3
$m
$m
$m
(7)
(5)
—
—
—
(1)
(5)
—
—
—
—
—
(1)
—
(1)
—
—
—
—
—
—
—
—
206,103
1,763
412
208,278
(13)
$m
175
361
400
510
483
2,880
9,561
14,370
Total
$m
(7)
(5)
—
—
—
(2)
(5)
(14)
HSBC Holdings plc Annual Report and Accounts 2018
115
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Personal lending – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to customers
including loan commitments and financial guarantees8
(Audited)
Non-credit impaired
Stage 1
Stage 2
Credit impaired
Stage 3
Total
Gross
carrying/
nominal
amount
$m
549,328
(4,270)
—
52,761
—
—
(17,035)
580,784
Allowance
for ECL
$m
(596)
(411)
358
(241)
266
—
77
(547)
383
Gross
carrying/
nominal
amount
$m
17,678
2,047
—
(2,453)
—
—
(434)
16,838
At 1 Jan 2018
Transfers of financial instruments
Net remeasurement of ECL arising from transfer of
stage
Net new and further lending/repayments
Changes to risk parameters – credit quality
Assets written off
Foreign exchange and other
At 31 Dec 2018
ECL release/(charge) for the period
Recoveries
Others
Total change in ECL for the period
For footnotes, see page 147.
Allowance
for ECL
Gross
carrying/
nominal
amount
Allowance
for ECL
Gross
carrying/
nominal
amount
Allowance
for ECL
$m
(1,157)
799
(374)
222
(786)
—
30
(1,266)
(938)
$m
4,874
2,223
—
(488)
—
(1,386)
(230)
4,993
$m
$m
$m
(1,312)
571,880
(3,065)
(388)
(11)
327
(1,197)
1,380
—
—
49,820
—
(27)
308
—
(1,717)
(1,386)
53
(17,699)
(1,148)
602,615
(881)
1,380
160
(2,961)
(1,436)
290
(18)
(1,164)
As shown in the above table, the allowance for ECL for loans and
advances to customers and banks and relevant loan commitments
and financial guarantees decreased $104m during the period from
$3,065m at 1 January 2018 to $2,961m at 31 December 2018.
This overall decrease was primarily driven by:
• $1,380m of assets written off;
• foreign exchange and other movements of $160m.
These decreases were partially offset by increases of:
• $1,717m relating to underlying credit quality changes,
including the credit quality of financial instruments transferring
between stages; and
• $27m relating to the net new measurement impact of stage
• $308m relating to underlying net book volume movements,
which included the ECL allowance associated with new
originations, assets derecognised and net further lending; and
transfers.
Personal lending – credit risk profile by internal PD band for loans and advances to customers at amortised cost
Gross carrying amount
Allowance for ECL
PD range20
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
First lien residential
mortgages
%
$m
$m
$m
$m
284,103
6,286
2,944
293,333
$m
$m
(62)
(432)
(535)
$m
(41)
(15)
(4)
(14)
(7)
(1)
—
—
—
—
(2)
(6)
(19)
(35)
—
— 247,354
15,536
19,868
4,870
1,746
1,015
2,944
—
—
—
—
—
2,944
1,637
—
—
—
—
—
—
1,637
4,581
101,004
(493)
(1,203)
41,086
12,640
23,896
14,359
6,219
1,167
1,637
(95)
(34)
(122)
(131)
(111)
—
—
—
—
(26)
(285)
(465)
(427)
—
Total
$m
(15)
(4)
(16)
(13)
(20)
(35)
ECL
coverage
%
0.2
—
—
0.1
0.3
1.1
3.4
(432)
14.7
(2,412)
(95)
(34)
(148)
(416)
(576)
(427)
(716)
2.4
0.2
0.3
0.6
2.9
9.3
36.6
43.7
0.7
—
—
—
—
—
—
(432)
(716)
—
—
—
—
—
—
(716)
394,337
(534)
(1,265)
(1,148)
(2,947)
– Band 1
– Band 2
– Band 3
– Band 4
– Band 5
– Band 6
– Band 7
Other personal lending
– Band 1
– Band 2
– Band 3
– Band 4
– Band 5
– Band 6
– Band 7
0.000 to 0.250
247,046
0.251 to 0.500
0.501 to 1.500
1.501 to 5.000
5.001 to 20.000
20.001 to 99.999
100.000
0.000 to 0.250
0.251 to 0.500
0.501 to 1.500
1.501 to 5.000
5.001 to 20.000
20.001 to 99.999
100.000
15,458
17,987
3,295
301
16
—
90,578
41,048
12,524
23,573
11,270
2,158
5
—
308
78
1,881
1,575
1,445
999
—
8,789
38
116
323
3,089
4,061
1,162
—
At 31 Dec 2018
374,681
15,075
For footnotes, see page 147.
116
HSBC Holdings plc Annual Report and Accounts 2018
Personal lending – credit risk profile by internal PD band for loans and advances to customers at amortised cost (continued)
Gross carrying amount
Allowance for ECL
PD range20
Stage 1
Stage 2
Stage 3
%
$m
$m
$m
Total
$m
266,879
8,299
2,921
278,099
Stage 1
Stage 2
Stage 3
$m
$m
Total
$m
(67)
(533)
(660)
First lien residential
mortgages
– Band 1
– Band 2
– Band 3
– Band 4
– Band 5
– Band 6
– Band 7
Other personal lending
– Band 1
– Band 2
– Band 3
– Band 4
– Band 5
– Band 6
– Band 7
0.000 to 0.250
235,249
0.251 to 0.500
17,350
0.501 to 1.500
1.501 to 5.000
5.001 to 20.000
20.001 to 99.999
100.000
0.000 to 0.250
0.251 to 0.500
0.501 to 1.500
1.501 to 5.000
5.001 to 20.000
20.001 to 99.999
100.000
9,316
3,524
1,414
26
—
87,426
41,026
9,761
20,971
12,930
2,719
19
—
339
535
3,975
1,236
1,177
1,037
—
8,055
369
342
657
2,091
3,403
1,193
—
—
—
—
—
—
—
2,921
1,489
—
—
—
—
—
—
1,489
4,410
235,588
17,885
13,291
4,760
2,591
1,063
2,921
96,970
41,395
10,103
21,628
15,021
6,122
1,212
1,489
At 1 Jan 2018
354,305
16,354
For footnotes, see page 147.
Collateral on loans and advances
(Audited)
The following table provides a quantification of the value of fixed
charges we hold over specific assets where we have a history
of enforcing, and are able to enforce, collateral in satisfying a debt
in the event of the borrower failing to meet its contractual
obligations, and where the collateral is cash or can be realised by
$m
(60)
(43)
(3)
(7)
(6)
(1)
—
—
(521)
(73)
(48)
(117)
(172)
(111)
—
—
(1)
(2)
(6)
(8)
(21)
(29)
—
(1,089)
—
—
(1)
(157)
(469)
(462)
—
—
—
—
—
—
—
(44)
(5)
(13)
(14)
(22)
(29)
(533)
(777)
(533)
(2,387)
—
—
—
—
—
—
(777)
(1,310)
(73)
(48)
(118)
(329)
(580)
(462)
(777)
(3,047)
ECL
coverage
%
0.2
—
—
0.1
0.3
0.8
2.7
18.2
2.5
0.2
0.5
0.5
2.2
9.5
38.1
52.2
0.8
375,069
(581)
(1,156)
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.
HSBC Holdings plc Annual Report and Accounts 2018
117
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Personal lending – residential mortgage loans including loan commitments by level of collateral for key countries/territories by stage
(Audited)
Total
UK
Of which:
Hong Kong
Gross
carrying/
nominal
amount
Gross
carrying/
nominal
amount
ECL
coverage
Gross
carrying/
nominal
amount
ECL
coverage
ECL
coverage
US
Gross
carrying/
nominal
amount
ECL
coverage
$m
%
$m
%
$m
%
$m
%
299,072
160,563
51,415
40,273
28,383
14,191
4,247
1,420
808
184
428
1,266
300,492
6,170
3,334
932
853
586
331
134
123
76
17
30
118
6,293
—
—
—
—
—
—
0.1
0.1
0.1
0.2
0.2
130,646
66,834
20,937
17,480
15,086
8,824
1,485
581
334
46
201
493
—
131,227
1.0
0.7
1.1
1.0
1.3
1.7
2.4
2.9
1.5
4.5
5.3
1.0
1,234
917
113
105
39
27
33
46
44
1
1
44
1,280
—
—
—
—
—
—
—
—
—
—
—
—
1.3
0.9
3.0
2.2
3.4
3.1
1.5
0.2
0.1
4.3
0.6
1.3
2,557
12.3
1,023
10.9
1,255
359
336
280
190
137
391
73
68
250
372
2,948
309,733
13.6
8.3
12.0
9.9
9.4
19.8
33.6
17.4
24.2
40.8
15.1
0.2
638
151
119
70
33
12
23
10
5
8
20
1,046
133,553
7.8
11.3
18.4
14.8
19.4
45.9
15.8
14.3
26.4
11.1
11.0
0.1
79,180
54,262
11,591
5,979
2,986
2,637
1,725
300
256
41
3
284
79,480
867
699
74
43
28
20
3
1
1
—
—
1
868
25
24
1
—
—
—
—
—
—
—
—
—
25
80,373
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.9
0.9
—
—
—
—
—
—
—
—
—
0.9
—
15,321
8,060
3,382
2,473
1,113
158
135
10
5
2
3
8
15,331
1,435
814
268
231
79
32
11
5
3
1
1
4
1,440
671
219
107
105
114
81
45
24
14
6
4
22
695
17,466
—
—
—
—
—
—
—
—
—
—
—
—
0.3
0.1
0.4
0.3
0.9
1.6
0.8
0.3
0.5
—
—
0.3
1.0
0.9
0.9
1.0
0.9
1.2
2.2
0.4
0.6
0.3
0.2
1.0
0.1
Stage 1
Fully collateralised
LTV ratio:
– less than 50%
– 51% to 60%
– 61% to 70%
– 71% to 80%
– 81% to 90%
– 91% to 100%
Partially collateralised (A):
LTV ratio:
– 101% to 110%
– 111% to 120%
– greater than 120%
Collateral value on A
Total
Stage 2
Fully collateralised
LTV ratio:
– less than 50%
– 51% to 60%
– 61% to 70%
– 71% to 80%
– 81% to 90%
– 91% to 100%
Partially collateralised (B):
LTV ratio:
– 101% to 110%
– 111% to 120%
– greater than 120%
Collateral value on B
Total
Stage 3
Fully collateralised
LTV ratio:
– less than 50%
– 51% to 60%
– 61% to 70%
– 71% to 80%
– 81% to 90%
– 91% to 100%
Partially collateralised (C):
LTV ratio:
– 101% to 110%
– 111% to 120%
– greater than 120%
Collateral value on C
Total
At 31 Dec 2018
118
HSBC Holdings plc Annual Report and Accounts 2018
Supplementary information
Wholesale lending – loans and advances to customers at amortised cost by country/territory
Gross carrying amount
Allowance for ECL
Corporate and
commercial
Of which:
real estate21
Non-bank
financial
institutions
$m
176,577
127,093
28,204
10,454
1,674
9,152
263,608
168,621
11,335
6,396
4,286
24,225
7,924
17,564
6,008
17,249
23,738
1,746
14,445
7,547
56,983
35,714
20,493
776
13,671
11,302
2,369
$m
25,715
18,384
5,890
246
509
686
79,941
63,287
2,323
1,408
35
4,423
1,649
4,463
23
2,330
2,025
41
1,849
135
14,169
8,422
5,354
393
1,383
1,354
29
$m
22,529
17,703
2,488
1,371
348
619
27,284
15,062
2,115
2,846
354
5,146
274
431
156
900
322
—
206
116
9,647
8,777
770
100
1,625
1,567
58
Total
$m
199,106
144,796
30,692
11,825
2,022
9,771
290,892
183,683
13,450
9,242
4,640
29,371
8,198
17,995
6,164
18,149
24,060
1,746
14,651
7,663
66,630
44,491
21,263
876
15,296
12,869
2,427
Corporate
and
commercial
Of which:
real estate21
Non-bank
financial
institutions
$m
(2,507)
(1,701)
(405)
(35)
(1)
(365)
(1,343)
(579)
(68)
(77)
(269)
(172)
(77)
(31)
(2)
(68)
(1,167)
(125)
(721)
(321)
(236)
(103)
(105)
(28)
(299)
(225)
(74)
$m
(481)
(410)
(36)
—
—
(35)
(67)
(40)
(3)
(4)
—
(15)
(2)
(2)
—
(1)
(178)
—
(176)
(2)
(37)
(8)
(5)
(24)
(8)
(8)
—
$m
(82)
(78)
(1)
—
—
(3)
(31)
(20)
—
(1)
(2)
(6)
—
—
—
(2)
(1)
—
(1)
—
(8)
(2)
(2)
(4)
(4)
(4)
—
Total
$m
(2,589)
(1,779)
(406)
(35)
(1)
(368)
(1,374)
(599)
(68)
(78)
(271)
(178)
(77)
(31)
(2)
(70)
(1,168)
(125)
(722)
(321)
(244)
(105)
(107)
(32)
(303)
(229)
(74)
534,577
123,233
61,407
595,984
(5,552)
(771)
(126)
(5,678)
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
– UAE
– other
North America
– US
– Canada
– other
Latin America
– Mexico
– other
At 31 Dec 2018
For footnotes, see page 147.
HSBC Holdings plc Annual Report and Accounts 2018
119
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Personal lending – loans and advances to customers at amortised costs by country/territory
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
– UAE
– other
North America
– US
– Canada
– other
Latin America
– Mexico
– other
At 31 Dec 2018
First lien
residential
mortgages
$m
131,557
124,357
3,454
—
1,120
2,626
119,718
79,059
13,858
1,030
59
8,706
2,890
5,991
5,123
3,002
2,393
—
1,974
419
36,964
17,464
18,267
1,233
2,701
2,550
151
Gross carrying amount
Other
personal
Of which:
credit
cards
$m
46,007
20,503
19,616
288
5,213
387
42,049
28,734
764
608
279
1,139
3,209
5,353
860
1,103
3,933
309
1,477
2,147
5,057
2,280
2,562
215
3,958
3,192
766
$m
9,790
9,356
376
—
—
58
11,900
8,124
626
228
206
502
888
434
289
603
1,181
71
538
572
1,341
1,028
265
48
1,432
1,121
311
Total
$m
177,564
144,860
23,070
288
6,333
3,013
161,767
107,793
14,622
1,638
338
9,845
6,099
11,344
5,983
4,105
6,326
309
3,451
2,566
42,021
19,744
20,829
1,448
6,659
5,742
917
Allowance for ECL
First lien
residential
mortgages
Other
personal
Of which:
credit
cards
$m
(258)
(141)
(43)
—
(2)
(72)
(44)
(1)
(5)
(5)
—
(2)
(24)
—
(1)
(6)
(88)
—
(82)
(6)
(122)
(13)
(16)
(93)
(23)
(22)
(1)
$m
(750)
(592)
(114)
—
(19)
(25)
(696)
(329)
(55)
(20)
(34)
(57)
(71)
(70)
(20)
(40)
(306)
(5)
(126)
(175)
(139)
(106)
(23)
(10)
(521)
(465)
(56)
$m
(313)
(309)
(4)
—
—
—
(465)
(228)
(54)
(14)
(27)
(50)
(33)
(21)
(5)
(33)
(148)
(1)
(54)
(93)
(81)
(75)
(5)
(1)
(254)
(227)
(27)
Total
$m
(1,008)
(733)
(157)
—
(21)
(97)
(740)
(330)
(60)
(25)
(34)
(59)
(95)
(70)
(21)
(46)
(394)
(5)
(208)
(181)
(261)
(119)
(39)
(103)
(544)
(487)
(57)
293,333
101,004
25,644
394,337
(535)
(2,412)
(1,261)
(2,947)
120
HSBC Holdings plc Annual Report and Accounts 2018
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied – by global business
Gross carrying/nominal amount
Allowance for ECL
Stage 1
Stage 2
Stage 3
POCI
Total Stage 1 Stage 2 Stage 3
POCI
Loans and advances to customers at amortised cost
915,188
61,786
13,023
$m
$m
$m
– RBWM
– CMB
– GB&M
– GPB
– Corporate Centre
Loans and advances to banks at amortised cost
– RBWM
– CMB
– GB&M
– GPB
– Corporate Centre
340,606
19,228
304,103
27,529
230,250
14,112
37,970
2,259
71,873
5,801
1,912
25,409
46
38,705
724
193
307
5
15
212
—
75
4,960
5,732
1,683
618
30
—
—
—
—
—
—
Other financial assets measured at amortised cost
581,118
1,673
126
– RBWM
– CMB
– GB&M
– GPB
– Corporate Centre
Total gross carrying amount on balance sheet at
31 Dec 2018
49,142
15,082
272,028
924
243,942
184
774
703
1
11
32
60
20
2
12
Total
$m
$m
$m
$m
$m
$m
990,321
(1,276)
(2,108)
(5,047)
(194)
(8,625)
364,794
337,662
246,070
39,313
2,482
72,180
5,806
1,927
25,621
46
38,780
582,917
49,358
15,916
272,751
927
243,965
(544)
(1,250)
(1,129)
—
(2,923)
(538)
(188)
(5)
(1)
(11)
(1)
(1)
(7)
—
(2)
(27)
(14)
(7)
(1)
—
(5)
(659)
(3,110)
(194)
(4,501)
(182)
(718)
(3)
(14)
(89)
(1)
(2)
—
—
(2)
—
—
(6)
(2)
(3)
(1)
—
—
—
—
—
—
—
—
(22)
(1)
(21)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,088)
(97)
(16)
(13)
(1)
(1)
(9)
—
(2)
(55)
(17)
(31)
(2)
—
(5)
$m
324
—
298
25
1
—
—
—
—
—
—
—
—
—
—
—
—
—
1,568,179
63,766
13,149
324
1,645,418
(1,314)
(2,116)
(5,069)
(194)
(8,693)
Loans and other credit-related commitments
569,250
21,839
– RBWM
– CMB
– GB&M
– GPB
– Corporate Centre
Financial guarantees8
– RBWM
– CMB
– GB&M
– GPB
– Corporate Centre
164,589
113,753
252,910
33,885
4,113
1,792
9,345
9,658
1,044
—
20,884
2,334
54
7,629
12,093
1,053
55
3
1,203
1,115
13
—
912
399
308
194
11
—
297
3
230
63
—
1
7
—
5
2
—
—
3
—
3
—
—
—
592,008
166,780
123,411
262,764
34,940
4,113
23,518
60
9,065
13,271
1,066
56
(143)
(139)
(6)
(72)
(58)
—
(7)
(19)
—
(10)
(8)
(1)
—
(1)
(52)
(86)
—
—
(29)
—
(11)
(18)
—
—
(43)
(1)
(40)
(2)
—
—
(45)
—
(39)
(5)
—
(1)
Total nominal amount off balance sheet at
31 Dec 2018
590,134
24,173
1,209
10
615,526
(162)
(168)
(88)
13,160
153
226
1,994
—
326,795
342,175
—
—
—
770
923
—
—
—
—
7
7
—
1
—
—
4
5
13,313
227
1,994
—
(5)
(2)
(5)
—
—
—
—
—
327,576
(21)
(50)
343,110
(33)
(50)
—
—
—
—
(1)
(1)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(325)
(8)
(164)
(146)
—
(7)
(93)
—
(60)
(31)
(1)
(1)
(418)
(5)
(2)
(5)
—
(72)
(84)
RBWM
CMB
GB&M
GPB
Corporate Centre
Debt instruments measured at FVOCI at
31 Dec 2018
For footnotes, see page 147.
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 221); 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 33).
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 $1.5bn at
31 December 2018 (2017: $2.1bn).
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 (2017: 100%). For further details of
credit quality classification, see page 79.
Securitisation exposures and other structured products
The following table summarises the carrying amount of our ABS
exposure by categories of collateral. It includes assets held in the
legacy credit portfolio held within Corporate Centre with a carrying
value of $5.9bn (2017: $9bn).
At 31 December 2018, the FVOCI reserve in respect of ABSs was a
deficit of $179m (2017: deficit of $466m). For 2018, the
impairment write-back in respect of ABSs was
$106m (2017: write-back of $240m).
HSBC Holdings plc Annual Report and Accounts 2018
121
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Carrying amount of HSBC’s consolidated holdings of ABSs
Mortgage-related assets
– sub-prime residential
– US Alt-A residential
– US Government agency and sponsored enterprises: MBSs22
– UK buy-to-let residential
– other residential
– commercial property
Leveraged finance-related assets
Student loan-related assets
Auto finance-related assets
Other assets
At 31 Dec 2018
For footnotes, see page 147.
Financial
investments
at FVOCI
Held at
amortised
cost
$m
$m
15,422
15,498
587
87
—
2
14,627
14,657
—
15
106
40
1,815
—
718
—
780
59
—
—
2,577
2,323
Financial assets
designated and
otherwise
mandatorily
measured at fair
value through profit
and loss
$m
127
—
94
—
—
—
33
21
1
—
7
Total
$m
32,727
604
183
29,437
—
1,719
784
367
1,965
2,859
4,184
17,995
20,398
156
42,102
Trading
$m
1,680
17
—
153
—
924
586
306
149
282
1,136
3,553
Of which
held through
consolidated
SEs
$m
208
50
42
—
—
10
106
200
1,800
—
204
2,412
Selected 2017 credit risk disclosures
The below disclosures were included in our 2017 external reports
and do not reflect the adoption of IFRS 9. As these tables are not
directly comparable to the current 2018 credit risk tables, which
are disclosed on an IFRS 9 basis, these 2017 disclosures have
been shown below and not adjacent to 2018 tables.
At 31 Dec 2017
$bn
3,078
2,306
772
1,060
376
684
15
5
10
%
1.3
1.5
1.5
$bn
7.5
1.7
5.8
1,053
For year ended 31 Dec 2017
$bn
2.0
1.0
1.0
(0.2)
1.8
Summary of credit risk
Maximum exposure to credit risk
– total assets subject to credit risk
– off-balance sheet commitments subject to credit risk7,23
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
Loan impairment charge
– personal lending
– wholesale lending
Other credit risk provisions
For footnotes, see page 147.
122
HSBC Holdings plc Annual Report and Accounts 2018
Credit exposure (2017)
Maximum exposure to credit risk
(Audited)
Derivatives
Loans and advances to customers held at amortised cost
– personal
– corporate and commercial
– non-bank financial institutions
Loans and advances to banks at amortised cost
Reverse repurchase agreements – non-trading
Total on–balance sheet exposure to credit risk
Total off–balance sheet
– financial guarantees and similar contracts23
– loan and other credit-related commitments7
At 31 Dec 2017
For footnotes, see page 147.
Distribution of financial instruments by credit quality
(Audited)
Neither past due nor impaired
Cash and balances at central banks
179,155
Strong
$m
Good
Satisfactory
Sub-
standard
Past due
but not
impaired
Impaired
$m
1,043
29
—
22,365
531
9,517
5,778
6,539
6,322
34,186
137,983
15,412
84,493
15,496
22,582
3,378
269
181,195
31,827
503,759
324,960
140,382
38,417
222,343
26,612
176,745
18,986
$m
407
273
—
26,438
491
12,978
4,757
8,212
1,029
5,874
204,162
14,549
176,661
12,952
$m
19
4
—
1,949
1,098
498
26
327
28
922
16,114
780
14,784
550
77,175
9,026
4,144
39
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
442
2,886
681
183
361
137
$m
$m
8,600
4,658
3,422
520
9
—
—
107
15
91
1
15,470
4,922
10,254
294
—
—
728
143
31
56
56
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 2017
Percentage of total gross amount
Maximum
exposure
$m
219,818
962,964
374,762
516,754
71,448
90,393
201,553
2017
Offset
$m
(204,829)
(35,414)
(2,946)
(29,459)
(3,009)
(273)
(3,724)
Net
$m
14,989
927,550
371,816
487,295
68,439
90,120
197,829
2,305,592
(244,240)
2,061,352
771,908
41,422
730,486
—
—
—
771,908
41,422
730,486
3,077,500
(244,240)
2,833,260
Total
gross
amount
$m
180,624
6,628
34,186
188,735
17,532
107,486
26,057
37,660
4,704
219,818
970,448
376,481
522,248
71,719
90,393
201,553
385,159
30,876
9,750
20,644
482
Impairment
allowances
$m
(7,484)
(1,719)
(5,494)
(271)
—
—
(48)
(48)
Total
$m
180,624
6,628
34,186
188,735
17,532
107,486
26,057
37,660
4,704
219,818
962,964
374,762
516,754
71,448
90,393
201,553
385,159
30,828
9,750
20,644
434
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
Past due but not impaired gross financial instruments (2017)
Past due but not impaired gross financial instruments by geographical region
(Audited)
At 31 Dec 2017
Europe
$m
1,324
Asia
$m
3,892
MENA
$m
852
North
America
$m
2,015
Latin
America
$m
633
Total
$m
8,716
HSBC Holdings plc Annual Report and Accounts 2018
123
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Ageing analysis of days for past due but not impaired gross financial instruments
(Audited)
Loans and advances to customers and banks held at amortised cost
– personal
– corporate and commercial
– financial
Other financial instruments
At 31 Dec 2017
Impaired loans (2017)
Movement in impaired loans by industry sector
(Audited)
At 1 Jan 2017
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
Impaired loans by industry sector and geographical region
Up to 29 days
30–59 days
60–89 days
90–179 days
180 days and
over
$m
6,837
3,455
2,899
483
33
6,870
$m
1,255
866
343
46
12
1,267
$m
493
337
156
—
18
511
$m
10
—
10
—
12
22
$m
14
—
14
—
32
46
Corporate
and
commercial
Financial
$m
11,362
3,691
(1,324)
(1,257)
(2,218)
10,254
$m
376
17
(8)
(53)
(38)
294
Personal
$m
6,490
2,671
(677)
(1,330)
(2,232)
4,922
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
Renegotiated loans and forbearance (2017)
Renegotiated loans and advances to customers by industry sector
Neither past due nor impaired
Past due but not impaired
Impaired
At 31 Dec 2017
Impairment allowances on renegotiated loans
Renegotiated loans and advances to customers by geographical region
At 31 Dec 2017
Europe
$m
5,667
Europe
$m
4,551
1,648
2,895
8
3,491
381
2,926
184
8,042
2.0%
Asia
$m
1,645
475
1,146
24
604
125
478
1
2,249
0.5%
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%
958
466
2
2,606
2.2%
$m
452
280
172
—
172
43
129
—
624
2.6%
First lien
residential
mortgages
Other personal
lending
Corporate and
commercial
Non-bank
financial
institutions
$m
476
58
1,329
1,863
165
Asia
$m
921
$m
268
49
298
615
127
$m
2,082
120
4,894
7,096
1,584
$m
257
—
251
508
151
MENA
$m
1,622
North
America
$m
1,604
Latin
America
$m
268
Total
$m
8,609
4,658
3,422
529
107
8,716
Total
$m
18,228
6,379
(2,009)
(2,640)
(4,488)
15,470
Total
$m
8,698
3,295
5,360
43
6,772
1,627
4,894
251
15,470
1.5%
Total
$m
3,083
227
6,772
10,082
2,027
Total
$m
10,082
124
HSBC Holdings plc Annual Report and Accounts 2018
Impairment of loans and advances (2017)
Loan impairment charge to the income statement by industry sector
(Audited)
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
Europe
$m
140
6
134
619
314
200
105
66
825
Asia
$m
243
(1)
244
298
236
21
41
17
558
MENA
$m
92
5
87
83
95
(4)
(8)
22
197
North
America
Latin
America
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
Europe
%
0.33
(0.09)
0.24
0.23
Asia
%
0.17
(0.03)
0.14
0.13
MENA
%
0.79
(0.14)
0.65
1.35
North
America
Latin
America
%
(0.05)
(0.07)
(0.12)
0.28
%
3.20
(0.41)
2.79
2.42
Movement in impairment allowances by industry sector and by geographical region
North
America
Latin
America
Asia
$m
1,635
MENA
$m
1,681
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
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
(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)
1,461
3,061
1,672
—
—
—
2,296
765
3,061
1,056
616
1,672
1,104
357
1,461
$m
32
—
32
(163)
18
9
(190)
1
(130)
$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
542
1,992
$m
452
(27)
479
90
59
—
31
—
$m
473
(487)
(9)
(478)
(63)
(18)
(4)
(41)
—
Total
$m
959
(17)
976
927
722
226
(21)
106
Total
%
0.29
(0.07)
0.22
0.28
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
545
55
490
97
34
10
53
2
644
1,992
171
7,484
—
4,960
2,524
7,484
HSBC Holdings plc Annual Report and Accounts 2018
125
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Movement in impairment allowances on loans and advances to customers and banks
(Audited)
At 1 Jan 2017
Amounts written off
Recoveries of loans and advances previously written off
Charge to income statement
Exchange and other movements
At 31 Dec 2017
Impairment allowances % of loans and advances
Wholesale lending (2017)
Total wholesale lending for loans and advances to banks and customers24
Banks
individually
assessed
Customers
Individually
assessed
Collectively
assessed
$m
—
—
—
—
—
—
—
$m
4,932
(1,468)
119
1,114
263
4,960
0.5%
$m
2,918
(1,705)
525
878
(92)
2,524
0.3%
Total
$m
7,850
(3,173)
644
1,992
171
7,484
0.8%
Corporate and commercial
– agriculture, forestry and fishing
– mining and quarrying
– manufacturing
– electricity, gas, steam and air-conditioning supply
– water supply, sewerage, waste management and remediation
– construction
– wholesale and retail trade, repair of motor vehicles and motorcycles
– transportation and storage
– accommodation and food
– publishing, audiovisual and broadcasting
– real estate
– professional, scientific and technical activities
– administrative and support services
– public administration and defence, compulsory social security
– education
– health and care
– arts, entertainment and recreation
– other services
– activities of households
– extra-territorial organisations and bodies activities
– government
– asset-backed securities
Non-bank financial institutions
Loans and advances to banks
At 31 Dec 2017
By geography
Europe
– of which: UK
Asia
– of which: Hong Kong
MENA
North America
Latin America
At 31 Dec 2017
For footnotes, see page 147.
Gross loans
Impairment
allowance
$m
522,248
6,302
10,911
115,531
17,397
2,806
15,443
98,079
24,258
16,971
18,405
114,349
18,094
19,960
221
1,490
5,688
3,003
20,354
—
—
11,728
1,258
71,719
90,393
$m
(5,494)
(122)
(450)
(1,390)
(88)
(3)
(540)
(1,361)
(131)
(138)
(83)
(638)
(95)
(138)
—
(7)
(34)
(14)
(235)
—
—
(8)
(19)
(271)
—
684,360
(5,765)
228,775
163,393
332,680
197,232
29,142
76,661
17,102
684,360
(2,469)
(1,589)
(1,402)
(639)
(1,131)
(579)
(184)
(5,765)
Wholesale lending: loan and other credit-related commitments7
At 31 Dec 2017
– corporate and commercial
– financial
For footnotes, see page 147.
Europe
$m
186,912
123,972
62,940
Asia
$m
195,396
179,302
16,094
MENA
$m
17,935
17,390
545
North
America
$m
123,267
102,666
20,601
Latin
America
$m
11,666
10,795
871
Total
$m
535,176
434,125
101,051
UK Hong Kong
$m
85,362
72,652
12,710
$m
88,859
79,596
9,263
126
HSBC Holdings plc Annual Report and Accounts 2018
Commercial real estate (2017)
Commercial real estate lending
Gross loans and advances
Neither past due nor impaired
Past due but not impaired
Impaired loans
At 31 Dec 2017
– of which: renegotiated loans
Impairment allowances
Europe
$m
Asia
$m
MENA
$m
North
America
Latin
America
$m
$m
26,632
60,894
56
905
27,593
1,112
297
57
17
60,968
—
15
500
5
182
687
190
142
8,637
197
83
8,917
97
75
Commercial real estate gross loans and advances maturity analysis
On demand, overdrafts or revolving
< 1 year
1–2 years
2–5 years
> 5 years
At 31 Dec 2017
Europe
$m
5,734
4,780
14,770
2,309
27,593
Asia
$m
18,038
11,549
25,395
5,986
60,968
MENA
$m
North
America
$m
268
119
117
183
687
4,678
1,178
2,199
862
8,917
Commercial real estate loans and advances including loan commitments by level of collateral
Total
$m
98,070
349
1,252
99,671
1,478
529
Total
$m
28,978
17,684
43,215
9,794
99,671
UK
$m
Hong Kong
$m
20,171
51,909
2
722
20,895
1,010
237
50
12
51,971
—
12
UK
$m
Hong Kong
$m
4,193
3,679
12,377
646
20,895
1,407
34
65
1,506
79
—
Latin
America
$m
260
58
734
454
1,506
15,964
9,345
21,089
5,573
51,971
US
$m
—
4,742
—
—
4,742
—
54
—
—
54
—
—
—
54
1
—
—
—
—
—
—
—
1
Total
$m
44,551
75,633
5,523
3,621
UK
$m
5,187
20,711
963
564
125,707
26,861
Of which:
Hong Kong
$m
31,100
31,768
1,557
752
64,425
6
221
67
40
89
25
71
43
298
63
717
157
173
141
246
486
295
1,266
127,271
4
128
64
31
19
14
54
40
186
46
376
60
149
122
45
350
189
772
—
—
—
—
—
—
—
—
—
—
12
9
1
1
1
—
—
12
27,819
64,437
4,797
HSBC Holdings plc Annual Report and Accounts 2018
127
(Audited)
Rated CRR/ EL1 to 7
Not collateralised
Fully collateralised
Partially collateralised (A)
– Collateral value on A
Total
Rated CRR/ EL8
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/ EL9 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
Strategic ReportCorporate Governance Financial Statements Additional 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/ EL8
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/ EL9 to 10
Not collateralised
Fully collateralised
– less than 50%
– 51% to 75%
– 76% to 90%
– 91% to 100%
Partially collateralised (B):
– Collateral value on B
Total
At 31 Dec 2017
Total
$m
3,722
554
188
157
39
170
493
206
4,769
3,734
2,572
804
606
398
764
1,750
877
8,056
12,825
Of which:
Hong Kong
$m
15
5
3
2
—
—
135
10
155
511
98
60
10
21
7
167
123
776
931
UK
$m
319
104
25
66
11
2
92
59
515
1,508
1,223
516
403
235
69
398
209
3,129
3,644
US
$m
1,708
48
7
34
2
5
42
21
1,798
3
317
—
6
—
311
425
300
745
2,543
Personal lending (2017)
Total personal lending gross loans
Europe
$m
Asia
$m
First lien residential mortgages
126,685
109,502
– 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
Loan and other credit-related commitments
409
43,329
32,995
10,235
99
—
3,111
40,880
29,400
11,435
21
24
170,014
50,384
150,382
120,312
Total personal lending impairment allowances
North
America
Latin
America
$m
$m
Total
$m
UK Hong Kong
$m
$m
Total as a %
of total
gross loans
37,330
2,281
278,173
119,770
70,279
26.2
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
—
—
376,481
194,310
139,560
48,413
—
3
27,868
19,977
7,891
—
—
98,147
89,994
3.4
1.6
9.3
6.7
2.4
0.1
0.1
35.5
MENA
$m
2,375
65
—
4,496
2,663
1,531
2
300
6,871
3,975
Europe
Asia
MENA
North
America
Latin
America
First lien residential mortgages
Other personal lending
– other
– credit cards
– second lien residential mortgages
– motor vehicle finance
At 31 Dec 2017
$m
262
341
230
111
—
—
603
$m
30
237
109
128
—
—
267
$m
68
259
132
122
—
5
327
Impairment allowances % of impaired loans
29.7%
44.5%
94.2%
$m
148
60
17
30
13
—
208
12.8%
$m
16
298
151
140
—
7
314
97.2%
Total
$m
524
1,195
639
531
13
12
1,719
34.9%
UK Hong Kong
$m
145
257
147
110
—
—
402
$m
—
86
36
50
—
—
86
28.3%
62.3%
128
HSBC Holdings plc Annual Report and Accounts 2018
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 than 120%
Collateral on A
Non-impaired loans and advances
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
Impaired loans and advances
At 31 Dec 2017
Total
$m
287,088
164,110
48,287
37,054
25,893
9,445
2,299
660
270
121
269
550
Of which:
Hong Kong
$m
UK
$m
124,736
69,679
20,706
15,422
11,992
5,824
1,113
174
89
16
69
125
72,073
55,237
8,340
3,282
3,402
1,376
436
—
—
—
—
—
US
$m
16,240
7,868
4,180
2,832
1,312
42
6
—
—
—
—
—
287,748
124,910
72,073
16,240
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
3,346
291,094
1,046
125,956
46
42
3
—
1
—
—
—
—
—
—
—
46
72,119
1,138
414
207
178
160
115
64
36
19
11
6
33
1,174
17,414
HSBC Holdings plc Annual Report and Accounts 2018
129
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Supplementary information (2017)
Wholesale gross loans and advances to customers by country/territory
Gross loans
Impairment allowances
Corporate and
commercial
Of which: real
estate21
Non-bank
financial
institutions
$m
182,501
130,121
32,647
9,690
1,244
8,799
250,950
156,198
11,311
5,382
4,157
26,052
7,489
17,541
5,176
17,644
21,533
1,343
12,130
8,060
54,915
35,678
18,330
907
12,349
9,354
2,995
$m
24,244
14,609
5,597
250
1
3,787
70,554
51,787
1,987
1,030
18
8,953
1,555
2,890
11
2,323
1,647
17
1,117
513
16,788
10,888
4,680
1,220
1,117
931
186
$m
32,093
27,829
2,048
1,156
531
529
26,311
15,346
2,355
2,165
114
4,824
331
259
185
732
1,107
38
769
300
10,926
10,204
682
40
1,282
1,083
199
Total
$m
214,594
157,950
34,695
10,846
1,775
9,328
277,261
171,544
13,666
7,547
4,271
30,876
7,820
17,800
5,361
18,376
22,640
1,381
12,899
8,360
65,841
45,882
19,012
947
13,631
10,437
3,194
Corporate and
commercial
Of which: real
estate21
$m
(2,286)
(1,390)
(542)
(51)
—
(303)
(1,375)
(613)
(75)
(95)
(254)
(224)
(34)
(41)
(4)
(35)
(1,092)
(97)
(824)
(171)
(557)
(318)
(200)
(39)
(184)
(158)
(26)
$m
(371)
(299)
(34)
—
—
(38)
(43)
(30)
(4)
(3)
—
(2)
—
(2)
—
(2)
(157)
—
(157)
—
(66)
(18)
(34)
(14)
(1)
(1)
—
Non-bank
financial
institutions
$m
(183)
(180)
—
(2)
—
(1)
(27)
(26)
—
(1)
—
—
—
—
—
—
(39)
(7)
—
(32)
(22)
(15)
(4)
(3)
—
—
—
Total
$m
(2,469)
(1,570)
(542)
(53)
—
(304)
(1,402)
(639)
(75)
(96)
(254)
(224)
(34)
(41)
(4)
(35)
(1,131)
(104)
(824)
(203)
(579)
(333)
(204)
(42)
(184)
(158)
(26)
522,248
114,350
71,719
593,967
(5,494)
(638)
(271)
(5,765)
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
– UAE
– other
North America
– US
– Canada
– other
Latin America
– Mexico
– other
At 31 Dec 2017
For footnotes, see page 147.
130
HSBC Holdings plc Annual Report and Accounts 2018
Personal gross loans and advances to customers by country/territory
Gross loans
Impairment allowances
First lien
residential
mortgages
Other
personal
Of which:
credit cards
First lien
residential
mortgages
Other
personal
Of which:
credit cards
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
– UAE
– other
North America
– US
– Canada
– other
Latin America
– Mexico
– other
At 31 Dec 2017
$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
—
1,880
495
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
1,682
2,531
5,227
2,278
2,731
218
4,376
3,044
1,332
$m
10,235
9,751
420
—
—
64
Total
$m
170,014
139,560
19,560
235
6,615
4,044
11,435
150,382
7,891
749
193
225
289
837
419
283
549
1,531
62
612
857
1,037
724
266
47
1,642
1,077
565
98,147
13,282
1,626
386
10,047
6,388
10,712
5,699
4,095
6,871
283
3,562
3,026
42,557
19,693
21,370
1,494
6,657
5,173
1,484
$m
(262)
(145)
(33)
—
—
(84)
(30)
—
(2)
(4)
—
(2)
(14)
—
(1)
(7)
(68)
—
(64)
(4)
(148)
(36)
(7)
(105)
(16)
(13)
(3)
$m
(341)
(257)
(66)
—
(12)
(6)
$m
(111)
(110)
—
—
—
(1)
Total
$m
(603)
(402)
(99)
—
(12)
(90)
(237)
(128)
(267)
(86)
(20)
(7)
(15)
(11)
(48)
(17)
(17)
(16)
(259)
(5)
(95)
(159)
(60)
(38)
(15)
(7)
(298)
(267)
(31)
(50)
(18)
(4)
(11)
(5)
(20)
(6)
(2)
(12)
(122)
(1)
(26)
(95)
(30)
(25)
(5)
—
(140)
(127)
(13)
(531)
(86)
(22)
(11)
(15)
(13)
(62)
(17)
(18)
(23)
(327)
(5)
(159)
(163)
(208)
(74)
(22)
(112)
(314)
(280)
(34)
(1,719)
278,173
98,308
25,880
376,481
(524)
(1,195)
Carrying amount of HSBC’s consolidated holdings of ABSs
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
Trading
$m
1,767
22
—
331
814
600
128
155
1,266
3,316
Available for
sale
$m
14,221
918
1,102
11,750
181
270
373
2,198
731
17,523
Held to
maturity
$m
13,965
—
3
13,962
—
—
—
—
—
13,965
Designated at
fair value
through profit
or loss
Loans and
receivables
$m
$m
Total
$m
—
—
—
—
—
—
—
—
2
2
1,762
31,715
32
—
—
1,595
135
45
—
3,553
5,360
972
1,105
26,043
2,590
1,005
546
2,353
5,552
40,166
Of which
held through
consolidated
SEs
$m
1,826
484
1,041
—
75
226
283
2,158
428
4,695
HSBC Holdings plc Annual Report and Accounts 2018
131
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Liquidity and funding risk profile
Liquidity and funding risk in 2018
Management of liquidity and funding risk
Sources of funding
Contractual maturity of financial liabilities
HSBC Holdings
Liquidity and funding risk in 2018
Net stable funding ratio
Page
132
132
133
135
135
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 2018, the Group’s principal operating entities
were within the NSFR risk tolerance level established by the Board
and applicable under the LFRF.
This section provides a summary of our current policies and practices
regarding the management of liquidity and funding risk.
The table below displays the NSFR levels for the principal
HSBC operating entities.
HSBC requires all operating entities to comply with its liquidity
and funding risk management framework (‘LFRF’) on a stand-
alone basis and to meet regulatory and internal minimum
requirements at all times. The liquidity coverage ratio (‘LCR’) and
net stable funding ratio (‘NSFR’) are key components of the LFRF.
The liquidity and funding position of the Group remained strong
throughout 2018 as illustrated below. The methodology used to
create a consolidated view of the Group’s liquidity using the LCR
is currently under review and any changes may have an impact on
this disclosure in the future. The liquidity value is lower than the
carrying value due to adjustments applied to comply with the
European Commission (‘EC’) or other local regulators.
High-quality liquid assets (liquidity value)
Net outflows
Liquidity coverage ratio
At
31 Dec
30 Jun
31 Dec
2018
2018
2017
$bn
567
369
$bn
540
342
$bn
513
360
154%
158%
142%
Management of liquidity and funding risk
Liquidity coverage ratio
The LCR aims to ensure that a bank has sufficient unencumbered
high-quality liquid assets (‘HQLAs’) to meet its liquidity needs in a
30-calendar-day liquidity stress scenario. HQLAs 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 an EC basis and at 31 December
2018 was 154% (31 December 2017: 142%).
At 31 December 2018, all the Group’s principal operating entities
were well above regulatory minimum levels and above the
internally expected levels established by the Board. The following
table displays the individual LCR levels for our principal operating
entities on an EC LCR basis. 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
At
Operating entities’ NSFRs
HSBC Bank plc UK liquidity group (pre-ring-
fencing)
HSBC UK Bank plc (ring-fenced bank)
HSBC Bank plc (non-ring-fenced bank)
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 147.
Footnotes
25
26
27,31
28
28
30
30
At
31 Dec
31 Dec
2018
%
—
144
113
132
123
131
113
152
126
153
132
123
203
2017
%
108
—
—
144
117
129
116
155
136
148
143
123
185
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 2018, 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.
31 Dec
31 Dec
Liquid assets of HSBC’s principal operating entities
The following table shows the liquidity value of the unencumbered
liquid assets of HSBC’s principal operating entities at the period
end as a six-monthly average. At 31 December 2018, 86% (June
2018: 85%) of the liquid assets eligible for inclusion in the Group
consolidated LCR were classified as Level 1.
Footnotes
25
26
27
28
28,29
30
30
HSBC Bank plc UK liquidity group (pre-
ring-fencing)
HSBC UK Bank plc (ring-fenced bank)
HSBC Bank plc (non-ring-fenced bank)
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 147.
2018
%
—
143
147
161
149
121
128
202
115
153
182
153
273
2017
%
139
—
—
151
144
132
149
204
123
162
197
215
220
132
HSBC Holdings plc Annual Report and Accounts 2018
Liquid assets of HSBC’s principal entities
HSBC Bank plc UK liquidity group (pre-ring-fencing)
Footnotes
25
Level 1
Level 2a
Level 2b
HSBC UK Bank plc (ring-fenced bank)
Level 1
Level 2a
Level 2b
HSBC Bank plc (non-ring-fenced bank)
Level 1
Level 2a
Level 2b
The Hongkong and Shanghai Banking Corporation –
Hong Kong Branch
26
27
28
Level 1
Level 2a
Level 2b
Hang Seng Bank
Level 1
Level 2a
Level 2b
HSBC Bank USA
Level 1
Level 2a
Level 2b
Total of HSBC’s other principal entities
32
Level 1
Level 2a
Level 2b
For footnotes, see page 147.
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 and to meet the
Group’s minimum requirement for own funds and eligible
liabilities.
The following ‘Funding sources and uses’ table provides a
consolidated view of how our balance sheet is funded, and should
be read in light of the LFRF, which requires operating entities to
manage liquidity and funding risk on a stand-alone basis.
Recognised
at 31 Dec 2018
2H18
Average
Recognised at
30 Jun 2018
1H18
Average
Recognised at
31 Dec 2017
$m
$m
$m
$m
$m
2H17
Average
$m
—
—
—
—
—
—
166,913
160,088
161,036
156,623
7,763
16,582
6,364
17,296
2,914
18,777
4,795
19,919
57,862
1,561
—
59,474
1,383
—
107,488
106,929
5,417
9,913
8,484
16,875
99,634
28,495
1,578
84,595
28,277
1,317
33,009
30,519
5,458
141
53,659
19,062
—
3,995
141
49,481
17,971
1
90,023
89,410
7,044
383
7,397
458
—
—
—
—
—
—
75,436
28,656
1,153
32,551
2,739
142
57,413
15,612
—
80,566
8,003
407
—
—
—
—
—
—
78,496
24,991
1,988
30,531
3,151
146
53,383
14,869
13
84,508
8,447
691
—
—
—
—
—
—
77,217
26,848
5,528
31,091
3,287
197
65,131
13,690
39
88,281
7,899
1,003
—
—
—
—
—
—
77,295
25,841
6,056
31,485
3,077
199
60,090
13,226
32
86,372
7,810
886
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 2018, 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.
HSBC Holdings plc Annual Report and Accounts 2018
133
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review
Report of the Directors | Risk
Funding sources
Funding uses
2018
$m
2017
$m
Customer accounts
Deposits by banks
1,362,643
1,364,462
Loans and advances to customers
56,331
69,922
Loans and advances to banks
Repurchase agreements – non-trading
165,884
130,002
Debt securities in issue
Cash collateral, margin and settlement accounts
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
85,342
54,066
313
22,437
148,505
87,330
84,431
1,495
10,998
64,546
N/A
1,286
19,826
94,429
85,667
Reverse repurchase agreements – non-
trading
Prepayments, accrued income and other
assets
Cash collateral, margin and settlement
accounts
Assets held for sale
Trading assets
184,361
– reverse repos
2,255
8,363
– stock borrowing
– settlement accounts
N/A
11,198
– other trading assets
71,938
162,545
Financial investments
194,249
197,871
Cash and balances with central banks
Other balance sheet liabilities
296,593
309,399
Other balance sheet assets
At 31 Dec
2,558,124
2,521,771
At 31 Dec
For footnotes, see page 147.
Wholesale term debt maturity profile
The maturity profile of our wholesale term debt obligations is set out in the following table.
Footnotes
2018
$m
2017
$m
981,696
962,964
72,167
90,393
242,804
201,553
5,6
47,159
47,159
735
N/A
N/A
781
238,130
287,995
9,893
8,387
N/A
10,224
6,895
15,258
219,850
255,618
407,433
389,076
162,843
180,624
405,157
408,385
2,558,124
2,521,771
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
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
8,091
4,378
467
817
—
2,094
—
335
—
—
—
$m
13,362
7,640
1,233
821
—
—
—
3,668
95
95
—
$m
15,808
10,696
3,107
1,452
205
—
—
348
2,007
2,007
—
$m
10,241
6,546
2,263
1,029
—
—
—
403
—
—
—
$m
5,447
818
2,172
2,394
—
—
—
63
—
—
—
Total
$m
$m
$m
$m
21,811
70,462
63,914
209,136
529
764
1,031
32,402
11,252
55,307
54,256
130,057
3,005
1,190
—
—
5,835
2,021
2,021
—
7,021
3,469
—
—
3,901
1,383
1,383
—
4,473
1,137
—
327
2,690
31,131
28,934
2,197
21,012
6,001
2,094
327
17,243
36,637
34,440
2,197
8,091
13,457
17,815
10,241
5,447
23,832
71,845
95,045
245,773
7,502
1,085
1,614
1,298
—
3,479
—
26
3
3
—
8,409
3,636
2,973
1,796
—
—
—
4
1,918
1,918
—
9,435
4,334
3,047
2,054
—
—
—
—
74
74
—
8,132
3,064
2,924
1,935
209
—
—
—
—
—
—
15,111
13,000
6,132
5,109
2,870
—
—
—
1,000
170
170
—
137
6,564
4,586
212
—
—
1,501
2,371
2,371
—
55,347
386
41,090
10,156
2,494
—
914
307
4,077
3,618
459
7,505
10,327
9,509
8,132
15,281
15,371
59,424
48,234
165,170
277
19,051
39,544
102,865
5,328
1,655
—
436
994
32,000
30,162
1,838
80,234
30,023
4,570
3,479
1,350
3,832
40,612
38,315
2,297
205,782
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 2018
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
134
HSBC Holdings plc Annual Report and Accounts 2018
Contractual maturity of financial liabilities
The following table 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 following table 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 29 on the Financial
Statements.
In addition, loans and other credit-related commitments and
financial guarantees are generally not recognised on our balance
sheet. The undiscounted cash flows potentially payable under loan
and other credit-related commitments and financial guarantees are
classified on the basis of the earliest date they can be called.
Cash flows payable by HSBC under financial liabilities by remaining contractual maturities
(Audited)
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
At 31 Dec 2018
Footnotes
33
33
8
On
demand
$m
35,544
1,082,007
5,929
84,431
217
204,062
236
—
100,268
1,512,694
685,650
22,942
Due within
3 months
$m
10,482
211,811
156,752
—
8,737
360
18,253
438
19,056
425,889
92,186
113
Due between
3 and 12
months
$m
2,419
62,963
2,487
—
15,591
927
24,902
793
4,694
Due between
1 and 5 years
Due after
5 years
$m
7,507
7,617
950
—
75,578
2,065
36,599
7,600
2,367
$m
556
130
—
—
89,261
1,323
13,656
27,670
1,260
114,776
140,283
133,856
1,109
289
944
160
377
14
2,221,286
518,188
116,174
141,387
134,247
Proportion of cash flows payable in period
71%
17%
4%
5%
4%
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
At 31 Dec 2017
Proportion of cash flows payable in period
For footnotes, see page 147.
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 following table are not directly comparable
with those on the balance sheet of HSBC Holdings as the table
48,247
1,159,962
20,550
184,361
715
212,797
11
3
48,407
1,675,053
570,132
23,944
2,269,129
75%
10,596
153,018
106,236
—
1,249
219
12,624
2,227
18,780
304,949
138,542
268
443,759
15%
1,877
44,348
2,270
—
7,117
1,221
21,066
841
3,701
82,441
10,602
821
93,864
3%
7,814
7,238
1,085
—
39,596
3,170
25,654
7,011
1,994
93,562
7,860
785
102,207
4%
1,508
675
—
—
59,428
1,506
11,092
21,775
1,314
97,298
2,350
31
99,679
3%
7
8,34
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.
HSBC Holdings plc Annual Report and Accounts 2018
135
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Cash flows payable by HSBC Holdings under financial liabilities by remaining contractual maturities
(Audited)
Amounts owed to HSBC undertakings
Financial liabilities designated at fair value
Derivatives
Debt securities in issue
Subordinated liabilities
Other financial liabilities
Loan commitments
Financial guarantees
At 31 Dec 2018
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
At 31 Dec 2017
For footnotes, see page 147.
Market risk profile
Market risk in 2018
Trading portfolios
Non-trading portfolios
Footnotes
8
8
On
demand
Due within
3 months
Due between
3 and 12
months
Due between
1 and 5 years
Due after
5 years
$m
—
—
1,321
—
—
—
1,321
—
8,627
9,948
—
—
2,008
—
—
—
2,008
—
7,778
9,786
$m
949
237
—
379
248
675
2,488
—
—
$m
—
2,656
—
1,159
757
228
4,800
—
—
$m
—
14,384
339
29,178
4,019
—
47,920
—
—
$m
—
11,653
499
30,801
25,311
—
68,264
—
—
2,488
4,800
47,920
68,264
2,525
286
—
232
2,113
849
6,005
—
—
6,005
46
875
—
1,787
537
200
3,445
—
—
—
16,554
293
13,975
2,852
—
33,674
—
—
—
19,465
781
26,452
20,944
—
67,642
—
—
3,445
33,674
67,642
Monetary tightening started across the developed world. The US
Federal Reserve raised official interest rates multiple times during
the year and signalled it will raise rates more slowly in 2019. Bond
yields started to increase but remained low by historical standards.
In the eurozone, the European Central Bank ended its bond-buying
programme, although softening growth and inflation prospects
add to the uncertainty of the timing of the next interest rate hike.
Trading value at risk (‘VaR’) ended the year lower when compared
with the previous year. The trading VaR composition remained
largely the same, with interest rate trading VaR being the largest
individual contributor to overall trading VaR.
Non-trading interest rate VaR ended the year lower when
compared with the previous year as exposures were managed
down.
Page
136
136
137
138
138
139
140
140
140
140
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
Market risk in 2018
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 86.
Trading portfolios
Value at risk of the trading portfolios
Trading VaR predominantly resides within Global Markets where
trading VaR was lower at 31 December 2018 compared with
31 December 2017. The contributions of each asset class were
largely range bound during the year.
The decrease in trading VaR from the equity and credit spread
trading VaR components was partially offset by an increase in the
interest rate and foreign exchange trading VaR components.
A summary of our current policies and practices regarding the
management of market risk is set out on page 81.
The effects of portfolio diversification reduced the overall trading
VaR.
Global markets were characterised by robust economic sentiment
at the start of the year. As the year progressed, economic activity
diverged across the global economy against a backdrop of
continuing trade and geopolitical tensions; concerns around
slowing growth in China; and the continuing uncertainty around
the shape of the UK’s withdrawal from the EU.
136
HSBC Holdings plc Annual Report and Accounts 2018
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
-80
Dec17
Jan18
Feb18
Mar18
Apr18
May18
Jun18
Jul18
Aug18
Sep18
Oct18
Nov18
Dec18
Trading total
Interest rate (‘IR’) trading
Equity (‘EQ’) trading
Credit spread (‘CS’) trading intent
Foreign exchange (‘FX’) trading
Diversification
The Group trading VaR for the year is shown in the table below.
Trading VaR, 99% 1 day35
(Audited)
Balance at 31 Dec 2018
Average
Maximum
Minimum
Balance at 31 Dec 2017
Average
Maximum
Minimum
For footnotes, see page 147.
Back-testing
Foreign
exchange and
commodity
$m
12.6
9.5
21.8
5.5
7.4
10.4
23.0
4.9
Interest
rate
$m
33.9
36.4
49.9
27.0
30.8
38.2
67.1
27.2
Equity
$m
22.6
22.5
33.8
13.5
32.6
16.7
32.6
9.1
Credit
spread
Portfolio
diversification36
$m
25.9
20.7
35.2
12.2
31.1
15.4
31.8
5.1
$m
(37.9)
(34.3)
(38.2)
(32.9)
Total37
$m
57.1
54.8
71.2
43.9
63.7
47.8
70.8
36.6
In 2018, the Group experienced three back-testing exceptions
against actual profit and loss: a profit exception in February,
driven by gains on short positions on falling index and stock
exposures; a profit exception in August, driven by volatility in
Turkish lira spot; and a loss exception in December, driven by
month-end adjustments that were not in scope of the market risk
model.
The Group also experienced one back-testing profit exception
against hypothetical profit and loss in August based on the same
driver described above.
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 was no commodity risk in the non-
trading portfolios. The non-trading VaR ended the year lower
compared with the previous year, due to a reduction in the non-
trading interest rate VaR component. This was caused by the
reduction of the risk in our investment portfolio, specifically from
reduced interest rate risk on US Treasuries and agency mortgage-
backed securities.
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 the following ‘Net interest
income sensitivity’ section.
Non-trading VaR excludes the insurance operations, which are
discussed further on page 143, and the interest rate risk in the
banking book arising from HSBC Holdings.
The daily levels of total non-trading VaR over the last year are set
out in the graph below.
HSBC Holdings plc Annual Report and Accounts 2018
137
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Daily VaR (non-trading portfolios), 99% 1 day ($m)
180
160
140
120
100
80
60
40
20
0
-20
-40
-60
-80
Dec17
Jan18
Feb18
Mar18
Apr18
May18
Jun18
Jul18
Aug18
Sep18
Oct18
Nov18
Dec18
Non-trading total
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 2018
Average
Maximum
Minimum
Balance at 31 Dec 2017
Average
Maximum
Minimum
For footnotes, see page 147.
Interest
rate
Credit
spread
Portfolio
diversification36
$m
61.4
96.8
129.3
59.9
88.5
119.0
164.1
88.5
$m
37.2
48.3
96.0
27.6
46.7
46.1
71.9
24.5
$m
(30.6)
(29.1)
(38.9)
(36.9)
Total37
$m
68.0
116.0
154.1
68.0
96.3
128.2
183.8
93.3
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.
The assets and liabilities included in trading VaR give rise to a
large proportion of the income included in net income from
financial instruments held for trading or managed on a fair value
basis. 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 1 on the Financial Statements.
Structural foreign exchange exposures
For our policies and procedures for managing structural foreign
exchange exposures, see page 83 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’.
Market risk balance sheet linkages
The following balance sheet lines in the Group’s consolidated
position 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.
138 HSBC Holdings plc Annual Report and Accounts 2018
Net structural foreign exchange exposures
Currency of structural exposure
Hong Kong dollars
Pound sterling
Chinese renminbi
Euros
Indian rupees
Mexican pesos
Canadian dollars
Saudi riyals
Malaysian ringgit
Singapore dollars
UAE dirhams
Taiwanese dollars
Australian dollars
Indonesian rupiah
Korean won
Swiss francs
Thai baht
Brazilian real
Argentine pesos
Turkish lira
Footnotes
36
2018
$m
41,477
36,642
27,554
20,964
3,837
4,363
3,815
3,913
2,572
2,246
2,185
1,904
1,823
1,792
1,285
987
856
707
568
507
2017
$m
33,992
37,039
27,968
20,269
4,286
4,270
4,241
3,971
2,461
2,433
2,054
1,877
1,892
1,845
1,423
950
766
745
753
778
Others, each less than $700m
At 31 Dec
For footnotes, see page 147.
5,762
165,759
5,623
159,636
Shareholders’ equity would decrease by $2,743m (2017: $2,659m)
if euro and sterling foreign currency exchange rates weakened by
5% relative to the US dollar.
Net interest income sensitivity
The following tables set out the assessed impact to a hypothetical
base case projection of our net interest income (‘NII’) (excluding
insurance) under the following scenarios:
• an immediate shock of 25 basis points (‘bps’) to the current
market-implied path of interest rates across all currencies on 1
January 2019 (effects over one year and five years); and
• an immediate shock of 100bps to the current market-implied
path of interest rates across all currencies on 1 January 2019
(effects over one year and five years).
NII sensitivity to an instantaneous change in yield curves (12 months)
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. Immediate interest rate rises of 25bps and 100bps
would increase projected net interest income for the 12 months to
31 December 2019 by $828m and $2,778m, respectively.
Conversely, falls of 25bps and 100bps would decrease projected
net interest income for the 12 months to 31 December 2019 by
$884m and $3,454m, respectively.
The sensitivity of NII for 12 months decreased by $521m and
$747m comparing December 2018 with December 2017 in
the plus and minus 100bps parallel shocks, respectively. These
decreases were driven by movements in the US dollar amounts
primarily due to changes in balance sheet composition and the
migration of non-interest-bearing liabilities to interest-bearing
liabilities as interest rates increased. By contrast, sterling NII
sensitivity increased because of higher liquidity linked to UK
structural reform and preparations surrounding the UK’s exit from
the European Union.
The change in NII sensitivity for five years is also driven by the
factors above.
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 73.
Currency
US dollar
HK dollar
Sterling
$m
$m
$m
Euro
$m
Other
$m
Total
$m
Change in Jan 2019 to Dec 2019 (based on balance sheet at 31 December
2018)
+25bps parallel
-25bps parallel
+100bps parallel
-100bps parallel
Change in Jan 2018 to Dec 2018 (based on balance sheet at 31 December
2017)
+25bps parallel
-25bps parallel
+100bps parallel
-100bps parallel
70
(160)
147
(523)
227
(287)
845
232
(301)
773
198
(244)
777
(1,046)
(1,122)
179
(305)
711
147
(181)
600
(631)
(1,444)
(1,425)
115
8
408
9
50
8
412
31
213
(187)
673
(772)
203
(160)
731
(732)
828
(884)
2,778
(3,454)
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.
HSBC Holdings plc Annual Report and Accounts 2018
139
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
NII sensitivity to an instantaneous change in yield curves (5 years)
Change in Jan 2019 to Dec 2019 (based on balance sheet at 31 December
2018)
+25bps parallel
-25bps parallel
+100bps parallel
-100bps parallel
Change in Jan 2018 to Dec 2018 (based on balance sheet at 31 December
2017)
+25bps parallel
-25bps parallel
+100bps parallel
-100bps parallel
Sensitivity of capital and reserves
Financial assets at fair value through other comprehensive income
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 this portfolio using the portfolio’s stressed
VaR, with a 99% confidence level and an assumed holding period
of one quarter. At December 2018, the stressed VaR of the
portfolio was $2.9bn (2017: $2.6bn).
We monitor the sensitivity of reported cash flow hedging reserves
to interest rate movements on a six-monthly basis by assessing
Year 1
$m
Year 2
$m
Year 3
$m
Year 4
$m
Year 5
$m
Total
$m
828
(884)
2,778
(3,454)
806
(925)
3,299
(4,201)
1,155
(1,127)
3,863
(4,632)
1,153
(872)
4,463
(4,538)
1,416
(1,206)
4,542
(5,276)
1,326
(1,154)
5,105
(5,102)
1,529
(1,296)
4,968
(5,691)
1,439
(1,271)
5,472
(5,498)
1,428
(1,597)
5,096
(6,187)
1,507
(1,381)
5,759
(5,813)
6,356
(6,110)
21,247
(25,240)
6,231
(5,603)
24,098
(25,152)
the expected reduction in valuation of cash flow hedges due to
parallel movements of plus or minus 100bps in all yield curves.
These particular exposures form only a part of our overall interest
rate exposure.
The following table describes the maximum and minimum
sensitivity of our cash flow hedge reported reserves to the
stipulated movements in yield curves 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 2018
+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 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
Maximum
impact
$m
(684)
(0.37)%
720
0.39%
(839)
(0.44)%
860
0.45%
Minimum
impact
$m
(492)
(0.26)%
550
0.30%
(684)
(0.36)%
720
0.38%
Third-party assets in Balance Sheet Management
For our BSM governance framework, see page 83 of ‘Risk management’.
Third-party assets in BSM decreased by 5% during 2018. Cash and
balances at central banks decreased by $17bn, predominantly in
Europe as a result of cash funding requirements across
businesses.
Interbank lending decreased by $11bn, largely driven by money
market and term lending operations in Asia.
Reverse repo activity decreased by $16bn, reflecting in part the
management of cash surplus in North America. Financial
investments increased by $17bn, driven by an increase in
investments across Asia and Europe.
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
2018
$m
144,802
601
25,257
964
22,899
333,622
6,880
535,025
2017
$m
161,715
637
36,047
3,202
38,842
309,908
4,648
554,999
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 6 on the Financial Statements, and for pension risk management
see page 87.
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 projected sensitivity of its net interest income to
future changes in yield curves and the interest rate gap repricing
tables.
140
HSBC Holdings plc Annual Report and Accounts 2018
Foreign exchange risk
Sensitivity of net interest income
Total foreign exchange VaR arising within HSBC Holdings in 2018
was as follows.
HSBC Holdings – foreign exchange VaR
At 31 Dec
Average
Minimum
Maximum
2018
$m
77.7
79.5
77.7
93.7
2017
$m
78.9
86.1
74.9
101.2
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 that 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.
NII sensitivity to an instantaneous change in yield curves (12 months)
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 25bps
parallel falls or rises in all yield curves at the beginning of each
quarter during the 12 months from 1 January 2018.
The NII sensitivities shown are indicative and based on simplified
scenarios. Immediate interest rate rises of 25bps and 100bps
would decrease projected net interest income for the 12 months to
31 December 2019 by $7m and $29m, respectively. Conversely,
falls of 25bps and 100bps would increase projected net interest
income for the 12 months to 31 December 2019 by $10m and
$43m, respectively.
US dollar
HK dollar
Sterling
$m
$m
$m
Euro
$m
Other
$m
Total
$m
Change in Jan 2019 to Dec 2019 (based on balance sheet at
31 Dec 2018)
+25bps
-25bps
+100bps
-100bps
Change in Jan 2018 to Dec 2018 (based on balance sheet at
31 December 2018)
+25bps
-25bps
+100bps
-100bps
(10)
10
(38)
38
32
(32)
129
(129)
—
—
—
—
—
—
—
—
8
(8)
31
(28)
3
(3)
12
(8)
(5)
8
(22)
33
(2)
10
(6)
40
—
—
—
—
—
—
—
—
NII sensitivity to an instantaneous change in yield curves (5 years)
Change in Jan 2019 to Dec 2019 (based on balance sheet at
31 December 2018)
+25bps
-25bps
+100bps
-100bps
Change in Jan 2018 to Dec 2018 (based on balance sheet at
31 December 2018)
+25bps
-25bps
+100bps
-100bps
Year 1
$m
Year 2
$m
Year 3
$m
Year 4
$m
Year 5
$m
(7)
10
(29)
43
34
(26)
135
(97)
(9)
12
(36)
47
52
(47)
208
(168)
(9)
11
(36)
47
52
(57)
210
(189)
(4)
11
(16)
29
53
(53)
210
(201)
(8)
11
(32)
42
—
53
(53)
210
(205)
(7)
10
(29)
43
34
(26)
135
(97)
Total
$m
(37)
55
(149)
208
244
(236)
973
(860)
The interest rate sensitivities in the preceding table 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 following interest rate repricing gap
table 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.
HSBC Holdings plc Annual Report and Accounts 2018
141
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Repricing gap analysis of HSBC Holdings
Footnotes
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
Net interest rate risk gap at 31 Dec 2018
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
Total
$m
3,509
707
79,657
—
160,231
1,077
245,181
(949)
(25,049)
(2,159)
(50,800)
(1,156)
(17,715)
(147,353)
(245,181)
1,985
2,388
88,571
4,264
92,930
1,596
191,734
(2,157)
(30,890)
(3,082)
(34,258)
(1,269)
(15,877)
(103,787)
(191,734)
Off-balance sheet items attracting interest rate
Net interest rate risk gap at 31 Dec 2017
39
Cumulative interest rate gap
For footnotes, see page 147.
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 84.
Operational risk exposures in 2018
In 2018, we continued our ongoing work to strengthen those
controls that manage our most material risks. Among other
measures, we:
• further enhanced our 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 as described on page 84
of the ‘Regulatory compliance risk management’ section;
142
HSBC Holdings plc Annual Report and Accounts 2018
Up to
1 year
$m
3,509
—
39,316
—
4,703
—
From over
1 to 5 years
From over
5 to 10 years
More than
10 years
Non-interest
bearing
$m
—
—
$m
—
—
$m
—
—
16,717
18,382
2,000
—
2,136
—
—
379
—
—
—
$m
—
707
3,242
—
153,013
1,077
47,528
18,853
18,761
2,000
158,039
—
—
—
(1,920)
(11,871)
(9,299)
—
—
—
—
(750)
—
(14,879)
(16,753)
(18,156)
(2,900)
—
(1,646)
(1,450)
(19,895)
(30,713)
(3,080)
(3,080)
1,985
—
63,237
2,375
4,866
—
72,463
—
—
—
(8,433)
—
(1,918)
(7,450)
(17,801)
(41,199)
13,463
13,463
—
—
(9,861)
(38,485)
10,544
(9,088)
(12,168)
—
—
6,027
—
2,640
—
8,667
—
(4,476)
(10,777)
(42,708)
12,718
(11,229)
(23,397)
—
(10,317)
(1,372)
(15,339)
6,410
(6,929)
(30,326)
—
—
—
—
12,521
3,351
—
—
—
—
—
—
12,521
3,351
(12,895)
(10,175)
—
(9,017)
—
(1,798)
(6,047)
(29,757)
17,812
(3,278)
10,185
—
(14,517)
—
(2,000)
(8,899)
(35,591)
14,171
(8,899)
1,286
(4,453)
—
(3,351)
—
(9,713)
(1,498)
(19,015)
7,705
(7,959)
(6,673)
(949)
(1,208)
(2,159)
1,888
(1,156)
(1,277)
(123,893)
(128,754)
1,041
30,326
—
2,388
3,435
1,596
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
—
•
increased monitoring and enhanced detective controls
to manage fraud risks, which arise from new technologies and
new ways of banking;
• strengthened internal security controls to help prevent cyber-
attacks;
•
improved controls and security to protect customers when
using digital channels; and
• enhanced our third-party risk management capability to help
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 69 and in ‘Risk management’
from pages 73 to 88.
Operational risk losses in 2018
Operational risk losses in 2018 were higher than in 2017, reflecting
an increase in losses incurred relating to large legacy conduct-
related events. For further details see Note 35 on the Financial
Statements and on conduct-related costs included in significant
items on page 66.
Insurance manufacturing operations risk profile
Insurance manufacturing operations risk in 2018
HSBC’s bancassurance model
Measurement
Key risk types
– Market risk
– Credit risk
– Liquidity risk
– Insurance risk
Page
143
143
143
145
145
146
146
146
Insurance manufacturing operations risk in 2018
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 86.
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 small and medium enterprises
(‘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 and territories (Hong Kong, France, Singapore, UK,
mainland China, Malta, Mexico, Argentina and Malaysia). 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 small
number 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.
Balance sheet of insurance manufacturing subsidiaries by type of contract
(Audited)
Financial assets
– trading assets
– financial assets designated and otherwise mandatorily measured at fair
value through profit or loss
– derivatives
– financial investments at amortised cost
– financial investments at fair value through other comprehensive income
– 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 2018
For footnotes, see page 147.
Footnotes
41
42
43
With
DPF
$m
66,735
—
17,855
200
33,575
11,499
3,606
1,255
—
2,670
70,660
—
69,269
179
—
69,448
—
69,448
Unit-linked
Other
contracts40
Shareholder
assets and
liabilities
$m
7,337
—
7,099
—
70
—
168
69
—
2
7,408
1,574
5,789
21
—
7,384
—
7,384
$m
15,552
—
3,024
33
11,597
450
448
1,368
—
235
17,155
3,884
12,272
15
—
16,171
—
16,171
$m
7,120
—
1,264
4
4,171
1,385
296
—
7,149
453
Total
$m
96,744
—
29,242
237
49,413
13,334
4,518
2,692
7,149
3,360
14,722
109,945
—
—
1,051
3,659
4,710
12,232
16,942
5,458
87,330
1,266
3,659
97,713
12,232
109,945
HSBC Holdings plc Annual Report and Accounts 2018
143
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Balance sheet of insurance manufacturing subsidiaries by type of contract (continued)
(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
For footnotes, see page 147.
Footnotes
44
44
41
42
43
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
Unit-linked
$m
9,081
—
8,814
—
—
—
267
274
—
2
9,357
1,750
7,548
6
—
9,304
—
9,304
Other
contracts40
$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
Balance sheet of insurance manufacturing subsidiaries by geographical region45
(Audited)
Financial assets
– trading assets
– financial assets designated and otherwise mandatorily measured at fair value
through profit or loss
– derivatives
– financial investments – at amortised cost
– financial investments – at fair value through other comprehensive income
– 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 2018
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
For footnotes, see page 147.
144
HSBC Holdings plc Annual Report and Accounts 2018
Footnotes
41
42
43
44
44
41
42
43
Europe
$m
28,631
—
13,142
121
296
12,453
2,619
249
832
1,053
30,765
780
26,375
209
1,690
29,054
1,711
30,765
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
Asia
$m
66,793
—
15,774
116
48,595
440
1,868
2,438
6,195
2,280
77,706
4,678
59,829
1,050
1,911
67,468
10,238
77,706
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
Shareholder
assets and
liabilities
$m
6,662
—
1,259
41
3,331
1,877
154
—
6,610
1,126
14,398
—
—
1,230
3,325
4,555
12,231
16,786
Latin
America
$m
1,320
—
326
—
522
441
31
5
122
27
1,474
—
1,126
7
58
1,191
283
1,474
1,500
—
494
—
523
456
27
4
128
24
1,656
—
1,204
9
73
1,286
370
1,656
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
Total
$m
96,744
—
29,242
237
49,413
13,334
4,518
2,692
7,149
3,360
109,945
5,458
87,330
1,266
3,659
97,713
12,232
109,945
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
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.
Financial return guarantees
(Audited)
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 decreased to $669m (2017: $696m)
primarily due to sales of new products with lower guarantees in
Hong Kong and updates to modelling assumptions.
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.
Investment
returns implied
by guarantee
%
0.0
0.1–2.0
2.1–4.0
4.1–5.0
Footnotes
46
2018
Long-term
investment
returns on
relevant
portfolios
%
2.2–3.0
3.6–3.7
2.7–4.6
2.7–4.1
Cost of
guarantees
Investment
returns implied
by guarantee
$m
100
78
420
71
669
%
0.0
0.1–2.0
2.1–4.0
4.1–5.0
2017
Long-term
investment
returns on
relevant
portfolios
%
2.3–3.2
3.2–3.7
3.2–4.4
3.2–4.1
Cost of
guarantees
$m
103
64
459
70
696
Capital
Nominal annual return
Nominal annual return
Nominal annual return
At 31 Dec
For footnotes, see page 147.
Sensitivities
Changes in financial market factors, from the economic
assumptions in place at the start of the year, had a negative
impact on reported profit before tax of $326m (2017: $296m
positive). 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. Due in part to the impact of the cost of guarantees and
hedging strategies which may be in place, 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 necessarily 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 historically had a greater impact on
total equity as changes in the market value of available-for-sale
(‘AFS’) bonds are recognised directly in equity. This impact has
reduced in 2018 due to the reclassification of debt securities in
Hong Kong and Singapore from AFS to amortised cost on the
implementation of IFRS 9.
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
2018
2017
Effect on
profit after tax
Effect on
total equity
Effect on
profit after tax
Effect on
total equity
$m
9
(28)
213
(202)
36
(36)
$m
(61)
46
213
(202)
36
(36)
$m
42
(140)
223
(225)
24
(24)
$m
(583)
617
237
(239)
24
(24)
HSBC Holdings plc Annual Report and Accounts 2018
145
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Risk
Credit risk
(Audited)
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 143.
The credit quality of the reinsurers’ share of liabilities under
insurance contracts is assessed as ‘satisfactory’ or higher (as
defined on page 79), with 100% of the exposure being neither past
due nor impaired (2017: 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 100. The
Expected maturity of insurance contract liabilities
(Audited)
risk associated with credit spread volatility is to a large extent
mitigated by holding debt securities to maturity, and sharing a
degree of credit spread experience with policyholders.
Liquidity risk
(Audited)
Description and exposure
Liquidity risk is the risk that an insurance operation, though
solvent, either does not have sufficient financial resources
available to meet its obligations when they fall due, or can secure
them only at excessive cost.
The following table shows the expected undiscounted cash flows
for insurance liabilities at 31 December 2018. 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 2018 remained comparable with 2017.
The remaining contractual maturity of investment contract
liabilities is included in Note 29 on page 280.
Within 1 year
1-5 years
5-15 years
Over 15 years
Expected cash flows (undiscounted)
$m
1,119
7,459
8,578
969
6,916
7,885
$m
2,932
27,497
30,429
3,041
26,453
29,494
$m
2,684
46,217
48,901
4,695
43,784
48,479
$m
1,962
55,989
57,951
6,814
45,334
52,148
Total
$m
8,697
137,162
145,859
15,519
122,487
138,006
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
2018
$m
2017
$m
(77)
82
(95)
107
(92)
93
(77)
82
(93)
106
(92)
91
Unit-linked
With DPF and Other contracts
At 31 Dec 2018
Unit-linked
With DPF and Other contracts
At 31 Dec 2017
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 143 and 145 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 2017.
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.
146
HSBC Holdings plc Annual Report and Accounts 2018
Footnotes to Risk
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
Customer risk rating (‘CRR’).
12-month point-in-time (‘PIT’) probability-weighted probability of default
(‘PD’).
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 132.
BSM, for external reporting purposes, forms part of Corporate Centre while
daily operations and risk are managed within GB&M.
The total ECL is recognised in the loss allowance for the financial asset
unless the total ECL exceeds the gross carrying amount of the financial
asset, in which case the ECL is recognised as a provision.
Includes only those financial instruments that are subject to the impairment
requirements of IFRS 9. ‘Prepayments, accrued income and other assets’ as
presented within the consolidated balance sheet on page 216 includes both
financial and non-financial assets.
31 December 2017 balances have been restated to include $44bn of loan
commitments (unsettled reverse repurchase agreements) not previously
identified for disclosure.
Excludes performance guarantee contracts to which the impairment
requirements in IFRS 9 are not applied.
Represents the maximum amount at risk should the contracts be fully drawn
upon and clients default.
Debt instruments measured at FVOCI continue to be measured at fair value
with the allowance for ECL as a memorandum item. Change in ECL is
recognised in ‘Change in expected credit losses and other credit impairment
charges’ in the income statement.
Purchased or originated credit-impaired (‘POCI’).
Days past due (‘DPD’). Up to date accounts in Stage 2 are not shown in
amounts.
Excludes ECL and financial instruments relating to defaulted obligors
because the measurement of ECL is relatively more sensitive to credit factors
specific to the obligor than future economic scenarios.
Includes off-balance sheet financial instruments that are subject to
significant measurement uncertainty.
Includes low credit-risk financial instruments such as Debt instruments at
FVOCI, which have low ECL coverage ratios under all the above scenarios.
Coverage ratios on loans and advances to customers including loan
commitments and financial guarantees are typically higher. For example, in
the UK the coverage ratio for reported ECL is 0.39%, UK AD1 0.43% and UK
AD2–3 0.72–0.81%. For US, the coverage ratio for these instruments for
reported ECL is 0.11% and for Hong Kong 0.06% for the reported ECL and
0.20% for the trade Downside scenario.
ECL sensitivities exclude portfolios utilising less complex modelling
approaches.
ECL sensitivity includes only on-balance sheet financial instruments to which
IFRS 9 impairment requirements are applied.
For the purposes of this disclosure gross carrying value is defined as the
amortised cost of a financial asset, before adjusting for any loss allowance.
As such the gross carrying value of debt instruments at FVOCI as presented
above will not reconcile to the balance sheet as it excludes fair value gains
and losses.
Revocable loan and other commitments of $188bn which are out-of-scope
of IFRS 9 are presented within the strong credit quality classification.
12 month point in time (PiT) adjusted for multiple economic scenarios
Real estate lending within this disclosure corresponds solely to the industry
of the borrower. Commercial real estate on page 108 includes borrowers in
multiple industries investing in income producing assets and to a lesser
extent, their construction and development.
US mortgage-backed securities.
31 December 2017 balances have been restated to include $3bn of
performance and other guarantees not previously identified for disclosure.
The disclosure is a comparative for the 2018 ‘Total wholesale lending for
loans and advances to banks and customers by stage distribution table’ and
was not presented in the Annual Report and Accounts 2017.
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 HSBC UK Liquidity Group shown comprises four legal entities: HSBC UK
Bank plc (including the Dublin branch), 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.
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
HSBC Bank plc includes all overseas branches, and SPEs consolidated by
HSBC Bank plc for Financial Statements purposes.
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.
The comparative figures have been re-presented to reflect revised data.
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.
In adopting the NSFR (BCBS 295) as a key internal risk management metric,
the HSBC Group has, until such time that the NSFR becomes a binding
regulatory requirement on the Group or the operating entity locally,
permitted entities to reduce the amount of required stable funding
requirement (‘RSF’) for listed equities where the valuation risk has been
hedged through an exchange traded daily cash margined derivative, due to
management’s view as to the speed at which these assets could be
monetised under stress and the mitigation of the valuation risk. At 31
December 2018, only HSBC Bank plc were applying a lower RSF to such
equities. The NSFRs presented seek to reflect the internal management view
of funding risk.
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.
Structured liabilities have moved from ’Trading liabilities’ to ‘Financial
liabilities designated at fair value’. Comparatives have not been restated. See
Note 37 for further detail.
The undiscounted cash flows potentially payable under financial guarantees
are classified on the basis of the earliest date they can be called. Application
of this policy throughout the Group was improved in 2018, and therefore
comparative information has been represented.
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.
At 31 December, we had forward foreign exchange contracts of $5bn (2017:
$5bn) in order to manage our sterling structural foreign exchange exposure.
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.
‘Other Contracts’ includes term insurance, credit life insurance, universal life
insurance and investment contracts not included in the ‘Unit-linked’ or ‘With
DPF’ columns.
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.
Financial investments held to maturity (‘HTM’) and available for sale (‘AFS’).
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.
HSBC Holdings plc Annual Report and Accounts 2018
147
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Capital
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
31 Dec
2018
%
14.0
17.0
20.0
14.0
16.6
19.4
Total regulatory capital and risk-weighted assets
31 Dec
2018
$m
Page
148
148
149
150
151
31 Dec1
2017
%
14.5
17.3
20.9
14.5
16.4
18.3
31 Dec1
2017
$m
At
1 Jan
2018
%
14.6
17.4
21.0
14.6
16.5
18.3
At
1 Jan
2018
$m
CRD IV transitional
Common equity tier 1 capital
121,022
127,310
126,144
Additional tier 1 capital
Tier 2 capital
Total regulatory capital
Risk-weighted assets
CRD IV end point
26,120
26,096
173,238
865,318
24,810
31,014
183,134
872,089
24,810
31,429
182,383
871,337
Common equity tier 1 capital
121,022
127,310
126,144
22,525
24,511
168,058
865,318
16,531
15,997
159,838
872,089
16,531
16,413
159,088
871,337
RWAs
$bn
691.1
47.3
35.8
91.1
865.3
Capital
required2
$bn
55.3
3.8
2.8
7.3
69.2
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 2018
For footnotes, see page 151.
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.
148
HSBC Holdings plc Annual Report and Accounts 2018
Our policy on capital management is underpinned by a capital
management framework and our internal capital adequacy
assessment process (‘ICAAP’), which helps enable 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 Group’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 risks include credit, market, operational, pensions,
insurance, structural foreign exchange, residual risk and interest
rate risk in the banking book.
Planning and performance
Capital and risk-weighted asset (‘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 Chief Financial Officer. 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 returns above internal hurdle levels have
been identified and in order to meet their regulatory and economic
capital needs.
We manage business returns by using a return on tangible equity
(‘RoTE’) measure and a return on average risk-weighted assets
(‘RoRWA’) 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.
HSBC closely monitors and considers future regulatory change.
In December 2017, the Basel Committee on Banking Supervision
(‘Basel’) published revisions to the Basel III framework, which
introduces considerable change across the regulatory framework.
Following a recalibration, Basel also published the final changes to
the market risk RWA regime, the Fundamental Review of the
Trading Book (‘FRTB’), in January 2019.
Basel has announced that the package will be implemented on
1 January 2022, with a five-year transitional provision for the
output floor, commencing at a rate of 50%. The final standards will
need to be transposed into the relevant local law before coming
into effect.
HSBC continues to evaluate the final package. Given that the
package contains a significant number of national discretions, the
possible impact is uncertain.
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 Regulation Authority
(‘PRA’), the Federal Reserve Board, the European Banking
Authority, the European Central Bank and the Hong Kong
Monetary Authority, 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.
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
Own funds disclosure
(Audited)
Ref*
1
2
3
5
5a
6
7
8
10
11
12
14
15
16
19
28
29
30
31
33
34
35
36
37
41b
43
44
45
46
47
48
49
51
52
55
57
58
59
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
Additional tier 1 capital: regulatory adjustments
Direct and indirect holdings of own AT1 instruments
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
Total regulatory adjustments to additional tier 1 capital
Additional tier 1 capital
Tier 1 capital
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
At
31 Dec
2018
$m
22,384
22,384
121,180
3,368
4,854
3,697
31 Dec1
2017
$m
18,932
18,932
124,679
9,433
4,905
608
155,483
158,557
(1,180)
(17,323)
(1,042)
135
(1,750)
298
(6,070)
(40)
(7,489)
(34,461)
121,022
22,367
22,367
2,297
1,516
1,298
26,180
(60)
N/A
N/A
(60)
(1,146)
(16,872)
(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)
26,120
147,142
24,810
150,954
25,056
N/A
1,673
1,585
26,729
(40)
(593)
(633)
16,880
4,746
10,306
10,236
31,932
(40)
(463)
(503)
26,096
173,238
31,429
182,383
* The references identify the lines prescribed in the European Banking Authority (‘EBA’) template, which are applicable and where there is a value.
For footnotes, see page 151.
HSBC Holdings plc Annual Report and Accounts 2018 149
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Capital
Throughout 2018, we complied with the PRA’s regulatory capital
adequacy requirements, including those relating to stress testing.
The following comments describe RWA movements in 2018,
excluding foreign currency translation differences.
At 31 December 2018, our Common equity tier 1 (‘CET1’) ratio
decreased to 14.0% from 14.5% at 31 December 2017.
CET1 capital decreased during the year by $5.1bn, mainly as a
result of:
• unfavourable foreign currency translation differences of $5.5bn;
• the $2.0bn share buy-back;
• a $1.2bn increase in threshold deductions as a result of an
increase in the value of our material holdings; and
• an increase in the deduction for intangible assets of $1.1bn.
These decreases were partly offset by:
• capital generation through profits, net of dividends and scrip of
$3.1bn; and
Asset size
Asset size movements of $41.5bn were principally driven by
lending growth in CMB, RBWM and GB&M. In CMB and GB&M,
corporate lending made the largest contribution, primarily in Hong
Kong, reflecting our strategic focus on loan business in the region
and customer demand. RBWM’s $6.5bn increase in book size
mainly stemmed from mortgage business in Asia and Europe,
which was boosted by expanding broker relationships in the UK.
In Corporate Centre, there was a fall of $11.3bn. This included
reductions in legacy portfolios of $9.1bn and a decline in money
market placements and balances with correspondent banks,
which was primarily in Hong Kong. Market risk exposures reduced
by $2.8bn, mostly due to lower exposures and rate volatility in
France.
• a $1.2bn day one impact from transition to IFRS 9, mainly due
Asset quality
to classification and measurement changes.
Our Pillar 2A requirement at 31 December 2018, as per the PRA’s
Individual Capital Guidance based on a point-in-time assessment,
was 2.9% of RWAs, of which 1.6% was met by CET1. On 1
January 2019, our Pillar 2A requirement increased to 3.0% of
RWAs, of which 1.7% must be met by CET1.
On 4 May 2018, HSBC changed the way in which some of its
capital securities are recognised in regulatory capital. The
securities were previously recognised as grandfathered tier 2
capital and are now treated as fully eligible tier 2 instruments.
Risk-weighted assets
RWAs
RWAs fell by $6.0bn in the year, which included a drop of $23.4bn
due to foreign currency translation differences. Excluding foreign
currency translation differences, the $17.4bn increase comprised
growth of $27.6bn from asset size and of $2.9bn from changes in
asset quality, less a $9.2bn fall due to changes in methodology
and policy and a $3.9bn decrease due to model updates.
Mainly as a result of changes in portfolio mix, RWAs increased by
$4.0bn across CMB, GB&M, GPB and RBWM, significantly in
Europe and North America. These rises were mitigated by the
impact of improved risk parameters in Corporate Centre,
predominantly in Asia.
Model updates
Extending our counterparty credit risk exposure models to
exposures in Asia and North America reduced RWAs by $4.3bn
and $2.4bn respectively.
This was partly offset by increases of $1.6bn, due to updates to
UK retail and corporate models, $1.1bn due to a new receivables
finance model in Germany, and $0.4bn due to a redeveloped
residential mortgage model in Hong Kong.
Methodology and policy
The $10.0bn decrease reported in internal updates derived from
management initiatives, including refinements to risk parameters
and improved collateral recognition. This was partly offset by a
$0.8bn increase in external updates from IFRS 9 implementation
effects on credit risk and deferred tax in Corporate Centre.
RWAs by global business
Credit risk
Counterparty credit risk
Market risk
Operational risk
At 31 Dec 2018
Credit risk
Counterparty credit risk
Market risk
Operational risk
At 31 Dec 2017
RWAs by geographical region
Credit risk
Counterparty credit risk
Market risk
Operational risk
At 31 Dec 2018
Credit risk
Counterparty credit risk
Market risk
Operational risk
At 31 Dec 2017
For footnotes, see page 151.
RBWM
$bn
99.6
—
—
27.3
126.9
94.2
—
—
27.3
121.5
Europe
$bn
219.5
27.3
24.0
27.3
298.1
225.9
27.8
29.0
28.9
311.6
CMB
$bn
296.9
—
—
24.3
321.2
277.3
—
—
23.7
301.0
Asia
$bn
291.9
9.2
23.3
39.5
363.9
284.2
13.0
23.5
37.1
357.8
GB&M
$bn
172.0
45.1
32.4
31.5
281.0
180.2
52.4
35.9
30.8
299.3
GPB
$bn
13.8
0.2
—
2.8
16.8
13.0
0.2
—
2.8
16.0
Corporate
Centre
$bn
108.8
2.0
3.4
5.2
119.4
120.5
1.9
3.0
8.1
133.5
MENA
North
America
Latin
America
$bn
47.0
1.0
1.9
6.8
56.7
47.7
1.1
3.3
7.1
59.2
$bn
103.1
8.3
8.5
11.7
131.6
101.2
10.9
7.1
12.1
131.3
$bn
29.6
1.5
1.4
5.8
38.3
26.2
1.7
1.0
7.5
36.4
Total
$bn
691.1
47.3
35.8
91.1
865.3
685.2
54.5
38.9
92.7
871.3
Total
$bn
691.1
47.3
35.8
91.1
865.3
685.2
54.5
38.9
92.7
871.3
Footnotes
3
3
150
HSBC Holdings plc Annual Report and Accounts 2018
RWA movement by global business by key driver
RWAs at 31 Dec 2017
Asset size
Asset quality
Model updates
– portfolios moving onto internal ratings based (‘IRB’) approach
– new/updated models
Methodology and policy
– internal updates
– external updates – regulatory
Foreign exchange movements
Total RWA movement
RWAs at 31 Dec 2018
Credit risk, counterparty credit risk and operational risk
RBWM
$bn
121.5
6.5
0.4
1.3
0.6
0.7
0.7
0.9
(0.2)
(3.5)
5.4
126.9
CMB
$bn
301.0
30.8
2.0
1.7
0.8
0.9
(2.4)
(2.6)
0.2
(11.9)
20.2
321.2
GB&M
$bn
263.4
4.2
0.9
(6.9)
(0.3)
(6.6)
(7.3)
(7.3)
—
(5.7)
(14.8)
248.6
GPB
$bn
16.0
0.2
0.7
—
—
—
0.1
0.1
—
(0.2)
0.8
16.8
Corporate
Centre
Market
risk
$bn
130.5
(11.3)
(1.1)
—
—
—
—
(0.8)
0.8
(2.1)
(14.5)
116.0
$bn
38.9
(2.8)
—
—
—
—
(0.3)
(0.3)
—
—
(3.1)
35.8
RWA movement by geographical region by key driver
Credit risk, counterparty credit risk and operational risk
Europe
$bn
282.6
(0.4)
2.3
2.9
1.4
1.5
(2.4)
(2.4)
—
(10.9)
(8.5)
274.1
RWAs at 31 Dec 2017
Asset size
Asset quality
Model updates
– portfolios moving onto IRB approach
– new/updated models
Methodology and policy
– internal updates
– external updates – regulatory
Foreign exchange movements
Total RWA movement
RWAs at 31 Dec 2018
Leverage ratio
Ref*
20
21
Tier 1 capital
Total leverage ratio exposure
22
Leverage ratio
Asia
$bn
334.3
23.2
(0.9)
(4.5)
(0.2)
(4.3)
(5.4)
(5.8)
0.4
(6.1)
6.3
MENA
North
America
Latin
America
Market
risk
$bn
55.9
0.4
0.1
—
—
—
(0.2)
(0.6)
0.4
(1.4)
(1.1)
$bn
124.2
2.6
1.3
(2.3)
(0.1)
(2.2)
(0.7)
(0.9)
0.2
(2.0)
(1.1)
$bn
35.4
4.6
0.1
—
—
—
(0.2)
—
(0.2)
(3.0)
1.5
36.9
$bn
38.9
(2.8)
—
—
—
—
(0.3)
(0.3)
—
—
(3.1)
35.8
340.6
54.8
123.1
31 Dec
2018
$bn
143.5
2,614.9
%
5.5
At
1 Jan
2018
$bn
143.8
2,556.4
%
5.6
Total
RWAs
$bn
871.3
27.6
2.9
(3.9)
1.1
(5.0)
(9.2)
(10.0)
0.8
(23.4)
(6.0)
865.3
Total
RWAs
$bn
871.3
27.6
2.9
(3.9)
1.1
(5.0)
(9.2)
(10.0)
0.8
(23.4)
(6.0)
865.3
31 Dec1
2017
$bn
142.7
2,557.1
%
5.6
EU-23
Choice of transitional arrangements for the definition of the capital measure
Fully phased-in
Fully phased-in
Fully phased-in
UK leverage ratio exposure – quarterly average
2,464.4
2,351.2
2,351.4
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 the Capital
Requirements Directive IV (‘CRD IV’) was 5.5% at 31 December
2018, down from 5.6% at 31 December 2017. The increase in
exposure was primarily due to growth in customer lending and
financial investments.
The Group’s UK leverage ratio at 31 December 2018 was 6.0%.
This measure excludes qualifying central bank balances from the
calculation of exposure.
At 31 December 2018, our UK minimum leverage ratio
requirement of 3.25% was supplemented by an additional leverage
ratio buffer of 0.5% and a countercyclical leverage ratio buffer of
0.2%. These additional buffers translated into capital values of
$12.7bn and $4.7bn respectively. We exceeded these leverage
requirements.
%
5.8
6.0
%
6.2
6.1
%
6.1
6.1
Pillar 3 disclosure requirements
Pillar 3 of the Basel regulatory framework is related to market
discipline and aims to make financial services firms more
transparent by requiring publication, at least annually, of wide-
ranging information on their risks, capital and management. Our
Pillar 3 Disclosures at 31 December 2018 is published on our
website, www.hsbc.com, under ‘Investor Relations’.
Footnotes to capital, leverage and risk-
weighted assets
1
2
3
All figures presented as reported under IAS 39 at 31 December 2017.
‘Capital requirement’ represents the minimum total capital charge set at 8%
of RWAs by article 92 of the Capital Requirements Regulation.
RWAs are non-additive across geographical regions due to market risk
diversification effects within the Group.
HSBC Holdings plc Annual Report and Accounts 2018 151
Strategic ReportCorporate Governance Financial Statements Additional Information Financial Review Report of the Directors | Corporate governance report
Corporate governance report
crime risk, known as the Financial Crime Risk Management
Meeting, which is chaired by the Group Chief Compliance Officer.
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
The Board
Page
Powers of the Board
152
152
153
157
158
164
165
165
166
169
171
The Board is responsible for overseeing the management of HSBC
globally and, in so doing, exercises its powers, subject to any
relevant laws, regulations and HSBC Holdings’ Articles of
Association (the ‘Articles of Association’).
Certain matters are reserved for the Board for its approval. These
include: 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 that exceed certain
thresholds; specified senior appointments; and any substantial
change in balance sheet management policy.
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.
Phillip Ameen, Joachim Faber and John Lipsky retired from the
Board following the conclusion of the 2018 Annual General
Meeting. Their departures led to a reduction in the size of the
Board, as part of its ongoing work to simplify, clarify and
strengthen governance arrangements. The number of Board
Committees was also reduced from seven to five and subsidiary
governance was simplified.
Group Chairman
Mark Tucker was appointed to the Board as an independent non-
executive Director on 1 September 2017 and became non-
executive Group Chairman on 1 October 2017.
Executive Directors
The Group Chief Executive, the Group Chief Financial Officer and
the Group Chief Risk Officer are HSBC employees.
Independent non-executive Directors
The majority of the Board comprises 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.
All of the non-executive Directors are considered to be
independent of HSBC. There are no relationships or circumstances
that are likely to affect any individual non-executive Director’s
judgement. To satisfy the Rules Governing the Listing of Securities
on The Stock Exchange of Hong Kong Limited (‘HKEx’), all non-
executive Directors have confirmed their independence during the
year. The non-executive Group Chairman was considered to be
independent on 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, who has been Senior Independent Director
(‘SID’) since April 2017, was appointed as Deputy Group Chairman
in August 2018.
The roles of the Group Chairman, Deputy Group Chairman and
Senior Independent Director, and Group Chief Executive are set
out in writing and are available on the website at www.hsbc.com/
our-approach/corporate-governance/board-responsibilities.
Responsibility for the day-to-day management of the business and
implementation of strategy is delegated by the Board to the Group
Chief Executive, who is supported by the Group Management
Board (‘GMB’), an executive forum which he chairs.
There are special meetings of the GMB that provide oversight of
risk matters, known as the Risk Management Meeting (‘RMM’),
which is chaired by the Group Chief Risk Officer. There are also
special meetings of the GMB that provide oversight of financial
152
HSBC Holdings plc Annual Report and Accounts 2018
These changes created clearer and stronger lines of authority and
accountability, which enables the Board to devote more time to
priority areas.
The Board regularly reviews reports on performance against
financial and other strategic objectives, key business challenges,
risk, business developments, investor relations and the Group's
relationships with its key stakeholders. During 2018, the Board
reviewed the Group's strategy with the newly-appointed Group
Chief Executive and his management team and approved a
number of strategic priorities targeted for delivery by the end of
2020. Following their approval, further details were announced to
investors in an update in June 2018. The Board routinely tracks
progress with respect to each strategic priority, together with the
Group Chief Executive and members of his management team.
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’) and the
Financial System Vulnerabilities Committee (‘FSVC’), promotes a
strong risk governance culture that shapes the Group’s approach
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 of non-
executive Directors, 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 able 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. During 2018, the
Board implemented a governance simplification initiative,
changing the size, structure and composition of the Board and its
committees. Given that these changes were relatively recent and
that a period of time is required for their impact to be fully
assessed, the Board agreed that it would be premature to conduct
an evaluation of its effectiveness during 2018. Instead, a review of
the Board's effectiveness, and that of its committees, will be
conducted in 2019 by an independent external service provider
and the results presented to the Board during this year. Details of
the process followed and actions arising from that evaluation will
be included in the Annual Report and Accounts 2019.
Director performance evaluation
The Group Chairman has routinely met with each of the non-
executive Directors during 2018 to discuss individual performance,
Board and committee governance, time commitment and business
priorities.
Executive Directors’ individual performance evaluations are
undertaken as part of the performance management process,
which applies for all employees. In respect of the Group Chief
Executive, this review process was led by the Group Chairman and
discussed with the Nomination & Corporate Governance
Committee. The Group Remuneration Committee considers the
result of the review by the Group Chairman of the Group Chief
Executive, as well as his assessments of the performance of the
Group Chief Financial Officer and Group Chief Risk Officer, when
determining variable pay each year, as set out in the Directors’
remuneration report contained in this Annual Report and Accounts.
The Group Chairman’s performance is evaluated by the non-
executive Directors, led by the SID.
Non-executive Group Chairman
Mark E Tucker, 61
Non-executive Group Chairman
Appointed to the Board: September 2017
Group Chairman since October 2017
Chairman of the Nomination & Corporate Governance 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. Mark
is also a Director of the Peterson Institute for International
Economics.
Executive Directors
John Flint, 50
Group Chief Executive
Appointed to the Board: February 2018
Skills and experience: John joined HSBC in 1989 and helped to
establish and expand the HSBC Global Markets business in Asia.
He has held various roles across the Group, including Group
Treasurer; Deputy Head of Global Markets and Head of Global
Markets, Europe, Middle East and Africa; Chief Executive of HSBC
Global Asset Management; Chief of Staff to the Group Chief
Executive and Group Head of Strategy and Planning. In 2013, John
was appointed Group Managing Director and Chief Executive of
Retail Banking and Wealth Management.
Current appointments include: Chairman of the Group
Management Board and The Hongkong and Shanghai Banking
Corporation Limited. John is a member of the Monetary Authority
of Singapore International Advisory Panel and the International
Business Council of the World Economic Forum. He is also a
member of the Climate Finance Leadership Initiative.
Marc Moses, 61
Group Chief Risk Officer
Appointed to the Board: January 2014
Skills and experience: Marc joined HSBC in 2005 as Chief
Financial and Risk Officer for Global Banking and Markets, and in
December 2010 became Group Chief Risk Officer. He has
extensive risk management and financial experience. Marc is a
fellow of the Institute of Chartered Accountants in England and
Wales. He was European Chief Financial Officer at J.P. Morgan
Chase & Co., and an audit partner at Price Waterhouse.
Ewen Stevenson, 52
Group Chief Financial Officer
Appointed to the Board: 1 January 2019
Skills and experience: Ewen has over 25 years of experience in
the banking industry, both as an adviser to major banks and as an
executive. Ewen was most recently executive Director and Chief
Financial Officer at Royal Bank of Scotland Group. Prior to this, he
was at Credit Suisse where his last role was co-Head of the EMEA
Investment Banking Division and co-Head of the Global Financial
Institutions Group.
Independent non-executive Directors
Kathleen Casey, 52
Independent non-executive Director
Appointed to the Board: March 2014
Member of the Group Audit Committee and the Nomination &
Corporate Governance 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.
Current appointments include: Senior adviser to Patomak
Global Partners, member of the Board of Trustees of the Financial
Accounting Foundation and a number of public and non-profit
bodies.
HSBC Holdings plc Annual Report and Accounts 2018
153
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Laura Cha, GBM, 69
Independent non-executive Director
Appointed to the Board: March 2011
Irene Lee, 65
Independent non-executive Director
Appointed to the Board: July 2015
Member of the Financial System Vulnerabilities Committee and the
Nomination & Corporate Governance Committee
Member of the Group Remuneration Committee and the
Nomination & Corporate Governance 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 International Advisory Council of the China Securities
Regulatory Commission. Other former appointments include non-
executive Director of China Telecom Corporation Limited; Bank of
Communications Co., Ltd; and Tata Consultancy Services Limited.
She also served as Chair of Hong Kong Special Administrative
Region’s Financial Services Development Council and Deputy
Chair of the Securities and Futures Commission in Hong Kong.
Current appointments include: Chair of Hong Kong Exchanges
and Clearing Limited and non-executive Deputy Chair of The
Hongkong and Shanghai Banking Corporation Limited. She is also
a non-executive Director of The London Metal Exchange, Unilever
PLC and Unilever N.V.
Henri de Castries, 64
Independent non-executive Director
Appointed to the Board: March 2016
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 Government Takeovers Panel.
Current appointments include: Executive Chair of Hysan
Development Company Limited and a non-executive Director of
The Hongkong and Shanghai Banking Corporation Limited, Hang
Seng Bank Limited and Cathay Pacific Airways Limited. She is also
a member of the Exchange Fund Advisory Committee of the Hong
Kong Monetary Authority.
Heidi Miller, 65
Independent non-executive Director
Appointed to the Board: September 2014
Member of the Group Remuneration Committee and the
Nomination & Corporate Governance Committee
Skills and experience: Henri has more than 25 years’
international experience in the financial services industry. He
joined AXA S.A. in 1989, and then held a number of senior roles,
ultimately as Chairman and Chief Executive Officer of AXA until
1 September 2016.
Current appointments include: Special Adviser to General
Atlantic, Chairman of Institut Montaigne, lead independent
Director of Nestlé S.A. and a non-executive Director of the French
National Foundation for Political Science. Henri is also a member
of the Global Advisory Council at LeapFrog Investments.
Member of the Group Risk Committee and the Nomination &
Corporate Governance Committee
Skills and experience: Heidi is a former President of
International at J.P. Morgan Chase & Co., 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; and Executive Vice President and Chief Financial
Officer of Citigroup Inc.
Current appointments include: Chair of HSBC North America
Holdings Inc. and a non-executive Director of First Data
Corporation and General Mills Inc.
Lord Evans of Weardale, 61
Independent non-executive Director
Appointed to the Board: August 2013
David Nish, 58
Independent non-executive Director
Appointed to the Board: May 2016
Chairman of the Financial System Vulnerabilities Committee
and member of the Nomination & Corporate Governance
Committee
Member of the Group Audit Committee, the Group Remuneration
Committee and the Nomination & Corporate Governance
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), had oversight of the
Joint Terrorist Analysis Centre and the Centre for the Protection of
National Infrastructure, and attended the National Security
Council.
Current appointments include: Chairman of the UK Committee
on Standards in Public Life and the Advisory Board of Blackdot
Solutions Ltd, non-executive Director of Ark Data Centres, and an
adviser to various cybersecurity and technology companies.
154
HSBC Holdings plc Annual Report and Accounts 2018
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
Group Finance Director of Scottish Power plc; non-executive
Director of the UK Green Investment Bank plc, HDFC Life (India),
and London Stock Exchange Group plc; and partner of Price
Waterhouse. He is a qualified chartered accountant.
Current appointments include: A non-executive Director of
Vodafone Group plc and Zurich Insurance Group.
Jonathan Symonds, CBE, 59
Independent non-executive Director
Appointed to the Board: April 2014
Senior Independent Director since April 2017
Deputy Group Chairman since August 2018
Chairman of the Group Audit Committee and member of the Group
Risk Committee and the Nomination & Corporate Governance
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 Chairman of the Audit Committee
of Diageo plc. He is a fellow of the Institute of Chartered
Accountants in England and Wales.
Current appointments include: Chairman of Proteus Digital
Health Inc. and Genomics England Limited and a non-executive
Director of Rubius Therapeutics, Inc.
Jackson Tai, 68
Independent non-executive Director
Appointed to the Board: September 2016
Chairman of the Group Risk Committee and member of the Group
Audit Committee, Financial System Vulnerabilities Committee and
the Nomination & Corporate Governance Committee
Skills and experience: Jackson Tai is a skilled international non-
executive Director with experience in senior operating and
governance roles across Asia and China, as well as North America
and Europe. Jackson was formerly Vice Chairman and Chief
Executive Officer 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 N.V., Mastercard
Incorporated and the Canada Pension Plan Investment Board.
International; and member of the supervisory board of ASML
Holding N.V.
Current appointments include: Chair of the Dutch Corporate
Governance Code Monitoring Committee, Chair of the supervisory
board of EY Netherlands, Deputy Chair of the supervisory board of
Royal DSM N.V., non-executive Director of Mylan N.V., member of
the Selection and Nomination Committee of the Supreme Court of
the Netherlands and member of the Capital Markets Committee of
the Dutch Authority for the Financial Markets.
Group Company Secretary
Ben Mathews, 51
Group Company Secretary
Ben joined HSBC in June 2013 and became Group Company
Secretary in July 2013. He is a fellow of the Institute of Chartered
Secretaries and Administrators. Former appointments include
Group Company Secretary of Rio Tinto plc and of BG Group plc.
Group Managing Directors
Elaine Arden, 50
Group Chief Human Resources Officer
Elaine joined HSBC in June 2017 as Group Chief Human
Resources Officer. 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.
Samir Assaf, 58
Chief Executive Officer, Global Banking and Markets
Samir joined HSBC in 1994 and became a Group Managing
Director in 2011. He is Chairman and a non-executive Director of
HSBC France; a Director of HSBC Trinkaus & Burkhardt AG and
The Saudi British Bank. Former appointments include: a Director
of HSBC Bank plc, HSBC Global Asset Management Limited and
HSBC Bank Egypt S.A.E.; and Head of Global Markets for Europe,
Middle East and Africa.
Pauline van der Meer Mohr, 58
Independent non-executive Director
Appointed to the Board: September 2015
Colin Bell, 51
Group Chief Compliance Officer
Chairman of the Group Remuneration Committee and a member of
the Group Risk Committee and the Nomination & Corporate
Governance 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 N.V.; Group Human
Resources Director at TNT N.V.; HR Director, Information
Technology, Royal Dutch Shell Group; Senior Legal Counsel, Shell
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.
Patrick Burke, 57
President and Chief Executive Officer, HSBC USA
Patrick joined HSBC in 1989 and became a Group Managing
Director in 2015. He is also an executive Director, President and
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.
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Pierre Goad, 57
Chief Communications Officer
Charlie Nunn, 47
Chief Executive Officer, Retail Banking and Wealth Management
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.
Noel Quinn, 57
Chief Executive Officer, 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 and Development for Commercial
Banking, Head of Commercial Finance Europe, Head of
Commercial Banking UK, and Head of Commercial Banking Asia.
António Simões, 43
Chief Executive Officer, Global Private Banking
António joined HSBC in 2007 and became a Group Managing
Director on 1 February 2016. On 1 January 2019, he was
appointed Chief Executive Officer of Global Private Banking.
António was previously Chief Executive Officer of UK and Europe
(HSBC Bank plc), and served as Chief of Staff to the Group Chief
Executive Officer and Group Head of Strategy and Planning.
António was also formerly the Chairman of the Practitioner Panel
of the FCA, a partner of McKinsey & Company, and an associate at
Goldman Sachs.
Ian Stuart, 55
Chief Executive Officer, HSBC UK Bank plc
Ian joined HSBC in 2014 and became a Group Managing Director
of HSBC Holdings plc on 1 July 2018. In April 2017 he was
appointed Chief Executive Officer of HSBC UK Bank plc. He is a
Board member of the financial services industry association UK
Finance. He has more than 38 years’ experience in the banking
industry. Before joining HSBC, Ian led the corporate banking
business at Barclays for six years and held a variety of roles in
business banking during his 22 years at NatWest.
Peter Wong, 67
Deputy Chairman and Chief Executive Officer,
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. He is also non-executive Vice
Chairman of Bank of Communications Co., Limited. Other
appointments include Deputy Chairman of the Hong Kong General
Chamber of Commerce; Council Member of Hong Kong Trade
Development Council and a member of its Belt and Road
Committee; and a Member of the Chongqing Mayor’s International
Economic Advisory Council.
Pierre first joined HSBC in 2001. In 2010, he left to join Zurich
Insurance Group as Head of Communications. He rejoined HSBC
in 2011 and became a Group Managing Director in 2015. Former
appointments include: Director of HSBC Bank Canada; Global Co-
Head of Communications; and Head of Corporate Development,
Europe, Middle East and Global Businesses.
Pam Kaur, 55
Group Head of Internal Audit
Pam joined HSBC and became a Group Managing Director in
2013. She is a non-executive Director of Centrica plc, a co-opted
Council member of The Institute of Chartered Accountants in
England and Wales, and Chair of the Financial Services Faculty
Board. 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, 55
Chief Legal Officer
Stuart joined HSBC and became a Group Managing Director in
2012. Former appointments include: Under Secretary for Terrorism
and Financial Intelligence in the US Department of the Treasury;
senior fellow for National Security and Financial Integrity at the
Council on Foreign Relations; Principal Associate Deputy Attorney
General at the US Department of Justice; and a partner at Miller,
Cassidy, Larroca & Lewin LLP and at Baker Botts LLP.
Andy Maguire, 52
Group Chief Operating Officer
Andy joined HSBC in 2014 as Group Chief Operating Officer and
became a Group Managing Director in 2015. He is Chairman of
HSBC Global Services Limited, HSBC Global Services (UK) Limited
and HSBC Group Management Services Limited. He is formerly a
Managing Partner (UK and Ireland) of the Boston Consulting
Group.
Paulo Maia, 60
Chief Executive Officer, Latin America
Paulo joined HSBC in 1993 and became a Group Managing
Director on 1 February 2016. He is Chairman of Grupo Financiero
HSBC Mexico S.A. de C.V., Chairman of HSBC Argentina Holdings
S.A. and a Director of HSBC North America Holdings Inc. Former
appointments include: Chief Executive Officer of HSBC Bank
Canada and HSBC Bank Australia Limited.
Stephen Moss, 52
Group Chief of Staff
Stephen, who has been with HSBC for 27 years, became a Group
Managing Director in 2018. As Chief of Staff to the Group Chief
Executive, Stephen leads Group Strategy and Planning, Group
Mergers and Acquisitions, Global Communications, Global Events,
Group Public Affairs and Group Corporate Sustainability. Stephen
is a Director of the Saudi British Bank, HSBC Middle East Holdings
B.V. and HSBC Global Asset Management Limited. He is a
qualified chartered accountant and member of the Institute of
Chartered Accountants in England and Wales.
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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.
The number of Directors must not be fewer 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.
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 &
Corporate Governance 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 by the Nomination
& Corporate Governance Committee.
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 estimated time required to perform
their role. The current anticipated time commitment, which is
subject to periodic review, is 75 days per year. Non-executive
Directors who chair a Board committee are expected to devote up
to 100 days per year to the Group. The Chairman of the GRC is
expected to commit up to 150 days per year reflecting the
complexity of the role and responsibilities of this Committee. 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.
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
corporate 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 a set of 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 that have been authorised, and the terms
of those authorisations, is routinely undertaken by the Board.
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. Additionally, 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. During the year, all Directors were reminded of their
obligations in respect of transacting in HSBC Group securities and,
save as disclosed on page 168, all Directors have confirmed that
they have complied with their obligations.
Training and development
Following a period of induction, training and development is
provided for each Director with the support of the Group Company
Secretary. Non-executive Directors develop and refresh their skills
and knowledge through periodic interactions and briefings with
senior management of the Group’s businesses and functions.
During the year, Directors and the Group Company Secretary
undertook mandatory training on a range of issues, including: anti-
money laundering; anti-bribery and corruption; embedding good
conduct; cybersecurity, and sanctions.
Subsidiary governance
The Group Chairman hosted two governance forums during 2018
for the Chairs of the Group's principal subsidiaries. Awareness and
discussion sessions were conducted by senior executives and
subject matter experts. These covered capital management,
investor demands, conduct, UK regulatory matters, IT resilience,
cybersecurity, data, and financial crime risk management.
Initiatives were agreed on enhancements to the accountability of
the principal subsidiaries for governance oversight across their
respective regions, and the improvement of information flows
between the Group and the principal subsidiary boards.
Additionally, discussions took place concerning the strategic
planning cycle, reducing organisational complexity, interactions
with regulators and board succession planning.
Jonathan Symonds, Chair of the Group Audit Committee (‘GAC’),
and Jackson Tai, Chair of the GRC, hosted regional forums during
2018 with the Chairs of the Group’s subsidiary audit and risk
committees.
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 on
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 2019 AGM will be held at the International Convention Centre,
8 Centenary Square, Birmingham B1 2EA at 11.00am on Friday, 12
April 2019 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.
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
HSBC Holdings plc Annual Report and Accounts 2018
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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 may be transacted except
that stated by the requisition or proposed by the Board.
As explained in more detail in the reports of the GAC and the GRC
on pages 159 and 161, this interaction is reinforced through the
Audit and Risk Committee Chairs’ forums. The Chairs of the
subsidiary audit and risk committees within the respective regions
attend a regional forum to exchange subject matter expertise and
to review and discuss forward-looking risk and audit issues.
Board members are encouraged to, and do, make visits to the
regions and attend principal subsidiary board and board
committee meetings as guests. Similarly, regional Directors are
invited regularly 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.
Board committees
Whistleblowing
The GAC is responsible for reviewing the Group’s whistleblowing
procedures. It receives 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. They also review a
rolling planner of proposed committee business. In 2019, the
feedback from this review process will be taken into account in
informing the results of the Board's effectiveness review being
undertaken by an independent external provider.
During 2018, the Board reduced the number of Board committees
from seven to five. Responsibilities previously delegated to its
Conduct & Values Committee and Philanthropic & Community
Investment Oversight Committee were reassigned to other, more
appropriate governance forums within the Group. Specific
responsibility for cyber-crime and information security risk was
transferred from the FSVC to the GRC. Responsibility for the
development of the firm’s culture was assumed by the Group
Chairman. In 2018, the Nomination Committee was also renamed
the Nomination & Corporate Governance Committee, reflecting its
broader corporate governance remit.
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/our-approach/corporate-governance/board-
committees.
Interaction with principal subsidiaries
The Board manages relationships with the regions through
principal subsidiaries. There are close interactions between the
Group Board and the principal subsidiaries and their respective
committees. Minutes are shared and certain appointments to
principal subsidiary boards, as well as other senior roles, are
required to be approved by the Nomination & Corporate
Governance Committee of the Group Board.
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HSBC Holdings plc Annual Report and Accounts 2018
Board and Committee attendance in 2018
AGM Board*
Group Audit
Committee
Group Risk
Committee
Group
Remuneration
Committee
Nomination &
Corporate
Governance
Committee
Financial
System
Vulnerabilities
Committee
Conduct &
Values
Committee1
Philanthropic
& Community
Investment
Oversight
Committee2
Number of meetings held*
Group Chairman
Mark Tucker
Executive Directors
John Flint3
Stuart Gulliver 4
Iain Mackay 5
Marc Moses
Non-executive Directors
Phillip Ameen 6
Kathleen Casey 7
Henri de Castries 7
Laura Cha 8, 9
Joachim Faber 6
Irene Lee 7, 9, 10
John Lipsky 6
Pauline van der Meer Mohr 7
Heidi Miller 7
David Nish 7, 9
Jonathan Symonds 7, 11
Jackson Tai 7, 12
Lord Evans of Weardale 7
1
1
1
-
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
9
9/9
6/6
3/3
9/9
9/9
5/5
9/9
9/9
8/9
5/5
8/9
4/5
9/9
8/9
7/9
9/9
9/9
9/9
13
11
-
-
-
-
-
5/5
13/13
-
-
-
-
-
-
-
13/13
13/13
1/1
-
-
-
-
-
-
-
-
-
-
-
-
4/5
6/6
10/11
-
6/6
11/11
-
8
-
-
-
-
-
-
-
8/8
-
-
6/6
2/2
8/8
-
6/8
-
-
-
5
5/5
-
-
-
-
-
3/3
3/3
5/5
-
3/3
2/2
5/5
3/3
3/3
5/5
3/3
3/3
6
-
-
-
-
-
-
2/2
-
3/4
-
-
-
-
-
-
-
6/6
6/6
2
-
-
-
-
-
-
-
-
1/2
-
-
-
2/2
-
-
2/2
-
1/2
2
-
-
-
-
-
-
-
-
2/2
-
-
-
-
-
-
-
-
2/2
*Board meetings in 2018 were held in London, Shanghai and Seattle. In addition to the Board meetings listed, Chairman’s Committee meetings were also held in 2018.
1 The Conduct & Values Committee was demised in 2018.
2 The Philanthropic & Community Investment Oversight Committee was demised in 2018.
3 Appointed to the Board 21 February 2018.
4 Retired from the Board 20 February 2018.
5 Retired from the Board 31 December 2018.
6 Retired from the Board 20 April 2018.
7 Appointed to the Nomination & Corporate Governance Committee 20 April 2018.
8 Appointed to the Financial System Vulnerabilities Committee 20 April 2018.
9 Unable to attend an ad-hoc meeting of the Board called at short notice.
10 Appointed to the Group Remuneration Committee 20 April 2018.
11 Appointed to the Group Risk Committee 20 April 2018 and as Deputy Group Chairman 6 August 2018.
12 Appointed to the Group Audit Committee 1 December 2018.
Group Audit Committee
Members
Jonathan Symonds (Chair)
Phillip Ameen (resigned 20 April 2018)
Kathleen Casey
David Nish
Jackson Tai (appointed 1 December 2018)
Role and responsibilities
The GAC has responsibility, delegated to it from the Board, for
overseeing all matters relating to external financial reporting.
This responsibility encompasses the Annual Report and Accounts,
quarterly reporting, analyst presentations and Pillar 3 disclosures.
In discharging their responsibility the GAC oversees:
• preparation of financial statements, compliance with
accounting standards and accounting judgements;
members of senior management routinely attend meetings of the
GAC. The external auditor also attended all meetings. The Chair
and other members of the GAC had regular meetings with
management to discuss agenda planning and specific issues as
they arose during the year. Each meeting includes in camera
sessions with the internal and external auditors. The Chair of the
GAC, who is also the Deputy Group Chairman and Senior
Independent Director, oversaw the Group Chief Financial Officer
succession process and selection.
Compliance with regulatory requirements
The Board has confirmed 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 assesses the adequacy of resources of the accounting
and financial reporting function. It also monitors the legal and
regulatory environment relevant to its responsibilities.
• the effectiveness of internal financial control functions;
How the Committee discharges its responsibilities
• the independence and performance of Internal Audit;
Financial reporting
• the relationships with external auditors, including their
independence, performance and approval of proposed services
outside of the scope of the Group audit; and
• whistleblowing (with effect from the conclusion of the 2018
AGM).
Governance
The Group Chief Financial Officer, Group Chief Accounting Officer,
Group Head of Internal Audit, Group Financial Controller and other
The GAC reviews HSBC’s financial and reporting judgements and
their application to the Group’s financial reporting, including Pillar
3 disclosures. It also reviews presentations to external analysts,
including the key financial metrics relating to HSBC’s strategic
actions.
Linkages with principal subsidiary audit committees
During the year the GAC maintained links with the audit
committees of The Hong Kong and Shanghai Banking Corporation
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Limited, HSBC North America Holdings Inc., HSBC Bank Canada,
HSBC Bank plc, HSBC UK Bank Plc, HSBC Latin America Holdings
(UK) Limited, HSBC Bank Middle East Limited and HSBC Private
Banking Holdings (Suisse) SA.
In 2018, the GAC and GRC hosted three joint regional forums with
the Chairs of subsidiaries' audit and risk committees, together
with senior management from the relevant subsidiaries. The
purpose of these forums was to discuss mutual priorities;
improvement and remediation programmes; risk profiles and
forward-looking issues. They also provided an opportunity to
deliver targeted training and conduct a review of committee
effectiveness. These meetings are supplemented throughout the
year by formal and informal communication between the
committee chairs and GAC members.
Appointments to the audit committees of the principal subsidiaries
are reviewed by the GAC. The GAC Chair meets with 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 164.
External audit
The GAC reviews the external auditor’s approach, strategy for the
annual audit and its findings. In 2018, the Committee reviewed
auditor independence, audit quality and the use of technology and
analytics. GAC members routinely met audit partners in key parts
of the world and were involved in auditor conferences. Principal
matters discussed with PwC are set out in their report on page
209.
The GAC is also involved in audit partner rotation and succession
for the Group and its principal subsidiaries.
A policy is in place and monitored by the GAC on hiring employees
or former employees of the external auditor, including in relation to
any breaches of the policy.
The GAC regularly meets privately with the external auditor. The
GAC Chair maintains regular contact with the audit partner
throughout the year.
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 7.
Auditors‘ remuneration
Total fees payable
Fees for non-audit services
2018
$m
119.50
32.90
2017
$m
129.70
44.90
A further breakdown of the fees paid to the auditors for each of
the last three financial years can be found in Note 7 on the
Financial Statements.
During the year, the GAC assessed the effectiveness of PwC as the
Group’s external auditor, using a questionnaire that focuses on the
overall audit process, its effectiveness and the quality of output.
The GAC also assessed any potential threats to independence that
were self-identified or reported by PwC. 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 2018.
The GAC has therefore recommended to the Board that PwC
be reappointed as auditor. Resolutions concerning the
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HSBC Holdings plc Annual Report and Accounts 2018
reappointment of PwC and their audit fee for 2019 will be
proposed to shareholders at the 2019 AGM.
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 Chair of the GAC and administratively to the Group
Chief Executive. The Committee meets regularly with the Group
Head of Internal Audit without other management present.
Committee members also meet with critical audit teams around
the world. In 2018, the GAC additionally considered audit quality
and the use of technology and analytics. The GAC concluded that
the Internal Audit function remained effective. The GAC also
reviewed succession planning in the Internal Audit function.
Principal activities and significant issues considered
during 2018
Internal control framework
The GAC continued to monitor the progress being made to
upgrade entity level controls. During 2018, 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. Where critical entity level
controls overlapped with the activities of the GRC, joint sessions
were held.
IFRS 9 implementation
Throughout 2018, the GAC received detailed presentations and
updates from management on the Group’s readiness for the
implementation of IFRS 9. Particular emphasis was given in 2018
to the forward-looking projections, required for IFRS 9 and its
relationship to regulatory stress testing. Detailed discussions were
held in situations where impairment risk could not be easily
modelled, for example, the significant uncertainty regarding the
economic outlook for the UK, and US-China trade in conjunction
with the relevant subsidiary audit committee.
Bank of Communications Co., Limited (‘BoCom’)
The GAC received regular updates on the assumptions
underpinning the valuation of BoCom. It monitored indicators
of impairment, both macro-economic and BoCom specific, and
reviewed the results of the impairment assessments carried out by
management. Much of this work was carried out in conjunction
with The Hongkong and Shanghai Banking Corporation audit
committee.
Resolution planning
The Group is required to have in place a recovery plan that sets out
recovery options to be initiated in the event of the Group coming
under severe financial stress. During 2018, 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
During 2018, the GAC considered the accounting judgements in
relation to the creation of HSBC UK, the ring-fenced bank, and the
creation of the internal service companies that supplies services to
banks.
Ibor
The GAC received presentations on the risks relating to Ibors
discontinuation.
Whistleblowing
The GAC reviewed the independence, autonomy and effectiveness
of the firm’s policies and procedures on whistleblowing, including
the procedures for the protection of staff who raise concerns of
detrimental treatment.
Significant accounting judgements considered during 2018 included:
Key area
Action taken
Expected credit loss
('ECL') impairment
Bank of
Communications Co.,
Limited (‘BoCom’)
impairment testing
Appropriateness of
provisioning for legal
proceedings and
regulatory matters
Interest rate benchmark
replacement
The GAC considered loan impairment allowances for personal and wholesale lending. Particular judgements included the effect
of UK economic uncertainty and the risk of escalation of trade wars between the US and China on the measurement of ECL
impairment. The GAC also considered disclosures relating to ECL in the year-end accounts.
During the year, the GAC considered the regular impairment reviews of HSBC’s investment in BoCom. The GAC review included
the sensitivity of the result of the impairment review to estimates and assumptions of projected future cash flows, regulatory
capital assumptions and 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, which was settled during the year.
The GAC considered the accounting implications of benchmark interest rate replacement for hedge accounting relationships as
at 31 December 2018, and longer-term broader accounting implications for financial instruments. The GAC considered
management's judgement that no change to hedge accounting is appropriate as at 31 December 2018, and that this position will
be kept under review in the context of future market developments in the transition of interest rate benchmarks to new risk-free
rates.
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.
Valuation of financial
instruments
Viability statement
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.
In accordance with the provisions contained in the UK Corporate Governance Code, the Directors carried out a robust
assessment of the principal risks for the Group and parent company. The GAC 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.
Tax-related judgements
The GAC considered the recoverability of deferred tax assets, in particular in the US. The GAC also considered management’s
judgements relating to the tax indemnity agreed to by HSBC as part of the sale of operations in Brazil 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.
Defined benefit pension
accounting
The GAC considered the UK defined benefit pension scheme accounting where, after the Court of Appeal ruling on 26 October
2018 against Lloyds Banking Group in respect of guaranteed minimum pension equalisation, HSBC has recognised past service
costs through the income statement.
IFRS 16 'Leases'
The GAC considered the estimated impact of adoption of IFRS 16 'Leases', which applies from 1 January 2019, and the related
disclosures.
Adjusted profit
measures
Throughout the year, the GAC considered management’s non-GAAP measures for adjusted profits. They have also reviewed a
revised policy for such measures as it was aligned to the Group’s strategy.
Group Risk Committee
Members
Jackson Tai (Chair)
John Lipsky (resigned 20 April 2018)
Heidi Miller
Pauline van der Meer Mohr (appointed 20 April 2018)
Jonathan Symonds (appointed 20 April 2018)
Independent Adviser
Andrew France (appointed 1 July 2018)
The Independent Adviser supports the Committee’s work and
has deep experience working with governments and private
companies across the world to keep information, technology and
critical national infrastructures safe.
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 controls overseen by the
GAC). In its holistic view of risk, the GRC is supported by the
FSVC, which is the Board committee responsible for overseeing
risks relating to financial crime, anti-bribery and corruption. The
FSVC reports second order risks to the GRC. Appropriate linkages
and information flows between these committees are further
enhanced by cross-membership and close engagement of the
members and the committee attendees. In April 2018, the GRC
assumed responsibility for the oversight of cyber-crime risk and
information security risk from the FSVC and people risk and
employee conduct from the Conduct & Values Committee.
Governance
In carrying out its responsibilities, the GRC is closely supported by
the Group Chief Risk Officer, Group Chief Financial Officer, Group
Head of Internal Audit, Group Financial Controller, Global Head of
Compliance and Global Head of Risk Strategy, all of whom
regularly attend GRC meetings to contribute their subject matter
expertise and insight. They together with the first line business,
functional and regional leaders, second line risk stewards and third
line internal auditors, facilitate Committee members' review and
challenge of current and forward-looking risk issues.
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 Chairs of
both these committees engage on the agendas of each other’s
committee meetings. Furthermore, the Chair of the GAC is a
member of the GRC and the Chair of the GRC is a member of the
GAC. This further enhances the linkages, coordination and the
flows of information between the GRC and GAC.
The GRC programmes its meeting agenda and capitalises on the
overseas location of the Holdings Board (and GRC) meetings, as
well as the GRC Chair’s annual visits to principal subsidiary risk
committees to proactively encourage in person participation of
principal subsidiary risk committee Chairs in GRC meetings,
reviews, stress testing and capital and liquidity management
sessions throughout the year.
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The GRC Chair and the GRC members regularly meet with the
Group Chief Risk Officer, the Group Head of Internal Audit and
external auditors without management present.
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 ('RAS'),
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 identifies any areas where
management is required to assess vulnerabilities via stress testing.
Page 69 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 RAS biannually 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.
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
proactively including Chairs of principal subsidiary risk committees
to participate in GRC meetings and thematic reviews, scheduling
regional updates in the GRC agenda, conducting holistic deep
dives and sharing GRC learnings and insight with subsidiaries, the
GRC has further enhanced its connectivity, linkages and two-way
flow of information with the principal subsidiary risk committees,
and among the risk committees themselves.
Principal activities and significant issues considered during 2018
Key area
Action taken
Any new appointments to the risk committees of the principal
subsidiaries are also reviewed by the GRC. The GRC Chair also
meets with any proposed new Chair of the principal subsidiary risk
committees.
During 2018, the GRC provided informed review and challenge to
the Group’s regulatory submissions relating to capital
management and liquidity adequacy assessments. It proactively
reviewed progress of the Group's liquidity risk management
improvement plan. It 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 GRC exercised its governance oversight for people risk and
employee conduct through reviews, including with the Group
Chief Human Resources Officer and Group business heads and at
the audit and risk committee chairs forums, that the right
behaviours are being promoted to support fair customer outcomes
and to protect the integrity of markets. The GRC continued to
oversee and challenge the effective delivery of the Global Markets
conduct enhancement programme, and considered the emerging
opportunities, ethical issues and risks as digital capabilities evolve.
Internal Audit’s independent assessments on conduct were
reported regularly with specific themes highlighted from audit
activity.
The GRC has overseen progress with delivering against the
remediation plan addressing the allegations set out in the 2018 FX
DPA with the US Department of Justice and the 2017 Consent
Order with the Federal Reserve Board.
The GRC reviewed HSBC’s progress towards improving the
Group’s cybersecurity and the actions being taken to mitigate
exposure to cyber-risk. It also conducted a review and challenge to
the Group's continued progress in improving its operational
resilience to presumed disruptions, especially in its key
infrastructure functions and prioritised business services.
The Group RAS and
monitoring of the Group
risk profile against the
RAS
Capital and liquidity
Stress testing
Execution risk
Internal control and risk
management
Following its biannual reviews, the GRC did not recommend any material changes to the overall level of risk appetite in 2018.
The GRC expanded its focus through the introduction of new risk appetite metrics for model risk and systems and data
integrity risk, related to the Group's most critical models and IT services.
The GRC has fully engaged with 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 process. The GRC also
encouraged a strengthening of the principal subsidiary risk committee's review and challenge of their respective capital and
liquidity programmes.
The GRC conducted a comprehensive review and challenge of the scenarios and approach to the PRA stress test and
reviewed the results of the annual cyclical scenario. 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 the GRC 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 reviewed the Group’s risk management framework and system of internal control (other than internal financial
controls covered by the GAC) and the developments affecting them over the course of 2018, as part of the Board’s
assessment of internal control. The GRC has reviewed and challenged the effectiveness of non-financial risk management
with particular focus on data management, information and cyber risk, people risk and conduct, model risk management, IT
and operational resilience and third-party risk management.
Deep dive reviews
The GRC conducted in-depth reviews of risk governance and implications relating to the Group’s approach to credit risk
appetite, data management and strategy, model risk management, information and cybersecurity, non-financial risk
management, liquidity and capital management, people risk and employee conduct, and IT and operational resilience.
Connectivity between the
GRC and subsidiary risk
committees
The GRC continued to enhance the connectivity and flow of information both to and from the subsidiary risk committees
during 2018. There has been ongoing active participation by the principal subsidiary risk committee Chairs at GRC meetings.
In addition, the GRC Chair attended principal subsidiary risk committee meetings in Asia, UK, Europe, US, Latin America,
Canada and the Middle East. In 2018, the GRC and GAC jointly strengthened its previously annual audit and risk committee
chairs' conference into three intensive regional audit and risk workshops and meetings for subsidiary committee leadership in
Asia Pacific, Europe and the Middle East and the Americas.
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Financial System Vulnerabilities Committee
Members
Lord Evans of Weardale (Chair)
Kathleen Casey (resigned 20 April 2018)
Jackson Tai
Laura Cha (appointed 20 April 2018)
Nick Fishwick, CMG (non-Director member)
Dave Hartnett, CB (non-Director member)
Lord Hogan-Howe (non-Director member)
David Irvine, AO (non-Director member)
Clovis Meath Baker, GMG (non-Director member) (resigned 16
April 2018)
Nehchal Sandhu (non-Director member) (resigned 16 April 2018)
John Raine, CMG (non-Director member)
The Honourable Juan Zarate (non-Director member)
The six non-Director members support the Committee’s work and
among them have extensive experience in geopolitical risk,
financial crime risk, international security 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,
proliferation financing, anti-bribery and corruption. It is also
responsible for monitoring, reviewing and advising the Board on
the effectiveness of the policies and procedures established by
management to ensure that HSBC meets its obligations to
regulatory and law enforcement agencies.
Principal activities and significant issues considered
during 2018
Financial crime
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 172 to 202.
Nomination & Corporate Governance Committee
Members
Mark Tucker (Chairman)
Laura Cha
John Lipsky (resigned 20 April 2018)
Pauline van der Meer Mohr
Jonathan Symonds
Kathleen Casey (appointed 20 April 2018)
Henri de Castries (appointed 20 April 2018)
Lord Evans of Weardale (appointed 20 April 2018)
Irene Lee (appointed 20 April 2018)
Heidi Miller (appointed 20 April 2018)
David Nish (appointed 20 April 2018)
Jackson Tai (appointed 20 April 2018)
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. In discharging its responsibilities, the Committee
regularly reviews the Board’s structure, size and composition,
including skills, knowledge, independence and diversity
represented on the Board so as to ensure it is aligned with the
Group’s strategic priorities. The Committee determines the
membership of Board committees and reviews appointments to
the boards of a number of the Group’s most significant operating
subsidiaries.
The Committee monitored the Group’s progress on the
implementation of its Global Standards programme and
considered the effectiveness of the Group’s financial crime risk
controls.
The Committee is also responsible for overseeing succession
planning for the top 20 roles across the Group and the succession
pool for those roles, including progress against the development
plans for individuals identified within that pool.
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 Skilled Person
The Committee was responsible for liaising with the Skilled Person
to ensure his recommendations were acted on.
Group Remuneration Committee
Members
Pauline van der Meer Mohr (Chair)
Henri de Castries
John Lipsky (resigned 20 April 2018)
David Nish
Irene Lee (appointed 20 April 2018)
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
As a result of an expansion of its scope of activities during 2018,
the Committee now oversees the Group's corporate governance
framework, providing recommendations to the Board to ensure
the framework remains robust and reflects best practice.
Principal activities and significant issues considered
during 2018
Succession planning
In 2018, the Committee led the process for the succession of the
Group Chief Financial Officer. This involved consideration of both
internal and external candidates, based on objective criteria and
taking into account the benefits of diversity, including gender. An
independent external consultant was engaged to advise and
support the Committee in its search. Following an initial interview
process, a sub-committee was appointed, comprising the Group
Chairman, the Deputy Group Chairman and Senior Independent
Director, the Group Chief Executive and the Group Chief Human
Resources Officer, with responsibility for determining a shortlist of
preferred candidates. The Committee discussed the shortlist and
made its recommendation to the Board. On 25 June 2018, the
Board announced that Ewen Stevenson was to succeed Iain
Mackay as Group Chief Financial Officer with effect from
1 January 2019.
Corporate governance
During the year, the remit of the Committee was expanded to
include a responsibility to oversee and monitor the Group’s
corporate governance framework. The Committee’s
recommendations are made to the Board, where required, to
ensure the framework is consistent with best corporate
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governance standards and practices while remaining appropriate
to the size, complexity and strategy of the Group. The Committee
is also responsible for monitoring compliance with applicable
corporate governance codes and recommending disclosures on
corporate governance to the Board for approval, including the
statement on corporate governance, which appears in the Annual
Report and Accounts 2018, on pages 152 and 171.
Diversity
In 2018, the Board's diversity and inclusion policy was updated to
ensure that HSBC and its various stakeholders continue to benefit
from a Board that includes Directors from a range of different
backgrounds and whose ethnicity, experience, age, geographical
provenance and gender more closely reflect the diversity of our
customers and the communities that we serve. The Board diversity
policy is available at www.hsbc.com/our-approach/corporate-
governance/board-responsibilities.
In the implementation of its policy, the Board has committed itself
to meeting the diversity targets recommended by the Hampton-
Alexander Review and Parker Review, most notably that the Board
should have 33% female share of representation by 2020 and a
minimum of one Board Director from an ethnic minority
background by 2021. The Committee will monitor these targets
and report performance on a periodic basis in the Annual Report
and Accounts.
At the date of publication 36% of the Board of Directors were
female and three were from an ethnic minority background.
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 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
19 February 2019, the date of approval of this Annual Report and
Accounts 2018.
The key risk management and internal control procedures include
the following:
• Adherence to the Group's Global Standards Manual: 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. In 2019, the GSM will be replaced by
a set of Global Principles.
• 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
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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 as set out in the enterprise-
wide risk framework. The Group‘s risk measurement and
reporting systems are designed to help ensure that material
risks are 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, which contains an aggregate of all current and
forward-looking risks and enables it to take action that either
prevents them materialising or limits their impact.
• Responsibility for risk management: All employees are
responsible for identifying and managing risk within the scope
of their role as part of the three lines of defence model, which
is an activity-based model to delineate management
accountabilities and responsibilities for risk management and
the control environment. The second line of defence sets the
policy and guidelines for managing specific risk areas, provides
advice and guidance in relation to the risk, and challenges the
first line of defence (the risk owners) on effective risk
management.
• Strategic plans: Strategic plans are prepared for global
businesses, global functions and geographical regions within
the framework of the Group’s overall strategy. Annual operating
plans, informed by detailed analysis of risk appetite describing
the types and quantum of risk that the Group is prepared to
take in executing its strategy, are prepared and adopted by all
major Group operating companies and set out the key business
initiatives and the likely financial effects of those initiatives.
• Subsidiary certifications to the GRC: The risk committees
of principal subsidiary companies provide half-year
confirmations to the GRC. These confirm 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 effectiveness of the Group’s system of risk management and
internal control is reviewed regularly by the Board, the GRC and
the GAC.
In 2018, the acceleration of operational resilience and investment
in technology controls were particular areas of focus for HSBC.
The Group continued to embed the operational risk management
framework and invest in the non-financial risk infrastructure.
Work also continued to enhance the risk appetite framework for
non-financial risks and improve the consistency of adoption of the
end-to-end risk and control assessment process. While there
remains more to do, progress has been made to strengthen
HSBC’s control environment and it will continue to be a priority in
2019.
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.
Internal control over financial reporting
HSBC is required to comply with section 404 of the US Sarbanes-
Oxley Act of 2002 and assess the effectiveness of internal control
over financial reporting as at 31 December 2018. 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 over
financial reporting include the following:
• Entity level controls: The primary mechanism through which
comfort over risk management and internal control systems is
achieved, is through assessments of the effectiveness of entity
level controls (‘ELC’), and the reporting of risk and control
issues on a regular basis through the various risk management
and risk governance forums. ELCs are internal controls that
have a pervasive influence over the entity as a whole. They
include controls related to the control environment, for example
the Company’s values and ethics, the promotion of effective
risk management and the overarching governance exercised by
the Board and its non-executive committees. The design and
operational effectiveness of ELCs are assessed annually as part
of the assessment of the effectiveness of internal controls over
financial reporting. If issues are significant to the Group they
are escalated to the GAC (for financial reporting issues) and/or
GRC (for all other risk types).
• Operational risk management framework: Key process
level controls that mitigate the risk of financial misstatement
are recorded in the Operational Risk system and monitored in
accordance with the ORMF. Further details on the framework
can be found on page 73.
• 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 US Securities and Exchange Commission
rules. In so doing, the Committee is empowered to determine
whether a new event or circumstance 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
Chief Financial Officer, Group Chief Risk Officer, Chief Legal
Officer, Group Chief Accounting Officer, Chief Communications
Officer, Global Head of Investor Relations, Group Chief of Staff
and Group Financial Controller. The Company's brokers and its
external legal counsel also attend as required. 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. As required by the
Sarbanes-Oxley Act, the Group Chief Executive and the Group
Chief Financial Officer have certified that the Group's disclosure
controls and procedures were effective as of the end of the
period covered by this annual report.
• 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 supported by a certification by the responsible financial
officer and analytical review procedures at reporting entity and
Group levels.
• Subsidiary certifications to the GAC: The audit committees
of principal subsidiary companies provide half-yearly
confirmations to the GAC regarding whether their financial
statements have been prepared in accordance with Group
policies. They also present fairly the state of affairs of the
relevant principal subsidiary and are prepared on a going
concern basis.
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 2013 framework. Based on
the assessment performed, the Directors concluded that for the
year ended 31 December 2018, the Group’s internal control over
financial reporting was effective.
PwC has audited the effectiveness of HSBC’s internal control over
financial reporting and has given an unqualified opinion.
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 a 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 2021. 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 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
determined that the principal risks are the Group’s top and
emerging risks, as set out on pages 69 to 72.
The Directors 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 2018, there were four heightened top and
emerging risks: economic outlook and capital flows, geopolitical
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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
• reports and updates on the Group’s compliance-related
initiatives in its Global Markets business as required under the
January 2018 deferred prosecution agreement with the US
Department of Justice;
• reports and updates on regulatory developments; and
strategy;
•
legal reports.
• details of the Group’s approach to managing risk and allocating
capital;
Share capital and other disclosures
• a summary of the Group’s financial performance, and its capital
position and annual operating plan;
Share buy-back programme
• enterprise risk reports, including the Group’s risk appetite
profile (see page 69), top and emerging risks (see page 69) and
risk map (see page 76);
• reports and updates regarding regulatory and internal stress
testing exercises (see page 76). In 2018, the published Bank of
England (‘BoE’) stress test results for HSBC showed that 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;
Month
Share buy-back of 2018
May-18
Jun-18
Jul-18
Aug-18
Dividends
Dividends for 2018
First, second and third interim dividends for 2018, each of
$0.10 per ordinary share, were paid on 5 July 2018,
27 September 2018 and 21 November 2018, respectively. Note 9
on the Financial Statements gives more information on the
dividends declared in 2018. On 19 February 2019, the Directors
declared a fourth interim dividend for 2018 of $0.21 per ordinary
share in lieu of a final dividend, which will be payable on 8 April
2019 in cash in US dollars, or in sterling or Hong Kong dollars at
exchange rates to be determined on 25 March 2019, with a scrip
dividend alternative. As the fourth interim dividend for 2018 was
declared after 31 December 2018, it has not been included in the
balance sheet of HSBC as a liability. The reserves available for
distribution at 31 December 2018 were $30.7bn.
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 2018.
Dividends for 2019
Quarterly dividends of $15.50 per Series A dollar preference share
(equivalent to a dividend of $0.3875 per Series A ADS, each of
which represents one-fortieth of a Series A dollar preference
share) and £0.01 per Series A sterling preference share were
declared on 6 February 2019 for payment on 15 March 2019.
Share capital
Issued share capital
The nominal value of HSBC Holdings’ issued share capital paid
up at 31 December 2018 was $10,180,420,748 divided into
20,360,841,496 ordinary shares of $0.50 each, 1,450,000 non-
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HSBC Holdings plc Annual Report and Accounts 2018
On 9 May 2018, HSBC Holdings commenced a share buy-back to
purchase its ordinary shares of $0.50 each up to a maximum
consideration of $2.0bn. This programme concluded on 16 August
2018, after the purchase and cancellation of 210,466,091 ordinary
shares. The purpose of the buy-back programme was to reduce
HSBC’s number of outstanding ordinary shares.
The nominal value of shares purchased during 2018 was
$105,233,046 and the aggregate consideration paid by HSBC was
£1,512,898,101.
The table that follows outlines details of the shares purchased on a
monthly basis during 2018. The total number of shares purchased
during the year was 210,466,091, representing 1.03% of the
shares in issue and 1.05% of the shares in issue, excluding
treasury shares.
Number
of shares
Highest price
paid per
share
Lowest price
paid per
share
Average price
paid per
share
Aggregate
price paid
£
£
£
£
43,843,281
65,164,512
65,467,508
35,990,790
210,466,091
7.4990
7.3910
7.3600
7.2790
7.1340
7.0030
6.9360
6.9860
7.3027
7.2110
7.1134
7.1443
320,172,904
469,898,070
465,698,679
257,128,448
1,512,898,101
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 2018.
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
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 2018 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 310, under the heading
‘Shareholder information’.
Dividend waivers
HSBC Holdings employee benefit trusts, which holds 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 2018 was $3.4m.
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: 6.20% non-cumulative US dollar preference
shares, Series A 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 2018 and 2019 may be found on page
249, under the heading ‘Dividends’ and in Note 9 on the Financial
Statements.
Further details of the rights and obligations attaching to the HSBC Holdings’
issued share capital may be found in Note 32 on the Financial Statements.
Share capital changes in 2018
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 2017
First interim dividend for 2018
Second interim dividend for 2018
Third interim dividend for 2018
All-employee share plans
HSBC Holdings
ordinary shares issued
Aggregate
nominal value
Market value per share
on
number
$
$
£
6 Apr 2018
39,256,458
19,628,229
10.0177
5 Jul 2018
21,593,550
10,796,775
27 Sep 2018
20,239,883
10,119,942
21 Nov 2018
85,760,978
42,880,489
9.8461
8.9716
8.2430
7.2184
7.3734
6.9574
6.2718
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 €
Number
Aggregate
nominal
value
$
23,219,600
11,609,800
20,631
11,064
8,486
10,316
5,532
4,243
Options over HSBC ordinary shares lapsed
4,845,695
2,422,848
Options over HSBC ordinary shares granted in response to approximately
17,528 applications from HSBC employees in the UK on 21 Sep 2018
20,501,336
HSBC International Employee Share Purchase Plan
810,042
405,021
HSBC share plans
HSBC Holdings
ordinary shares
issued
Vesting of awards under the HSBC Share Plan and HSBC Share Plan 2011
59,670,637
Exercise price
from
to
4.0472
55.4701
7.1456
5.3532
5.9640
—
—
—
6.2400
7.9300
£
HK$
$
€
£
Aggregate
nominal
value
$
29,835,319
Market value per share
from
£
6.3380
to
£
7.3280
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 2018, shareholders renewed the general authority
for the Directors to allot new shares up to 13,330,736,120 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 1,999,610,418 ordinary shares. The
Directors exercised this authority during the year and purchased
210,466,091 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 3,999,220,836 ordinary shares in relation to any issue by
HSBC Holdings or any member of the Group of contingent
convertible securities that automatically convert into or are
exchanged for ordinary shares in HSBC Holdings in prescribed
circumstances. Further details about the issue of contingent
convertible securities may be found in Note 32 on the Financial
Statements.
Other than as disclosed in the tables above headed ‘Share capital
changes in 2018’, the Directors did not allot any shares during
2018.
Debt securities
In 2018, following its capital plan, HSBC Holdings issued the
equivalent of $25.6bn of debt securities in the public capital
markets in a range of currencies and maturities, including $6bn of
contingent convertible and $19.6bn of senior securities to ensure it
meets the current and proposed regulatory rules, including those
relating to the availability of adequate total loss-absorbing
capacity. For additional information on capital instruments and
bail-inable debt, refer to Notes 28 and 32 on pages 277 and 286.
HSBC Holdings plc Annual Report and Accounts 2018
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Treasury shares
In accordance with the terms of a waiver granted by the Hong
Kong Stock Exchange on 19 December 2005, HSBC Holdings
will comply with the applicable law and regulation in the UK in
relation to the holding of any shares in treasury and with the
conditions of the waiver in connection with any shares it may hold
in treasury. Pursuant to Chapter 6 of the UK Companies Act 2006,
325,273,407 ordinary shares are currently held in treasury. This
was the maximum number of shares held at any time during 2018;
representing 1.60% of the shares in issue as at 31 December
2018. The nominal value of shares held in treasury is
$162,636,704.
Notifiable interests in share capital
At 31 December 2018, 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 15 February 2019 that on
14 February 2019 it had the following: an indirect interest in
HSBC Holdings ordinary shares of 996,000,424; qualifying
financial instruments with 240,796,561 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 9,275,682 voting
rights, representing 4.97%, 1.20% and 0.04%, respectively, of
the total voting rights at that date.
At 31 December 2018, 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 17 October 2018 that on
12 October 2018 it had the following interests in HSBC
Holdings ordinary shares: a long position of 1,335,245,703
shares and a short position of 6,355,666 shares, representing
6.59% and 0.03%, respectively, of the ordinary shares in issue
at that date.
• Ping An Asset Management Co., Ltd. gave notice on
2 November 2018 that on 1 November 2018 it had a long
position of 1,418,925,452 in HSBC Holdings ordinary shares,
representing 7.01% of the ordinary shares in issue at that date.
Directors’ interests – shares and debentures
• The Bank of New York Mellon Corporation gave notice on
18 September 2018 that on 14 September 2018 it had the
following interests in HSBC Holdings ordinary shares: a long
position of 1,123,775,445 shares and a short position of
812,085,965 shares, representing 5.55% and 4.01%
respectively, of the ordinary shares in issue at that date. The
notification includes the shares held in custody under the HSBC
Holdings plc American Depository Receipt Programme.
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 2018 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 2018.
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 2018 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 following
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.
At 1 Jan
2018, or date of
appointment, if later
Beneficial
owner
Child
under 18
or spouse
Jointly with
another
person
Footnotes
Trustee
Total
interests
At 31 Dec 2018
HSBC Holdings ordinary shares
Kathleen Casey
Laura Cha
Henri de Castries
Lord Evans of Weardale
John Flint (appointed on 21 February 2018)
Irene Lee
Iain Mackay (ceased employment on 31 December 2018)
Heidi Miller
Marc Moses
David Nish
Jonathan Symonds
Jackson Tai
Mark Tucker
Pauline van der Meer Mohr
1
5
2, 4
2
1
2
1, 3
9,125
18,200
17,116
12,892
9,635
10,200
18,064
12,892
533,118
822,252
10,588
11,172
442,118
718,532
4,200
4,420
1,207,068
1,533,039
5,439
50,000
42,821
44,825
38,823
22,970
50,000
4,998
11,430
21,675
276,000
288,381
15,000
15,000
9,635
10,200
18,064
12,892
827,691
11,172
718,532
4,420
1,533,039
50,000
43,821
56,075
288,381
15,000
1 Kathleen Casey has an interest in 1,927, Heidi Miller has an interest in 884 and Jackson Tai has an interest in 11,215 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 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 172. At 31 December 2018, 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: John Flint –
1,408,565; Iain Mackay – 2,513,553; and Marc Moses – 3,321,777. Each Director’s total interests represents less than 0.02% of the shares in issue and 0.02% of the
shares in issue excluding treasury shares.
3 Jackson Tai has a non-beneficial interest in 11,430 shares of which he is custodian.
4 On 8 January 2019, John Flint reported to HSBC that, as part of a discretionary portfolio structure whereby investment decisions are made entirely by the investment
manager, he and his spouse had jointly acquired 4,836 shares on 6 June 2018 and 603 shares on 30 August 2018. Prior clearance was not obtained as required
pursuant to the standards set out in the Hong Kong Model Code for Securities Transactions by Directors of Listed Issuers. Arrangements have now been put in place to
prevent further transactions in HSBC Group securities within the portfolio structure.
5 Laura Cha advised HSBC Holdings plc on 20 January 2019 that her spouse had sold 8,000 shares on 23 August 2018.
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HSBC Holdings plc Annual Report and Accounts 2018
There have been no changes in the shares or debentures of the
Directors from 31 December 2018 to the date of this report.
Listing Rule 9.8.4
More information about our diversity and inclusion activity and our
UK Gender Pay Gap Report is available at www.hsbc.com/our-
approach/measuring-our-impact.
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.
Gender diversity statistics
Political donations
HSBC does not make any political donations or incur political
expenditure within the ordinary meaning of those words. We have
no intention of altering this policy. However, the definitions of
political donations, political parties, political organisations and
political expenditure used in the UK Companies Act 2006 (the
'Act') are very wide. As a result, they may cover routine activities
that form part of the normal business activities of the Group and
are an accepted part of engaging with stakeholders. To ensure that
neither the Company nor any of its subsidiaries inadvertently
breaches the Act, authority is sought from shareholders at the
Annual General Meeting to make political donations.
HSBC provides administrative support to two political action
committees ('PACs') in the US funded by voluntary political
contributions by eligible employees. We do not control the PACs,
and all decisions regarding the amounts and recipients of
contributions are directed by the respective steering committee of
each PAC, which are comprised of eligible employees. The PACs
recorded combined political donations of $179,200 during 2018
(2017: $131,300).
Employees
At 31 December 2018, HSBC had a total workforce of 235,000 full-
and part-time employees compared with 229,000 at the end of
2017 and 241,000 at the end of 2016. Our main centres of
employment were the UK with approximately 39,000 employees,
India 38,000, Hong Kong 31,000, mainland China 26,000, Mexico
15,000, the US 10,000 and France 7,000.
People at HSBC span many cultures, communities and continents.
We want to build trust-based relationships with our people, where
they feel empowered in their roles and inspired to grow. We help
our leaders to set the tone by listening, not just talking, and
valuing the behaviours that get a job done as much as the
outcome.
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. There have been no material disruptions to
our operations from labour disputes during the past five years.
Diversity and inclusion
We are committed to a thriving environment where people are
valued, respected and supported to fulfil their potential. By
building upon the extraordinary range of ideas, backgrounds,
styles and perspectives of our employees, we can drive better
outcomes for our stakeholders, including customers, communities,
suppliers and shareholders.
We focus on enhancing the diversity of our workforce so that it is
more reflective of the communities in which we operate and the
customers we serve.
We expect our people to treat each other with dignity and respect,
creating an inclusive culture to support equal opportunities. We do
not tolerate discrimination, bullying, harassment and victimisation
on any grounds. We encourage our employees to build positive
and lasting relationships among the variety of people with whom
they interact.
Diversity and inclusion is championed by our Group Chief
Executive and his executive team and is governed by the Group
People Committee.
Holdings Board
9
5
Group Management Board 17
2
11%
64%
36%
89%
Combined executive committee and direct reports* 148
51
Senior employees** 6,887
2,701
Senior leadership RBWM 752
331
Senior leadership CMB 652
226
Senior leadership GB&M 2,398
608
Senior leadership GPB 387
174
Senior leadership HOST 645
245
74%
72%
69%
74%
80%
69%
72%
26%
28%
31%
26%
20%
31%
28%
All employees 115,391
125,276
48%
52%
Male
Female
*Combined executive committee and direct reports includes HSBC's executive
Directors, Group Managing Directors and their direct reports (excluding
administrative staff) plus the Group Company Secretary.
**Senior leadership refers to employees performing roles classified as 0, 1, 2 or 3 in
our global career band structure.
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.
Employee development
The opportunity to develop is one of the most important factors
affecting how people feel about HSBC. We celebrated the first
anniversary of our home of learning, HSBC University, in
November 2018. HSBC University strengthens how we learn and
lead, through new programmes, resources and premises. We have
launched HSBC University regional hubs at our offices in Dubai
and in the new HSBC UK Headquarters in Birmingham, providing
opportunities for our colleagues, clients and community groups to
come together to learn, develop and connect.
We have expanded our management and leadership development
with new programmes, including ‘Leading with Impact’, for senior
leaders, and ‘Leading Myself’, for individual contributors. We have
further developed our ‘Essentials’ programme to support people
managers strengthen their coaching and hiring skills. Across the
HSBC Holdings plc Annual Report and Accounts 2018
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organisation our employees have completed 6.2 million hours of
formal learning, which equates to 2.8 days of learning per
employee.
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 2018 we delivered a
health and safety education and information training programme
to every one of our employees. We also carried out a range of
programmes to help us understand and effectively manage the
risks we face and improve the buildings in which we operate:
• We developed and implemented a health and safety continuous
improvement programme, focusing on education, engineering
and enforcement/reward.
• We developed and implemented an improved health and safety
training and awareness programme for all employees globally.
This was to ensure roles and responsibilities were clear and
understood; and processes for identifying and reporting
hazards and incidents were clearly defined and communicated.
• We implemented, through our global facilities management
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 172.
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 2018 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 https://www.hsbc.com/our-approach/corporate-
governance/remuneration 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 191.
service provider, an electronic permit-to-work system to provide
effective controls for all high-risk work that is undertaken.
Note 6 on the Financial Statements gives details of share-based payments,
including discretionary awards of shares granted under HSBC share plans.
All-employee share plans
HSBC operates all-employee share option plans under which
options are granted over HSBC ordinary shares. Subject to leaver
provisions, options are normally exercisable after three or five
years. During 2018, options were granted 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%. 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 2018, the day before the options were granted was
£6.6570.
The UK HSBC Holdings Savings-Related Share Option Plan will
expire on 23 May 2025 (at which time the plan may be extended
with approval from Shareholders) unless the Directors resolve to
terminate the plans at an earlier date. There have been 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.
• We developed and implemented a global earthquake risk
management programme to ensure all HSBC properties in
earthquake zones were risk assessed and controls implemented
to manage the risk.
• We ensured all our properties had been assessed for fire and
asbestos risk, with over 40,000 individual actions taken to
improve standards.
Employee health and safety
Number of workplace fatalities
Number of major injuries to employees
All injury rate per 100,000 employees
1
2
1
27
2
33
184
209
1
44
246
Footnotes
2018
2017
2016
1 Contractor fatality relating to use of work equipment.
2 Fractures, dislocation, concussion.
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
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HSBC Holdings plc Annual Report and Accounts 2018
HSBC Holdings Share Option Plans
Dates of awards
Exercise price
Exercisable
At
Granted
Exercised
Lapsed
At
from
to
from
to
from
to Footnotes
1 Jan 2018
during year
during year
during year 31 Dec 2018
HSBC Holdings ordinary shares
Savings-Related Share Option Plan
24 Apr
2012
21 Sep
2018
(£)
(£)
4.0472
5.9640
1 Aug
2017
30 Apr
2024
Savings-Related Share Option Plan: International
1
2
24 Apr
2012
24 Apr
2012
24 Apr
2012
24 Apr
2012
_
_
_
_
(£)
4.4621
($)
7.1456
(€)
5.3532
(HK$)
55.4701
(£)
_
($)
_
(€)
_
(HK$)
_
1 Aug
2017
1 Aug
2017
1 Aug
2017
1 Aug
2017
31 Jan
2018
31 Jan
2018
31 Jan
2018
31 Jan
2018
64,566,103
20,501,336
23,194,305
4,807,621
57,065,513
38,829
17,873
10,539
36,309
_
_
_
_
_
25,295
13,534
11,064
6,809
8,486
2,053
20,631
15,678
_
_
_
_
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £6.5220.
2 The weighted average closing price of the shares immediately before the dates on which options were exercised was £7.7119.
Statement of compliance
The statement of corporate governance practices set out on pages
152 to 213 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, role profiles and policies
UK Corporate Governance Code
www.frc.org.uk
Hong Kong Corporate Governance
Code (set out in Appendix 14 to
the Rules Governing the Listing of
Securities on the Stock Exchange
of Hong Kong Limited)
Descriptions of the roles and
responsibilities of the:
– Group Chairman
– Group Chief Executive
– Deputy Group Chairman and Senior
Independent Director
– Board
Board and senior management
Roles and responsibilities of the
Board's committees
Board’s policies on:
– Diversity and inclusion
– Shareholder communication
– Human rights
– Remuneration practices and
governance
Global Internal Audit Charter
www.hkex.com.hk
www.hsbc.com/our-approach/
corporate-governance/board-
responsibilities
www.hsbc.com/who-we-are/leadership
www.hsbc.com/our-approach/
corporate-governance/board-
committees
www.hsbc.com/our-approach/
corporate-governance/board-
responsibilities
https://www.hsbc.com/our-approach/
corporate-governance/corporate-
governance-codes/internal-control
HSBC is subject to corporate governance requirements in both the
UK and Hong Kong. During 2018, and with the following
exceptions, HSBC applied the principles and complied with the
applicable provisions of the UK Corporate Governance Code, and
also the requirements of the Hong Kong Corporate Governance
Code.
Under the UK Corporate Governance Code, the Board is required
to undertake an annual evaluation of its own performance and that
of its committees. For the reasons described on page 152, this
evaluation did not take place in 2018.
Under the Hong Kong Code, the audit committee should be
responsible for the oversight of all risk management and internal
control systems. HSBC’s Group Risk Committee is responsible for
oversight of internal control, other than internal control over
financial reporting, and risk management systems. This is
permitted under the UK Corporate Governance Code.
The Company 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 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. During the year, all Directors were reminded of their
obligations in respect of transacting in HSBC Group securities and,
except as disclosed on page 168, all Directors have confirmed that
they have complied with their obligations.
On behalf of the Board
Mark E Tucker
Group Chairman
HSBC Holdings plc
Registered number 617987
19 February 2019
HSBC Holdings plc Annual Report and Accounts 2018
171
Strategic ReportFinancial Review Financial Statements Additional Information Corporate Governance
Report of the Directors | Director’s remuneration report
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
172
175
184
198
199
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 2018 Directors’ remuneration report.
I have set out below a summary of our 2018 performance, and the
key decisions made during the year.
Group variable pay pool and risk adjustments
The Group Remuneration Committee reviewed and agreed the
Group variable pay pool, taking into account performance against
financial and non-financial metrics set out in the Group risk
appetite statement and targets set out in our annual operating
plan.
Based on this assessment, the Committee considered that a total
variable pay pool for 2018 of $3,473m was appropriate. This
represents a 5.1% increase on the 2017 variable pay pool
reflecting the improvement in financial performance during 2018.
In setting the pool, the Committee used its discretion to apply:
• a reduction of $208m for the fines, penalties and cost of
customer redress faced by the Group; and
• a reduction of $793m for:
– negative adjusted jaws achieved during 2018;
– certain financial and non-financial risk metrics, where
performance was outside our risk appetite;
– conduct assessments and continued work required to
address conduct issues; and
Our current remuneration policy entered its third and final year in
2018. Therefore, we will be seeking shareholders’ approval for our
proposed Directors’ remuneration policy for the following three
years at the 2019 Annual General Meeting (‘AGM’).
– counter-cyclical adjustments to recognise the positive
impact that interest rate increases have had on the financial
performances of Retail Banking and Wealth Management,
and Commercial Banking.
Our current policy and the implementation of the policy received
strong support with more than 96% of the votes cast in favour of
the policy and its implementation for 2016 and 2017. Therefore,
we intend to make only minor changes to simplify our policy and
ensure alignment of executive remuneration with our strategic
priorities in line with shareholder feedback. I have explained the
key changes in this statement and the remuneration policy section
provides further details.
Performance achieved during 2018
During 2018, we announced our strategic priorities to return HSBC
to growth and create value for our shareholders. We aim to do this
by increasing returns from the Group's areas of strength,
particularly in Asia and across our network, turning around low-
return businesses of high strategic importance, particularly the
US, investing to build a bank for the future with the customer at its
centre, and making it easier for our employees to do their jobs.
Our 2018 results demonstrate that our strategy is working.
Reported profit before tax was $19.9bn, up 16% from $17.2bn in
2017. On an adjusted basis, profit before tax was $21.7bn, up 3%
from $21.1bn in 2017.
Reported revenue rose by 5% to $53.8bn. On an adjusted basis,
revenue rose by 4% to $53.9bn, reflecting revenue growth in all of
our global businesses. Progress is being made on growing our
Asian franchise and international client revenue. We missed our
target to achieve positive adjusted jaws, as growth in adjusted
operating expenses exceeded our adjusted revenue growth.
Our return on tangible equity (‘RoTE’) improved to 8.6% in 2018
from 6.8% in 2017, demonstrating our commitment to generating
value for shareholders.
Details of performance against each of the strategic priorities are
set out on page 13 of the Strategic Report. The scorecards of our
executive Directors include measures that are aligned to the
delivery of these strategic priorities, as set out on page 186.
The Group announced a dividend of $0.51 per ordinary share and
in 2018, we returned a total of $2bn to shareholders through share
buy-backs. We remain a well-funded business with a strong
capital base and a diversified balance sheet. We received the
‘World’s Best Bank for Transaction Services’, ‘World’s Best Bank
for Corporates’ and the ‘World's Best Bank for public-sector
clients’ awards at the 2018 Euromoney Awards for Excellence, a
significant endorsement of our investment in innovation and digital
solutions, and making transaction banking simpler, better and
faster.
At HSBC we assess individual performance based on what is
achieved but also how it is achieved, as we believe the latter
contributes to the long-term sustainability of the business. We
reward employees who exemplify our values through:
• the use of behaviour and performance ratings for all employees,
which directly influence pay outcomes;
• variable pay adjustments:
– during 2018, we made positive adjustments to variable pay
awards totalling $13.4m for individuals who have exhibited
exemplary conduct and who went the extra mile to
courageously do the right thing; and
– we reduced variable pay awards to certain individuals by
$3.7m in aggregate to reflect individual conduct and
behaviours; and
• our global recognition programme, where our employees can
recognise peers and reward positive behaviours in a real-time,
visible way.
Fixed pay for executive Directors
We are proposing to increase the base salary of our executive
Directors by 3.3%, which is in line with the average base salary
increase made for our UK employees. This is the first base salary
increase we will have made for any executive Directors since 2011.
Executive Directors’ 2018 variable pay awards
The 2018 annual incentive scorecard outcome was 76% for John
Flint, 73% for Iain Mackay and 89% for Marc Moses, reflecting the
performance of the Group and performance achieved against their
individual scorecards. Details of the annual incentive scorecard
outcome are provided on page 186.
For John Flint and Marc Moses, the Committee determined to
grant 50% of the annual incentive in shares subject to a one-year
retention period and the remaining 50% in cash. This is in line with
the structure applied for other employees and permissible under
the remuneration rules of the UK's Prudential Regulation Authority
(‘PRA’). The Committee noted that more than 80% of John Flint's
and Marc Moses’ combined variable pay and fixed pay allowance
for 2018 will continue to be delivered in shares that will be
released over a period of eight years, ensuring long-term
alignment with share price performance and shareholder
experience.
Stuart Gulliver stepped down as Group Chief Executive on
20 February 2018. As set out in our 2017 Directors’ remuneration
report, Stuart Gulliver was eligible to be considered for a 2018
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HSBC Holdings plc Annual Report and Accounts 2018
annual incentive award based on the 2018 annual incentive
scorecard outcome, pro-rated for time spent by him in the Group
Chief Executive role. Based on this approach, Stuart Gulliver’s
annual incentive award has been determined to be £282,000 (see
details on page 186).
John Flint and Marc Moses will be awarded a long-term incentive
('LTI') award in respect of 2018 performance. In granting these
awards, the Committee took into consideration the good progress
made during 2018 towards achieving our strategic priorities. These
awards will also be subject to a three-year forward-looking
performance period ending on 31 December 2021. We have
simplified our LTI scorecard through the use of fewer measures
with a higher weighting attached to financial measures. Details of
the performance measures are set out on page 189.
Executive Director changes
Iain Mackay stepped down as Group Finance Director on
31 December 2018. He received payment in lieu of his salary, fixed
pay allowance and cash in lieu of pension for the period from 1
January 2019 to 13 January 2019. In accordance with our
approved remuneration policy and contractual terms agreed, Iain
Mackay has been designated as a good leaver in respect of his
unvested awards that were granted between 2014 and 2018, and
was eligible to be considered for an annual incentive award in
respect of 2018 as set out on page 186.
Ewen Stevenson was appointed as an executive Director and
Group Chief Financial Officer of the Company on 1 January 2019,
having joined the Group on 1 December 2018 as Group Chief
Financial Officer designate.
For the 2018 performance year, Ewen Stevenson will receive an
award in lieu of any variable pay award he would have otherwise
received from The Royal Bank of Scotland Group plc (‘RBS’). This
will be based on his maximum opportunity of £1.6m under RBS’s
policy and the outcome of the 2018 scorecard, as disclosed in its
2018 annual report and accounts.
In 2019, Ewen Stevenson will be granted share awards to replace
unvested RBS awards, which were forfeited as a result of him
joining HSBC. The awards granted will, in general, match the
performance, vesting and retention periods attached to the awards
forfeited, and will be subject to any performance adjustments that
would otherwise have been applied by RBS. Further details can be
found on page 190.
New remuneration policy
As the term of the current remuneration policy for Directors comes
to an end at the 2019 AGM, the Committee is seeking shareholder
approval for a new policy.
The Committee undertook an extensive review of the policy based
on the following key principles:
• the policy should be simple and transparent;
• there should be a strong alignment between rewards and the
interest of our stakeholders, including shareholders, customers
and employees;
• the policy should maintain a focus on long-term performance;
• the total compensation package should be competitive to
ensure we can retain and attract talent; and
• the structure should meet the expectations of investors and our
regulators.
As part of the review, the Committee considered alternatives to
our current policy, including the use of restricted share awards or
a single incentive scorecard. The Committee was of the view that
while these alternative structures had some merits, on balance,
our current policy approach provided a more suitable and
appropriate framework that was aligned with our key principles.
The Committee also considered that our current policy structure
was broadly in line with the structure used by our global peers and
other listed peers on the FTSE 100 of a similar size and had
received strong support from our shareholders. Therefore, the
Committee is proposing only minor changes to the policy being
put forward to shareholders for approval, including:
• simplifying our LTI scorecard through the use of fewer
measures and a substantial proportion of the scorecard
weighted towards value creation financial measures, such as
RoTE to reflect feedback received from our shareholders.
Assigning a substantial proportion of the overall scorecard
weighting to a value creation measure such as RoTE will
incentivise executive Directors to improve financial performance
and generate a return that delivers value for our shareholders;
and
•
increasing the fees for non-executive Directors to reflect the
increase in time that they are required to commit to their roles,
as the Board supports HSBC through its ambitious agenda of
governance reform, growth and organisational development in
an environment of increasing regulatory, political and
organisational complexity. Details of the change in fees and our
rationale for changes are set out on page 182.
Within the context of the review, the Committee was also mindful
of the changes within the UK Corporate Governance Code (the
‘Code’), namely:
• Pension provision: The current executive Director remuneration
policy allows for 30% of salary to be paid in lieu of a pension
entitlement (reduced from 50% of salary paid under our
previous policy in operation before 2016). This is equivalent to
16% of salary after UK income tax and national insurance
deductions, which aligns with the maximum contribution rate
(as a percentage of salary) that HSBC makes for employees
who are defined contribution members of the HSBC Bank (UK)
Pension Scheme. For the majority of such employees, HSBC
makes a contribution of 9% of salary (10% on the first £21,200
of salary) and, where the employee also makes a contribution to
the plan, an additional matching contribution of up to 7% of
salary. As the current cash in lieu of pension allowance of our
executive Directors is in line with pension contributions
available to the majority of our UK workforce, we have not
proposed any change. The Committee will continue to monitor
the cash in lieu of pension to ensure this remains aligned with
the benefit available for the majority of the workforce.
• Post-employment shareholding policy: Under our remuneration
policy, executive Directors will realise their pay over a period of
up to eight years which is not accelerated on departure. We
believe this achieves the objective of ensuring ongoing
alignment of executive Directors' interests with shareholder
experience post-cessation of their employment. Further details
are available on page 175.
• Time horizons for awards: During the policy review, we also
reviewed the combined vesting and retention period for our LTI
awards, and are comfortable that they meet the five-year
holding period as the weighted average holding period for each
award is six years from the date of grant.
We also discussed the approach we will use under the current
policy and the new policy for making any salary increases for
executive Directors and delivering our annual incentive award with
a number of our large shareholders and institutional shareholder
bodies. We informed them that our approach going forwards will
involve:
• considering salary increases for executive Directors, provided
they are in line with increases made for our employees and
within the limits approved by shareholders; and
• paying a portion of the annual incentive awards of our executive
Directors in cash, as permitted by our current and new policy.
Currently the executive Directors receive their annual incentive
awards entirely in shares subject to a retention period. Under
this approach, executives will be eligible to receive a portion,
not more than 50% of the total annual incentive awards, in
cash. This is to bring the variable pay structure of our executive
Directors in line with the structure used for our employees and
that used by our international peers, while meeting the
requirements of the remuneration rules of the PRA. Even with
this change, more than 80% of the executive Directors'
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Pay ratio of Group Chief Executive and UK
employees
We have disclosed the ratio between the remuneration of our
Group Chief Executive and UK employees on page 194.
Additional fee for the Chair of the Group Risk
Committee (‘GRC’)
The Committee noted that there has been an increase in the
demands and expectations of the role of the GRC Chair, including
from regulators and the expanding remit of the GRC also being
involved in improving connectivity between the GRC and our
regulated subsidiaries. In total, Jackson Tai currently devotes
around 150 days per year to the Group. Taking these
circumstances into consideration, the Committee exercised its
discretion to increase the GRC Chair fee from £60,000 to £120,000
per annum with effect from 1 December 2018. Further details are
provided on page 182.
Our annual report on remuneration
The next section provides an overview of our remuneration policy
for executive Directors, for which we are seeking shareholder
approval.
In the annual report section, we provide details of remuneration
decisions made for executive Directors in 2018 for which we will
seek shareholder approval with an advisory vote at the 2019 AGM.
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 our
remuneration policy and the 2018 annual report on remuneration.
Pauline van der Meer Mohr
Chair
Group Remuneration Committee
19 February 2019
combined variable pay and fixed pay allowance for each year
will be delivered in shares and released over a period of eight
years.
They have been supportive of the proposed changes and the
simplification of the LTI scorecard was well received. In light of the
feedback received from shareholders, we have included an
environmental, social and governance ('ESG') measure in the LTI
scorecard.
Employee remuneration
During 2018, we introduced a simpler and more transparent
framework for determining variable pay awards for our junior
employees in global functions and HSBC Operations, Services and
Technology, based on feedback we received from our employees.
The new framework provides a clear and transparent link between
performance and behaviour ratings, and the variable pay awards.
The Code issued by the Financial Reporting Council, effective from
1 January 2019, requires remuneration committees to review
workforce remuneration to ensure these policies are aligned with
our culture and executive Director remuneration. The Committee
has been undertaking these reviews as part of the oversight role it
performs in respect of the Group’s remuneration policy. The
framework for this review, was developed after taking into account
the industry reforms introduced since the financial crisis,
expectations of regulators for the financial service sector and the
prescribed responsibility assigned under the PRA's Senior
Managers Regime.
Under the PRA‘s Senior Managers Regime, I have been assigned,
as the Chair of the Committee, the responsibility for setting the
Group's remuneration policy for all employees. In carrying out this
responsibility, the Committee regularly reviews the effectiveness
of the remuneration policy for all employees, through feedback
received from employee survey results and the information and
updates we receive on employee remuneration matters throughout
the year. The Committee also reviews the year-end pay review
outcomes for the wider group of employees to ensure the
outcomes are in line with our remuneration principles. The results
of such reviews also inform the decisions the Committee makes
on executive remuneration matters. We will include details of the
review undertaken by the Committee during 2019 in the next
year’s report in line with the requirements of the Code.
An overview of our remuneration principles and the wider
employee remuneration policy is set out on page 199.
Diversity and inclusion
Our definition of diversity is broader than inherent characteristics
and includes other differences that make individuals unique. Our
pay strategy is designed to attract and motivate the very best
people, regardless of gender, ethnicity, age, disability or any other
factor unrelated to performance or experience.
We also encourage diversity of thought from our leaders and our
people so we can deliver on our purpose.
Our reported UK gender pay gap is driven by the gender profile of
our businesses and functions. There are fewer women in senior
leadership roles, meaning that we have more men earning higher
salaries. There is a gender imbalance in our more junior roles and
a higher proportion of female employees working part-time hours.
Collectively, this means that we have a gender pay gap in the UK.
We are committed to improving our gender balance and are taking
a number of specific steps, which we expect will positively impact
our gender pay gap in the UK over time, including:
• driving better gender balance at all levels in the organisation;
• developing female talent to strengthen the leadership pipeline;
and
• supporting families, flexible working; and
• retaining female talent.
We are confident in our approach to pay, and if we identify any
pay differences that cannot be explained, we make appropriate
adjustments.
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HSBC Holdings plc Annual Report and Accounts 2018
Directors’ remuneration policy
In the following tables we have set out our remuneration policy for
our executive Directors and non-executive Directors. We will seek
shareholders' approval at the AGM on 12 April 2019, and if
approved, the policy is intended to apply immediately for three
years to the end of the AGM in 2022.
Remuneration policy – key principles
HSBC is one of the world‘s largest banking and financial services
organisations. We are a global company serving more than 39
million customers in both established and emerging markets. Our
aim is to attract, retain and motivate the very best people in a
competitive environment, and our remuneration strategy is
designed to reward the achievement of long-term sustainable
performance. The key guiding principles that form the basis of our
review of the remuneration policy for Directors are as follows:
Key guiding principles
Simplification
Alignment
• The policy should be simple and the outcomes from the application of
the policy should be transparent.
The policy should:
• align the interests of Directors with the interests of shareholders and
other stakeholders; and
• maintain a focus on long-term performance and reward achievement of
our strategic priorities.
Market competitive
Meet regulatory and investor expectations
• Total compensation under the policy should be competitive and provide
• The policy should meet the regulatory requirements and also be aligned
us the ability to attract and retain talent.
with investor expectations.
Key changes to our policy for executive Directors
From our discussions with investors on the implementation of our
current policy, it was clear there is a considerable desire for
companies to simplify remuneration structures and for the total
remuneration outcome to be transparent and aligned to
shareholder experience.
Equally, our current policy and its implementation have received
strong support from investors. We are therefore proposing to
continue with our current remuneration policy structure for
executive Directors, but with a simplified approach for assessing
performance for variable pay awards.
No changes have been made to fixed pay components and
benefits for our executive Directors. We are also not proposing any
increase in the variable pay opportunity as a percentage of salary.
Key changes to the policy are:
• Using simpler scorecards: Our LTI awards will have fewer
performance measures and will be aligned with the financial
targets set out in our strategic priorities. The financial measures
will carry a significant weighting in the scorecard, with capital
and risk and compliance measures being used as an underpin.
The objective of this approach is to create a strong alignment
between the LTI awards that pay out and the value generated
for our shareholders as measured by financial metrics such as
RoTE. The targets for the financial metrics used in the LTI
scorecard will result in 50% of the total awards vesting if the
performance achieved over a three-year performance period is
in line with expectations at the start of the performance period.
The awards will only vest at 100% if a stretch performance
target has been achieved over the performance period.
• Delivering annual incentive awards in cash and shares: Up to a
maximum of 50% of any annual incentive award will be paid in
cash. The balance will be paid in shares subject to a one-year
retention period. This is to bring the variable pay structure of
our executive Directors in line with the structure used for our
employees and that used by our international peers, while
meeting the requirements of the remuneration rules of the PRA.
We believe there will continue to be a strong alignment
between the interest of our executive Directors and
shareholders, as the LTI awards will be granted entirely over
shares and deferred over a period of seven years with a one-
year retention period applied to each tranche on vesting. In
addition, the fixed pay allowance (‘FPA’) will continue to be
delivered entirely in shares, subject to a five-year retention
period, and released equally over a five-year period. Therefore,
more than 80% of the combined variable pay and FPA will
continue to be delivered in shares and released over a period of
eight years.
As part of the policy review, the Committee also considered a
number of alternative structures, including the use of restricted
stock awards or a single incentive scorecard. The Committee
concluded that while these alternative pay structures had some
merits, our proposed policy presented an appropriate framework
that was aligned to our guiding principles.
As part of our review, we also considered whether a post-
employment shareholding policy should be introduced. For this
purpose, the Committee took into consideration the following
features of our policy:
• Shares delivered to executive Directors as part of the FPA have
a five-year retention period, which continues to apply following
a departure of an executive Director.
• Shares delivered as part of an annual incentive award are
subject to a one-year retention period, which continues to apply
following a departure of an executive Director.
• LTI awards have a seven-year vesting period with a one-year
post-vesting retention period, which is not accelerated on
departure. Therefore, when an executive Director ceases
employment as a good leaver under our policy, any LTI awards
granted will continue to be released over a period of up to eight
years, subject to the outcome of performance conditions.
Executive Directors have a five-year period to meet the
shareholding requirement under our policy. On cessation of
employment as a good leaver after this period, they will hold
shares not subject to further performance conditions equivalent in
value to more than 400% of salary, assuming they receive a target
payout of 50% for LTI awards. These shares will be released over a
period of up to eight years.
We believe our existing policy structure achieves the objective of
ensuring there is ongoing alignment of executive Directors‘
interests with shareholder experience post-cessation of their
employment.
We also considered whether the combined vesting and retention
period for our LTI awards meets the five-year holding period
(aggregate of vesting and retention period) that is expected by
investors. We believe the seven-year vesting period and the one-
year post-vesting retention period applied to shares granted under
the LTI aligns with investor expectations as the share awards will
be released over a period of eight years with a weighted-average
holding period of six years.
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Shareholder views
The proposed policy was discussed with a number of our large
shareholders and proxy advisory bodies. They have been
supportive of the policy and the simplification of our approach was
well received.
The engagement with shareholders and proxy advisory bodies has
been valuable, and our aim is to continue this dialogue as we
implement the proposed policy over the following years.
Directors’ remuneration policy
The following tables set out our remuneration policy for executive Directors.
Remuneration policy – executive Directors
Fixed pay
Elements
Base salary
Operation
Details
To attract and retain key talent by being market competitive and rewarding ongoing contribution to role.
Base salary reflects the individual’s role, experience and responsibility.
Base salaries are benchmarked on an annual basis against relevant comparator groups and may be reviewed more frequently
at the discretion of the Committee. The Committee reviews and approves changes, taking into consideration local
requirements, employee increases and market competitiveness.
Maximum opportunity
Other than in exceptional circumstances, the base salary for the current executive Directors will not increase by more than
15% above the level at the start of the policy period, as set out on page 197, in total for the duration of this policy.
Fixed pay allowance
(‘FPA’)
To deliver a level of 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.
Operation
Fixed pay allowances (‘FPAs’) are non-pensionable and will be granted in four instalments of immediately vested shares per
year, or at any other frequency that the Committee deems appropriate.
On vesting, shares equivalent to the net number of shares delivered (after those sold to cover any income tax and social
security) will be subject to a retention period and released annually on a pro-rata basis over five years, starting from the
March immediately following the end of the financial year in respect of which the shares are granted.
Dividends will be paid on the vested shares held during the retention period.
The Committee retains the discretion to amend the retention period and/or pay the FPA in cash if required to do so to meet
any regulatory requirements.
Maximum opportunity
FPAs are determined based on the role, skills and responsibility of each individual and taking into account market
competitiveness of the total remuneration opportunity and other elements of remuneration set in this policy.
Other than in exceptional circumstances, the FPA for the duration of this policy will be capped at 150% of base salary levels
at the start of this policy.
Cash in lieu of pension
To attract and retain key talent by being market competitive.
Operation
Directors receive a cash allowance in lieu of a pension entitlement.
Maximum opportunity
30% of base salary. This is equivalent to 16% of salary after income tax and social security and aligned with the aggregate of
contributions that HSBC can make to the defined contribution plan for the majority of our UK employees (currently employer
contribution of 10% on the first £21,200 of salary, 9% on salary above £21,200 and additional matching contribution of up to
7%). The Committee retains the discretion to reduce the maximum opportunity to ensure it remains aligned with the pension
contribution percentage available for the majority of the UK workforce.
Benefits and all employee share plans
Elements
Benefits
Operation
Details
To provide benefits in accordance with local market practice.
Benefits take account of local market practice and include, but are not restricted to:
• all taxable benefits (gross value before payment of tax) including provision of medical insurance, accommodation, car,
club membership, independent legal advice in relation to a matter arising out of the performance of employment duties
for HSBC, tax return assistance or preparation and travel assistance (including any associated tax due, where applicable);
and
• non-taxable benefits including the provision of health assessment, life assurance and other insurance coverage.
The Group Chief Executive is also eligible to be provided with accommodation and car benefit in Hong Kong. Any tax and/or
social security due on this benefit will be paid by HSBC.
Additional benefits may also be provided when an executive is relocated or spends a substantial proportion of his/her time in
more than one jurisdiction for business needs or in such other circumstances as the Committee may determine in its
discretion. Such benefits could include, but are not restricted to, airfare, accommodation, shipment, storage, utilities, and
any tax and social security that may be due in respect of such benefits.
Maximum opportunity
The maximum opportunity is determined by the nature of the benefit provided. The benefit amount will be disclosed in the
single figure of remuneration table for the relevant year.
All employee share plans To promote share ownership by all employees.
Operation
Executive Directors are entitled to participate in all employee share plans, such as the HSBC Sharesave, on the same basis
as all other employees.
Under the Sharesave, executive Directors can make monthly savings over a period of three or five years towards the grant of
an option over HSBC shares. The option price can be at a discount, currently up to 20%, on the share price at the time that
the option is granted.
Maximum opportunity
The maximum number of options is determined by the maximum savings limit set by HM Revenue and Customs. This is
currently £500 per month.
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Variable pay
Adhering to the HSBC Values is a prerequisite to be considered for any variable pay. Executive Directors receive a performance and
behaviour rating that is considered by the Committee in determining the variable pay awards.
Elements
Details
Annual incentive
To drive and reward performance against annual financial and non-financial objectives that are consistent with the strategy and
align to shareholder interests.
Operation
Awards are discretionary and can be delivered in any combination of cash and shares under the HSBC Share Plan 2011 (‘HSBC
Share Plan’). Shares will not represent less than 50% of any award and are normally immediately vested.
On vesting, shares equivalent to the net number of shares that vested (after those sold to cover any income tax and social
security payable) must be held for a retention period up to one year, or such other period as required by regulators.
The awards will be subject to clawback (i.e. repayment or recoupment of paid/vested awards) on or after vesting for a period of
seven years from the date of award. This may be extended to 10 years in the event of an ongoing internal/regulatory
investigation at the end of the seven-year period. Details of the clawback provision are set out in the following section on LTI
awards.
The Committee retains the discretion to:
• apply a longer retention period;
• increase the proportion of the award to be delivered in shares; and
• defer the vesting of a portion of the awards, which will be subject to malus (i.e. reduction and/or cancellation of unvested
awards) provisions during any applicable deferral period.
Any deferred shares may be entitled to dividend equivalents during the vesting period, which will be paid on vesting. Where
awards do not receive dividend equivalents during the vesting period (to meet regulatory requirements), the number of shares
to be awarded will be determined using a share price discounted for the expected dividend yield.
Any deferred cash award may be entitled to notional return during the deferral period as determined by the Committee.
Maximum opportunity
The maximum opportunity for the annual incentive award, in respect of a financial year, is up to 215% of base salary.
Performance metrics
Performance is measured against an annual scorecard, based on targets set for financial and non-financial measures. The
scorecards vary by individual.
Measures with financial targets will generally have a weighting of 60% for the Group Chief Executive, 50% for the Group Chief
Financial Officer and 25% for the Group Chief Risk Officer.
The Committee will assess performance against the targets set to determine the level of achievement. The overall payout of the
annual incentive could be between 0% (for below threshold performance) and 100% of the maximum.
At threshold level of performance set in the scorecard for each measure, 25% of the award opportunity for that measure will
pay out, whereas 100% of the award opportunity will pay out for achieving maximum performance set in the scorecard. Payout
will be determined on a straight-line basis between threshold and maximum performance. The Committee can reduce (to zero
if appropriate) the annual incentive payout based on the outcome of the performance measures, if it considers that the payout
determined does not appropriately reflect the overall position and performance of the Company during the performance
period.
The Committee has the discretion to:
• change the overall weighting of the measures with financial targets and non-financial measures;
• vary the measures and their respective weightings within each category. The specific performance measures will be
disclosed in the ‘annual report on remuneration’ for the relevant year; and
• make adjustments to performance targets to reflect significant one-off items or exceptional events that occur during the
measurement period. Full and clear disclosure of any such adjustments will be made within the annual report on
remuneration at the end of the performance year, subject to commercial confidentiality.
HSBC Holdings plc Annual Report and Accounts 2018
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Elements
Details
Long-term incentives
(‘LTI’)
Operation
To incentivise sustainable long-term performance and alignment with shareholder interests.
Awards are discretionary and are granted if the Committee considers that there has been satisfactory performance over the
prior year. The awards are granted as rights to receive shares under the HSBC Share Plan, subject to a forward-looking three-
year performance period from the start of the financial year in which the awards are granted.
At the end of the performance period, the performance outcome will be used to assess the percentage of the awards that will
vest. These shares will then normally vest in five equal instalments, with the first vesting on or around the third anniversary of
the grant date and the last instalment vesting on or around the seventh anniversary of the grant date, in accordance with the
PRA remuneration rules.
On each vesting, shares equivalent to the net number of shares that vested (after those sold to cover any income tax and
social security payable) must be held for a retention period up to one year or such other period as required by regulators.
Awards are subject to malus provisions prior to vesting. The awards will also be subject to clawback on or after vesting for a
period of seven years from the date of award. This may be extended to 10 years in the event of an ongoing internal/regulatory
investigation at the end of the seven-year period. Details of the malus and clawback provisions are set out in the bottom
section of this table.
Awards may be entitled to dividend equivalents during the vesting period, which will be paid on vesting. Where awards do not
receive dividend equivalents during the vesting period (to meet regulatory requirements), the number of shares to be awarded
will be determined using a share price discounted for the expected dividend yield.
The Committee may adjust or amend awards in accordance with the rules of the HSBC Share Plan.
Maximum opportunity
The maximum opportunity for the LTI award, in respect of a financial year, is up to 320% of base salary.
Performance metrics
Malus and clawback
(applicable to both annual
incentive and long-term
incentive)
The Committee will take into consideration prior performance when assessing the value of the LTI grant. Forward-looking
performance is measured against a long-term scorecard. Financial measures will generally have a weighting of 60% or more.
The Committee will assess performance against the targets set to determine the level of achievement and the overall payout
level could be between 0% (for below threshold performance) and 100% of the maximum.
At threshold level of performance set in the scorecard for each measure, 25% of the award opportunity for that measure will
vest. Up to 50% will vest for achieving the target level of performance set for each measure, while 100% of the award will vest
for achieving the maximum level of performance set for each measure. Where performance achieved is between the threshold,
target and maximum level of performance set in the scorecard, the number of awards that will vest will be determined on a
straight-line basis.
The Committee can reduce (to zero if appropriate) the LTI payout based on the outcome of the performance measures, if it
considers that the payout determined does not appropriately reflect the overall position and performance of the Company
during the performance period.
The scorecard outcome may also be subject to a risk and compliance and/or a capital underpin under which the Committee
will have the discretion to adjust down the overall scorecard outcome, taking into account performance against those factors.
Performance targets will normally be set annually for each three-year cycle. The Committee has the discretion to:
• change the overall weighting of the financial and non-financial measures;
• vary the measures and their respective weightings within each category. The specific performance measures will be
disclosed in the ‘annual report on remuneration’ for the relevant year;
• vary the underpin measures; and
• make adjustments to performance targets, measures, weighting and/or outcomes in exceptional circumstances. This may
be to reflect significant one-off items that occur during the measurement period and/or if events happen that cause it to
determine that original targets or conditions are no longer appropriate and that amendment is required so that the targets
or conditions achieve their original purpose. Revised targets/measures will be, in the opinion of the Committee, no less
difficult to satisfy than the original conditions. Full and clear disclosure of any such adjustments will be made within the
'annual report on remuneration', subject to commercial confidentiality.
The Committee has the discretion to operate malus and clawback provisions.
Malus can be applied to unvested awards in circumstances including:
• detrimental conduct, including conduct that brings the business into disrepute;
• past performance being materially worse than originally reported;
• restatement, correction or amendment of any financial statements; and
• improper or inadequate risk management.
Clawback can be applied to vested or paid awards for a period of seven years from the grant date. This may be extended to 10
years 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 that 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; and
• any other circumstances required by local regulatory obligations to which any member of the HSBC Group or its subsidiary
is subject.
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HSBC Holdings plc Annual Report and Accounts 2018
Other
Elements
Shareholding guidelines
Operation
Details
To ensure appropriate alignment with the interest of our shareholders.
Executive Directors are expected to satisfy the following shareholding requirement as a percentage of base salary within five
years from the date of their appointment:
• Group Chief Executive: 400%
• Group Chief Financial Officer: 300%
• Group Chief Risk Officer: 300%
HSBC operates an anti-hedging policy under which individuals are not permitted to enter into any personal hedging
strategies in relation to HSBC shares subject to a vesting and/or retention period.
Maximum opportunity
Not applicable.
Provisions of previous policy that will continue to apply
2013–2015 Group Performance Share Plan (‘GPSP’), LTI awards, deferred cash and share awards.
Operation
Maximum opportunity
Performance metrics
Vesting of outstanding deferred cash and share-based awards granted in prior years will continue to form part of the
remuneration policy until vesting.
The awards normally vest over a period of up to seven years from the date of grant. On vesting, shares equivalent to the net
number of shares that vested (after those sold to cover income tax and social security payable) will be subject to the
applicable retention period set out at the time of the award.
The awards will also be entitled to dividend equivalents and notional returns (for deferred cash awards), in accordance with
their terms as set at the time of grant of the awards.
The maximum opportunity is based on the award levels determined in the relevant prior year and as disclosed in the relevant
Directors' remuneration report.
The vesting of these awards is subject to a service condition and performance conditions as set out in the terms of the
awards at the time of grant.
The Committee reserves the right to make any remuneration
payments and payments for loss of office, notwithstanding that
they are not in line with the policy set out above, where the terms
of the payment were agreed:
• before the policy set out above or any previous policy came into
effect;
• at a time where a previous policy, approved by shareholders,
was in place provided the payment is in line with the terms of
that policy; or
• at a time when the relevant individual was not a Director of the
Company and the payment was not in consideration for the
individual becoming a Director of the Company.
In addition to the specific discretions expressly set out in the
policy, the incentive plans include a number of operational
discretions available to the Committee, including:
• the right to grant awards in the form of conditional share
awards or options (including nil-cost options);
• the right to amend a performance condition in accordance with
its terms, or if anything happens that causes the Committee to
consider it appropriate to do so;
• the right to settle the award in cash, based on the relevant
share price, or shares as appropriate; and
• the right to adjust the award on a variation of share capital or
other corporate event that affects the current or future value of
the award, or alternatively, the right to vest the award early in
such circumstances.
Choice of performance measures and targets
The performance measures selected for the annual incentive and
LTI awards will be set on an annual basis by the Committee, taking
into account the Group’s strategic priorities and any feedback
received from our shareholders. The following table sets out the
performance measures we currently consider for inclusion in our
scorecards. The Committee retains the discretion to choose other
measures that are considered to be appropriate for achieving our
strategic priorities and meeting any regulatory expectation.
The targets for the performance measures will be set taking into
account a number of factors, including the targets set in our
annual operating plan, our strategic priorities, the economic
environment, market conditions and expectations, and risk
appetite.
Performance measures
Measures and
underpin
Financial
measures
Strategic
measures
Example measures for annual incentive scorecard
• Profit before tax
• Return on tangible equity ('RoTE')
• Revenue growth to exceed growth in operating expenses ('positive jaws')
• Revenue growth
• Tier 1/common equity tier 1 ('CET1') metrics
• Increase returns from areas of strength
• Turn around low return businesses
• Improve customer service
• Strengthen external relationships
• Succession planning and diversity
Risk and
compliance
measures
and/or
underpin
• Achieve sustained delivery of global conduct outcomes and effective financial
crime risk management
• Effectively manage material operational risks in support of strategic priorities
• Comply with 2018 FX DPA, the 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.
Example measures for LTI
scorecard
Rationale
• RoTE
• Total shareholder
return
• Underpin to maintain a
minimum CET1 ratio
Measures are selected to
incentivise the
achievement of our
financial targets as set out
in our strategic priorities
and annual operating plan.
• Improve environment,
social and governance
scores
Measures are selected to
support the delivery of our
strategic priorities.
• Improve employer
advocacy
Underpin linked to risk
and compliance
performance
Measures are chosen to
ensure a high level of
accountability of risk and
conduct, to promote an
effective risk management
environment and to embed
a robust governance
system.
HSBC Holdings plc Annual Report and Accounts 2018
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Remuneration arrangement for Group employees
Our wider employee remuneration policy is driven by the Group
reward strategy, which the Committee reviewed to ensure 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. Full details of our remuneration policy for
employees are disclosed on page 199.
The Committee considers the following factors in designing the
remuneration policy and determining the remuneration of
executive Directors:
• Results of employee surveys on the effectiveness of our
remuneration framework: This informs the Committee’s
decisions on remuneration of executive Directors.
• Group employees’ base salary increases: The base salary
increases for executive Directors take into consideration base
salary increases of employees, taking into account relevant
market conditions.
• Group employees’ pension plans design and contribution
levels: The net value of the cash in lieu of pension allowance
for executive Directors will not exceed the maximum
contribution (as a percentage of salary) that can be made for
the majority of UK employees.
• Annual incentive eligibility and quantum for Group employees:
All employees are eligible to be considered for an annual
incentive award based on their performance and behavioural
ratings. The variable pay for all employees, including executive
Directors, is funded from a Group variable pay pool that is
Components of remuneration package of a new executive Director
Component
Approach taken to each component of remuneration
determined by reference to Group performance. Employees
who receive an annual incentive above a certain level have a
portion of their award deferred over a period of three to seven
years.
•
LTI awards: This is generally considered for senior
management within the Group, given their proximity and
ability to influence long-term performance.
Approach to recruitment remuneration – executive
Directors
On the recruitment or appointment of a new executive Director,
the Committee would adhere to the following principles:
• Remuneration packages should be in line with the approved
policy for executive Directors.
• Remuneration packages must meet any applicable
local regulatory requirements.
• Where necessary, compensation may be provided in respect of
forfeiture of awards from an existing employer (buy-out
awards).
Outlined in the following table are all components that would be
considered for inclusion in the remuneration package of a new
executive Director and, for each, the approach that would be
adopted.
In the case of an internal appointment, any existing commitments
will be honoured and any variable element awarded in respect of
the prior role may be allowed to be paid out according to its
existing terms.
Fixed pay
Benefits
Variable pay
awards
Buy-out
The base salary and FPA will reflect the individual’s role, experience and responsibility, and will be set in the context of market practice.
The pension will be determined in line with policy as set out in the remuneration policy table and equivalent contributions (as a
percentage of salary) made for the majority of UK employees at the time of recruitment. The Committee reserves the right to offer a
pension level that may be lower than the current maximum level permitted under the policy.
Benefits to be provided will be dependent on circumstances while in line with Group policy and the remuneration policy table, including
the global mobility policy (where applicable) and local regulations.
New joiners will be eligible to be considered for variable pay awards consisting of an annual incentive and/or LTI award (or any
combination of variable pay).
For the year in which the individual commences providing services as an executive Director, the Committee retains the discretion to
determine the proportion of variable pay to be deferred, the deferral and retention period, whether any performance conditions should be
applied, and the period over which such performance should be assessed. In exercising this discretion, the Committee will take into
account the circumstances in which the individual is appointed (for example, if it is promotion of an internal candidate or an external
appointment), expectation of shareholders and any regulatory requirements.
Total variable pay awarded for the year of joining HSBC will be limited to 535% of base salary. This limit excludes buy-out awards and is
in line with the aggregate maximum variable pay opportunity set out in the remuneration policy table.
Guaranteed bonuses are only permitted by exception and must be limited to the first year of service, subject to the Group deferral policy
and performance requirements.
A buy-out may be offered if the individual holds any outstanding unvested awards that are forfeited on resignation from the previous
employer.
The Group buy-out policy is in line with the PRA remuneration rules, which state that both the terms and amount of any replacement
awards will not be more generous than the award forfeited on departure from the former employer.
A buy-out award is delivered as HSBC deferred shares with vesting and retention periods to match the terms of forfeited awards with the
previous employer as closely as possible, subject to proof of forfeiture and other relevant documentation. Where the vesting time is
fewer than 90 days, cash or deferred cash may be awarded for administrative purposes.
Where appropriate, the Committee retains the discretion to utilise the provisions provided in the Listing Rules for the purpose of making
buy-out awards.
180 HSBC Holdings plc Annual Report and Accounts 2018
Policy on payments for loss of office – executive
Directors
no further obligations that could give rise to remuneration
payments or payments for loss of office:
The following table sets out the basis on which payments on loss
of office may be made. Other than as set out in the table, there are
Payments on loss of office
Component of remuneration
Approach taken
Fixed pay and benefits
Executive Directors may be entitled to payments in lieu of:
• notice, which may consist of base salary, FPA, pension entitlements and other contractual benefits, or an amount in
Annual incentive and
LTI
Unvested awards
Post-departure benefits
Other
Legal claims
lieu of; and/or
• accrued but untaken holiday entitlement.
Payments may be made in instalments or a lump sum, and may be subject to mitigation, and subject to applicable tax
and social security deductions.
In exceptional circumstances, as determined by the Committee, an executive Director may be eligible for the grant of
annual and/or long-term incentives under the HSBC Share Plan based on the time worked in the performance year and
on the individual’s contribution.
All unvested awards will be forfeited when an executive Director ceases employment voluntarily and is not deemed a
good leaver. An executive Director may be considered a good leaver, under the HSBC Share Plan, if their employment
ceases in specified circumstances which includes:
• ill heath, injury or disability, as established to the satisfaction of the Committee;
• retirement with the agreement and approval of the Committee;
• the employee's employer ceasing to be a member of the Group;
• redundancy with the agreement and approval of the Committee; or
• any other reason at the discretion of the Committee.
If an executive Director is considered a good leaver, unvested awards will normally continue to vest in line with the
applicable vesting dates, subject to performance conditions, the share plan rules, and malus and clawback provisions.
In the event of death, unvested awards will vest and will be released to the executive Director’s estate as soon as
practicable.
In respect of outstanding unvested awards, the Committee may determine that good leaver status is contingent upon
the Committee being satisfied that the executive has no current or future intention at the date of leaving HSBC of being
employed by any competitor financial services firm. The Committee determines the list of competitor firms from time
to time, and the length of time for which this restriction applies. If the Committee becomes aware of any evidence to
the contrary before vesting, the award will lapse.
Executive Directors can be provided certain benefits for up to a maximum of seven years from date of departure for
those who depart under good leaver provisions under the HSBC Share Plan, in accordance with the terms of the policy.
Benefits may include, but are not limited to, medical coverage, tax return preparation assistance and legal expenses.
The Committee also has the discretion to extend the post-departure benefit of medical coverage to former executive
Directors, up to a maximum of seven years from their date of departure.
Where an executive Director has been relocated as part of their employment, the Committee retains the discretion to
pay the repatriation costs. This may include, but is not restricted to, airfare, accommodation, shipment, storage,
utilities, and any tax and social security that may be due in respect of such benefits.
Except in the case of gross misconduct or resignation, an executive Director may also receive retirement gifts.
The Committee retains the discretion to make payments (including professional and outplacement fees) to mitigate
against legal claims, subject to any such payments being made in accordance with the terms of an appropriate
settlement agreement waiving all claims against the Group.
Change of control
In the event of a change of control, outstanding awards will be treated in line with the provisions set out in the
respective plan rules.
Other directorships
The charts set out:
•
•
•
the minimum level of remuneration receivable under the policy
for each performance year;
the remuneration level for achieving target level of
performance (which assumes 50% of maximum variable pay
opportunity is realised); and
the maximum level of remuneration (which assumes 100% of
the variable pay opportunity is realised), as well as the
maximum value assuming a 50% increase in share price for LTI
awards.
The charts have been prepared using 2019 salaries and, therefore,
the annual incentive and LTI opportunities have been computed as
percentages of 2019 salaries.
Executive Directors may accept appointments as non-executive
Directors of companies that are not part of HSBC if so authorised
by either the Board or the Nomination & Corporate Governance
Committee.
When considering a request to accept a non-executive
appointment, the Board or the Nomination & Corporate
Governance Committee will take into account, among other
things, the expected time commitment associated with the
proposed appointment. The time commitment for external
appointments is also routinely reviewed to ensure that they will
not compromise the Directors’ commitment to HSBC.
Any remuneration receivable in respect of an external appointment
of an executive Director is normally paid to the Group unless
otherwise approved by the Nomination & Corporate Governance
Committee or the Board.
Remuneration scenarios
The following charts show how the total value of remuneration
(excluding benefits) and its composition would vary under different
performance scenarios for executive Directors under the proposed
policy, which will be effective from the date of the 2019 AGM,
subject to shareholders’ approval.
HSBC Holdings plc Annual Report and Accounts 2018
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Group Chief Executive (£000)
Total fixed pay
Annual incentive
LTI
£11,909
50%
22%
28%
£9,925
40%
27%
33%
£6,619
30%
20%
50%
Proposed policy
Target
Proposed policy
Proposed policy with 50% share price increase
Maximum
£3,312
100%
Proposed policy
Minimum
Group Chief Financial Officer / Group Chief Risk Officer (£000)
Total fixed pay
Annual incentive
LTI
£1,890
100%
Proposed policy
Minimum
£3,780
30%
20%
50%
Proposed policy
Target
£5,670
40%
27%
33%
£6,804
50%
22%
28%
Proposed policy
Proposed policy with 50% share price increase
Maximum
Remuneration policy – non-executive Directors
The Nomination & Corporate Governance Committee has reviewed
and revised the time commitments required for all non-executive
Directors as the Board supports HSBC through its ambitious
agenda of governance reform, growth and organisational
development in an environment of increasing regulatory, political
and organisational complexity.
In 2018, the Board appointed Jonathan Symonds to the role of
Deputy Group Chairman, following his retirement as non-executive
Chairman of HSBC Bank plc. In this role, Jonathan formally
deputises for the Group Chairman, takes a leadership role in
relation to external high level regulatory and political relationships,
and leads the Board in relation to specific projects. He performs
this new role in addition to his existing roles as Senior
Independent Director and Chair of the GAC. The fee for the Deputy
Group Chairman reflects Jonathan’s experience and the additional
time he devotes to the Group in relation to this important role.
Additionally, as set out on page 172, the demands and
expectations of the GRC Chair have increased significantly, leading
to the Group Remuneration Committee approving an increase to
Jackson Tai’s fee for this position in 2018.
The following table sets out the framework that will be used to
determine the fees for non-executive Directors during the term of
this policy.
182 HSBC Holdings plc Annual Report and Accounts 2018
Elements and link to strategy Operation
Fees
To reflect the time
commitment and
responsibilities of a non-
executive Director of HSBC
Holdings.
The policy for non-executive Directors is to pay:
• base fees;
• further fees for additional Board duties, including but not limited to chairmanship,
membership of a committee, or acting as the Senior Independent Director and/or
Deputy Chairman; and
• travel allowances.
Fees are paid in cash. The Board retains the discretion to pay in shares rather than cash
where appropriate.
The non-executive Group Chairman will be paid a fixed annual fee for all Board
responsibilities based on their experience and the time commitments expected for
the role, together with such other benefits as the Group Remuneration Committee may
in its absolute discretion determine.
A newly appointed non-executive Director would be paid in line with the policy on a
time-apportioned basis in the first year as necessary. No sign-on payments are offered
to non-executive Directors.
The Board (excluding the non-executive Directors) has discretion to approve changes to
the fees. The Board may also introduce any new component of fees for non-executive
Directors, subject to the principles, parameters and other requirements set out in this
remuneration policy.
Certain non-executive Directors may be entitled to receive fees for their services as
directors of subsidiary companies of HSBC Holdings plc. Such additional remuneration
is determined by the Board of Directors of each relevant subsidiary within a framework
set by the Committee.
Maximum opportunity
The Board will review the amount
of each component of fees
periodically to assess whether,
individually and in aggregate,
they remain competitive and
appropriate in light of changes in
roles, responsibilities and/or time
commitment of the non-executive
Directors, and to ensure that
individuals of the appropriate
calibre are retained or appointed.
Other than in exceptional
circumstances, during the term of
this policy, fees will not increase
by more than 20% above the 2019
levels.
Travel allowances are set at an
appropriate level, taking into
account the time requirement for
non-executive Directors to travel to
overseas meetings.
Any new fees, allowance or
component part (for example, for a
new committee) would be set and
then subject to a maximum of
20% increase for the duration of
the policy.
Expenses
Any taxable or other expenses incurred in performing their role are reimbursed, as well
as any related tax cost on such reimbursement.
Not applicable
Shareholding guidelines
To ensure appropriate
alignment with the interests
of our shareholders.
Non-executive Directors, individually or with their connected persons, are expected to
satisfy a shareholding guideline of 15,000 shares within five years from their
appointment.
The Committee reviews compliance with the guidelines annually. The Committee has
full discretion in determining any consequences in cases of non-compliance.
Not applicable
The following table sets out the fees payable in 2019, subject to shareholder approval of the Directors‘ remuneration policy at the AGM.
Position
Non-executive Group Chairman
Non-executive Director (base fee)
Deputy Group Chairman and Senior Independent Director
Senior Independent Director
Group Risk Committee
Group Audit, Group Remuneration and Financial System Vulnerabilities Committee
Nomination & Corporate Governance Committee
Travel allowances are also currently provided. The Committee
intends to review such travel allowances during 2019, in light of
the increased travel expectations for non-executive Directors to
attend Board meetings. Details on any changes will be set out in
the Annual Report and Accounts 2019.
2019 fees
£
1,500,000
127,000
375,000
–
150,000
40,000
75,000
40,000
–
33,000
Chair
Member
Chair
Member
Chair
Member
Policy on payments on loss of office – non-
executive Directors
Other than as set out above, 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 are entitled to notice under their letter of
appointment.
HSBC Holdings plc Annual Report and Accounts 2018
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Service contracts
Executive Directors
The length of service and notice periods of executive Directors are
set at the discretion of the Committee, taking into account market
practice, governance considerations, and the skills and experience
of the particular candidate at that time.
Service agreements for 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 153 to 155, and
include those directorships provided for under Capital
Requirement Directive IV (‘CRD IV’).
Contract date (rolling)
Notice period
(Director and HSBC)
Non-executive Directors
John Flint1
Stuart Gulliver2
Ewen Stevenson3
Iain Mackay4
Marc Moses
21 February 2018
10 February 2011
1 December 2018
4 February 2011
27 Nov 2014
12 months
12 months
12 months
12 months
12 months
1 John Flint was appointed as Group Chief Executive with effect from 21 February
2018.
2 Stuart Gulliver stepped down from the Board on 20 February 2018 and retired
from the Group on 11 October 2018.
3 Ewen Stevenson was appointed as executive Director and Group Chief Financial
Officer of the Company on 1 January 2019, having joined the Group on 1
December 2018.
Iain Mackay stepped down as executive Director and Group Finance Director
on 31 December 2018.
4
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, which are available for
inspection at HSBC Holdings’ registered office. 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:
2019 AGM
Henri de Castries
Irene Lee
Pauline van der Meer Mohr
2020 AGM
Kathleen Casey
Laura Cha
David Nish
Jonathan Symonds
Jackson Tai
Lord Evans of Weardale
2021 AGM
Mark Tucker
Heidi Miller
Annual report on remuneration
Remuneration Committee
Activities
Details of the roles, responsibilities and membership of the
Committee are set out on page 163. During 2018, members of the
Committee included Pauline van der Meer Mohr (Committee
Chair), John Lipsky (until 20 April 2018), David Nish, Irene Lee
(appointed on 20 April 2018) and Henri de Castries.
The Committee met six times during 2018. The following is a
summary of the Committee’s key activities during 2018. A copy of
the Committee’s terms of reference can be found on our website
at www.hsbc.com/about-hsbc/corporate-governance/board-
committees.
Details of the Committee’s key activities
Executive Directors
All employees
• Approved Directors' remuneration report
• Considered executive Director remuneration policy matters, including key
principles for remuneration policy review, Directors' remuneration policy
design alternatives and structure
• Approved 2017/2018 performance year pay review matters
• Reviewed remuneration policy effectiveness
• Received updates on notable events and regulatory and corporate
governance matters
• Consulted with key shareholders and proxy advisory bodies on executive
Director remuneration matters, including policy design and structure
• Reviewed and approved 2018 Material Risk Taker ('MRT') identification
approach, outcomes of MRT review and remuneration matters for MRTs
• Reviewed and approved executive Director remuneration matters
• Reviewed and approved executive Directors’ scorecards and pay
• Approved 2018 regulatory submissions
• Reviewed attrition data and plans to address area of concerns
proposals
Advisers
The Committee received input and advice from different advisers
on specific topics during 2018. 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 2018, 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.
The Committee also received advice from Willis Towers Watson on
market data and remuneration trends for senior management.
Deloitte also provided tax compliance and other advisory services
to the Group. Willis Towers Watson also provides benchmarking
data and services related to benefits administration for our Group
184
HSBC Holdings plc Annual Report and Accounts 2018
employees. To ensure the advice from Deloitte and Willis Towers
Watson 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 and Willis Towers Watson was
objective and independent in 2018. 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 2018, total fees of £155,750 and £59,400 were incurred in
relation to remuneration advice provided by Deloitte and Willis
Towers Watson, respectively. This was based on pre-agreed fees
and a time-and-materials basis.
During the year, John Flint, the Group Chief Executive, provided
regular briefings to the Committee. In addition, the Committee
engaged with and received updates from the following employees:
•
Iain Mackay, Group Finance Director;
• Marc Moses, Group Chief Risk Officer;
• Ralph Nash, Global Head of Financial Crime Compliance and
• Stuart Levey, Chief Legal Officer;
• Charlie Nunn, Chief Executive Officer, Retail Banking and
Group Money Laundering Reporting Officer;
• Ruth Horgan, Global Head of Regulatory Compliance; and
Wealth Management;
• Ben Mathews, Group Company Secretary.
• Elaine Arden, Group Chief Human Resources Officer;
• Alexander Lowen, Group Head of Performance and Reward;
• Colin Bell, Group Chief Compliance Officer;
• Pam Kaur, Group Head of Internal Audit;
Single figure of remuneration
(Audited)
The Committee also received feedback and input from the Group
Risk Committee and the Financial System Vulnerabilities
Committee (‘FSVC’) on risk, conduct and compliance-related
matters relevant to remuneration. No executive Directors
are involved in deciding their own remuneration.
The following table shows the single figure total remuneration of each executive Director for 2018, together with comparative figures
for 2017.
Single figure of remuneration
Base
salary
Fixed pay
allowance
(£000)
1,028
—
171
1,250
700
700
700
700
(£000)
1,459
—
241
1,700
950
950
950
950
Cash in
lieu of
pension
(£000)
308
—
51
375
210
210
210
210
Annual
incentive
AML DPA
award1
LTI2
Sub-total
(£000)
1,665
—
282
2,127
1,088
1,334
1,324
1,358
(£000)
—
—
1,530
—
1,057
—
695
—
(£000)
—
—
—
—
—
—
—
—
(£000)
4,460
—
2,275
5,452
4,005
3,194
3,879
3,218
Taxable
benefits
Non-
taxable
benefits
Notional
returns
(£000)
(£000)
(£000)
40
—
65
500
80
64
13
16
28
—
6
71
44
37
38
38
54
—
41
63
33
42
33
42
Total
(£000)
4,582
—
2,387
6,086
4,162
3,337
3,963
3,314
John Flint3
2018
2017
Stuart Gulliver4, 6 2018
2017
2018
2017
2018
2017
Iain Mackay5, 6
Marc Moses
1 60% of the 2012 annual incentive for Stuart Gulliver and Iain Mackay disclosed in the 2012 Directors’ remuneration report was deferred for five years. The vesting of
these awards was subject to a service condition and satisfactory completion of the five-year deferred prosecution agreement ('AML DPA') with the US Department of
Justice ('DoJ'). The AML DPA condition was satisfied in March 2018 and the awards were released to the executive Directors. For Marc Moses, the value of the award
attributable to services provided as an executive Director between 1 January 2014 and the vesting date has been included in the table.
2 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.
3 John Flint succeeded Stuart Gulliver as Group Chief Executive with effect from 21 February 2018 and his remuneration in the single figure table of remuneration is in
respect of services provided as an executive Director. For services rendered between 1 January 2018 and 20 February 2018, he received a salary of £97,139, fixed pay
allowance of £130,236, cash in lieu of pension of £28,000 and an annual incentive award of £271,000.
4 Stuart Gulliver stepped down from the Board on 20 February 2018 and retired from the Group on 11 October 2018. His remuneration in the single figure table of
remuneration is in respect of services provided as an executive Director. Further details can be found on page 190.
Iain Mackay stepped down as executive Director and Group Finance Director on 31 December 2018.
5
6 To meet regulatory deferral requirements for 2018, 60% of the annual incentive award of Stuart Gulliver and Iain Mackay will be deferred in awards linked to HSBC's
shares and will vest in five equal instalments between the third and seventh anniversary of the grant date. On vesting the awards will be subject to a one-year retention
period. The deferred awards are subject to the executive Director maintaining a good leaver status during the deferral period.
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 2019.
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Annual
incentive
Long-term
incentive
• Paid 50% in cash and 50% in immediately
vested shares subject to a retention period of
one year.
Perform
-ance
period
Shares
• 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.
• 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.
• Unvested awards subject to malus
provisions.
• 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.
Clawback
Performance
period
Vesting period
Retention period
Malus
Clawback
HSBC Holdings plc Annual Report and Accounts 2018
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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 the provision of medical insurance, accommodation and
car, club membership, as well as any tax gross-up. It also includes
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)
Stuart Gulliver
2018
2017
Car benefit
(UK and Hong Kong)1
Hong Kong bank-owned
accommodation1,2
Tax expense on car benefit
and Hong Kong bank-owned
accommodation1
(£000)
—
—
(£000)
—
282
(£000)
—
164
Insurance benefit
(non-taxable)1
(£000)
—
63
1 The car benefit, Hong Kong bank-owned accommodation, tax on benefits and insurance benefits for 2018 for all executive Directors are not included in the above table
as they were not significant. Taxable benefits during 2018 for Stuart Gulliver as an executive Director includes £41,711 in respect of Hong Kong bank-owned
accommodation and £17,117 in respect of tax expense on car benefit and Hong Kong bank-owned accommodation. Further details regarding Stuart Gulliver's benefits
between 21 February 2018 and 11 October 2018 are available on page 190.
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)
Awards made to executive Directors reflected the Committee’s
assessment of each of the executive Director’s performance
against the objectives in their scorecards, which were agreed at
the start of the year and reflect the Group’s strategic priorities and
risk appetite. The Committee also consulted the Group Risk
Committee and took into consideration its feedback on risk and
compliance matters.
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 2018,
all executive Directors achieved the required behaviour rating.
The performance achieved by executive Directors in the year is
shown in the table below. For John Flint and Stuart Gulliver, the
scorecard outcome, as determined below, has been applied to the
maximum annual incentive opportunity on a pro-rata basis, taking
into account the time spent by them in the Group Chief Executive
role.
Annual assessment
Profit before tax1
Positive jaws
Revenue growth
Capital management (RoTE)
Strategic priorities
– Financials
– Other targets
Risk and compliance
Total
Maximum annual incentive opportunity (£000)
– John Flint
– Stuart Gulliver
Annual incentive (£000)
– John Flint (86%)
– Stuart Gulliver (14%)
Group Chief Executive
Group Finance Director
Group Chief Risk Officer
Weighting
(%)
Assessment
(%)
Outcome
(%)
Weighting
(%)
Assessment
(%)
Outcome
(%)
Weighting
(%)
Assessment
(%)
Outcome
(%)
20.00
10.00
10.00
10.00
7.50
17.50
25.00
100.00
10.00
15.00
—
25.00
2.50
22.50
25.00
100.00
100.00
20.00
—
70.00
58.75
78.53
96.46
80.00
—
7.00
5.88
5.89
16.88
20.00
75.65
£2,560
£2,660
£1,665
£282
100.00
10.00
15.00
100.00
15.00
—
—
—
—
—
—
—
—
—
—
58.75
14.69
10.00
58.75
5.88
100.00
98.62
95.00
2.50
22.19
23.75
73.13
£1,488
–
–
£1,088
–
–
2.50
12.50
60.00
100.00
100.00
94.88
89.58
2.50
11.86
53.75
88.99
£1,488
–
–
£1,324
–
–
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HSBC Holdings plc Annual Report and Accounts 2018
Financial performance
Annual assessment
Measure
Profit before tax ($bn)1
Positive jaws (%)
Revenue growth (%)
Capital management (RoTE%)2
Strategic priorities3
Minimum
(25% payout)
Maximum
(100% payout)
Performance
Assessment
US$19.7
Positive
2.0
9.3
US$22.7
US$23.3
1.5
6.0
11.3
Various
(1.2)
4.4
10.2
100.00
—
70.00
58.75
Various
1 Profit before tax, as defined for Group annual bonus pool calculation. This definition excludes business disposal gains and losses, debt valuation adjustments 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 RoTE excluding significant items and bank levy.
3 Strategic priorities measures include: accelerate revenue growth from our Asian franchise, grow international revenue, turn around the US business, improve customer
service, strengthen external relationships, employee engagement, talent development and diversity.
Non-financial performance
The table below provides an overview of the non-financial performance achieved by each executive Director.
Group Chief Executive
Performance
Strategic priorities
• Deliver HSBC’s strategy
• Turn around the US business
• Accelerate revenue growth from our
Asian franchise
• Deliver revenue growth from our
international network
•
Improve customer satisfaction
• Strengthen the Group’s external
relationships
•
Improve employee engagement
• Strengthen HSBC’s leadership cadre
Improve diversity in senior leadership
•
Risk and compliance
• Successfully embed financial crime risk
governance and management
information through the completion of
the Global Standards programme
• Effectively manage material
operational risks
• Achieve and deliver sustainable global
conduct outcomes
• Comply with the 2018 FX DPA
•
• Set out strategic priorities to return HSBC to growth and create value for our shareholders. The strategy
was communicated in the Strategy Update in June 2018 to investors, shareholders and employees.
Execution of the strategy is underway.
• RoTE in the US business at 2.7% exceeded target of 2.2%, supported by favourable expected credit losses
and significant capital reductions. Commercial Banking revenue grew by 7% and transaction banking
revenue in Global Banking and Markets rose 9%.
• Revenue growth of 11.4% in Asia was driven by Commercial Banking as well as Retail Banking and Wealth
Management, reflecting wider spreads and balance sheet growth, with double-digit revenue growth in
Hong Kong, Pearl River Delta and mainland China.
• Revenue growth from international clients was strong at 7.2%; transaction banking revenue grew 14%,
driven by double-digit growth across Global Liquidity and Cash Management, Foreign Exchange and
Securities Services.
• Customer satisfaction rankings improved in key Retail Banking and Wealth Management markets (first in
Mexico, Singapore and Hong Kong and second in UAE). Rankings in Commercial Banking largely remained
unchanged, but required improvement with the exception of the UK (third) and Singapore (third). Customer
engagement score (‘CES’) in Global Banking and Markets at 85 was at par with the CES of our
competitors. In Global Private Banking, customer satisfaction declined by 0.8 points from a mean of 8.4/10
in 2017 to 7.6/10 in the client engagement programme survey. Action is being taken in all global
businesses to drive customer service improvements, especially through investment in digital capability.
• Positive feedback was received on interactions with investors and regulators, which found that they were
conducted with high professional competence and embodying trust, respect and transparency.
• Employer advocacy, as a measure of employee engagement, at the end of 2018 was 66% (2017: 64%),
which represents the number of employees who would recommend HSBC as a great place to work.
• Succession plans are in place for all critical leadership roles.
• Exceeded diversity target with female representation in the senior leadership at 28.2%, and on track
towards our 2020 aspirational target of 30% senior leadership positions to be held by women.
• HSBC was recognised as the 'Most Innovative Investment Bank' by The Banker; the 'World’s Best Bank for
Transaction Services', the 'World’s Best Bank for Corporates' and 'Asia's Best Bank for Sustainable
Finance' by Euromoney, and 'Best Overall Global RMB Products/Services' by Asiamoney.
• Significant progress was made to strengthen financial crime risk management across the Group,
specifically, towards achieving operational effectiveness in global businesses and regions. A strong tone
from the top included an aspiration to deliver industry-leading financial crime standards as part of the
Group’s strategy. Demonstrated excellent awareness and understanding of key financial crime risks and
issues. Actively engaged at senior governance forums to strengthen risk management practices and
controls. Continued focus is required to complete the transition to business-as-usual financial crime risk
management, and further enhance the effectiveness of financial crime governance in some countries, in
order to achieve sustainable operating maturity.
Implementation of the operational risk management framework was achieved with strong ownership and
proactive prioritisation of management of key risks across the Group. However further work is required to
embed the framework and associated tools and strengthen the control environment.
• Showed strong commitment to continue embedding the conduct pillars and outcomes, and underpinning
controls across the Group.
• Additional steps were taken that were consistent with the requirements of the 2018 FX DPA with the US
Department of Justice to enhance the Global Markets compliance programme and related internal controls.
Areas of focus have included a strong tone from the top, updated policies and procedures to prevent
violations of US law (such as fraud and market manipulation) and comprehensive risk assessment. Further
enhancements and steps to comply with the DPA are ongoing.
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Group Finance Director
Performance
Strategic priorities
• Deploy cloud technologies and
enhance Finance operating efficiency
• Streamline and embed IFRS 9 and
RWA production
• Deliver ring-fenced bank ('RFB') in the
UK and Global Service Company
('ServCo') structures and processes
• Deliver cost savings
• Strengthen the Group’s external
relationships
•
Improve employee engagement
• Strengthen HSBC’s leadership cadre
•
Improve diversity in senior
management
• Deployed cloud technologies for regulatory reporting of liquidity coverage ratio and net stable funding ratio
in Canada and France. Implementation plans to deploy the technology in other locations are on track. The
innovative capabilities of Finance are being further developed with eight key laboratories set up to deliver a
real-time vision for Finance, utilising cloud technology, advanced analytics, artificial intelligence and
machine learning.
• Completed 2018 IFRS 9 plan with few milestones remaining and daily performance maturing, with no
major downstream impact on processing time. All key activities integrated within routine processes.
• Successfully established the Group’s RFB – HSBC UK Bank plc (‘HSBC UK’) – with a separate information
technology and operations infrastructure and financial, pensions and legal structures. Transfer of Retail
Banking and Wealth Management and Commercial Banking customers and employees to HSBC UK was
also completed. Successfully established the Group’s ServCo structure in the UK in support of ring-fencing
and the Recovery and Resolution Plan.
• Strengthened Group's relationships and reputation with key stakeholders as evidenced by a high level of
investor relations engagement and robust regulatory interactions.
• Employer advocacy, as a measure of employee engagement, at the end of 2018 improved to 68% (2017:
66%). The Finance function’s structure was further simplified through the global consolidation of the
finance operational processes into a single Finance operations team. The function is driving forward the
focus on digital leadership and capabilities across all levels.
• Confirmed four key Finance ‘enterprise critical roles’ and ensured that the succession plans are actionable,
resulting in a successor gender profile of 38% female. Development plans and support in place for all
successors.
• Met aspirational gender diversity target, with 28% female representation at senior management levels in
Finance. Finance leadership initiatives, sponsorship of diverse networks, parental transition coaching and
career development support have all helped improve gender diversity. Difference and inclusion is being
addressed more broadly within Finance with an aim to increase the representation of lesbian, gay, bisexual
and transgender and differently abled employees.
Risk and compliance
• Effectively manage material operational
risks
• Achieve and deliver sustainable global
conduct outcomes
• Deliver commitments to regulators
• Successful delivery of PRA and
European Banking Authority (‘EBA’)
stress tests and Comprehensive Capital
Analysis and Review (‘CCAR’) capital
plan
• Completed the implementation of the operational risk framework in Finance, which is actively used to
•
monitor the effectiveness of key controls against significant accounting risks, including for Sarbanes-Oxley
compliance. Made significant progress embedding the understanding of relevant roles and responsibilities
through improved governance and reporting.
Improved processes for monitoring and reporting conduct outcomes for Finance, including strengthened
governance meetings with an increased focus on metrics. No significant conduct issues, breaches or
reportable events were identified. Internal review of conduct governance and control for Finance were
rated as effective.
• Delivered all regulatory updates on time and to the required standard, with queries addressed on a timely
basis. PRA and EBA stress tests in 2018 were successfully submitted on time. HSBC North America
Holdings Inc received a non-objection to its CCAR 2018 capital plan submitted to the Federal Reserve
Board on both a qualitative and quantitative basis.
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HSBC Holdings plc Annual Report and Accounts 2018
Group Chief Risk Officer
Performance
Strategic priorities
Improve customer satisfaction
•
• Strengthen the Group's external
relationships
• Turn around the US business
•
Improve employee engagement,
strengthen HSBC’s leadership cadre
and improve diversity in senior
management
• Support innovation
• Deliver cost savings
Risk and compliance
• Ensure Global Risk supports the
financial crime risk target end state
• Effectively manage material
operational risks
• Achieve and sustain the delivery of the
global conduct outcomes
• Deliver commitments to regulators,
including compliance with the 2018 FX
DPA
• Successfully deliver regulatory and
internal stress tests in 2018
• Manage credit and market risk, and
oversee liquidity risk within Board
approved risk appetite
• Successfully enhance HSBC's model
risk management
Long-term incentive awards
(Audited)
•
•
Improved customer service satisfaction with measured progress being made across markets. Global
businesses are showing delivery successes, with improvements identified for action.
Interacted regularly and successfully with regulators. The strength, quality and independence of financial
risk management was recognised. An increased focus on non-financial risk management and model risk
management is key to these ongoing interactions.
• Supported the turnaround of the US business through active risk management oversight, focusing on a
credit risk and risk remediation programme; strong forward-looking capital management through
engagement and oversight of the stress testing CCAR programme; and an enhanced modelling
infrastructure in support of stress testing and financial crime models. RoTE at 2.7% exceeded the target for
2018.
• Delivered on the Global Risk function people initiatives. Employer advocacy, as a measure of employee
engagement, increased to 68% at the end of 2018 (2017: 64%), which represents the number of employees
who would recommend HSBC as a great place to work. Focused the development of our leadership talent,
and achieved the diversity target, with 28.7% of senior management positions held by women.
• Enhanced the focus on innovative ways of working, through the facilitation of idea generation and
knowledge concept evaluation and delivery of new approaches. Education and training of Global Risk in
innovation was rolled out to enable change through the use of agile methodologies and cloud
technologies.
• Enabled the management of costs and headcount of the Global Risk function, through close ongoing
monitoring of performance.
• Enabled effective financial crime risk management through the enterprise wide and operational risk
management frameworks, with strong governance through risk management meetings and completion of
financial crime risk model reviews.
• Made significant progress in adopting and embedding the operational risk management framework, with
active focus and engagement on the material operational risks, and increased focus on non-financial risks.
• Successfully drove conduct outcomes through a strong tone from the top, and a continual monitoring of
compliance on conduct regulations. Maturity levels across conduct outcomes were excellent.
• Delivered all regulatory updates on time and up to the required standard, with any remedial actions tracked
to timely completion. Engagements with other lead regulators gained positive feedback, including working
with the Department of Justice and Federal Reserve Board to progress our commitments under the FX
DPA.
• Successfully delivered the 2018 annual cyclical scenario to the PRA. Submitted the biennial stress test to
the EBA and the CCAR submission to the Federal Reserve Board.
• Managed credit risk, market risk and liquidity risk effectively within the Group risk appetite profile and with
oversight from the Group risk management meeting.
• Made significant progress in model risk management during 2018, through significant appointments,
ongoing employee training and key stakeholder engagements.
For the 2018 performance year, the Committee determined to
grant John Flint and Marc Moses an LTI award of £3,840,000 and
£2,232,000, respectively, after taking into consideration
performance achieved for the financial year ended 31 December
2018 and the progress made towards achieving the strategic
priorities set out in the June 2018 Strategy Update. The awards
will be subject to a three-year performance period starting
1 January 2019. As the awards are not entitled to 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.
In line with the approach set out for our new policy and feedback
received from investors, we have simplified the LTI scorecard by
using fewer measures. To ensure the rewards realised by executive
Directors are strongly aligned with our strategic priorities and
value created for shareholders, a 75% weighting has been
attached to the RoTE measure. For target payout (50% of
maximum) the average RoTE over the performance period will
need to be 11%, and is aligned with our target of achieving a RoTE
of more than 11% by 2020. For maximum payout, the average
RoTE over the performance period will need to be 12% reflecting a
stretch and a continued improvement of the RoTE performance.
The RoTE measure will also be subject to a CET1 underpin
requiring the CET1 ratio at the end of the performance period to be
above the CET1 risk tolerance level.
The scorecard also attaches a 12.5% weighting to an employer
advocacy measure. This is a key indicator of employee sentiment
and underpins our strategic priority to simplify our organisation
and invest in future skills. The 2018 score has been used to set the
threshold level of performance for this measure. The target
performance level will require an improvement over the 2018 score
and the maximum level requires further improvement.
Based on feedback received from investors, we have also included
an environmental, social and governance measure with a 12.5%
weighting. This will be assessed based on ratings issued by
Sustanalytics with threshold level of performance set at receiving
an 'average performer' rating and the maximum level of
performance requiring an 'outperformer rating', which is the
highest rating that can be achieved.
The LTI awards will also be subject to a risk and compliance
underpin, which would give the Committee the discretion to adjust
down the overall scorecard outcome taking into account
performance against risk and compliance factors at the end of the
performance period. For this purpose, the Committee will receive
information on any risk management failures which have caused
significant reputational damage to the Group or have an adverse
impact on the financial performance of the Group. This is to
ensure that the Group operates within tolerance levels set for
relevant risk and compliance metrics when achieving its financial
targets.
The measures and weighting that will be used to assess
performance and payout are described in the following table.
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.
Stuart Gulliver and Iain Mackay are not eligible to receive an LTI
award in respect of 2018.
HSBC Holdings plc Annual Report and Accounts 2018
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Performance conditions for LTI awards in respect of 2018
Measures
Average RoTE (with CET1
underpin)1
Employer advocacy2
Environmental, social and
governance rank3
Total4
Minimum
(25% payout)
10.0%
Target
(50% payout)
11.0%
Maximum
(100% payout)
12.0%
65.0%
Score to achieve an 'average
performer' rating
70.0%
Mid-point score between average
and outperformer threshold scores
75.0%
Score required to achieve an
'outperformer' rating
Weighting
%
75.0
12.5
12.5
100.0
1
If the CET1 ratio at the end of performance period is below the CET1 risk tolerance level set in the risk appetite statement, then the assessment for this measure will be
reduced to nil.
2 To be assessed based on results of the latest employee Snapshot survey question ‘I would recommend this company as a great place to work’
3 To be assessed based on results of the latest rating issued by Sustainalytics. In the event that Sustainalytics changes its approach to provide the ratings during the
performance period, this may impact the assessment of the performance condition. To ensure that the performance targets/assessment approach achieves its original
purpose (i.e. are no less or more difficult than when the original targets were set) the Committee retains the discretion to review and where appropriate modify the
targets once further details on any updated Sustainalytics ratings approach is published.
4 Awards will vest on a straight-line basis for performance between the minimum, target and maximum levels of performance set in this table.
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.
Payments to past Directors
(Audited)
Details of payments made to Stuart Gulliver and Iain Mackay after
they stepped down as executive Directors are set out in the
following sections. No other 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.
Retirement arrangements for Stuart Gulliver
(Audited)
Stuart Gulliver stepped down as executive Director and Group
Chief Executive on 20 February 2018 and ceased employment with
the Group on 11 October 2018.
Under the terms of his service contract, and as previously
disclosed, for the period between 21 February 2018 and
11 October 2018, he received a salary of £802,988, FPA of
£1,089,600, cash in lieu of pension allowance of £240,897,
contractual benefits totalling £321,778 and other benefits of
£64,329. The value of contractual benefits includes the taxable
value of £201,078 for the use of a company-provided car and
Hong Kong accommodation, the tax expense of £78,201 in
relation to the use of a company car and Hong Kong
accommodation and insurance-related benefits of £42,499. In
October 2018, he was paid cash in lieu of unused holiday
entitlement, accrued during the period 2007 to 2017 for leave
cancelled at the request of the Group due to urgent HSBC matters,
totalling to £466,778. Stuart Gulliver also received a post-
employment medical cover as per the shareholder approved
policy.
Stuart Gulliver received an annual incentive award for 2018 (pro-
rated for time spent in Group Chief Executive role) as set out on
page 186. He did not receive an LTI award for 2018.
As disclosed in the 2017 Directors’ remuneration report, and
referenced here for completeness, Stuart Gulliver was granted
good leaver status in respect of outstanding unvested share
awards. In respect of his 2016 LTI award, performance will be
measured at the end of the original performance period (i.e. 31
December 2019), with the maximum number of shares available
pro-rated for time in employment (i.e. 357,911 shares after pro-
ration for time and any dividend equivalents accrued in the period
during the vesting period).
Stuart Gulliver will not receive:
• an LTI award for 2018 ; and
190
HSBC Holdings plc Annual Report and Accounts 2018
• any compensation or payment for the termination of his service
contract or his ceasing to be a Director of any Group company.
Departure terms for Iain Mackay
(Audited)
Iain Mackay stepped down as executive Director and Group
Finance Director of the Company on 31 December 2018
(‘Departure Date’).
In January 2019, he received a payment of £64,385 in lieu of his
salary, FPA and cash in lieu of pension allowance for the period
from 1 January 2019 to 13 January 2019.
In accordance with the Directors’ remuneration policy approved by
shareholders, Iain Mackay has been considered a good leaver.
Accordingly, he has been made eligible to receive:
• an annual incentive award for 2018 (details are provided on
page 186);
• his unvested deferred awards that are due to vest after the
Departure Date, 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 condition. For this purpose, his 2016 and
2017 LTI awards will be pro-rated for the period he was
employed by the Group with the maximum number of shares
being as follows:
– 2016 LTI awards: 228,817 shares (and the value of any
dividend equivalents accrued during the vesting period); and
– 2017 LTI awards: 131,796 shares; and
• certain post-departure benefits for a period of up to seven years
from the Departure Date.
Iain Mackay will not receive:
• an LTI award for 2018; and
• any compensation or payment for the termination of his service
contract or his ceasing to be a Director of any Group company.
Recruitment arrangements for Ewen Stevenson
Ewen Stevenson was appointed as executive Director and Group
Chief Financial Officer of the Company on 1 January 2019, having
joined the Group on 1 December 2018.
Ewen Stevenson's 2019 remuneration details are provided on
page 197.
In accordance with our approved policy, Ewen Stevenson will be
granted share awards to replace unvested RBS awards, which
were forfeited as a result of him joining HSBC. The grant value of
these awards is £6,464,478.
All replacement awards granted will, in general, match the
performance, vesting and retention periods attached to the awards
forfeited, and will be subject to any performance adjustments that
would otherwise have been applied by RBS.
Ewen Stevenson will also receive an award in lieu of any variable
pay award from RBS for the 2018 performance year. This will be
based on his maximum opportunity of £1.6m under RBS’s policy
and the outcome of the 2018 scorecard, as disclosed in the 2018
annual report and accounts of RBS. This award will be granted in
shares that will vest in five equal annual instalments between the
third and seventh anniversary of the grant date. On vesting, the
shares will be subject to a one-year retention period. Details on the
value of the final award will be disclosed in the Annual Report and
Accounts 2019.
External appointments
During 2018, executive Directors did not receive any fees from
external appointments.
Scheme awards in 2018
(Audited)
Scheme interests awarded during 2018
(Audited)
The table below sets out the scheme interests awarded to
Directors in 2018, for performance in 2017, as disclosed in
the 2017 Directors’ remuneration report. No non-executive
Directors received scheme interests during the financial year.
Type of interest awarded
Basis on which
award made
Date of award
Face value
awarded1
£000
Percentage
receivable for
minimum
performance
Number of
shares
awarded
Iain Mackay (ceased employment
on 31 December 2018)
Marc Moses
LTI deferred shares 2
% of salary 4
LTI deferred shares 2
% of salary 4
John Flint (appointed on 21
February 2018)
Stuart Gulliver (retired from the
Board on 20 February 2018)
Deferred shares 3
See note 5
Deferred shares 3
% of salary 6
26 February
2018
26 February
2018
26 February
2018
26 February
2018
2,860
2,860
1,201
1,635
25
25
-
-
395,388
395,388
166,014
226,072
End of
performance
period
31 December
2020
31 December
2020
31 December
2017
31 December
2017
1 The face value of the award has been computed using the actual share price of £7.234.
2 LTI awards are subject to a three-year forward-looking performance period and vest in five equal instalments subject to performance achieved. On vesting, awards will
be subject to a one-year 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.
3 Deferred shares form part of the annual incentive, for which awards were determined based on performance achieved during the period to 31 December 2017. These
awards are subject to malus during the vesting period and 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.
In line with regulatory requirements, scheme interests awarded during 2018 were not eligible for dividend equivalents. In accordance with the remuneration policy
approved by shareholders at the 2016 AGM, the LTI award was determined at 319% of salary and the number of shares to be granted was determined by taking into
account a share price discounted based on HSBC’s expected dividend yield for the vesting period (i.e. £5.645).
4
5 John Flint received a discretionary annual incentive award for 2017. Of this 2017 annual incentive award 60% was deferred and 50% of the total deferred award was
granted over HSBC shares. The deferred shares will vest in five equal instalments between the third and seventh anniversary of the award date, and on vesting will be
subject to a one-year retention period. As the awards were not eligible for dividend equivalents, the number of shares to be granted was determined by taking into
account a share price discounted based on HSBC’s expected dividend yield for the vesting period (i.e. £5.645).
6 As previously disclosed Stuart Gulliver received a 2017 annual incentive award equivalent to 170% of salary. Of this award 60% was deferred into HSBC shares. The
deferred shares will vest in five equal instalments between the third and seventh anniversary of the award date, and on vesting will be subject to a one-year retention
period. As the awards were not eligible for dividend equivalents, in accordance with the remuneration policy, the number of shares to be granted was determined by
taking into account a share price discounted based on HSBC’s expected dividend yield for the vesting period (i.e. £5.645).
The above table does not include details of shares issued as part
of the FPA and shares issued as part of the 2017 annual incentive
award that vested on grant and were not subject to any further
service or performance conditions. Details of the performance
measures and targets for the LTI award in respect of 2017 and
2016 are set out on page 191.
Directors’ interests in shares
(Audited)
The shareholdings of all persons who were Directors in 2018,
including the shareholdings of their connected persons, at
31 December 2018 (or date of retirement from the Board, if earlier)
are set out below. The following table shows the comparison of
shareholdings with the company shareholding guidelines. There
have been no changes in the shareholdings of the Directors from
31 December 2018 to the date of this report.
Individuals are given five years from their appointment date to
build up the recommended levels of shareholding. Unvested share-
based incentives are not normally taken into consideration in
assessing whether the shareholding requirement has been met.
The Committee reviews compliance with the shareholding
requirement and has full discretion in determining if any unvested
shares should be taken into consideration for assessing
compliance with this requirement (taking into account investor
expectations and guidelines). The Committee also has full
discretion in determining any penalties for non-compliance.
HSBC operates an anti-hedging policy under which individuals are
not permitted to enter into any personal hedging strategies in
relation to HSBC shares subject to a vesting and/or retention
period.
HSBC Holdings plc Annual Report and Accounts 2018
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Shares
(Audited)
At 31 Dec 2018, or date of retirement from the Board, if earlier
Shareholding at
31 Dec 2018, or
date of retirement
from the Board, if
earlier3 (% of
salary)
Shareholding
guidelines2
(% of salary)
Share
interests4
(number
of shares)
Share options5
Scheme interests
Shares awarded subject to
deferral1
without
performance
conditions4, 6
with
performance
conditions7
Executive Directors
Stuart Gulliver (retired on 20 February 2018) 8
Iain Mackay (ceased employment on 31 December
2018)
John Flint (appointed on 21 February 2018)
Marc Moses
Group Managing Directors 9
400%
300%
400%
300%
1,918%
3,711,169
663%
445%
718,532
827,691
1,415%
1,533,039
250,000 shares
n/a
n/a
—
—
9,952
—
n/a
2,293,071
738,499
1,025,725
570,922
1,019,442
n/a
769,296
—
769,296
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 that falls due at the time of vesting.
2 Unvested share-based incentives are not normally 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 2018 (£6.4589).
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 considers 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 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 LTI awards granted in February 2017 and February 2018 are subject to the performance conditions as set out in the following tables.
8 Stuart Gulliver's scheme interests deferred with performance conditions include an award granted in March 2013 subject to service and performance conditions. The
award vested on 12 March 2018 following the Committee decision on 30 January 2018.
9 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. The
shareholding guidelines for this population has been updated from 250,000 shares to 250% of reference salary from 1 January 2019 to align with the approach used for
executive Directors.
The following tables detail the performance measures and targets for the LTI award granted in respect of 2017 and 2016.
Performance conditions for LTI awards in respect of 2017 (granted in 2018)
Measures
Average return on equity (with CET1 underpin)1
Cost-efficiency ratio
Relative total shareholder return2
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
Minimum
(25% payout)
9.0%
60.0%
At median of the
peer group.
Target
(50% payout)
10.0%
58.0%
Maximum
(100% payout)
11.0%
55.5%
Straight-line vesting
between minimum and
maximum.
At upper quartile of the
peer group.
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%
Improvement in
recommendation in
three of the top five
markets for CMB, GBM
and RBWM.
$34bn
67%
Improvement in
recommendation in four
of the top five markets
for CMB, GBM and
RBWM.
$37bn
70%
Improvement in
recommendation in all of
the top five markets for
CMB, GBM and RBWM.
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. 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, J.P. Morgan 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’.
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HSBC Holdings plc Annual Report and Accounts 2018
Performance conditions for LTI awards in respect of 2016 (granted in 2017)
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 revenue supported by
international network)
• Revenue synergies
(Share of revenues supported by
universal banking model)
• Employee3
(Results of employee survey)
• Customer
(Based on customer recommendation
in home country markets)
Total
50%
22%
65%
51%
23%
67%
52%
24%
70%
Rank within top three in
at least two of the four RBWM
and CMB customer segments
in home country markets.
Rank within top three in three
of the four RBWM and CMB
customer segments in home
country markets.
Rank within top three in
all four RBWM and CMB
customer segments in home
country markets.
Weighting
%
20
20
20
25
15
100
1 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’.
Share options
(Audited)
John Flint (appointed 21 February 2018)
Iain Mackay (ceased employment on 31
December 2018)
Date of award
Exercise price
Exercisable
22 Sep 15
21 Sep 18
£
4.0472
5.4490
from1
1 Nov 18
1 Nov 23
until
30 Apr 19
30 Apr 24
At 1 Jan
2018, or date
of
appointment,
if later
Granted in
year
Exercised in
year
At 31 Dec
2018
4,447
—
—
5,505
—
—
4,447
5,505
23 Sep 14
5.1887
1 Nov 17
30 Apr 18
3,469
—
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 31 December 2018 was £6.469. 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.
HSBC Holdings plc Annual Report and Accounts 2018
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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 10-
year period that ended on 31 December 2018. 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
HSBC TSR and FTSE 100 Total Return Index
figure remuneration for the Group Chief Executive over the past
10 years, together with the outcomes of the respective
annual incentive and long-term incentive awards, is presented in
the following table.
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
Dec 2018
HSBC TSR
FTSE 100 Total Return Index
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Group Chief
Executive
Michael
Geoghegan
Michael
Geoghegan
Stuart
Gulliver
Stuart
Gulliver
Stuart
Gulliver
Stuart
Gulliver
Stuart
Gulliver
Stuart
Gulliver
Stuart
Gulliver
Stuart
Gulliver
John
Flint
Total single figure
£000
Annual incentive1
(% of maximum)
Long-term
incentive1,2,3
(% of maximum)
7,580
7,932
8,047
7,532
8,033
7,619
7,340
5,675
6,086
2,387
4,582
94%
82%
58%
52%
49%
54%
45%
64%
80%
76%
76%
25%
19%
50%
40%
49%
44%
41%
—%
—%
100%
–%
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 five-year deferred prosecution agreement with the US Department of
Justice, entered into in December 2012 ('AML DPA') as determined by the Committee. The AML DPA performance condition has been met, and as such, this award has
now been released. This award vested in 2018 and the value of the award at vesting has been included in the 2018 single figure of remuneration and included as long-
term incentive for 2018.
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. LTI awards have a three-year performance
period and the first LTI award was made in February 2017. The value of the LTI awards expected to vest will be included in the total single figure of the year in which the
performance period ends. Stuart Gulliver was not eligible for an LTI award in respect of 2017 and 2018 given his announced retirement.
194 HSBC Holdings plc Annual Report and Accounts 2018
Comparison of Group Chief Executive and all-
employee pay
The following charts compare the changes in Group Chief
Executive pay to changes in employee pay between 2017 and
2018, and provide a breakdown of total staff pay relative to the
amount paid out in dividends.
Pay ratio
The following table shows on the ratio between the total pay of
the Group Chief Executive and the median pay of our UK
employees.
Pay ratio for 2018
Percentage change in remuneration between 2017 and 2018
Pay ratio
Group Chief Executive
Employee group
At median
118:1
We considered compensation of over 40,000 employees (other
than the Group Chief Executive) providing services in the UK as at
31 December 2018. We estimated our median compensation
using:
•
•
full-time equivalent fixed pay, which includes salary and
allowances;
2018 variable pay award, including notional returns paid during
2018;
• gains realised from exercising awards granted under HSBC
Sharesave and all other employee share plans;
•
•
value of benefits (including pension contributions); and
the value of the AML DPA award that vested in 2018.
The value of the benefits have been computed as a percentage of
salary. Benefits that are one-off benefits and are provided on a
temporary basis to employees currently on secondment to the UK
have not been included in calculating the above ratios as these are
not permanent in nature and in some cases, depending on
individual circumstances, may not truly reflect a benefit to the
employee.
The above ratio has been calculated based on the annualised fixed
and variable pay for John Flint as we consider this a better basis
for a year-on-year comparison for 2019 when the regulations for
disclosing the above ratios come into force. The total
remuneration of John Flint does not include a value for an LTI
award as the performance period for the first LTI award granted to
John Flint ends on 31 December 2021. Therefore, to the extent
performance conditions are satisfied for an LTI award, the relevant
value for John Flint will be reported in the Directors' remuneration
report for 2021. In a year in which a value for an LTI award is
included in the single figure table of remuneration, the above
ratios could be higher.
Given the different business mix, size of the business,
methodologies for computing the median pay, estimates and
assumptions used by other companies to calculate their respective
pay ratios, as well as differences in employment and
compensation practices between companies, the ratios reported
above may not be comparable to that reported by other listed
peers on the FTSE 100 and our international peers.
Base salary1
Benefits2, 3
Annual incentive4
-4%
-76%
-8%
6%
-1%
2%
1 Employee group consists of local full-time UK employees as representative of
employees from different businesses and functions across the Group. The
changes for the Group Chief Executive are based on the annualised base salary
of the current and former Group Chief Executive to provide a meaningful
comparison.
2 The change in the value of the benefit is due to the change in the value of the
benefit as reported in the single figure table for the current and former Group
Chief Executive.
3 For benefits, the employee group consists of UK employees, which was deemed
the most appropriate comparison for the Group Chief Executive given varying
local requirements.
4 For annual incentive, the employee group consists of all employees globally. The
change is based on annual incentive pool as disclosed on page 33 and staff
numbers are based on 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 2017 and 2018 scorecard outcome,
reflecting performance achieved in those years, and change in annual incentive
maximum opportunity for John Flint and Stuart Gulliver, based on their
annualised salary. Details of the 2018 total single figure of remuneration for the
Group Chief Executive are on page 185.
Relative importance of spend on pay
The following chart shows the change in:
•
total staff pay between 2017 and 2018; and
• dividends paid out in respect of 2017 and 2018.
In 2018, we returned a total of $2bn to shareholders through share
buy-backs.
Relative importance of spend on pay
î
7.6%
ì
0.1%
$12,188m
$13,196m
$17,339m
$17,315m
2018
2017
2018
2017
Return to shareholder
Employee compensation and benefits
Dividends
Share buy-back
HSBC Holdings plc Annual Report and Accounts 2018
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Non-executive Directors
(Audited)
The following table shows the total fees and benefits of non-executive Directors for 2018, together with comparative figures for 2017.
Fees and benefits
(Audited)
(£000)
Phillip Ameen (Retired on 20 April 2018)
Kathleen Casey
Henri de Castries
Laura Cha
Lord Evans of Weardale
Joachim Faber (Retired on 20 April 2018)
Irene Lee
John Lipsky (Retired on 20 April 2018)
Heidi Miller
David Nish
Jonathan Symonds
Jackson Tai
Mark Tucker
Pauline van der Meer Mohr
Total
Total ($000)
Footnotes
2018
2017
2018
2017
2018
2017
Fees1
Benefits2
Total
3
4, 13
13
5, 6, 14
6, 13, 14
7, 13
8, 13
13
9, 14
10, 13
11
12, 14
154
171
161
255
200
38
361
66
573
187
653
228
1,500
239
4,786
6,383
474
174
132
269
215
162
300
199
571
158
639
194
500
239
6
23
4
13
2
3
5
—
9
11
1
47
97
17
4,226
5,636
238
317
12
16
5
22
8
9
8
25
18
18
2
43
318
16
520
693
160
194
165
268
202
41
366
66
582
198
654
275
1,597
256
5,024
6,700
486
190
137
291
223
171
308
224
589
176
641
237
818
255
4,746
6,329
1 Fees include a travel allowance of £4,000 for non-UK-based non-executive Directors.
2 Benefits include taxable expenses such as accommodation, travel and subsistence 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.
Includes fees of £106,000 in 2018 (£330,000 in 2017) as a Director and Chair of the Audit Committee of HSBC North America Holdings Inc.
3
4 Resigned as a member of the Financial System Vulnerabilities Committee.
5 Appointed as a member of the Financial System Vulnerabilities Committee on 20 April 2018. Includes fees of £80,000 in 2018 (£75,000 in 2017) as a Director, Deputy
Chairman and member of the Nomination Committee of The Hongkong and Shanghai Banking Corporation Limited.
6 The Philanthropic and Community Investment Oversight Committee was demised during 2018.
7 Appointed as a member of the Group Remuneration Committee on 20 April 2018. Includes fees of £210,000 in 2018 (£187,000 in 2017) 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 Chair
of the Risk Committee of Hang Seng Bank Limited.
Includes fees of £412,000 in 2018 (£427,000 in 2017) as Chair of HSBC North America Holdings Inc.
8
9 Appointed as Deputy Group Chairman on 6 August 2018 and appointed as a member of the Group Risk Committee on 20 April 2018. Includes fees of £240,000
(£382,000 in 2017) as non-executive Chair of HSBC Bank plc, from which he stepped down on 6 August 2018.
10 Appointed as a member of the Group Audit Committee on 1 December 2018. Appointed as Chair of the GRC on 28 April 2017. As set out in the statement from the Chair
of the Group Remuneration Committee, the fee for GRC Chair was increased to £120,000 on 1 December 2018, taking into account the increase in the expectations of
the role of the GRC Chair from a regulatory perspective and the expanded oversight role of the Group Risk Committee following the re-assignment of the work previously
undertaken by the Conduct & Values Committee and the Financial System Vulnerabilities Committee.
11 The Group Chairman’s benefits in 2018 included £10,200 in respect of life assurance and £15,426 in respect of healthcare insurance, as approved by the Group
Remuneration Committee.
12 Appointed a member of the Group Risk Committee on 20 April 2018.
13 Appointed as a member of the Nomination & Corporate Governance Committee on 20 April 2018.
14 Conduct and Values Committee was demised during 2018.
The following table sets out the base fee and further fees for additional Board duties such as chairmanship or membership of a
committee received by directors in 2018.
Position
Non-executive Group Chairman 1
Non-executive Director (base fee)
Deputy Group Chairman 2
Senior Independent Director 2
Group Risk Committee 3
Group Audit, Group Remuneration and Financial System Vulnerabilities Committee
Nomination & Corporate Governance Committee
2018 fees
£
1,500,000
110,000
40,000
54,000
60,000
30,000
60,000
30,000
40,000
25,000
Chair
Member
Chair
Member
Chair
Member
1 Group Chairman does not receive a base fee or any other fees in respect of chairmanship of any other committee.
2 The fees for the Deputy Group Chairman and Senior Independent Director were combined and increased to £375,000 with effect from 1 August 2018.
3 The fee for the Group Risk Committee Chair was increased to £120,000 with effect from 1 December 2018.
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HSBC Holdings plc Annual Report and Accounts 2018
Non-executive Directors’ interests in shares
(Audited)
The shareholdings of persons who were non-executive Directors in 2018, including the shareholdings of their connected persons, at
31 December 2018, or date of cessation as a Director, if earlier, are set out below. The following table shows the comparison of
shareholdings to the company shareholding guidelines.
Shares
Phillip Ameen (retired on 20 April 2018)
Kathleen Casey
Laura Cha
Henri de Castries
Lord Evans of Weardale
Joachim Faber (retired on 20 April 2018)
Irene Lee
John Lipsky (retired on 20 April 2018)
Heidi Miller
David Nish
Jonathan Symonds
Jackson Tai
Mark Tucker
Pauline van der Meer Mohr
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
5,000
9,635
10,200
18,064
12,892
93,221
11,172
16,165
4,420
50,000
43,821
56,075
288,381
15,000
Voting results from Annual General Meeting
The following table summarises the voting results at our AGM.
Annual General Meeting voting results
Remuneration report (2018 AGM)
Remuneration policy (2016 AGM)
1 Votes cast.
For1
97.00%
Against1
3.00%
Withheld
–
10,062,767,783
311,311,586
31,562,311
96.05%
8,887,168,002
3.95%
365,908,568
–
35,165,873
Implementation of remuneration policy in 2019 for executive Directors
The following table summarises how each element of pay will be implemented in 2019.
Implementation of remuneration policy in 2019
Summary of operation
Group Chief Executive
Group Chief Financial
Officer
Group Chief Risk Officer
Base salary (£)
3.3% increase with effect from 1 March 2019
Fixed pay allowance (£) No change
Cash in lieu of pension No change
Benefits
No change
1,240,000
1,700,000
723,000
950,000
723,000
950,000
30% of base salary
Same benefit provisions will be made available to executive Directors
Annual incentive
No change in maximum opportunity
Maximum opportunity will be 215% of base salary
Long-term incentive
No change in maximum opportunity
Maximum opportunity will be 320% of base salary
Annual incentive scorecards
The weightings and performance measures for the 2019 annual
incentive award for executive Directors 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.
2019 annual incentive scorecards
Executive Directors will be eligible for an annual incentive award
of up to 215% of base salary.
2019 annual incentive scorecards measures and weightings
Group Chief Executive1
Group Chief Financial Officer
Group Chief Risk Officer
Measures
Profit before tax ($bn)
RoTE
Revenue growth
Positive jaws
Capital metrics
Strategic priorities
Risk and compliance
Personal objectives
Total
1 Strategic priorities includes financial/quantitative metrics with a 25% weighting.
%
10.0
5.0
10.0
5.0
5.0
30.0
25.0
10.0
100.0
%
10.0
8.3
–
10.0
16.7
20.0
25.0
10.0
100.0
%
10.0
3.3
–
–
6.7
15.0
45.0
20.0
100.0
HSBC Holdings plc Annual Report and Accounts 2018
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Long-term incentives
Details of the performance measures and targets for LTI awards to
be made in 2019, in respect of 2018, are provided on page 189.
The performance measures and targets for awards to be made in
respect of 2019, granted in 2020, will be provided in the Annual
Report and Accounts 2019.
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
The details of compensation paid to executive Directors for the year ended 31 December 2018 are set out below.
Emoluments
Basic salaries, allowances and benefits in kind
Pension contributions
Performance-related pay paid or receivable3
Inducements to join paid or receivable
Compensation for loss of office
Notional return on deferred cash
Total
Total ($000)
John Flint1
Stuart Gulliver2
Iain Mackay
Marc Moses
2018
£000
2,863
—
5,505
—
—
54
8,422
11,232
2017
£000
—
—
—
—
—
—
—
—
2018
£000
534
—
282
—
—
41
857
1,143
2017
£000
3,896
—
2,127
—
—
63
6,086
7,834
2018
£000
1,984
—
1,088
—
—
33
3,105
4,141
2017
£000
1,961
—
3,566
—
—
42
5,569
7,168
2018
£000
1,911
—
3,556
—
—
33
5,500
7,335
2017
£000
1,914
—
3,590
—
—
42
5,546
7,139
1 John Flint succeeded Stuart Gulliver as Group Chief Executive with effect from 21 February 2018 and his remuneration in this table is in respect of services provided as
an executive Director.
2 Details of payments made to Stuart Gulliver after he stepped down from the Board on 20 February 2018 are provided on page 190.
3
Includes the value of the deferred and LTI awards at grant.
The aggregate amount of Directors' emoluments (including both
executive Directors and non-executive Directors) for the year
ended 31 December 2018 was $30,550,208. 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). Post-employment medical insurance benefit was
provided to former Directors, Douglas Flint of £4,563 ($6,085),
Alexander Flockhart of £5,463 ($7,286), and Stuart Gulliver of
£2,840 ($3,787) during the year ended 31 December 2018.
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 (in this case, executive Directors and Group
Managing Directors of the Group) for the year ended 31 December
2018, or for the period of appointment in 2018 as a Director or
Group Managing Director. Details of the remuneration paid to the
five highest paid employees, comprising two executive Directors
and three Group Managing Directors of the Group, for the year
ended 31 December 2018, 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.
Five highest paid employees
Senior management
£000
14,982
10
19,696
—
—
34,688
46,260
£000
39,285
188
40,519
—
—
79,992
106,678
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HSBC Holdings plc Annual Report and Accounts 2018
Emoluments by bands
Hong Kong dollars
US dollars
Number of
highest paid employees
Number of
senior management
$2,000,001 – $2,500,000
$16,000,001 – $16,500,000
$17,000,001 – $17,500,000
$24,500,001 – $25,000,000
$27,500,001 – $28,000,000
$32,000,001 – $32,500,000
$33,500,001 – $34,000,000
$34,500,001 – $35,000,000
$35,500,001 – $36,000,000
$38,000,001 – $38,500,000
$39,500,001 – $40,000,000
$41,500,001 – $42,000,000
$46,000,001 – $46,500,000
$50,000,001 – $50,500,000
$57,000,001 – $57,500,000
$58,000,001 – $58,500,000
$69,500,001 – $70,000,000
$84,000,001 – $84,500,000
$93,000,001 – $93,500,000
$255,182 – $318,978
$2,041,457 – $2,105,253
$2,169,048 – $2,232,844
$3,125,981 – $3,189,777
$3,508,754 – $3,572,550
$4,082,914 – $4,146,710
$4,274,301 – $4,338,096
$4,401,892 – $4,465,687
$4,529,483 – $4,593,278
$4,848,461 – $4,912,256
$5,039,847 – $5,103,643
$5,295,029 – $5,358,825
$5,869,189 – $5,932,984
$6,379,553 – $6,443,349
$7,272,691 – $7,336,486
$7,400,282 – $7,464,077
$8,867,579 – $8,931,374
$10,717,649 – $10,781,445
$11,865,969 – $11,929,764
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
1
1
1
1
1
1
1
1
1
2
1
1
1
1
1
1
1
1
1
1
1
1
1
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, regardless of gender, ethnicity,
age, disability or any other factor unrelated to performance or
experience with the Group. 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
the long-term interests of our stakeholders.
Our remuneration strategy, as approved by the Group
Remuneration 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 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.
• Considering the full-market range when making pay decisions
for employees, taking into account the individual’s and the
Group’s performance in any given year. An individual’s pay will
vary depending upon their performance.
• 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 employees a competitive total reward package.
This includes market competitive fixed pay levels, which ensure
our employees are able to meet their basic day-to-day needs.
• 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.
• Ensuring variable pay is awarded on a discretionary basis and
dependent upon Group, business and individual performance.
• Offering employee benefits that are 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.
• Linking reward packages to performance and behaviour with
no bias towards an individual’s ethnicity, gender, age, or any
other characteristic.
The remuneration policy applies for all employees on a Group-wide
basis.
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 reviews the effectiveness and compliance of the
Group's reward strategy.
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 163. Activities and advisers used by the Committee
are detailed on page 184.
The Committee reviewed the Group's remuneration policy in
2018 and made no material changes to the policy and its
implementation for 2018.
HSBC Holdings plc Annual Report and Accounts 2018
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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, which (subject to
compliance with local laws and regulations) help 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,
with both a floor and a ceiling, and the payout ratio reducing 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 Group Remuneration Committee when determining the Group variable pay pool and 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 risk appetite statement (‘RAS’), annual operating plan 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 reward of individuals in Control Functions, including risk and compliance employees, are assessed according to
a balanced scorecard of objectives specific to the functional role they undertake. This is 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.
Variable pay
adjustments
and conduct
recognition
Malus
Clawback
• Group policy is for Control Functions staff to report into their respective function. 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.
• Remuneration is carefully benchmarked with the market and internally to ensure it is set at an appropriate level.
• Variable pay awards may be adjusted downwards in circumstances including:
– detrimental conduct, including conduct that brings HSBC into disrepute;
– involvement in events resulting in significant operational losses, or events that have caused or have the potential to cause
significant harm to HSBC; and
– non-compliance with the HSBC Values and other mandatory requirements or policies.
• Rewarding positive conduct may take the form of use of our global recognition programme, At Our Best, or positive adjustments to
variable pay awards. These are used where exceptional behaviours have been demonstrated that go beyond the normal course of an
employee’s responsibilities. This can also happen when an employee sets an outstanding example of the HSBC Values.
Malus can be made to unvested deferred awards granted in prior years. It may be applied in circumstances including:
• detrimental conduct, including conduct that brings the business into disrepute;
• past performance being materially worse than originally reported;
• restatement, correction or amendment of any financial statements; and
•
improper or inadequate risk management.
Clawback can be applied to vested or paid awards granted to Material Risk Takers ('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 Managers 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 that 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; and
• 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 generally do not operate commission-based sales plans.
Sales
incentives
Identification
of MRTs
•
Individuals are identified as MRTs if they perform certain specified roles or activities for our regulated entities, or if their total
compensation exceeds certain threshold. The variable pay awards of MRTs are deferred over a period of three to seven years to ensure
alignment between the payout realised by them and the long-term performance of the Group. Details of the variable pay structure, the
deferral and retention period applied to MRTs, in accordance with the applicable local regulations, are detailed in the following table.
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HSBC Holdings plc Annual Report and Accounts 2018
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 characteristics of our remuneration framework that
apply on a Group-wide basis, subject to compliance with local
laws, are 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.
• Fixed pay may include salary, fixed pay allowance, cash in lieu of pension and other cash allowances in accordance with
local market practices. These pay elements are categorised as fixed pay as they are based on predetermined criteria, are
non-discretionary, are transparent and are not reduced based on performance.
• Fixed pay represents 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 generally delivered in cash on a monthly basis. However, the fixed pay allowance of executive Directors is
delivered in shares.
Benefits
Ensure market
competitiveness and
provide benefits in
accordance with local
market practice.
Annual incentive
Incentivise 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.
• Benefits may include, but are not limited to, the provision of a pension, 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.
• 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
any current year adjustments to variable pay.
• Annual incentives 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 are generally paid in cash and shares. For MRTs, at least 50% of the awards are in shares and/or where required by
regulations, in units linked to asset management funds.
• A portion of the annual incentive award may be deferred and vest over a period of three years, five years or seven years.
• A deferral approach is applicable to all employees across the Group to defer a portion of annual incentive awards above a
specified threshold. The deferred variable pay is delivered through HSBC shares. Vesting of deferred awards will be
annually over a three-year period with 33% vesting on the first and second anniversaries of grant 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; or
– 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 based outside the UK who have not been identified at the Group level as an MRT, but who are identified as
MRTs under local regulations, are generally subject to a three-year deferral period. In Germany, a five-year deferral period is
applied for members of the local management board and individuals in managerial roles reporting into the management
board. In Malta, a five-year deferral period is applied for executive Committee members. Local MRTs are also subject to a
minimum deferral rates discussed above, except in China (where a minimum deferral rate of 50% is applied for the Chief
Executive Officer in China), Germany (where a minimum deferral rate of 60% is applied for members of the local
management board and individuals in managerial roles reporting into the management board) and Oman (where a
minimum deferral rate of 45% is applied).
• Where an employee is subject to two sets of regulations, the requirement that is specific to the sector and/or country in
which the individual is working is applied, subject to meeting the minimum requirements applicable under each regulation.
• 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. This prohibits employees from entering 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 in HSBC shares and the balance is deferred into cash. In accordance with local regulatory
requirements, for local MRTs in Poland, 50% of the deferred awards are delivered in an instrument linked to the
performance of the local entity and the balance in deferred cash. For local MRTs in Brazil and Oman, 100% of the deferred
amount is delivered in shares or linked to the value of shares.
• 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.
HSBC Holdings plc Annual Report and Accounts 2018
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Overview of remuneration structure for employees (continued)
Remuneration components
and objectives
Application
Post-vesting retention
period
Ensure appropriate
alignment with
shareholders.
• Variable pay awards made in HSBC shares or linked to relevant fund units granted to MRTs, identified in accordance with
the PRA and FCA remuneration rules, are generally subject to a one-year retention period post-vesting. Local MRTs (except
those in Brazil, France, Oman and Russia) are also generally subject to a one-year retention period post-vesting. For local
MRTs in Brazil, France and Russia, a six-month retention period is applied. No retention period is applied for local MRTs in
Oman.
• MRTs who are subject to a five-year deferral period, except senior management or individuals in PRA- and FCA-designated
Long-term incentive
awards (‘LTI’)
Align the medium- to long-
term strategy with
stakeholder interests and
adherence to the HSBC
Values.
Shareholding
requirement
Align interests of senior
management with
shareholders' interests.
Buy-out awards
Support recruitment of
talent.
Guaranteed variable
remuneration
Support recruitment of
talent.
Severance payments
Adhere to contractual
agreements with
involuntary leavers.
senior management functions, have a six-month retention period applied to their awards.
• Only executive Directors are eligible to be considered for an LTI award. See details on page 189.
• All executive Directors and Group Managing Directors of HSBC Holdings are subject to a minimum shareholding
requirement. Details are set out on page 191.
• The minimum shareholding requirement must be achieved by 2019 or within five years of their appointment, whichever is
later.
• Buy-out 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.
Where relevant, any performance conditions attached to the awards, and malus and clawback provisions, will remain
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 15.3% for individuals with seven-year deferral period and 7.7% for
individuals with five-year deferral period. This discount rate was used for four MRTs in UK and one MRT in 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, and
subject to compliance with local regulations, 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
We identify individuals as Material Risk Takers ('MRTs') based on
the qualitative and quantitative criteria set out in the Regulatory
Technical Standard (‘RTS’) EU 604/2014. We also identify MRTs
based on additional criteria developed internally. The following key
principles underpin HSBC’s identification process:
• MRTs are identified at Group, HSBC Bank plc (consolidated)
and HSBC UK Bank plc level.
• MRTs are also identified at other solo regulated entity level as
required by the regulations.
• When identifying an MRT, HSBC considers an employee’s role
within its matrix management structure. The global business
and functions that an individual works within takes precedence,
followed by the geographical location in which they work.
In addition to applying the qualitative and quantitative criteria
specified in the RTS, we also identified additional MRTs based on
our own internal criteria, which included compensation thresholds
and individuals in certain roles and grades who otherwise would
not be identified as MRTs under the criteria prescribed in the RTS.
The list of MRTs, and any exclusions from it, is reviewed by Chief
Risk Officers and Chief Operating Officers of the relevant global
202
HSBC Holdings plc Annual Report and Accounts 2018
functions and businesses. The overall results are reviewed by the
Group Chief Risk Officer.
The Group Remuneration 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 2018.
Remuneration disclosures
The following tables 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, HSBC UK Bank plc or other solo-
regulated entity levels are included, where relevant, in those
entities' disclosures.
The 2018 variable pay information included in the following tables
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.
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
13.8
6.7
—
7.1
—
16.8
2.5
—
14.3
11.8
—
—
30.6
11
$m
6.3
6.3
—
—
—
—
—
—
—
—
—
—
6.3
16
$m
36.4
36.4
—
—
—
44.7
21.1
12.8
23.6
15.3
—
—
81.1
Total
31
$m
56.5
49.4
—
7.1
—
61.5
23.6
12.8
37.9
27.1
—
—
118.0
1 Cash-based fixed remuneration is paid immediately.
2 Variable pay awarded in respect of 2018. 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.
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
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
$m
2.7
2.7
2.7
—
—
4.6
60.7
56.5
60.7
(10.9)
—
21.8
—
—
—
—
—
—
Non-executive
Directors
$m
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Senior
management
$m
24.4
24.4
24.4
—
—
12.4
57.1
48.7
57.1
(9.7)
—
31.3
—
—
—
—
—
—
Total
$m
27.1
27.1
27.1
—
—
17.0
117.8
105.2
117.8
(20.6)
—
53.1
—
—
—
—
—
—
1 This table provides details of balances and movements during performance year 2018. For details of variable pay awards granted for 2018, 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 2018.
Includes any amendments due to malus or clawback. Page 200 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.
HSBC Holdings plc Annual Report and Accounts 2018
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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
628
$m
388.6
388.6
—
—
—
385.6
188.1
95.9
197.5
106.7
—
—
167
$m
90.6
90.6
—
—
—
83.1
40.6
20.1
42.5
22.6
—
—
27
$m
17.9
17.9
—
—
—
17.0
8.4
4.1
4.6
2.4
4.0
2.4
144
$m
77.6
77.6
—
—
—
75.1
37.0
17.9
38.1
20.0
—
—
151
$m
60.9
60.9
—
—
—
45.8
23.1
9.6
22.6
11.1
0.1
—
64
$m
40.9
40.9
—
—
—
39.5
19.4
10.4
20.1
11.5
—
—
Total
1,181
$m
676.5
676.5
—
—
—
646.1
316.6
158.0
325.4
174.3
4.1
2.4
774.2
173.7
34.9
152.7
106.7
80.4
1,322.6
1 Cash-based fixed remuneration is paid immediately.
2 Variable pay awarded in respect of 2018. In accordance with shareholder approval received on 23 May 2014 (98% in favour), for each MRT the variable component of
remuneration for any one year is limited to 200% of the fixed component of the total remuneration.
3 Share-based awards are made in HSBC shares and/or linked to notional fund units in the HSBC World Selection Balanced Portfolio. Vested shares are subject to a
retention period of up to one year.
Guaranteed bonus, sign-on and severance payments
Guaranteed bonus and sign-on payments1
Made during year ($m)
Number of beneficiaries
Severance payments2
Awarded during year ($m)
Number of beneficiaries
Highest such award to a single person ($m)
Paid during year ($m)
Number of beneficiaries
Investment
banking
Retail
banking
Asset
management
Corporate
functions
Independent
control
functions
All other
Total
20.1
22
17.8
18
5.4
14.0
18
1.7
2
5.7
9
2.6
5.3
8
—
—
—
—
—
—
—
1.8
3
0.9
2
0.6
0.4
2
—
—
1.0
4
0.3
1.0
4
—
—
1.8
4
0.8
1.6
3
23.6
27
27.2
37
—
22.3
35
1 No sign-on payments were made in 2018. 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
204
HSBC Holdings plc Annual Report and Accounts 2018
Deferred remuneration at 31 December1
Investment
banking Retail banking
Asset
management
Corporate
functions
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
$m
170.2
170.2
$m
33.6
33.6
170.2
33.6
—
—
71.3
252.3
219.2
—
—
13.4
46.5
41.1
252.3
46.5
$m
8.7
8.7
8.7
—
—
4.4
8.7
7.5
8.7
Independent
control
functions
$m
14.8
14.8
All other
$m
17.8
17.8
Total
$m
272.0
272.0
$m
26.9
26.9
26.9
14.8
17.8
272.0
—
—
10.6
52.5
46.2
—
—
5.3
22.0
20.8
—
—
—
—
8.5
113.5
30.6
24.3
412.6
359.1
52.5
22.0
30.6
412.6
(39.2)
(7.2)
(1.4)
(7.4)
(3.5)
(4.9)
(63.6)
—
199.5
—
40.3
—
—
—
—
—
—
—
—
—
—
—
—
—
7.9
4.0
2.7
4.0
(0.3)
—
1.9
—
37.2
—
—
—
—
—
—
—
20.9
0.1
—
0.1
—
—
0.1
—
—
19.8
325.6
—
—
—
—
—
—
4.1
2.7
4.1
(0.3)
—
2.0
1 This table provides details of movements during performance year 2018. For details of variable pay awards granted for 2018, 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 2018.
Includes any amendments due to malus or clawback. Page 200 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
€11,000,000 – 12,000,000
Management body
All other
9
1
1
—
—
—
1
1
—
—
1
—
—
—
—
1
804
214
87
36
21
10
5
12
3
3
1
—
—
1
—
—
Total
813
215
88
36
21
10
6
13
3
3
2
—
—
1
—
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.
HSBC Holdings plc Annual Report and Accounts 2018
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Strategic ReportFinancial Review Financial Statements Additional Information Corporate Governance Report of the Directors | Directors’ responsibility statement
Directors’ responsibility statement
The Directors are responsible for preparing the Annual Report and
Accounts 2018, 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 enabling
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 2018 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 2018,
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 report’ on pages
153 to 157 of the Annual Report and Accounts 2018, 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.
The GAC has responsibility, delegated to it from the Board, for
overseeing all matters relating to external financial reporting. The
GAC report on page 159 sets out how the GAC discharges its
responsibilities.
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
19 February 2019
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HSBC Holdings plc Annual Report and Accounts 2018
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 2018 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 this opinion, I believe that the audit evidence I have obtained is sufficient and appropriate. My work has been undertaken,
and my opinion 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.
How the audit approach was structured
This was the fourth year that it has been my responsibility to form this opinion on behalf of PricewaterhouseCoopers LLP ('PwC'), who
you first appointed on 31 March 2015 in relation to that year’s audit. Over 2,000 partners and staff from member firms of the PwC
network have spent more than 500,000 hours supporting this report, which in addition to the opinion provides information on how I
approached the audit, how it changed from the previous year and details of the significant discussions that I, and my senior colleagues,
had with the Group Audit Committee ('GAC').
The audit approach remained broadly unchanged, and reflects 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:
Additional partners led our audit work on three of the global businesses. Global Private Banking was not included because of its relative
contribution to the financial statements. 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 11 individual locations. Financial reporting processes are performed in
HSBC’s 4 Finance Operations Centres. Working closely with me, a partner coordinated the audit work performed by PwC member firms
in the UK, Poland, China, Sri Lanka, Malaysia, India and Philippines. 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 to consider the implications for the remainder of our audit work.
Approximately 10% of the controls tested in the audit are undertaken in these sites.
(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, HSBC North America Holdings Inc, HSBC Mexico S.A., HSBC Bank Middle East Limited Dubai branch, HSBC Bank
Canada, HSBC Bank plc, HSBC Bank UK plc, HSBC Global Services (UK) Limited and HSBC Group Management Services Limited
(together 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 Significant Subsidiaries, and attended Audit Committee
meetings for most of them. We also visited businesses in a further three countries. These visits 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 Significant Subsidiaries relied upon work performed by PwC member firms in Australia, China, India, France, and
Germany. 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 85% of
assets, 75% of total operating income and 85% 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.
In March 2018, I chaired a three-day meeting in London of the partners and senior staff from PwC member firms who undertake audits of
the Significant Subsidiaries. There were no significant changes in this team during 2018. The meeting provided an opportunity for those
partners and staff to hear directly from HSBC management, including the new Group CEO who outlined his areas of focus. We
considered during this meeting how our view of significant audit risks had changed.
1 We have audited HSBC Holdings plc’s financial statements which comprise the consolidated and parent company balance sheets as at 31 December 2018, the
consolidated and parent company income statements and the consolidated and parent company statements of comprehensive income for the year then ended, the
consolidated and parent company statements of cash flows for the year then ended, the consolidated and parent company statements of changes in equity for the year
then ended, and the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. We have also
audited the consolidated and parent company balance sheets as at 1 January 2018. Certain required disclosures have been presented elsewhere in the Annual Report
and Accounts 2018, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as ‘(Audited)’. The
relevant disclosures are included in the Global businesses and geographical regions sections on pages 47 to 49; the Risk sections on pages 79 to 146; the Capital
sections on pages 148 to 149; and the Directors' remuneration report disclosures on pages 185 to 197.
HSBC Holdings plc Annual Report and Accounts 2018
207
Strategic ReportFinancial Review Financial Statements Additional Information Corporate Governance Changes to the audit in 2018
More detailed changes in the approach arose because of:
(1) Changes in the structure and strategy of the HSBC Group
In assessing the Significant Subsidiaries in 2018 I limited work performed on HSBC Bank Middle East Limited to the Dubai branch and
removed HSBC Private Bank Suisse S.A. because of its relative size. HSBC Bank UK plc, the ring-fenced retail bank, was included for the
first time because it commenced trading as an independent entity in July 2018. There were no other changes in scope.
(2) Impairment of assets required under IFRS 9 "Financial Instruments"
IFRS 9 was applied from 1 January 2018. It has changed the classification and measurement of assets and liabilities on the balance
sheet, and the calculation of impairment on assets. With respect to impairment, this has been a substantial exercise for HSBC with
changes required to processes and controls to comply with the complexities of the accounting standard. I asked a partner who is a
specialist in IFRS 9 to lead the audit of the processes adopted, assumptions made, and control framework established for both the
analysis of the transition included in Note 37 and the current year impacts included in the audited credit risk disclosures on pages 79 to
146. The additional work required drove much of the increased audit fee in both 2018 and 2017.
The work undertaken included a review of over 120 models used to calculate the expected losses, but also considered the controls
governing the origination, maintenance and necessary adjustments to the data used by these models, much of which had not previously
been subject to the application of internal controls suitable for financial reporting.
Time was spent considering how macroeconomic events could impact the calculation of expected loss through the application of forward
economic guidance. This guidance cannot consider all possible outcomes that could occur in the future, but is an estimate based on
information available at the date of the financial statements. As this is a new and complex accounting standard, market practice will
emerge that may lead to refinements in the methodology adopted.
(3) The impact of geopolitical tensions on the macro environment
Geopolitical factors were considered to determine if changes in the approach were required, for example; the impacts of the UK's
departure from the EU, China-US trade arrangements, tensions in the Middle East and changing oil prices. I specifically considered how
these matters were reflected in IFRS 9, but more broadly on the valuation of assets and liabilities. IFRS requires financial statements to
carry certain assets at fair value, as discussed in Note 1. Where this is the case, it is the value on 31 December 2018, and therefore the
financial statements cannot reflect changes which will occur in the future as a result of these or other events.
(4) Adding unpredictability to our audit procedures
As required by auditing standards, my team undertook procedures which were deliberately unexpected and could not have reasonably
been predicted by HSBC management. As an example, the team in the Middle East undertook unannounced cash counts in branches
during the year. The results of these procedures were consistent with our expectations.
(5) Using the work of others
During 2018 I made more use of evidence provided by others. This included testing of controls performed by Group Internal Audit and
management themselves in some low risk areas. I also used the work of experts where this is necessary, most notably; the calculation of
pension liabilities. An increasing number of controls are operated on behalf of HSBC by third parties, where I rely on audit evidence
provided by other audit firms not part of the PwC network. For example, I obtain a report evidencing the testing of external systems and
controls supporting HSBC’s payroll and HR processes. In all of these situations, the PwC audit teams reviewed the work undertaken and
determined it to be acceptable for the purposes of the audit.
(6) Innovations in the audit
My senior colleagues and I are committed to driving innovation and the use of technology in the audit to improve quality and
consistency. A workshop was held in India for the PwC member firms involved in the audit to explore how work could be enhanced and
new audit procedures could be undertaken. As a result of this workshop, we identified three areas of focus, Ways of Working,
Technology Enabled Audit, and Reliance on Others. As a result, we have implemented our ‘Agile’ working methodology and tools to
deliver sections of the audit more efficiently, such as maximising the use of our own offshore service delivery centres for approximately
100 audit procedures that can be performed consistently for all audit teams. To make our audit more technology enabled, we developed
five solutions to automate certain standard audit procedures and increased our use of robotics, data analytics and process intelligence.
Responsibilities of the Directors and auditor
The Directors have, on page 206 acknowledged their responsibility to prepare the financial statements to give a true and fair view; to
have controls enabling them to be satisfied that the financial statements are free from material misstatement, whether due to fraud or
error; and, as described below to assess whether the Group and parent company can continue as a going concern.
It is the sole responsibility of the Directors to ensure that you receive financial statements which are both true and fair. However, an audit
has an important role in providing confidence in the financial statements that are provided by companies to their members. That
confidence is based upon independence and objectivity. I can confirm that PwC 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.
There has been considerable media debate about the impact that other services may have on auditor independence. I reviewed the
details of services provided by the PwC network of firms and concluded that they were all permitted by the FRC’s Ethical Standard, as
discussed on page 160, the GAC also rigorously reviewed these other services. The fees for all services provided by members of the PwC
network is included in Note 7. Of these fees, 94% are for services related to the audit or providing independent assurance, I am working
with the GAC to ensure that progressively during 2019 our services relate solely to these categories.
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 critical that you understand the inherent limitations of the audit which are disclosed in this description, including the possibility
that an approach based upon sampling and other audit techniques may not identify all issues.
208
HSBC Holdings plc Annual Report and Accounts 2018
Report of the independent auditors to the members of HSBC Holdings plc
As in all PwC statutory audits I did specifically address the risk of management override of internal controls, including testing journals
and evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud.
While our audit procedures include obtaining representations that the Group is in compliance with all applicable laws and regulations, an
audit does not involve testing HSBC’s compliance with each of the very large number of laws and regulations with which the Group, as a
financial services business, must comply. I and my colleagues apply judgement in selecting the specific laws and regulations as the focus
of our audit procedures. For example, we focused on business authorisations issued by the Prudential Regulatory Authority because in
our judgement a breach could lead to a material impact on the financial statements or the Group’s going concern. Audit procedures were
performed to identify if any such breaches had occurred. These procedures included regularly meeting with some of the Group’s
regulators, reviewing correspondence with both regulators and legal advisors and meeting with the Group General Counsel.
Annually the Prudential Regulatory Authority provide questions covering aspects of our audit where they would like further information to
assist them in their regulatory responsibilities. These questions did not highlight any areas that I had not already considered in our audit.
Materiality
In order for me to perform my work, I had regard to the concept of materiality. The table provides you with details of how I have
determined materiality for both the Group and the parent company.
Overall Group materiality $1bn (2017: $900m)
Group
Parent company
$1bn (2017: $900m)
How I determined it
5% of adjusted profit before tax excluding the debit valuation
adjustment and non-qualifying hedges.
Why I believe this is
appropriate
Given the geographically dispersed nature of HSBC and the
diversity of its banking activities, I believe a standard
benchmark of 5% of adjusted profit before tax is an
appropriate quantitative indicator of materiality, although of
course an item could also be material for qualitative reasons.
I selected adjusted profit before tax, because as discussed on
page 47, 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.
0.75% of total assets. This would result in an overall
materiality of $1.8bn and is therefore capped at the
materiality for the Group.
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.
1% is a commonly used measure when determining
materiality based on total assets. Given the parent company
has a significant level of external debt, we considered 0.75%
to be more appropriate.
When planning the Group audit, I considered if multiple errors might exist which, when aggregated, could exceed $1bn. 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 $750m 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 $837m (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 economic
decisions of users taken on the basis of these financial statements. The misstatements identified during the audit were carefully
considered to assess if they were individually or in aggregate material. I agreed with the GAC that we would report to them
misstatements identified during our audit above $50m (2017: $50m), as well as misstatements below those amounts that, in our view,
warranted reporting for qualitative reasons. I reported several items for both the Group and parent company to the GAC, impacting either
the absolute level of profit and equity or misclassifications within the financial statements and notes. The Directors concluded that all
items which remained unadjusted were not material to the financial statements. I agreed with their conclusion. All other significant
adjustments that we identified in our audit were adjusted by the Group prior to the issuance of the financial statements.
Matters discussed with the GAC
Most of our discussions occur with senior management of the Group. However, we escalate those matters which we believe are most
important to the GAC for their consideration. I attended each of the 13 GAC meetings held during the year. Part of each meeting involved
a discussion without management present. I also met with members of the GAC a further 20 times. During these various conversations
we discussed my observations on a variety of accounting matters, observations on controls over financial reporting, culture and the
impact of changes in senior management. I can confirm that this report is consistent with the reporting made to the GAC.
During the April meeting, the audit plan was presented. This was supplemented by an update in December on how technology was being
used in the audit. Throughout the year, this plan was refreshed and revisions discussed with the GAC. For example, given the focus on
‘jaws’ as an alternative performance measure in external reporting and sensitivity to changes in income and expense recognition
significantly lower than materiality, I changed our risk assessment and audit effort.
I discussed with the GAC all of the matters that presented the most significant risks of material misstatement in the financial statements.
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. To help you understand their impact on
the audit, I have listed them in order of decreasing audit effort. 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. The list is similar to last year, with the exception of litigation and regulatory enforcement
actions, which was not a key audit matter in 2018 as a result of the settlements made by the Group.
HSBC Holdings plc Annual Report and Accounts 2018
209
Strategic ReportFinancial Review Financial Statements Additional Information Corporate Governance IT Access Management
Discussion with the GAC
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.
Over the past four years, management implemented remediation activities that have contributed to reducing the risk over access management in the
financial reporting process. The status of the remediation was discussed at several GAC meetings during the year.
However, issues related to privileged access and business user access remained unresolved on parts of the technology infrastructure, requiring our audit
approach to respond to the risks presented.
This matter was discussed in relation to both the Group and the parent company.
Procedures performed to support our discussions and conclusions
Highly privileged access was restricted to appropriate personnel.
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.
•
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 review controls undertaken by management.
• Testing was performed over toxic combination controls.
• 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 2018
GAC Report, page 160.
Effectiveness of internal controls, page 164.
Application of IFRS 9 in the calculation of impairment of loans and advances
Discussion with the GAC
As this is the first year of adoption of IFRS 9, there is limited experience available to back-test the charge for expected credit losses (‘ECL’) with actual
results. There is also a significant increase in the number of data inputs required for the impairment calculation. The data is sourced from a number of
systems that have not been used previously for the preparation of the accounting records. This increases risk around completeness and accuracy of
certain data used to create assumptions and operate the models.
The global credit environment has remained benign for an extended period of time, in part due to the globally low interest rates and relative strength of
the global economy. However, there are a number of headwinds to the global economy as well as certain regional and country specific risks. As a result,
whilst the current levels of delinquencies and defaults remains low, the risk of impairment remains significant.
At each GAC and Group Risk Committee meeting there was a discussion on changes to risk factors and other inputs within the models, geopolitical risks,
such as the escalating US-China trade wars and the UK's departure from the EU, as well as discussions on individually significant loan impairments.
The more judgemental interpretations of IFRS 9 made by management continued to be discussed, in particular the application of forward economic
guidance, including the severity and magnitude of modelled downside scenarios; and associated considerations of post model adjustments.
As the control environment for the calculation of ECL under IFRS 9 continued to be strengthened following initial adoption, we provided updates on the
changes being made and the results of our testing procedures.
Procedures performed to support our discussions and conclusions
• Model performance monitoring controls were tested, including periodic policy and independent model reviews, back testing of performance, and
approval of model changes.
• Performed risk based substantive testing of models, including independently re-building certain assumptions.
• Tested the review and challenge of multiple economic scenarios by an expert panel and internal governance committee, and assessed the
reasonableness of the multiple economic scenarios and variables using our economic experts.
• Controls over the inputs of critical data, into source system, and the flow and transformation of data between source systems to the impairment
calculation engine were tested. Substantive testing was performed over the critical data used in the year end ECL calculation.
• Assessed management’s user acceptance testing over the automated calculation of ECL to ensure it is performed in line with business requirements,
as well as independently reviewing the underlying script to validate that the calculation operated as per our expectations.
• Observed review and challenge forums to assess the ECL output and approval of post model adjustments.
• Tested the approval of the key inputs, assumptions and discounted cash-flows that support the significant individual impairments, and substantively
tested a sample of individually assessed loans.
Relevant references in the Annual Report and Accounts 2018
Credit risk disclosures, page 88.
GAC Report, page 160.
Note 1.2 (d): Financial instruments measured at amortised cost, page 228.
Note 37: Effects of reclassification upon adoption of IFRS 9, page 296.
210 HSBC Holdings plc Annual Report and Accounts 2018
Report of the independent auditors to the members of the HSBC Holdings plc
Investment in associate - Bank of Communications Company, Limited (‘BoCom’)
Discussion with the GAC
For eight 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 $6.8bn lower than the carrying value.
This is considered an indicator of potential impairment. An impairment test was performed by HSBC using a value in use ('VIU') model to estimate the
investment’s value assuming it continues to be held in perpetuity rather than sold. The VIU was only $300m in excess of the carrying value. On this basis
no impairment was recorded and the share of BoCom’s profits has been recognised in the consolidated income statement.
The VIU 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. Given the proximity of the carrying value and VIU, small
changes in some of these assumptions would lead to an impairment. We discussed the appropriateness of these assumptions with the GAC, particularly
those with the greatest sensitivity related to short term cash flows and the minimum level of capital required by BoCom. The focus of this discussion was
on whether the impact of China-US trade tensions and perspectives on the China banking market had been fully reflected. We also reviewed with the GAC
the long term profit growth rate and loan impairment rate, and considered reasonably possible alternatives. In the discussion we specifically considered
whether the assumptions used captured the current levels of uncertainty, both individually and when standing back and considering the output of the
model in aggregate.
Procedures performed to support our discussions and conclusions
• The conclusions on the appropriateness of the model were reviewed, including an assessment of management's expert.
• A reasonable range for the discount rate used within the model was independently calculated 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, and its mathematical accuracy were tested.
• We observed a meeting in November 2018 between management and senior BoCom executive management, held specifically to identify facts or
circumstances impacting management assumptions.
• Disclosures made in the Annual Report and Accounts 2018 in relation to BoCom were reviewed.
• Representations were obtained from HSBC that the assumptions used were consistent with information currently available to them, both as a
shareholder and to which HSBC are entitled through their participation on BoCom's Board of Directors.
Relevant references in the Annual Report and Accounts 2018
GAC Report, page 160.
Note 1.1(f): Critical accounting estimates and judgements, page 226.
Note 18: Interests in associates and joint ventures, page 265.
Management override of controls - alternative performance measure
Discussion with the GAC
The use of alternative performance measures is common by listed companies to help better explain performance. HSBC use a number, and the GAC has
considered them in detail during the year, specifically assessing the appropriateness of ‘adjusted profit’.
During the year we discussed with the GAC the potential for the jaws target to be missed. Given the metric is highly sensitive to small changes in revenue
and cost, we concluded that this increased the incentive for management to override controls to meet targets. This change in assessment prompted us to
perform a number of incremental procedures which might indicate that revenue or costs were intentionally misstated.
We communicated the change in risk assessment during October 2018, and designed a year end testing response as a result. The outcome of our testing
was communicated to the GAC in February 2019.
Procedures performed to support our discussions and conclusions
Reassessed significant judgements in light of the enhanced incentives noted in the risk assessment.
• Performed additional tests on journals, specifically considering cut off and unusual combinations that impact costs and revenue.
• Performed work over revenue and expenses booked in January 2019 to assess if they were included in the correct period.
• Tested the clearance and appropriateness of classification of aged reconciliation breaks, considering if there was a trend towards only resolving issues
which would improve revenue or reduce costs.
• Considered the accuracy of accruals with a specific focus on the bonus accrual.
• Tested impairment processes at year end, identifying where booking of impairments may have been delayed into FY19 or was close to meeting criteria
for impairment at year end.
Relevant references in the Annual Report and Accounts 2018
GAC Report, page 160.
There were a number of other matters which were covered in the meetings, including;
• the impact of models on the financial statements and the related control environment. The carrying value of almost 70% of the
Group’s total assets is calculated or supported by models and included areas such as loans and advances, calculation of the present
value of inforce policies sold by the insurance businesses and goodwill. Our audit work considered the controls over, inputs into and
reasonableness of the outputs of those models with a material impact;
• internal controls over financial reporting. At the GAC meetings in November 2018 and February 2019, there was an update on the
control environment over financial reporting. I provided information on the aggregate number of new and outstanding control
deficiencies identified by my team and management. Those deemed to be significant in their potential impact on financial reporting,
but not material, were discussed individually;
• a focus on uncertain tax positions ('UTPs'). During the November GAC meeting, I highlighted the increase in UTP exposure,
particularly in the UK entities due to increased focus from HMRC on UK VAT matters in financial services Groups. This increase in UTP
exposure is consistent with our expectations based on what we’ve seen across the sector and given the nature of the Group’s
business; and
• a detailed discussion on the quality of the results of quality inspections performed with respect to the audit work of different PwC
member firms on which I rely, and the rotation plans for key audit partners.
HSBC Holdings plc Annual Report and Accounts 2018
211
Strategic ReportFinancial Review Financial Statements Additional Information Corporate Governance Going concern
On page 165, the Directors confirmed their belief 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 reviewed this statement, and considered HSBC’s budgets, cash flows,
capital plan and stress tests. There is nothing arising from this review that is materially inconsistent with my understanding and
information obtained during the audit. Further, there is nothing material that I would add to this statement, or that I wish to draw your
attention to.
Other required matters and reporting on other information
The Annual Report and Accounts 2018 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, while being unaudited, may still be
important to your consideration of the performance and position of HSBC, for example risk weighted assets. 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. It is important that you understand the limitations in the scope of my responsibility,
particularly over areas important to considering the future potential of HSBC such as the Viability Statement and how the Group’s key
risks are managed.
Area of the Annual Report and Accounts 2018
My responsibility
My reporting
Directors’ remuneration report on pages 172 to 205
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.
Other areas
Strategic Report and the Report of the Directors’
on pages 2 to 206.
Viability statement on page 165 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 159.
Directors’ statement on page 206 that they
consider the HSBC Annual Report and Accounts
2018, 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 152 to
171.
All other information in the Annual Report and
Accounts 2018 aside from the audited financial
statements and the auditors’ report.
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.
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.
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’).
I have nothing material to draw attention to or to
add to the confirmation or description.
Consider whether it deals appropriately with those
matters that I reported to the GAC.
No exceptions to report.
Consider whether any information found during
the course of the audit would cause me to
disagree.
No disagreements to report.
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.
212
HSBC Holdings plc Annual Report and Accounts 2018
Report of the independent auditors to the members of HSBC Holdings plc
Other Reporting
In addition, I am required to report to you under the Companies Act 2006 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
19 February 2019
HSBC Holdings plc Annual Report and Accounts 2018
213
Strategic ReportFinancial Review Financial Statements Additional Information Corporate Governance Financial statements
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
Consolidated income statement
for the year ended 31 December
Net interest income
– interest income
– interest expense
Net fee income
– fee income
– fee expense
Page
214
215
216
217
218
220
220
221
222
223
Net income from financial instruments held for trading or managed on a fair value basis
Net income/(expense) from assets and liabilities of insurance businesses, including related derivatives,
measured at fair value through profit or loss
Changes in fair value of long-term debt and related derivatives
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or
loss
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 change in expected credit losses and other credit impairment
charges/Loan impairment charges and other credit risk provisions
Change in expected credit losses and other credit impairment charges
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
214
HSBC Holdings plc Annual Report and Accounts 2018
Notes
2
3
3
3
3
4
4
6
21
5
18
8
10
10
2018
$m
30,489
49,609
(19,120)
12,620
16,044
(3,424)
9,531
(1,488)
(97)
695
218
75
10,659
885
63,587
(9,807)
53,780
(1,767)
N/A
52,013
(17,373)
(15,353)
(1,119)
(814)
—
2017
$m
28,176
40,995
(12,819)
12,811
15,853
(3,042)
8,426
2,836
155
N/A
1,150
106
9,779
337
63,776
(12,331)
51,445
N/A
(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)
7,521
1,262
(1,997)
N/A
1,385
95
9,951
(971)
59,836
(11,870)
47,966
N/A
(3,400)
44,566
(18,089)
(16,473)
(1,229)
(777)
(3,240)
(34,659)
(34,884)
(39,808)
17,354
2,536
19,890
(4,865)
15,025
12,608
90
1,029
1,298
14,792
2,375
17,167
(5,288)
11,879
9,683
90
1,025
1,081
15,025
11,879
$
0.63
0.63
$
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
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
– fair value gains reclassified to the income statement
– amounts reclassified to the income statement in respect of impairment losses
– income taxes
Debt instruments at fair value through other comprehensive income
– fair value losses
– fair value gain transferred to the income statement on disposal
– expected credit losses recognised in the income statement
– income taxes
Cash flow hedges
– fair value losses
– fair value losses reclassified to the income statement
– income taxes and other movements
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 taxes7
– income taxes
Changes in fair value of financial liabilities designated at fair value upon initial recognition arising from changes in
own credit risk
– before income taxes
– income taxes
Equity instruments designated at fair value through other comprehensive income
– fair value losses
– income taxes
Effects of hyperinflation
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
For footnotes, see page 222.
2018
$m
2017
$m
15,025
11,879
2016
$m
3,446
N/A
N/A
N/A
N/A
N/A
(243)
(168)
(95)
(94)
114
19
(267)
317
(31)
(64)
(64)
(7,156)
—
(7,156)
—
(329)
(388)
59
2,847
3,606
(759)
(27)
(71)
44
283
(4,670)
10,355
8,083
90
1,029
1,153
10,355
146
1,227
(1,033)
93
(141)
N/A
N/A
N/A
N/A
N/A
(192)
(1,046)
833
21
(43)
(43)
9,077
—
8,939
138
2,419
3,440
(1,021)
(2,024)
(2,409)
385
N/A
N/A
N/A
N/A
9,383
21,262
18,914
90
1,025
1,233
21,262
(299)
475
(895)
71
50
N/A
N/A
N/A
N/A
N/A
(68)
(297)
195
34
54
54
(8,092)
1,894
(9,791)
(195)
7
(84)
91
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(8,398)
(4,952)
(6,968)
90
1,090
836
(4,952)
HSBC Holdings plc Annual Report and Accounts 2018
215
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Financial statements
Consolidated balance sheet
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 and otherwise mandatorily measured at fair value through profit or loss
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
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
Equity
Called up share capital
Share premium account
Other equity instruments
Other reserves
Retained earnings
Total shareholders’ equity
Non-controlling interests
Total equity
Total liabilities and equity
Notes
11
14
14
15
16
22
18
21
8
23
24
15
25
26
4
27
8
28
32
32
31
31 Dec
2018
$m
162,843
5,787
35,859
238,130
41,111
N/A
207,825
72,167
981,696
242,804
407,433
110,571
684
22,407
24,357
4,450
At
1 Jan
20181
$m
180,621
6,628
34,186
254,410
39,746
N/A
219,818
82,559
949,737
201,553
383,499
114,777
1,006
21,802
23,374
4,714
31 Dec
2017
$m
180,624
6,628
34,186
287,995
N/A
29,464
219,818
90,393
962,964
201,553
389,076
67,191
1,006
22,744
23,453
4,676
2,558,124
2,518,430
2,521,771
35,859
56,331
1,362,643
165,884
5,641
84,431
148,505
205,835
85,342
97,380
718
87,330
2,920
2,619
22,437
34,186
64,492
1,360,227
130,002
6,850
80,864
144,006
216,821
66,536
99,926
928
85,598
4,295
1,614
25,861
34,186
69,922
1,364,462
130,002
6,850
184,361
94,429
216,821
64,546
45,907
928
85,667
4,011
1,982
19,826
2,363,875
2,322,206
2,323,900
10,180
13,609
22,367
1,906
138,191
186,253
7,996
194,249
10,160
10,177
22,250
6,643
139,414
188,644
7,580
196,224
10,160
10,177
22,250
7,664
139,999
190,250
7,621
197,871
2,558,124
2,518,430
2,521,771
1 Balances at 1 January 2018 have been prepared in accordance with accounting policies referred to on page 224. 31 December 2017 balances have not been re-
presented. Information regarding the effects of adoption of IFRS 9 can be found in Note 37.
The accompanying notes on pages 224 to 309, and the audited sections in: ‘Global businesses and regions’ on pages 47 to 64; ‘Risk’ on
pages 69 to 147; ‘Capital’ on pages 148 to 151; and ‘Directors’ remuneration report’ on pages 172 to 206 form an integral part of these
financial statements.
These financial statements were approved by the Board of Directors on 19 February 2019 and signed on its behalf by:
Mark E Tucker
Group Chairman
Ewen Stevenson
Group Chief Financial Officer
216
HSBC Holdings plc Annual Report and Accounts 2018
Consolidated statement of cash flows
for the year ended 31 December
Profit before tax
Adjustments for non-cash items:
Depreciation and amortisation
Net (gain)/loss from investing activities
Share of profits in associates and joint ventures
(Gain)/Loss on disposal of subsidiaries, businesses, associates and joint ventures
Change in expected credit losses gross of recoveries and other credit impairment charges
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 differences1
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 and otherwise mandatorily measured 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 ventures2
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 repaid3
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 Dec4
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
Cash and cash equivalents at 31 Dec4
2018
$m
19,890
1,933
(126)
(2,536)
—
2,280
N/A
1,944
450
(1,303)
7,299
10,716
(44,071)
(40,499)
(1,515)
4,047
(5,745)
35,882
18,806
4,500
(2,644)
910
(332)
(3,417)
6,469
(383,454)
370,357
(1,196)
(204)
(1,848)
4
(16,341)
6,001
(1,998)
133
—
(6,078)
—
(4,077)
(10,762)
(16,781)
(26,653)
337,412
(9,677)
301,082
2017
$m
17,167
1,862
(1,152)
(2,375)
(79)
N/A
2,603
917
500
(381)
2016
$m
7,112
5,212
(1,215)
(2,354)
1,743
N/A
4,090
2,482
534
(207)
(21,289)
15,364
(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
162,843
180,624
128,009
5,787
47,878
59,602
30,613
(5,641)
301,082
6,628
82,771
58,850
15,389
(6,850)
337,412
5,003
77,318
55,551
14,646
(5,977)
274,550
Interest received was $45,291m (2017: $41,676m; 2016: $42,586m), interest paid was $14,172m (2017: $10,962m; 2016: $12,027m) and
dividends received were $1,702m (2017: $2,225m; 2016: $475m).
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 operations in Brazil resulting in a net cash inflow of $4.8bn.
2
3 Subordinated liabilities changes during the year are attributable to repayments of $(4.1)bn (2017: $(3.6)bn; 2016: $(0.6)bn) of securities. Non-cash changes during the
year included foreign exchange (loss)/gain $(0.6)bn (2017: $(0.6)bn; 2016: $2.1bn) and fair value losses of $(1.4)bn (2017: $(1.2)bn; 2016: $(0.3)bn).
4 At 31 December 2018, $26,282m (2017: $39,830m; 2016: $35,501m) was not available for use by HSBC, of which $19,755m (2017: $21,424m; 2016: $21,108m)
related to mandatory deposits at central banks.
HSBC Holdings plc Annual Report and Accounts 2018
217
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Financial statements
Consolidated statement of changes in equity
for the year ended 31 December
Called up
share
capital
and share
premium
Other
equity
instru-
ments2,3
Retained
earnings4,5
$m
$m
$m
20,337
22,250
139,999
As at 31 Dec 2017
Impact on transition to IFRS 9
—
—
(585)
Other reserves
Cash flow
hedging
reserve
Foreign
exchange
reserve
Merger
and
other
reserves6
Total
share-
holders’
equity
Non-
controlling
interests
$m
$m
$m
$m
$m
Total
equity
$m
(222)
(19,072)
27,308
190,250
7,621
197,871
—
—
—
(1,606)
(41)
(1,647)
20,337
22,250
139,414
(222)
(19,072)
27,308
188,644
Financial
assets at
FVOCI
reserve8
$m
(350)
(1,021)
(1,371)
—
13,727
2,765
(245)
—
—
—
2,847
(301)
(64)
283
—
(245)
—
—
—
—
—
—
—
—
16
—
—
16
—
—
—
—
—
—
(7,061)
—
—
—
—
—
—
—
(7,061)
16,492
(245)
16
(7,061)
(610)
1,494
—
10,798
328
—
—
(2,024)
2,395
(43)
—
(566)
3,206
—
(11,551)
500
—
489
—
—
—
—
—
—
—
—
84
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(477)
—
131
131
—
—
—
—
—
(27)
—
(194)
—
(194)
—
—
—
—
—
8,966
—
—
—
—
—
8,966
—
—
—
—
—
—
(4)
(350)
—
—
—
—
—
—
(1)
—
—
—
—
—
—
—
11,126
131
(194)
8,966
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,200
—
269
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
13,727
7,580
1,298
196,224
15,025
(4,525)
(145)
(4,670)
(245)
2
(243)
—
16
(27)
3
(27)
19
2,847
—
2,847
(301)
(28)
(329)
(64)
283
—
—
(64)
283
(7,061)
(95)
(7,156)
9,202
1,153
10,355
111
1,494
5,968
(11,547)
(6,088)
—
450
(1,998)
17
—
—
—
111
1,494
5,968
(710)
(12,257)
—
—
—
—
(27)
(6,088)
—
450
(1,998)
(10)
10,798
9,231
131
(194)
(2,024)
2,395
(43)
8,966
7,192
1,081
182,578
11,879
152
15
2
—
24
—
111
9,383
146
(192)
(2,024)
2,419
(43)
9,077
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
—
(11,547)
— (5,851)
—
—
2,731
—
—
—
—
—
(237)
(2,200)
450
(4,998)
(67)
23,789
22,367
138,191
(1,532)
(206)
(26,133)
29,777
186,253
7,996
194,249
22,715
17,110
136,795
(28,038)
27,308
175,386
At 1 Jan 2018
Profit for the year
Other comprehensive income
(net of tax)
– debt instruments at fair value through
other comprehensive income
– equity instruments designated at fair
value through other comprehensive
income
– cash flow hedges
– changes in fair value of financial
liabilities designated at fair value
upon initial recognition arising from
changes in own credit risk
– remeasurement of defined benefit
asset/liability7
– share of other comprehensive income
of associates and joint ventures
– effects of hyperinflation
– 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
Redemption of securities
Transfers9
Cost of share-based payment
arrangements
Cancellation of shares10, 11
Other movements
At 31 Dec 2018
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/liability7
– 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 shares1
Other movements
At 31 Dec 2017
—
—
—
—
—
—
—
—
—
—
—
—
—
5,968
—
—
—
—
—
—
—
—
—
—
—
721
—
—
—
—
—
—
—
—
—
—
—
—
622
—
—
—
—
(3,000)
—
—
—
—
—
—
—
—
—
—
—
—
5,140
—
—
—
—
20,337
22,250
139,999
(222)
(19,072)
27,308
190,250
7,621
197,871
218
HSBC Holdings plc Annual Report and Accounts 2018
Consolidated statement of changes in equity (Continued)
Called up
share
capital and
share
premium
Other
equity
instru-
ments2,3
Retained
earnings4,5
Financial
assets at
FVOCI
reserve8
Cash flow
hedging
reserve
Foreign
exchange
reserve
Merger
and other
reserves6
Total
share-
holders’
equity
Non-
controlling
interests
Other reserves
$m
$m
$m
22,263
15,112
143,976
$m
$m
$m
$m
(20,044)
27,308
188,460
9,058
197,518
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 shares1
Capital securities issued
Dividends to shareholders
Cost of share-based payment
arrangements
Other movements
At 31 Dec 2016
—
—
—
—
—
—
—
—
—
452
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,998
—
—
—
2,479
59
—
—
5
54
—
—
(425)
3,040
(2,510)
—
(11,279)
534
921
$m
(189)
—
(271)
(271)
—
—
—
—
—
$m
34
—
(61)
—
(61)
—
—
—
—
—
(7,994)
—
—
—
—
1,894
(9,888)
—
—
—
—
—
—
(17)
(477)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,538
(271)
(61)
(7,994)
Total
equity
$m
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,479
967
3,446
(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)
534
(879)
22,715
17,110
136,795
(27)
(28,038)
27,308
175,386
7,192
182,578
1 For further details, refer to Note 32. In February 2017, HSBC announced a share buy-back of up to $1.0bn, which was completed in April 2017. In July 2017, HSBC
announced a share buy-back of up to $2.0bn, which was completed in November 2017. Shares bought back from these two buy-back programmes have been
cancelled. In August 2016, HSBC announced a share buy-back of up to $2.5bn, which was completed in December 2016 and resulted in a net increase in shares held in
treasury.
2 During 2018, HSBC Holdings issued $4,150m, £1,000m and SGD750m of perpetual subordinated contingent convertible capital securities on which there were $60m of
external issuance costs, $49m of intra-Group issuance costs and $11m of tax benefits. In 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. Under IFRSs these issuance costs and tax benefits are classified as equity.
3 During 2018, HSBC Holdings redeemed $2,200m 8.125% perpetual subordinated capital securities and its $3,800m 8.000% perpetual subordinated capital securities,
Series 2, on which there were $172m of external issuance costs and $23m of intra-Group issuance costs wound down.
4 At 31 December 2018, retained earnings included 379,926,645 treasury shares (2017: 360,590,019; 2016: 353,356,251). 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 Global Markets.
5 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.
6 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.
7 During 2018, an actuarial gain of $1,180m has arisen as a result of the remeasurement of the defined benefit pension obligation of the HSBC Bank (UK) Pension
Scheme. During 2017, 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 6 for further detail.
8 The $350m at 31 December 2017 represents the IAS 39 available-for-sale fair value reserve as at 31 December 2017.
9 Permitted transfers from the merger reserve to retained earnings were made when the investment in HSBC Overseas Holdings (UK) Limited was previously impaired. A
part reversal of this impairment results in a transfer from retained earnings back to the merger reserve of $2,200m.
10 This includes a re-presentation of the cancellation of shares to retained earnings and capital redemption reserve in respect of the 2017 share buy-back, under which
retained earnings have been reduced by $3,000m, called up capital and share premium increased by $2,731m and other reserves increased by $269m.
11 For further details refer to Note 32 .In May 2018, HSBC announced a share buy-back of up to $2.0bn, which was completed in August 2018.
HSBC Holdings plc Annual Report and Accounts 2018
219
Strategic ReportFinancial Review Corporate Governance Additional 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 income from financial instruments held for trading or managed on a fair value basis
Changes in fair value of long-term debt and related derivatives
Changes in fair value of other financial instruments mandatorily measured at fair value
through profit or loss
Gains less losses from financial investments
Dividend income from subsidiaries1
Other operating income
Total operating income
Employee compensation and benefits
General and administrative expenses
Reversal of impairment/(impairment) of subsidiaries2
Total operating expenses
Profit before tax
Tax (charge)/credit
Profit for the year
Notes
3
3
3
6
2018
$m
(1,112)
2,193
(3,305)
—
245
(77)
43
4
55,304
960
55,367
(37)
(4,507)
2,064
(2,480)
52,887
(62)
52,825
2017
$m
(383)
2,185
(2,568)
2
(181)
103
—
154
10,039
769
10,503
(54)
(4,911)
(63)
(5,028)
5,475
64
5,539
2016
$m
(424)
1,380
(1,804)
(1)
119
(49)
—
—
10,436
696
10,777
(570)
(4,014)
—
(4,584)
6,193
402
6,595
1 2018 includes $44,893m (2017:nil) return on capital from HSBC Finance (Netherlands) resulting from restructuring the Group’s Asia operation to meet resolution and
recovery requirements. This amount does not form part of distributable reserves.
2 2018 includes a $2,200m (2017:nil) part reversal of the impairment previously recognised against HSBC Holdings investment in HSBC Overseas Holdings (UK) Limited.
This amount does not form part of distributable reserves.
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 upon initial recognition arising from changes
in own credit risk
– before income taxes
– income taxes
Other comprehensive income for the year, net of tax
Total comprehensive income for the year
2018
$m
52,825
—
—
—
865
1,090
(225)
865
53,690
2017
$m
5,539
(53)
(70)
17
(828)
(1,007)
179
(881)
4,658
2016
$m
6,595
(72)
(83)
11
(896)
(1,030)
134
(968)
5,627
220
HSBC Holdings plc Annual Report and Accounts 2018
HSBC Holdings balance sheet
Assets
Cash and balances with HSBC undertakings
Loans and advances to HSBC undertakings designated and otherwise mandatorily measured 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 subsidiaries1
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
Deferred tax 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
31 Dec 2018
1 Jan 20182
31 Dec 2017
Notes
$m
$m
$m
15
24
15
25
28
32
3,509
23,513
707
56,144
—
126
594
1,985
16,208
2,388
76,627
—
369
379
1,985
11,944
2,388
76,627
4,264
369
379
160,231
92,930
92,930
357
—
293
380
293
555
245,181
191,559
191,734
949
25,049
2,159
50,800
994
17,715
162
97,828
10,180
13,609
22,231
39,899
61,434
147,353
245,181
2,571
25,488
3,082
34,258
1,344
20,139
—
86,882
10,160
10,177
22,107
37,381
24,852
104,677
191,559
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
1 2018 includes a $56,587m (2017:nil) capital injection to HSBC Asia Holdings Overseas Limited.
2 Balances at 1 January 2018 have been prepared in accordance with accounting policies referred to on page 224. 31 December 2017 balances have not been re-
presented. Information regarding the effects of adoption of IFRS 9 can be found in Note 37.
The accompanying notes on pages 224 to 309, and the audited sections in: ‘Global businesses and regions’ on pages 47 to 64, ‘Risk’ on
pages 69 to 147, ‘Capital’ on pages 148 to 151 and ‘Directors’ remuneration report’ on pages 172 to 206 form an integral part of these
financial statements.
These financial statements were approved by the Board of Directors on 19 February 2019 and signed on its behalf by:
Mark E Tucker
Group Chairman
Ewen Stevenson
Group Chief Financial Officer
HSBC Holdings plc Annual Report and Accounts 2018
221
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Financial statements
HSBC Holdings statement of cash flows
for the year ended 31 December
Profit before tax
Adjustments for non-cash items:
– depreciation, amortisation and impairment/expected credit losses
– share-based payment expense
– other non-cash items included in profit before tax1
Changes in operating assets and liabilities
Change in loans to HSBC undertakings
Change in loans and advances to HSBC undertakings designated and otherwise mandatorily measured 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 issue
Change in financial liabilities designated at fair value
Change in other liabilities
Tax received
Net cash from operating activities
Purchase of financial investments
Proceeds from the sale and maturity of financial investments
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
Redemption of 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 Dec
Cash and cash equivalents comprise:
– cash at bank with HSBC undertakings
– loans and advances to banks of one month or less
2018
2017
2016
(Restated)2
$m
6,193
48
10
34
4
(36,437)
—
612
3,066
(239)
(1,633)
(1,229)
(693)
646
$m
5,475
(17)
33
(2)
(48)
(1,122)
(11,944)
(1,775)
(2,183)
134
1,020
954
721
443
(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
52,887
(46,878)
70
—
(46,948)
5,745
(7,305)
—
758
231
(1,094)
(740)
(1,883)
301
2,022
—
—
(8,992)
3,627
(121)
(5,486)
6,652
(6,093)
—
(1,998)
—
(1,972)
19,513
(1,025)
(8,693)
(1,360)
5,024
1,560
4,949
6,509
3,509
3,000
Interest received was $2,116m (2017: $2,103m; 2016: $1,329m) Interest paid was $3,379m (2017: $2,443m; 2016: $1,791m) and
dividends received were $10,411m (2017: $10,039m; 2016: $10,412m)
1 2018 includes $44,893m (2017:nil) return on capital from HSBC Finance (Netherlands) resulting from restructuring the Group’s Asia operation to meet resolution and
recovery requirements.
2 The 2016 comparative figure for cash and cash equivalents was amended in 2017 to include loans and advances to HSBC undertakings of one month or less duration.
222
HSBC Holdings plc Annual Report and Accounts 2018
HSBC Holdings statement of changes in equity
for the year ended 31 December
Other reserves
At 31 Dec 2017
Impact on transition to IFRS 9
At 1 Jan 2018
Profit for the year
Other comprehensive income (net of tax)
– changes in fair value of financial liabilities designated at fair
value upon initial recognition arising from changes 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 shares4
Capital securities issued
Dividends to shareholders
Redemption of capital securities
Transfers5
Other movements
At 31 Dec 2018
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
Called
up
share
capital
Share
premium
Other
equity
instruments
Retained
earnings1,3
$m
$m
$m
$m
10,160
10,177
22,107
23,903
—
—
10,160
10,177
22,107
—
—
—
—
42
83
—
—
—
—
679
(83)
(105)
2,836
—
—
—
—
—
—
—
—
—
—
949
24,852
52,825
865
865
53,690
—
1,494
(4,998)
—
—
—
—
—
—
—
—
5,967
—
(11,547)
(5,843)
—
—
(236)
(2,200)
379
10,180
13,609
22,231
61,434
10,096
12,619
17,004
—
—
—
—
—
38
190
(164)
—
—
—
—
—
—
—
—
584
(190)
(2,836)
—
—
—
—
—
—
0
—
—
—
5,103
—
—
—
27,656
5,539
(828)
—
(828)
4,711
(52)
3,205
—
—
(11,551)
(2)
(64)
10,160
10,177
22,107
23,903
9,842
12,421
15,020
—
—
—
—
—
35
—
—
—
—
—
—
—
—
—
—
417
(219)
—
—
—
—
—
—
—
—
—
—
—
—
1,984
—
—
—
32,224
6,595
(896)
—
(896)
5,699
(51)
3,040
(2,510)
—
(11,279)
34
499
Financial
assets at
FVOCI
reserve
$m
59
(59)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
112
—
(53)
(53)
—
(53)
—
—
—
—
—
—
59
183
—
(72)
(72)
—
(72)
—
—
—
—
—
—
1
10,096
12,619
17,004
27,656
112
Other
paid-in
capital2
Merger
and other
reserves3
Total
share-
holders’
equity
$m
$m
$m
2,254
35,127
103,787
—
890
2,254
35,127
104,677
—
—
—
—
—
—
—
—
—
—
—
46
—
—
—
—
—
—
269
—
—
—
2,200
3
52,825
865
865
53,690
721
1,494
(1,998)
5,967
(11,547)
(6,079)
—
428
2,300
37,599
147,353
2,244
35,127
104,858
—
—
—
—
—
—
—
—
—
—
—
10
2,254
—
—
—
—
—
—
—
—
—
—
—
5,539
(881)
(53)
(828)
4,658
570
3,205
(3,000)
5,103
(11,551)
(2)
(54)
35,127
103,787
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
Shares issued in lieu of dividends and amounts arising thereon
219
Dividends per ordinary share at 31 December 2018 were $0.51 (2017: $0.51; 2016: $0.51).
1 At 31 December 2018, retained earnings includes 326,503,319 ($2,546m) of treasury shares (2017: 326,843,840 ($2,542m); 2016: 325,499,152 ($2,499m)). 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.
3 HSBC Holdings distributable reserves at 31 December 2018 of $30,705m (2017: $38,031m) represents realised profits included in retained earnings of $14,974m (2017:
$22,300m) and in merger reserve of $15,731m (2017: $15,731m). The distributable reserves are lower than retained earnings of $61,434m (2017: $23,903m). In 2018,
income of $44,893m (2017:nil) generated from restructuring the Group’s Asia operation to meet resolution and recovery requirements does not form part of distributable
reserves.
4 This includes a re-presentation of the cancellation of shares to retained earnings and capital redemption reserve in respect of the 2017 share buy-back, under which
retained earnings has been reduced by $3,000m, share premium increased by $2,836m and other reserves increased by $164m.
5 Permitted transfers from the merger reserve to retained earnings were made when the investment in HSBC Overseas Holdings (UK) Limited was previously impaired. A
part reversal of this impairment results in a transfer from retained earnings back to the merger reserve of $2,200m.
HSBC Holdings plc Annual Report and Accounts 2018
223
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
Notes on the Financial Statements
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Basis of preparation and significant accounting policies
Net fee income
Net income/(expense) from financial instruments through profit or
loss measured 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
Fair values of financial instruments not carried at fair value
Financial assets designated and otherwise mandatorily measured
at fair value
Derivatives
Financial investments
Assets pledged, collateral received and assets transferred
Interests in associates and joint ventures
Investments in subsidiaries
Structured entities
Page
224
237
238
238
240
240
246
246
249
249
250
250
258
259
260
263
264
265
269
270
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
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
Maturity analysis of assets, liabilities and off-balance sheet
commitments
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
Effects of reclassification upon adoption of IFRS 9
Events after the balance sheet date
HSBC Holdings’ subsidiaries, joint ventures and associates
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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 International Financial Reporting Standards (‘IFRSs’) as issued by the International Accounting Standards Board (‘IASB’),
including interpretations issued by the IFRS Interpretations Committee, and as endorsed by the European Union (‘EU’). At 31 December
2018, there were no unendorsed standards effective for the year ended 31 December 2018 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 2018
HSBC has adopted the requirements of IFRS 9 ‘Financial Instruments’ from 1 January 2018, 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. This
includes the adoption of ‘Prepayment Features with Negative Compensation (Amendments to IFRS 9)’, which is effective for annual
periods beginning on or after 1 January 2019 with early adoption permitted. The effect of its adoption is not significant. IFRS 9 includes
an accounting policy choice to remain with IAS 39 hedge accounting, which HSBC has exercised. The classification and measurement,
and impairment requirements, are applied retrospectively by adjusting the opening balance sheet at the date of initial application. As
permitted by IFRS 9, HSBC has not restated comparatives. Adoption reduced net assets at 1 January 2018 by $1,647m as set out in
Note 37 of the Annual Report and Accounts 2018.
In addition, HSBC has adopted the requirements of IFRS 15 ‘Revenue from contracts with customers’ and a number of interpretations
and amendments to standards, which have had an insignificant effect on the consolidated financial statements of HSBC and the separate
financial statements of HSBC Holdings.
IFRS 9 transitional requirements
The transitional requirements of IFRS 9 necessitated a review of the designation of financial instruments at fair value. IFRS 9 requires that
the designation is revoked where there is no longer an accounting mismatch at 1 January 2018 and permits designations to be revoked
or additional designations created at 1 January 2018 if there are accounting mismatches at that date. As a result:
• fair value designations for financial liabilities were revoked where the accounting mismatch no longer exists, as required by IFRS 9;
and
• fair value designations were revoked for certain long-dated securities where accounting mismatches continue to exist, but where
HSBC has revoked the designation as permitted by IFRS 9 since it will better mitigate the accounting mismatch by undertaking fair
value hedge accounting.
The results of these changes are included in the reconciliation set out in Note 37.
Changes in accounting policy
While not necessarily required by the adoption of IFRS 9, the following voluntary changes in accounting policy and presentation were
made as a result of reviews carried out in conjunction with its adoption. The effect of presentational changes at 1 January 2018 is
included in the reconciliation set out in Note 37, and comparatives have not been restated.
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• We considered market practices for the presentation of certain financial liabilities, which contain both deposit and derivative
components. We concluded that it would be appropriate to change the accounting policy and presentation of ‘trading customer
accounts and other debt securities in issue’, to better align with the presentation of similar financial instruments by peers. This
therefore provides more relevant information about the effect of these financial liabilities on our financial position and performance. As
a result, rather than being classified as held for trading, we designate these financial liabilities as at fair value through profit or loss
since they are managed and their performance evaluated on a fair value basis. A further consequence of this change in presentation is
that the effects of changes in the liabilities’ credit risk are presented in ‘Other comprehensive income’, with the remaining effect
presented in profit or loss in accordance with Group accounting policy adopted in 2017 (following the adoption of the requirements in
IFRS 9 relating to the presentation of gains and losses on financial liabilities designated at fair value).
• Cash collateral, margin and settlement accounts have been reclassified from ‘Trading assets’ and ‘Loans and advances to banks and
customers’ to ‘Prepayments, accrued income and other assets’ and from ‘Trading liabilities’ and ‘Deposits by banks’ and ‘Customer
accounts‘ to ‘Accruals, deferred income and other liabilities’. The change in presentation for financial assets is in accordance with
IFRS 9 and the change in presentation for financial liabilities is considered to provide more relevant information, given the change in
presentation for the financial assets. The change in presentation for financial liabilities has had no effect on the measurement of these
items and therefore on retained earnings or profit for any period.
• Certain stock borrowing assets have been reclassified from ‘Loans and advances to banks and customers’ to ‘Trading assets’. The
change in measurement is a result of the determination of the global business model for this activity and will align the presentation
throughout the Group.
• Prior to 2018, foreign exchange exposure on some financial instruments designated at fair value was presented in the same line in the
income statement as the underlying fair value movement on these instruments. In 2018, we have grouped the presentation of the
entire effect of foreign exchange exposure in profit or loss and presented it within ‘Net income from financial instruments held for
trading or managed on a fair value basis’. Comparative data has been re-presented.
(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 that are effective from 1 January 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.
Major new IFRSs
The IASB has published IFRS 16 ‘Leases’ and IFRS 17 ‘Insurance Contracts’. IFRS 16 has been endorsed for use in the EU and IFRS 17
has not yet been endorsed. In addition, an amendment to IAS 12 ‘Income Taxes’ has not yet been endorsed.
IFRS 16 ‘Leases’
IFRS 16 ‘Leases’ has 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 (‘ROU’) 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. The Group expects to adopt the standard using a modified retrospective approach where the
cumulative effect of initially applying it is recognised as an adjustment to the opening balance of retained earnings and comparatives are
not restated. The implementation is expected to increase assets by approximately $5bn and increase financial liabilities by the same
amount with no effect on net assets or retained earnings.
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 currently effective from 1 January 2021. However, the IASB is
considering delaying the mandatory implementation date by one year and may make additional changes to the standard. The Group is in
the process of implementing IFRS 17. Industry practice and interpretation of the standard is still developing and there may be changes to
it, therefore the likely impact of its implementation remains uncertain.
Amendment to IAS 12 ‘Income Taxes’
An amendment to IAS 12 was issued in December 2017 as part of the annual improvement cycle. The amendment clarifies that an entity
should recognise the tax consequences of dividends where the transactions or events that generated the distributable profits are
recognised. This amendment is effective for annual reporting periods beginning on or after 1 January 2019 and is applied to the income
tax consequences of distributions recognised on or after the beginning of the earliest comparative period. As a result of its application,
the income tax consequences of distributions on certain capital securities classified as equity will be presented in profit or loss rather
than directly in equity. If the amendment had been applied in 2018, the impact for the year ended 31 December 2018 would have been a
$261m increase in profit after tax (2017: $224m) with no effect on equity.
(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
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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 sections marked as (‘Audited’) in this Annual Report and Accounts as
follows:
• segmental disclosures are included in the ‘Report of the Directors: Financial summary’ on pages 34 to 68;
• 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 69 to 147;
• capital disclosures are included in the ‘Report of the Directors: Capital’ on pages 148 to 151; and
• disclosures relating to HSBC’s securitisation activities and structured products are included in the ‘Report of the Directors: Risk’ on
pages 69 to 147.
In accordance with the 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 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 that 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, who is 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.
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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 re-tests
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 is
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 18.
(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 on derivatives managed
in conjunction with those debt securities is included in interest expense.
Interest on credit-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
HSBC generates fee income from services provided at a fixed price over time, such as account service and card fees, or when HSBC
delivers a specific transaction at a point in time, such as broking services and import/export services. With the exception of certain fund
management and performance fees, all other fees are generated at a fixed price. Fund management and performance fees can be
variable depending on the size of the customer portfolio and HSBC’s performance as fund manager. Variable fees are recognised when
all uncertainties are resolved. Fee income is generally earned from short-term contracts with payment terms that do not include a
significant financing component.
HSBC acts as principal in the majority of contracts with customers, with the exception of broking services. For most brokerage trades,
HSBC acts as agent in the transaction and recognises broking income net of fees payable to other parties in the arrangement.
HSBC recognises fees earned on transaction-based arrangements at a point in time when we have fully provided the service to the
customer. Where the contract requires services to be provided over time, income is recognised on a systematic basis over the life of the
agreement.
Where HSBC offers a package of services that contains multiple non-distinct performance obligations, such as those included in account
service packages, the promised services are treated as a single performance obligation. If a package of services contains distinct
performance obligations, such as those including both account and insurance services, the corresponding transaction price is allocated
to each performance obligation based on the estimated stand-alone selling prices.
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 measured at fair value through profit or loss includes the following:
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•
•
•
•
‘Net income from financial instruments held for trading or managed on a fair value basis’: This comprises net trading income, which
includes 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. It also includes all gains and losses from changes in the fair value of derivatives that
are managed in conjunction with financial assets and liabilities measured at fair value through profit or loss.
‘Net income/(expense)from assets and liabilities of insurance businesses, including related derivatives, measured at fair value through
profit or loss’: This includes interest income, interest expense and dividend income in respect of financial assets and liabilities
measured at fair value through profit or loss; and those derivatives managed in conjunction with the above that can be separately
identifiable from other trading derivatives.
‘Changes in fair value of long-term debt and related derivatives’: Interest paid on the external long-term debt and interest cash flows
on related derivatives is presented in interest expense.
‘Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss’: This includes interest
on instruments that fail the solely payments of principal and interest (‘SPPI’) test, see (d) below.
The accounting policies for insurance premium income are disclosed in Note 1.2(j).
(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 until the transaction matures, is closed out, the valuation inputs become observable or HSBC
enters into an offsetting transaction.
The fair value of financial instruments is generally measured on an individual basis. However, in cases where HSBC manages a group of
financial assets and liabilities according to its net market or credit risk exposure, 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 classified 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, 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
Financial assets that are held to collect the contractual cash flows and which contain contractual terms that give rise on specified dates
to cash flows that are solely payments of principal and interest are measured at amortised cost. Such financial assets include most loans
and advances to banks and customers and some debt securities. In addition, most financial liabilities are measured at amortised cost.
HSBC accounts for regular way amortised cost financial instruments using trade date accounting. 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 through the recognition of interest income.
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,
the loan commitment is included in the impairment calculations set out below.
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 repo or repo 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 repo or
repo agreements.
(e) Financial assets measured at fair value through other comprehensive income
Financial assets held for a business model that is achieved by both collecting contractual cash flows and selling and which contain
contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at fair
value through other comprehensive income (‘FVOCI’). These comprise primarily debt securities. They are recognised on the trade date
when HSBC enters into contractual arrangements to purchase and are normally derecognised when they are either sold or redeemed.
They are subsequently remeasured at fair value and changes therein (except for those relating to impairment, interest income and foreign
currency exchange gains and losses) are recognised in other comprehensive income until the assets are sold. Upon disposal, the
cumulative gains or losses in other comprehensive income are recognised in the income statement as ‘Gains less losses from financial
instruments’. Financial assets measured at FVOCI are included in the impairment calculations set out below and impairment is
recognised in profit or loss.
(f)
Equity securities measured at fair value with fair value movements presented in other comprehensive income
The equity securities for which fair value movements are shown in other comprehensive income are business facilitation and other similar
investments where HSBC holds the investments other than to generate a capital return. Gains or losses on the derecognition of these
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equity securities are not transferred to profit or loss. Otherwise, equity securities are measured at fair value through profit or loss (except
for dividend income which is recognised in profit or loss).
(g) Financial instruments designated at fair value through profit or loss
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;
• a group of financial assets and liabilities or a group of financial liabilities is managed and its performance is evaluated on a fair value
basis, in accordance with a documented risk management or investment strategy; and
• the financial liability contains 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 from financial instruments held
for trading or managed on a fair value basis’ or ‘Net income/(expense) from assets and liabilities of insurance businesses, including
related derivatives, measured at fair value through profit or loss’.
Under the above 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. Customer liabilities under linked and certain
non-linked investment contracts issued by insurance subsidiaries are determined based on the fair value of the assets held in the
linked funds. If no fair value designation was made for the related assets, at least some of the assets would otherwise be measured at
either fair value through other comprehensive income or amortised cost. The related financial assets and liabilities are managed and
reported to management on a fair value basis. Designation at fair value of the financial assets and related liabilities allows changes in
fair values to be recorded in the income statement and presented in the same line.
(h) 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 through profit or loss. Derivatives are classified as
assets when their fair value is positive or as liabilities when their fair value is negative. This includes embedded derivatives in financial
liabilities, which are bifurcated from the host contract when they meet the definition of a derivative on a stand-alone basis.
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 income from financial instruments held for trading or managed on a fair value basis’. 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. When a hedge relationship is discontinued, or partially discontinued, any cumulative gain or
loss recognised in other comprehensive income remains in equity until the forecast transaction is recognised in the income statement.
When a forecast transaction is no longer expected to occur, the cumulative gain or loss previously recognised in other comprehensive
income is immediately reclassified to the income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. 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.
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Critical accounting estimates and judgements
As a result of the request received by the Financial Stability Board from the G20, a fundamental review and reform of the major interest rate benchmarks is
under way across the world’s largest financial markets. The process of replacing existing benchmark interbank offered rates (‘Ibors’) with alternative risk-free
rates (‘RFRs’) is at different stages, and is progressing at different speeds, across several major jurisdictions. There is therefore uncertainty as to the timing
and the methods of transition for many financial products affected by these changes, and whether some existing benchmarks will continue to be supported
in some way.
As a result of these developments, significant accounting judgement is involved in determining whether certain hedge accounting relationships that hedge
the variability of cash flows and interest rate risk due to changes in Ibors continue to qualify for hedge accounting as at 31 December 2018. Management’s
judgement is that those existing hedge accounting relationships continue to be supported at the 2018 year-end. Even though there are plans to replace
those rates with economically similar rates based on new RFRs over the next few years, there is widespread continued reliance on Ibors in market pricing
structures for long-term products with maturities over the hedged horizons that extend beyond the timescales for replacing Ibors. In addition there is a
current absence of term structures on the new RFRs. This judgement will be kept under review in future as markets based on the new RFRs develop, taking
into consideration any specific accounting guidance that may be developed to deal with these unusual circumstances. The IASB has commenced the due
process for providing clarification on how the guidance for hedge accounting in IAS 39 ‘Financial Instruments: Recognition and Measurement’ and IFRS 9:
‘Financial Instruments’ should be applied in these circumstances, which were not contemplated when the standards were published.
(i)
Impairment of amortised cost and FVOCI financial assets
Expected credit losses (‘ECL’) are recognised for loans and advances to banks and customers, non-trading reverse repurchase
agreements, other financial assets held at amortised cost, debt instruments measured at FVOCI, and certain loan commitments and
financial guarantee contracts. At initial recognition, allowance (or provision in the case of some loan commitments and financial
guarantees) is required for ECL resulting from default events that are possible within the next 12 months, or less, where the remaining life
is less than 12 months (’12-month ECL’). In the event of a significant increase in credit risk, allowance (or provision) is required for ECL
resulting from all possible default events over the expected life of the financial instrument (‘lifetime ECL’). Financial assets where 12-
month ECL is recognised are considered to be ‘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’. Purchased or originated credit-impaired financial assets (‘POCI’) are treated differently, as set
out below.
Credit impaired (stage 3)
HSBC determines that a financial instrument is credit impaired and in stage 3 by considering relevant objective evidence, primarily
whether:
• contractual payments of either principal or interest are past due for more than 90 days;
• there are other indications that the borrower is unlikely to pay, such as when a concession has been granted to the borrower for
economic or legal reasons relating to the borrower’s financial condition; and
• the loan is otherwise considered to be in default.
If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due, even where
regulatory rules permit default to be defined based on 180 days past due. Therefore the definitions of credit impaired and default are
aligned as far as possible so that stage 3 represents all loans that are considered defaulted or otherwise credit impaired.
Interest income is recognised by applying the effective interest rate to the amortised cost amount, i.e. gross carrying amount less ECL
allowance.
Write-off
Financial assets (and the related impairment allowances) 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.
Renegotiation
Loans are identified as renegotiated and classified as credit impaired when we modify the contractual payment terms due to significant
credit distress of the borrower. Renegotiated loans remain classified as credit impaired until there is sufficient evidence to demonstrate a
significant reduction in the risk of non-payment of future cash flows and retain the designation of renegotiated 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 a substantially different financial
instrument. Any new loans that arise following derecognition events in these circumstances are considered to be POCI and will continue
to be disclosed as renegotiated loans.
Other than originated credit-impaired loans, all other modified loans could be transferred out of stage 3 if they no longer exhibit any
evidence of being credit impaired and, in the case of renegotiated loans, there is sufficient evidence to demonstrate a significant
reduction in the risk of non-payment of future cash flows over the minimum observation period, and there are no other indicators of
impairment. These loans could be transferred to stage 1 or 2 based on the mechanism as described below by comparing the risk of a
default occurring at the reporting date (based on the modified contractual terms) and the risk of a default occurring at initial recognition
(based on the original, unmodified contractual terms). Any amount written off as a result of the modification of contractual terms would
not be reversed.
Loan modifications that are not credit impaired
Loan modifications that are not identified as renegotiated are considered to be commercial restructuring. Where a commercial
restructuring results in a modification (whether legalised through an amendment to the existing terms or the issuance of a new loan
contract) such that HSBC’s rights to the cash flows under the original contract have expired, the old loan is derecognised and the new
loan is recognised at fair value. The rights to cash flows are generally considered to have expired if the commercial restructure is at
market rates and no payment-related concession has been provided.
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Significant increase in credit risk (stage 2)
An assessment of whether credit risk has increased significantly since initial recognition is performed at each reporting period by
considering the change in the risk of default occurring over the remaining life of the financial instrument. The assessment explicitly or
implicitly compares the risk of default occurring at the reporting date compared with that at initial recognition, taking into account
reasonable and supportable information, including information about past events, current conditions and future economic conditions. The
assessment is unbiased, probability-weighted, and to the extent relevant, uses forward-looking information consistent with that used in
the measurement of ECL. The analysis of credit risk is multifactor. The determination of whether a specific factor is relevant and its
weight compared with other factors depends on the type of product, the characteristics of the financial instrument and the borrower, and
the geographical region. Therefore, it is not possible to provide a single set of criteria that will determine what is considered to be a
significant increase in credit risk, and these criteria will differ for different types of lending, particularly between retail and wholesale.
However, unless identified at an earlier stage, all financial assets are deemed to have suffered a significant increase in credit risk when 30
days past due. In addition, wholesale loans that are individually assessed, typically corporate and commercial customers, and included
on a watch or worry list, are included in stage 2.
For wholesale portfolios, the quantitative comparison assesses default risk using a lifetime probability of default (‘PD’) which
encompasses a wide range of information including the obligor’s customer risk rating (‘CRR’), macroeconomic condition forecasts and
credit transition probabilities. For origination CRRs up to 3.3, significant increase in credit risk is measured by comparing the average PD
for the remaining term estimated at origination with the equivalent estimation at the reporting date. The quantitative measure of
significance varies depending on the credit quality at origination as follows:
Origination CRR
0.1–1.2
2.1–3.3
Significance trigger - PD to increase by
15bps
30bps
For CRRs greater than 3.3 that are not impaired, a significant increase in credit risk is considered to have occurred when the origination
PD has doubled. The significance of changes in PD was informed by expert credit risk judgement, referenced to historical credit
migrations and to relative changes in external market rates.
For loans originated prior to the implementation of IFRS 9, the origination PD does not include adjustments to reflect expectations of
future macroeconomic conditions since these are not available without the use of hindsight. In the absence of this data, origination PD
must be approximated assuming through-the-cycle (‘TTC’) PDs and TTC migration probabilities, consistent with the instrument’s
underlying modelling approach and the CRR at origination. For these loans, the quantitative comparison is supplemented with additional
CRR deterioration-based thresholds, as set out in the table below:
Origination CRR
0.1
1.1–4.2
4.3–5.1
5.2–7.1
7.2–8.2
8.3
Additional significance criteria – number of CRR grade notches deterioration
required to identify as significant credit deterioration (stage 2) (> or equal to)
5 notches
4 notches
3 notches
2 notches
1 notch
0 notch
Further information about the 23-grade scale used for CRR can be found on page 80.
For certain portfolios of debt securities where external market ratings are available and credit ratings are not used in credit risk
management, the debt securities will be in stage 2 if their credit risk increases to the extent they are no longer considered investment
grade. Investment grade is where the financial instrument has a low risk of incurring losses, the structure has a strong capacity to meet
its contractual cash flow obligations in the near term, and adverse changes in economic and business conditions in the longer term may,
but will not necessarily, reduce the ability of the borrower to fulfil their contractual cash flow obligations.
For retail portfolios, default risk is assessed using a reporting date 12-month PD derived from credit scores, which incorporates all
available information about the customer. This PD is adjusted for the effect of macroeconomic forecasts for periods longer than 12
months and is considered to be a reasonable approximation of a lifetime PD measure. Retail exposures are first segmented into
homogeneous portfolios, generally by country, product and brand. Within each portfolio, the stage 2 accounts are defined as accounts
with an adjusted 12-month PD greater than the average 12-month PD of loans in that portfolio 12 months before they become 30 days
past due. The expert credit risk judgement is that no prior increase in credit risk is significant. This portfolio-specific threshold identifies
loans with a PD higher than would be expected from loans that are performing as originally expected, and higher than what would have
been acceptable at origination. It therefore approximates a comparison of origination to reporting date PDs.
Unimpaired and without significant increase in credit risk – (stage 1)
ECL resulting from default events that are possible within the next 12 months (12-month ECL) are recognised for financial instruments
that remain in stage 1.
Purchased or originated credit impaired
Financial assets that are purchased or originated at a deep discount that reflects the incurred credit losses are considered to be POCI.
This population includes the recognition of a new financial instrument following a renegotiation where concessions have been granted for
economic or contractual reasons relating to the borrower’s financial difficulty that otherwise would not have been considered. The
amount of change-in-lifetime ECL is recognised in profit or loss until the POCI is derecognised, even if the lifetime ECL are less than the
amount of ECL included in the estimated cash flows on initial recognition.
Movement between stages
Financial assets can be transferred between the different categories (other than POCI) depending on their relative increase in credit risk
since initial recognition. Financial instruments are transferred out of stage 2 if their credit risk is no longer considered to be significantly
increased since initial recognition based on the assessments described above. Except for renegotiated loans, financial instruments are
transferred out of stage 3 when they no longer exhibit any evidence of credit impairment as described above. Renegotiated loans that are
not POCI will continue to be in stage 3 until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment
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of future cash flows, observed over a minimum one-year period and there are no other indicators of impairment. For loans that are
assessed for impairment on a portfolio basis, the evidence typically comprises a history of payment performance against the original or
revised terms, as appropriate to the circumstances. For loans that are assessed for impairment on an individual basis, all available
evidence is assessed on a case-by-case basis.
Measurement of ECL
The assessment of credit risk and the estimation of ECL are unbiased and probability-weighted, and incorporate all available information
that is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts
of future events and economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value
of money.
In general, HSBC calculates ECL using three main components: a probability of default, a loss given default (’LGD’) and the exposure at
default (‘EAD’).
The 12-month ECL is calculated by multiplying the 12-month PD, LGD and EAD. Lifetime ECL is calculated using the lifetime PD instead.
The 12-month and lifetime PDs represent the probability of default occurring over the next 12 months and the remaining maturity of the
instrument respectively.
The EAD represents the expected balance at default, taking into account the repayment of principal and interest from the balance sheet
date to the default event together with any expected drawdowns of committed facilities. The LGD represents expected losses on the EAD
given the event of default, taking into account, among other attributes, the mitigating effect of collateral value at the time it is expected
to be realised and the time value of money.
HSBC leverages the Basel II IRB framework where possible, with recalibration to meet the differing IFRS 9 requirements as set out in the
following table:
Model
Regulatory capital
IFRS 9
• Through the cycle (represents long-run average PD throughout a
• Point in time (based on current conditions, adjusted to take into
full economic cycle)
account estimates of future conditions that will impact PD)
PD
• The definition of default includes a backstop of 90+ days past
• Default backstop of 90+ days past due for all portfolios
due, although this has been modified to 180+ days past due for
some portfolios, particularly UK and US mortgages
EAD
• Cannot be lower than current balance
• Amortisation captured for term products
• Downturn LGD (consistent losses expected to be suffered
• Expected LGD (based on estimate of loss given default including
LGD
Other
during a severe but plausible economic downturn)
• Regulatory floors may apply to mitigate risk of underestimating
downturn LGD due to lack of historical data
• Discounted using cost of capital
• All collection costs included
the expected impact of future economic conditions such as
changes in value of collateral)
• No floors
• Discounted using the original effective interest rate of the loan
• Only costs associated with obtaining/selling collateral included
• Discounted back from point of default to balance sheet date
While 12-month PDs are recalibrated from Basel II models where possible, the lifetime PDs are determined by projecting the 12-month
PD using a term structure. For the wholesale methodology, the lifetime PD also takes into account credit migration, i.e. a customer
migrating through the CRR bands over its life.
The ECL for wholesale stage 3 is determined on an individual basis using a discounted cash flow (‘DCF’) methodology. The expected
future cash flows are based on the credit risk officer’s estimates as at the reporting date, reflecting reasonable and supportable
assumptions and projections of future recoveries and expected future receipts of interest. Collateral is taken into account if it is likely that
the recovery of the outstanding amount will include realisation of collateral based on the estimated fair value of collateral at the time of
expected realisation, less costs for obtaining and selling the collateral. The cash flows are discounted at a reasonable approximation of
the original effective interest rate. For significant cases, cash flows under four different scenarios are probability-weighted by reference to
the three economic scenarios applied more generally by the Group and the judgement of the credit risk officer in relation to the likelihood
of the workout strategy succeeding or receivership being required. For less significant cases, the effect of different economic scenarios
and work-out strategies is approximated and applied as an adjustment to the most likely outcome.
Period over which ECL is measured
Expected credit loss is measured from the initial recognition of the financial asset. The maximum period considered when measuring ECL
(be it 12-month or lifetime ECL) is the maximum contractual period over which HSBC is exposed to credit risk. For wholesale overdrafts,
credit risk management actions are taken no less frequently than on an annual basis and therefore this period is to the expected date of
the next substantive credit review. The date of the substantive credit review also represents the initial recognition of the new facility.
However, where the financial instrument includes both a drawn and undrawn commitment and the contractual ability to demand
repayment and cancel the undrawn commitment does not serve to limit HSBC’s exposure to credit risk to the contractual notice period,
the contractual period does not determine the maximum period considered. Instead, ECL is measured over the period HSBC remains
exposed to credit risk that is not mitigated by credit risk management actions. This applies to retail overdrafts and credit cards, where the
period is the average time taken for stage 2 exposures to default or close as performing accounts, determined on a portfolio basis and
ranging from between two and six years. In addition, for these facilities it is not possible to identify the ECL on the loan commitment
component separately from the financial asset component. As a result, the total ECL is recognised in the loss allowance for the financial
asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.
Forward-looking economic inputs
HSBC will in general apply three forward-looking global economic scenarios determined with reference to external forecast distributions
representative of our view of forecast economic conditions, the consensus economic scenario approach. This approach is considered
sufficient to calculate unbiased expected loss in most economic environments. They represent a most likely outcome (the Central
scenario) and two, less likely, outer scenarios referred to as the Upside and Downside scenarios. The Central scenario is the basis for the
annual operating planning process and, with regulatory modifications, will also be used in enterprise-wide stress tests. The Upside and
Downside scenarios are constructed following a standard process supported by a scenario narrative reflecting the Group’s current top
and emerging risks and by consulting external and internal subject matter experts. The relationship between the outer scenarios and
Central scenario will generally be fixed with the Central scenario being assigned a weighting of 80% and the Upside and Downside
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scenarios 10% each, with the difference between the Central and outer scenarios in terms of economic severity being informed by the
spread of external forecast distributions among professional industry forecasts. The outer scenarios are economically plausible, internally
consistent states of the world and will not necessarily be as severe as scenarios used in stress testing. The period of forecasts is five
years for the Central scenario. Upside and Downside scenarios use distributional forecasts for the first two years, after which they
converge to the Central forecasts. The spread between the Central and outer scenarios is grounded on consensus distributions of
projected gross domestic product of the following economies: UK, France, Hong Kong, mainland China, US and Canada. The economic
factors include, but are not limited to, gross domestic product, unemployment, interest rates, inflation and commercial property prices
across all the countries and territories in which HSBC operates.
In general, the consequences of the assessment of credit risk and the resulting ECL outputs will be probability-weighted using the
standard probability weights. This probability weighting may be applied directly or the effect of the probability weighting determined on a
periodic basis, at least annually, and then applied as an adjustment to the outcomes resulting from the central economic forecast. The
central economic forecast is updated quarterly.
HSBC recognises that the consensus economic scenario approach using three scenarios will be insufficient in certain economic
environments. Additional analysis may be requested at management’s discretion, including the production of extra scenarios. If
conditions warrant, this could result in alternative scenarios and probability weightings being applied in arriving at the ECL.
Critical accounting estimates and judgements
In determining ECL, management is required to exercise judgement in defining what is considered to be a significant increase in credit risk and in making
assumptions and estimates to incorporate relevant information about past events, current conditions and forecasts of economic conditions. Judgement
has been applied in determining the lifetime and point of initial recognition of revolving facilities.
The PD, LGD and EAD models, which support these determinations are reviewed regularly in light of differences between loss estimates and actual loss
experience, but given that IFRS 9 requirements have only just been applied, there has been little time available to make these comparisons. Therefore, the
underlying models and their calibration, including how they react to forward-looking economic conditions, remain subject to review and refinement. This is
particularly relevant for lifetime PDs, which have not been previously used in regulatory modelling, and for the incorporation of ‘Upside scenarios’, that
have not generally been subject to experience gained through stress testing.
The exercise of judgement in making estimations requires the use of assumptions that 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 loan impairment allowances as a whole are sensitive. The sections marked as audited on pages 94
to 101, ‘Measurement uncertainty and sensitivity analysis of ECL estimates,’ set out the assumptions underlying the Central scenario and information
about how scenarios are developed in relation to the Group’s top and emerging risks and its judgements, informed by consensus forecasts of professional
industry forecasters. The sensitivity of ECL to different economic scenarios is illustrated by recalculating the ECL for selected portfolios as if 100%
weighting had been assigned to each scenario.
(j)
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
discretionary participation features (‘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
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Notes on the financial statements
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.
(k) 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 the
provision of their services.
The vesting period for these schemes may commence before the legal grant date if the employees have started to render services in
respect of the award before the legal grant date, where there is a shared understanding of the terms and conditions of the arrangement.
Expenses are recognised when the employee starts to render service to which the award relates.
Cancellations result from the failure to meet a non-vesting condition during the vesting period, and are treated as an acceleration of
vesting recognised immediately in the income statement. Failure to meet a vesting condition by the employee is not treated as a
cancellation, and the amount of expense recognised for the award is adjusted to reflect the number of awards expected to vest.
Post-employment benefit plans
HSBC operates a number of pension schemes including defined benefit, 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.
(l)
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.
(m) 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.
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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 that 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.
(n)
Accounting policies applied to financial instruments prior to 1 January 2018
Financial instruments measured at amortised cost
Loans and advances to banks and customers, held-to-maturity investments and most financial liabilities are measured at amortised cost.
The carrying value of these financial assets at initial recognition includes any directly attributable transactions costs. If the initial fair value
is lower than the cash amount advanced, such as in the case of some leveraged finance and syndicated lending activities, the difference
is deferred and recognised over the life of the loan (as described in sub-section (c) above) through the recognition of interest income,
unless the loan becomes impaired.
HSBC 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 that 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, although 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 that 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:
HSBC Holdings plc Annual Report and Accounts 2018
235
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
• 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
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.
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.
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.
236
HSBC Holdings plc Annual Report and Accounts 2018
Available-for-sale equity securities
A significant or prolonged decline in the fair value of the equity below its cost is objective evidence of impairment. In assessing whether it
is significant, the decline in fair value is evaluated against the original cost of the asset at initial recognition. In assessing whether it is
prolonged, the decline is evaluated against the continuous period in which the fair value of the asset has been below its original cost at
initial recognition.
All subsequent increases in the fair value of the instrument are treated as a revaluation and are recognised in other comprehensive
income. Subsequent decreases in the fair value of the available-for-sale equity security are recognised in the income statement to the
extent that further cumulative impairment losses have been incurred. Impairment losses recognised on the equity security are not
reversed through the income statement.
Financial instruments designated at fair value
Financial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out
below, and are so designated irrevocably at inception:
• the use of the designation removes or significantly reduces an accounting mismatch;
• when a group of financial assets, liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance
with a documented risk management or investment strategy; and
• where financial instruments contain one or more non-closely related embedded derivatives.
Designated financial assets are recognised when HSBC enters into contracts with counterparties, which is generally on trade date, and
are normally derecognised when the rights to the cash flows expire or are transferred. Designated financial liabilities are recognised
when HSBC enters into contracts with counterparties, which is generally on settlement date, and are normally derecognised when
extinguished. Subsequent changes in fair values are recognised in the income statement in ‘Net income/(expense) from financial
instruments designated at fair value’. Under this criterion, the main classes of financial instruments designated by HSBC are:
Long-term debt issues
The interest and/or foreign exchange exposure on certain fixed rate debt securities issued has been matched with the interest and/or
foreign exchange exposure on certain swaps as part of a documented risk management strategy.
Financial assets and financial liabilities under unit-linked and non-linked investment contracts
A contract under which HSBC does not accept significant insurance risk from another party is not classified as an insurance contract,
other than investment contracts with discretionary participation features (‘DPF’), but is accounted for as a financial liability. See Note
1.2(j) 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.
2 Net fee income
Net fee income by global business
2018
2017
2016
Retail
Banking and
Wealth
Management
Commercial
Banking
Global
Banking and
Markets
Global Private
Banking
$m
1,383
991
1,575
71
494
937
96
100
1
3
354
1,110
7,115
(1,917)
5,198
$m
134
748
370
824
44
25
357
18
10
532
23
858
3,943
(388)
3,555
$m
421
332
16
813
533
3
320
584
708
176
1
2,362
6,269
(3,040)
3,229
$m
284
106
—
16
139
73
5
35
4
2
27
186
877
(135)
742
Corporate
Centre
$m
(1)
—
(5)
(1)
—
—
—
(1)
—
(4)
(1)
Total
$m
2,221
2,177
1,956
1,723
1,210
1,038
778
736
723
709
404
(2,147)
(2,160)
2,056
(104)
2,369
16,044
(3,424)
12,620
Funds under management
Account services
Cards
Credit facilities
Broking income
Unit trusts
Remittances
Global custody
Underwriting
Imports/exports
Insurance agency
commission
Other
Fee income
Less: fee expense
Net Fee income
Total
$m
2,188
2,244
1,994
1,718
1,191
1,010
759
692
829
736
410
2,082
15,853
(3,042)
12,811
Total
$m
2,076
2,417
1,970
1,795
1,060
863
766
662
705
820
419
2,116
15,669
(2,892)
12,777
Net Fee income includes $7,522m of 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) (2017: $7,577m; 2016: $7,732m), $1,682m of fees payable on financial liabilities that
are not at fair value through profit of loss (other than amounts included in determining the effective interest rate) (2017: $1,475m; 2016:
$1,214m), $3,165m of fees earned on trust and other fiduciary activities (2017: $3,088m; 2016: $2,926m), and $175m of fees payable
relating to trust and other fiduciary activities (2017: $134m; 2016: $129m). Comparatives for fees earned on trust and other fiduciary
activities have been restated to align with current year treatment.
HSBC Holdings plc Annual Report and Accounts 2018
237
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
3
Net income/(expense) from financial instruments measured at fair value through profit or
loss
Net income/(expense) arising on:
Net trading activities
Other instruments managed on a fair value basis
Net income from financial instruments held for trading or managed on a fair value basis
Financial assets held to meet liabilities under insurance and investment contracts
Liabilities to customers under investment contracts
Net income from assets and liabilities of insurance businesses, including related derivatives,
measured at fair value through profit or loss
Changes in own credit spread on long-term debt
Derivatives managed in conjunction with HSBC’s issued debt securities
Other changes in fair value
Changes in fair value of long-term debt and related derivatives
Changes in fair value of other financial instruments mandatorily measured at fair value through
profit or loss
Year ended 31 Dec
Footnotes
1
1
2
3
2
2018
$m
6,982
2,549
9,531
(1,585)
97
2017
$m
8,236
190
8,426
3,211
(375)
(1,488)
2,836
—
(626)
529
(97)
695
8,641
—
(343)
498
155
N/A
11,417
2016
$m
7,473
48
7,521
1,480
(218)
1,262
(1,793)
(1,604)
1,400
(1,997)
N/A
6,786
1 At 1 January 2018 we changed our accounting policy for financial liabilities that contain both deposit and derivative components. As a result, net income from these
instruments is reported in ‘Other instruments managed on a fair value basis’ rather than ‘Trading activities’. Comparative periods have not been re-presented. Refer to
Note 1 ‘Basis of preparation and accounting policies’ for further details.
2 Prior to 2018, foreign exchange exposure on some financial instruments designated at fair value was presented in the same line in the income statement as the
underlying fair value movement on these instruments. In 2018, we grouped the presentation of the entire effect of foreign exchange exposure in profit or loss and
presented it within ‘Net trading activities’ in ‘Net income from financial instruments held for trading or managed on a fair value basis’. Comparative data has been re-
presented. There is no net impact on Total operating income and the impact on ‘Changes in fair value of long-term debt and related derivatives’ is $(517)m in 2017 and
$1,978m in 2016.
3 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:
- trading activities
- other instruments managed at on a fair value basis
Net income from financial instruments held for trading or managed on a fair value basis
– derivatives managed in conjunction with HSBC Holdings issued debt securities
– other changes in fair value
Changes in fair value of long-term debt and related derivatives
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or
loss
Year ended 31 Dec
2018
$m
(176)
421
245
(337)
260
(77)
43
211
2017
$m
(392)
211
(181)
292
(189)
103
—
(78)
4
Insurance business
Net insurance premium income
Gross insurance premium income
Reinsurers’ share of gross insurance premium income
Year ended 31 Dec 2018
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
1 Discretionary participation features.
238
HSBC Holdings plc Annual Report and Accounts 2018
Non-linked
insurance
Linked life
insurance
Investment
contracts with
DPF1
$m
8,616
(672)
7,944
8,424
(1,016)
7,408
8,036
(629)
7,407
$m
422
(7)
415
351
(7)
344
675
(8)
667
$m
2,300
—
2,300
2,027
—
2,027
1,877
—
1,877
2016
$m
119
—
119
(642)
593
(49)
—
70
Total
$m
11,338
(679)
10,659
10,802
(1,023)
9,779
10,588
(637)
9,951
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 2018
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
1 Discretionary participation features.
Liabilities under insurance contracts
Gross liabilities under insurance contracts at 1 Jan 2018
Impact on transition to IFRS 9
Claims and benefits paid
Increase in liabilities to policyholders
Exchange differences and other movements
Gross liabilities under insurance contracts at 31 Dec 2018
Reinsurers’ share of liabilities under insurance contracts
Net liabilities under insurance contracts at 31 Dec 2018
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
$m
8,943
3,852
5,091
(605)
(311)
(294)
8,338
8,894
2,883
6,011
(942)
(297)
(645)
7,952
8,778
2,828
5,950
(560)
(112)
(448)
8,218
$m
(446)
1,088
(1,534)
191
(181)
372
(255)
1,413
1,044
369
65
(223)
288
1,478
1,321
749
572
(78)
(14)
(64)
$m
1,724
1,869
(145)
—
—
—
1,724
2,901
2,002
899
—
—
—
2,901
2,409
2,017
392
—
—
—
Total
$m
10,221
6,809
3,412
(414)
(492)
78
9,807
13,208
5,929
7,279
(877)
(520)
(357)
12,331
12,508
5,594
6,914
(638)
(126)
(512)
1,243
2,409
11,870
Non-linked
insurance
Linked life
insurance
Investment
contracts with DPF1
Footnotes
2
2
$m
52,112
(69)
(3,852)
8,943
149
57,283
(2,438)
54,845
46,043
(2,883)
8,894
58
52,112
(2,203)
49,909
$m
7,548
—
(1,088)
(446)
(225)
5,789
(68)
5,721
6,949
(1,044)
1,413
230
7,548
(268)
7,280
$m
26,007
—
(1,869)
1,724
(1,604)
24,258
—
24,258
22,281
(2,002)
2,901
2,827
26,007
—
26,007
Total
$m
85,667
(69)
(6,809)
10,221
(1,680)
87,330
(2,506)
84,824
75,273
(5,929)
13,208
3,115
85,667
(2,471)
83,196
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 movements in the market value of assets supporting
policyholder liabilities, death claims, surrenders, lapses, liabilities to policyholders created at the initial inception of the policies, the
declaration of bonuses and other amounts attributable to policyholders.
HSBC Holdings plc Annual Report and Accounts 2018
239
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
5
Operating profit
Operating profit is stated after the following items:
Income
Interest recognised on impaired financial assets
Interest recognised on financial assets measured at amortised cost
Interest recognised on financial assets measured at fair value through other comprehensive income
Expense
Footnotes
1
1
2018
$m
263
42,130
7,020
2017
$m
261
N/A
N/A
2016
$m
574
N/A
N/A
Interest on financial instruments, excluding interest on financial liabilities held for trading or designated or
otherwise mandatorily measured at fair value
(16,972)
(10,912)
(11,858)
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
Loss on net monetary position
Gain/(loss) on disposal of operations in Brazil
Change in expected credit loss charges and other credit impairment charges
– loans and advances to banks and customers
– loans commitments and guarantees
– other financial assets
– debt instruments measured at fair value though other comprehensive income
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
(879)
(862)
(17)
(964)
(73)
N/A
27
(136)
(15)
(1,767)
(1,896)
3
21
105
N/A
N/A
N/A
N/A
(936)
(911)
(25)
(916)
(204)
(98)
195
—
19
N/A
N/A
N/A
N/A
N/A
(1,769)
(1,992)
190
33
(969)
(945)
(24)
(922)
(415)
(36)
(206)
—
(1,743)
N/A
N/A
N/A
N/A
N/A
(3,400)
(3,350)
63
(113)
External net operating income is attributed to countries and territories on the basis of the location of the branch responsible for reporting
the results or advancing the funds:
External net operating income by country/territory
– UK
– Hong Kong
– US
– France
– other countries
Footnotes
2
2018
$m
53,780
10,340
17,162
4,379
1,898
20,001
2017
$m
51,445
11,057
14,992
4,573
2,203
18,620
2016
$m
47,966
9,495
12,864
5,094
2,571
17,942
1
Interest revenue calculated using the effective interest method comprises interest recognised on financial assets measured at either amortised cost or fair value through
other comprehensive income.
2 Net operating income before change in expected credit losses and other credit impairment charges/Loan impairment charges and other credit risk provisions, also
referred to as revenue.
6
Employee compensation and benefits
Wages and salaries
Social security costs
Post-employment benefits
Year ended 31 Dec
2018
$m
14,751
1,490
1,132
17,373
2017
$m
15,227
1,419
669
17,315
2016
$m
15,735
1,312
1,042
18,089
240
HSBC Holdings plc Annual Report and Accounts 2018
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
Footnotes
1
2018
135,239
48,757
48,990
8,206
1,658
2017
134,021
46,716
49,100
7,817
7,134
2016
137,234
45,912
47,623
8,322
7,842
242,850
244,788
246,933
1 The reduction in the average number of people employed was due to the completion of the cost to achieve transformation programme at the end of 2017.
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 2018 bonus pool
Variable compensation from 2017 bonus pool
Variable compensation from 2016 bonus pool and earlier
Total
Cash awards
Equity awards
Share-based payments
Charge recognised
2018
2017
$m
150
180
142
472
169
303
$m
—
162
336
498
184
314
2018
67,007
127,992
9,798
17,350
20,703
242,850
2018
$m
3,473
(351)
3,122
322
(70)
3,374
2016
$m
—
—
320
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
2016
71,196
122,282
12,021
20,353
21,081
246,933
2016
$m
3,035
(323)
2,712
371
(128)
2,955
Expected charge
2019 2020 and beyond
$m
149
60
111
320
102
218
$m
202
29
85
316
113
203
‘Wages and salaries’ includes the effect of share-based payments arrangements, of which $450m were equity settled (2017: $500m;
2016: $534m), as follows:
Restricted share awards
Savings-related and other share award option plans
Year ended 31 Dec
HSBC share awards
Award
Policy
2018
$m
499
23
522
2017
$m
520
26
546
2016
$m
591
33
624
Deferred share awards
(including annual incentive
awards, LTI awards
delivered in shares) and
Group Performance Share
Plans (‘GPSP’)
• An assessment of performance over the relevant period ending on 31 December is used to determine the amount
of the award to be granted.
• Deferred awards generally require employees to remain in employment over the vesting period and are not subject to
performance conditions after the grant date.
• Deferred share awards generally vest over a period of three, five or seven years.
• Vested shares may be subject to a retention requirement post-vesting. GPSP awards are retained until cessation of
employment.
• Awards granted from 2010 onwards are subject to a malus provision prior to vesting.
• Awards granted to Material Risk Takers from 2015 onwards are subject to clawback post-vesting.
International Employee
Share Purchase Plan
(‘ShareMatch’)
• The plan was first introduced in Hong Kong in 2013 and now includes employees based in 27 jurisdictions.
• Shares are purchased in the market each quarter up to a maximum value of £750, or the equivalent in local currency.
• Matching awards are added at a ratio of one free share for every three purchased.
• Matching awards vest subject to continued employment and the retention of the purchased shares for a maximum
period of two years and nine months.
HSBC Holdings plc Annual Report and Accounts 2018
241
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
Movement on HSBC share awards
Restricted share awards outstanding at 1 Jan
Additions during the year
Released in the year
Forfeited in the year
Restricted share awards outstanding at 31 Dec
Weighted average fair value of awards granted ($)
HSBC share option plans
Main plans
Policy
2018
Number
(000s)
104,525
61,569
(67,899)
(3,298)
94,897
7.66
2017
Number
(000s)
123,166
62,044
(76,051)
(4,634)
104,525
7.09
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 could 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% (2017: 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 2018
Granted during the year
Exercised during the year
Expired during the year
Forfeited during the year
Outstanding at 31 Dec 2018
Of which exercisable
Weighted average remaining contractual life (years)
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)
1 Weighted average exercise price.
2 The weighted average fair value of options granted during the year was $1.40 (2017: $1.29).
3 The weighted average share price at the date the options were exercised was $8.28 (2017: $9.93).
Post-employment benefit plans
Footnotes
2
3
2
3
Savings-related
share option plans
Number
(000s)
64,670
20,501
(23,260)
(3,148)
(1,698)
57,065
3,513
2.59
70,027
10,447
(9,503)
(3,902)
(2,399)
64,670
1,129
2.42
WAEP1
£
4.49
5.45
4.14
5.20
4.53
4.92
4.09
4.30
5.96
4.83
4.45
4.27
4.49
5.00
The Group operates pension plans throughout the world for its employees. ‘Pension risk management’ on page 87 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’).
HSBC’s balance sheet includes the net surplus or deficit, being the difference between the fair value of plan assets and the discounted
value of scheme liabilities at the balance sheet date for each plan. Surpluses are only recognised to the extent that they are recoverable
through reduced contributions in the future or through potential future refunds from the schemes. In assessing whether a surplus is
recoverable, HSBC has considered its current right to obtain a future refund or a reduction in future contributions.
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. 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 2016 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
combined assets was £30.2bn ($37.2bn), and this exceeded the value placed on its liabilities on an ongoing basis by £1.3bn ($1.6bn),
242
HSBC Holdings plc Annual Report and Accounts 2018
giving a funding level of 104%. These figures include all sections of the plan and defined contribution assets amounting to £3.1bn
($3.8bn). The main differences between the assumptions used for assessing the defined benefit 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 continues to make further contributions to the plan to support a lower-risk
investment strategy over the longer term. The remaining contributions are £64m ($82m) in 2019, and £160m ($204m) in each of 2020
and 2021.
To meet the requirements of the Banking Reform Act, the main employer of the plan changed from HSBC Bank plc to HSBC UK Bank plc
with effect from 1 July 2018, with additional support from HSBC Holdings plc. At the same time, non-ring-fenced entities including HSBC
Bank plc exited the section of the plan for ring-fenced entities and joined a newly created section for the future defined benefit and
defined contribution pension benefits of their employees. These changes have not materially affected the overall funding position of
the plan.
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 £38bn ($47bn) at 31 December 2016.
Guaranteed minimum pension (‘GMP’) equalisation
On 26 October 2018, the High Court of Justice of England and Wales issued a judgment in a claim between Lloyds Banking Group
Pension Trustees Limited as claimant and Lloyds Bank plc and others as defendants regarding the rights of men and women to equal
treatment in relation to their benefits from certain pension schemes.
The judgment concluded that the claimant is under a duty to amend the schemes in order to equalise benefits for men and women in
relation to GMP benefits. The judgment also provided comments on the method to be adopted in order to equalise benefits, on the period
during which a member can claim in respect of previously underpaid benefits, and on what should be done in relation to benefits that
have been transferred into, and out of, the relevant schemes.
The issues determined by the judgment arise in relation to many other occupational pension schemes and consequently will result in an
increase in the principal plan’s liabilities. We have estimated the financial effect of equalising benefits in respect of GMPs, and any
potential conversion of GMPs into non-GMP benefits, to be an approximate 0.8% increase in the plan’s liabilities, or £177m ($226m) on
the IAS19 basis as at 31 December 2018. This has been recognised as a past service cost in profit and loss. The estimate was performed
based on Method C2, which compares the accumulated benefits, with interest, payable to a member on their ‘own sex’ and an ‘opposite
sex’ basis and each year pays the amount necessary to ensure the higher of the two accumulated amounts has been paid.
Income statement charge
Defined benefit pension plans
Defined contribution pension plans
Pension plans
Defined benefit and contribution healthcare plans
Year ended 31 Dec
2018
$m
355
756
1,111
21
1,132
2017
$m
100
603
703
(34)
669
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 2018
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 2017
Total employee benefit liabilities (within ‘Accruals, deferred income and other liabilities’)
Total employee benefit assets (within ‘Prepayments, accrued income and other assets’)
HSBC Holdings
Fair value of
plan assets
Present value
of defined
benefit
obligations
Effect of
limit on plan
surpluses
$m
42,799
110
42,909
$m
(36,583)
(524)
(37,107)
47,265
124
47,389
(40,089)
(663)
(40,752)
$m
(35)
—
(35)
(37)
—
(37)
2016
$m
218
783
1,001
41
1,042
Total
$m
6,181
(414)
5,767
(2,167)
7,934
7,139
(539)
6,600
(2,152)
8,752
Employee compensation and benefit expense in respect of HSBC Holdings’ employees in 2018 amounted to $37m (2017: $54m). The
average number of persons employed during 2018 was 43 (2017: 55). 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 $2,428m (2017: $2,240m) for these services, which is
included under ‘General and administrative expenses’.
HSBC Holdings plc Annual Report and Accounts 2018
243
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
Defined benefit pension plans
Net asset/(liability) under defined benefit pension plans
Fair value of plan assets
Present value of defined
benefit obligations
Effect of the asset
ceiling
Net defined benefit
asset/(liability)
Principal
plan
$m
Other
plans
$m
Principal
plan
$m
Other
plans
$m
Principal
plan
$m
Other
plans
Principal
plan
At 1 Jan 2018
Current service cost
Past service cost and gains/(losses) from settlements
Service cost
Net interest income/(cost) on the net defined benefit
asset/(liability)
Remeasurement 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
38,265
9,000
(30,126)
(9,963)
—
—
—
—
—
—
(66)
(280)
(346)
(157)
8
(149)
970
220
(759)
(249)
(1,501)
(1,501)
—
—
(568)
(568)
—
—
(2,038)
(151)
197
197
—
—
(1,138)
(51)
128
128
—
26
(538)
(22)
1,180
—
1,051
129
1,601
—
—
—
—
1,138
51
413
—
505
(92)
86
—
—
—
(26)
544
22
At 31 Dec 2018
34,704
8,095
(27,261)
(9,322)
Present value of defined benefit obligation relating to:
– actives
– deferreds
– pensioners
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)
Remeasurement 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
At 31 Dec 2017
Present value of defined benefit obligation relating to:
– actives
– deferreds
– pensioners
(5,337)
(8,200)
(13,724)
(4,443)
(1,589)
(3,290)
33,442
8,955
(29,279)
(10,468)
—
—
—
864
1,410
1,410
—
—
3,292
449
58
391
—
(1,143)
(49)
38,265
—
(833)
(833)
272
784
784
—
—
239
236
215
21
27
(65)
(231)
(296)
(160)
1,051
891
(750)
(300)
1,730
—
954
776
(2,723)
—
—
—
—
(486)
—
(491)
5
(306)
—
—
—
(27)
716
17
(663)
(17)
1,143
49
9,000
(30,126)
(9,963)
(5,837)
(8,745)
(15,544)
(5,084)
(1,663)
(3,216)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Other
plans
$m
(1,000)
(157)
8
(149)
$m
8,139
(66)
(280)
(346)
211
(30)
(321)
(1,501)
1,051
129
(437)
197
197
—
—
—
—
(155)
(568)
505
(92)
(62)
128
128
—
—
6
—
$m
(37)
—
—
—
(1)
—
—
—
—
3
—
—
—
—
—
—
(35)
7,443
(1,262)
(24)
4,163
—
—
—
(1)
(9)
—
(9)
—
(3)
—
—
—
—
—
—
(65)
(231)
(296)
114
3,140
1,410
954
776
569
449
58
391
—
—
—
(1,537)
(160)
218
58
(29)
289
784
(500)
5
(70)
236
215
21
—
53
—
(37)
8,139
(1,000)
HSBC expects to make $312m of contributions to defined benefit pension plans during 2019. 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
Footnotes
1
1
2019
$m
820
442
2020
$m
856
517
2021
$m
911
522
2022
$m
981
514
2023
$m
1,004
469
2024 - 2028
$m
5,248
2,286
1 The duration of the defined benefit obligation is 17.0 years for the principal plan under the disclosure assumptions adopted (2017: 17.4 years) and 13.3 years for all other
plans combined (2017: 12.9 years).
244
HSBC Holdings plc Annual Report and Accounts 2018
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 2018
Quoted
market price
in active
market
No quoted
market price
in active
market
Thereof
HSBC1
$m
$m
$m
31,300
3,675
26,509
—
1,116
6,795
742
5,559
—
494
3,404
1,034
—
—
2,030
1,374
—
—
1,034
—
1,300
182
921
148
37
194
2
7
—
173
Value
$m
34,704
3,675
26,509
2,030
2,490
8,095
1,663
5,707
37
688
31 Dec 2017
Quoted
market price
in active
market
No quoted
market price
in active
market
$m
$m
33,624
5,503
26,591
—
1,530
7,737
1,340
5,714
39
644
4,641
628
—
2,398
1,615
1,263
665
157
(39)
480
Value
$m
38,265
6,131
26,591
2,398
3,145
9,000
2,005
5,871
—
1,124
Thereof
HSBC1
$m
1,006
—
—
1,006
—
114
—
7
—
107
1 The fair value of plan assets includes derivatives entered into with HSBC Bank plc as detailed in Note 36.
Post-employment defined benefit plans’ principal actuarial financial assumptions
HSBC determines the discount rates to be applied to its obligations in consultation with the plans’ local actuaries, on the basis of current
average yields of high-quality (AA-rated or equivalent) debt instruments with maturities consistent with those of the defined benefit
obligations.
Key actuarial assumptions for the principal plan
UK
At 31 Dec 2018
At 31 Dec 2017
At 31 Dec 2016
Discount rate
Inflation rate
Rate of increase
for pensions
Rate of pay
increase
%
2.80
2.60
2.50
%
3.40
3.40
3.50
%
3.10
3.10
3.20
%
3.65
3.88
4.00
Mortality tables and average life expectancy at age 65 for the principal plan
UK
At 31 Dec 2018
At 31 Dec 2017
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
21.6
22.2
22.9
23.6
24.1
24.4
25.6
25.9
1 Self-administered pension scheme (‘SAPS’) S2 table (males: 'All pensioners' version; females: 'Normal pensions' version) with a multiplier of 1.05 for male and 1.01 for
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 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.
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
2018
$m
(1,097)
734
1,172
55
1,494
2017
$m
(1,246)
850
1,077
62
1,332
2018
$m
1,170
(724)
(1,105)
(56)
N/A
2017
$m
1,333
(837)
(1,021)
(61)
N/A
Details of Directors’ emoluments, pensions and their interests are disclosed in the Directors’ remuneration report on page 172.
HSBC Holdings plc Annual Report and Accounts 2018
245
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
7
Auditors’ remuneration
Audit fees payable to PwC
Other audit fees payable
Year ended 31 Dec
Fees payable by HSBC to PwC6
Fees for HSBC Holdings’ statutory audit
Fees for other services provided to HSBC
– audit of HSBC’s subsidiaries
– audit-related assurance services
– other assurance services
– taxation compliance services
– taxation advisory services
– other non-audit services
Year ended 31 Dec
Footnotes
1
Footnotes
2
3
4
5
5
2018
$m
86.6
0.9
87.5
2018
$m
16.4
103.1
70.2
11.4
13.5
1.4
0.1
6.5
2017
$m
84.8
1.2
86.0
2017
$m
15.1
114.6
69.7
10.8
25.2
1.2
—
7.7
119.5
129.7
2016
$m
65.7
1.6
67.3
2016
$m
14.0
97.1
51.7
17.8
14.9
1.9
0.4
10.4
111.1
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
2018
$000
172
—
172
2017
$000
260
4
264
2016
$000
208
4
212
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
4
performed due to the technology systems and data access controls matter as described on page 207.
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.
5
6 The 2017 and 2016 comparative data has been re-presented to align to the current year presentation of fees payable. The totals remain unchanged for both 2017 and
2016.
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 $14.0m (2017: $3.5m; 2016:
$4.3m). 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 that 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.
8
Tax
Tax expense
Current tax
– for this year
– adjustments in respect of prior years
Deferred tax
– origination and reversal of temporary differences
– effect of changes in tax rates
– adjustments in respect of prior years
Year ended 31 Dec
Footnotes
1
2018
$m
4,195
4,158
37
670
656
17
(3)
4,865
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
3,666
1 Current tax included Hong Kong profits tax of $1,532m (2017: $1,350m; 2016: $1,118m). The Hong Kong tax rate applying to the profits of subsidiaries assessable in
Hong Kong was 16.5% (2017: 16.5%; 2016: 16.5%).
246
HSBC Holdings plc Annual Report and Accounts 2018
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:
2018
2017
2016
Profit before tax
Tax expense
Taxation at UK corporation tax rate of 19.00% (2017: 19.25%; 2016: 20.0%)
Impact of differently taxed overseas profits in overseas locations
$m
19,890
3,779
264
%
19.00
1.3
Items increasing tax charge in 2018:
– local taxes and overseas withholding taxes
– UK tax losses not recognised
– other permanent disallowables
– UK banking surcharge
– bank levy
– non-deductible regulatory settlements
– impacts of hyperinflation
– adjustments in respect of prior period liabilities
– non-UK tax losses not recognised
– change in tax rates
– non-deductible UK customer compensation
– deferred tax remeasurement due to US federal tax rate reduction
– non-deductible goodwill write-down
– non-deductible loss and taxes suffered on Brazil disposal
Items reducing tax charge in 2018:
– non-taxable income and gains
– effect of profits in associates and joint ventures
– other items
– other deferred tax temporary differences previously not recognised
Year ended 31 Dec
437
435
396
229
191
153
78
34
32
17
16
—
—
—
(691)
(492)
(13)
—
4,865
2.2
2.2
2.0
1.1
1.0
0.8
0.4
0.2
0.2
0.1
0.1
—
—
—
(3.5)
(2.5)
(0.1)
—
24.5
$m
17,167
3,305
407
618
70
400
136
180
%
19.25
2.3
3.6
0.4
2.3
0.8
1.0
(132)
(0.8)
—
64
33
49
166
1,288
—
—
(766)
(481)
—
(49)
5,288
—
0.4
0.2
0.3
1.0
7.5
—
—
(4.4)
(2.8)
—
(0.3)
30.8
$m
7,112
1,422
43
434
305
438
199
170
20
—
256
147
(4)
162
—
648
464
(577)
(461)
—
—
3,666
%
20.00
0.6
6.1
4.3
6.2
2.8
2.4
0.3
—
3.6
2.1
(0.1)
2.3
—
9.1
6.5
(8.1)
(6.5)
—
—
51.6
The Group’s profits are taxed at different rates depending on the country or territory in which the profits arise. The key applicable tax
rates for 2018 include Hong Kong (16.5%), the US (21%) and the UK (19%). 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 20.30% (2017: 21.15%). The effective tax rate for the
year was 24.5% (2017: 30.8%). The effective tax rate for 2018 was significantly lower than for 2017 as 2017 included 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.
Accounting for taxes involves some estimation because the tax law is uncertain and its application requires a degree of judgement, which
authorities may dispute. Liabilities are recognised based on best estimates of the probable outcome, taking into account external advice
where appropriate. We do not expect significant liabilities to arise in excess of the amounts provided. HSBC only recognises current and
deferred tax assets where recovery is probable.
HSBC Holdings plc Annual Report and Accounts 2018
247
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
Movement of deferred tax assets and liabilities
Assets
Liabilities
At 1 Jan 2018
IFRS 9 transitional adjustment
Income statement
Other comprehensive income
Equity
Foreign exchange and other adjustments
At 31 Dec 2018
Assets
Liabilities
Assets
Liabilities
At 1 Jan 2017
Income statement
Other comprehensive income
Equity
Foreign exchange and other adjustments
At 31 Dec 2017
Assets
Liabilities
Loan
impairment
provisions
Unused tax
losses and
tax credits
Derivatives,
FVOD1
and other
investments
Insurance
business
Expense
provisions
$m
713
—
713
358
(72)
—
—
(17)
982
982
—
950
—
950
(235)
3
—
(5)
713
713
—
$m
1,373
—
1,373
—
(203)
—
—
(14)
1,156
1,156
—
2,212
—
2,212
(873)
(6)
—
40
1,373
1,373
—
$m
1,282
(93)
1,189
(411)
51
(722)
—
9
116
492
(376)
1,441
(274)
1,167
(397)
368
—
51
1,189
1,282
(93)
$m
—
(1,182)
(1,182)
—
(104)
—
—
15
(1,271)
—
(1,271)
—
(1,170)
(1,170)
12
—
—
(24)
(1,182)
—
(1,182)
$m
643
—
643
—
19
—
—
(33)
629
629
—
893
—
893
(269)
—
—
19
643
643
—
Footnotes
2
2
2
2
Other
$m
2,313
(2,355)
(42)
459
(361)
190
(23)
(4)
219
1,889
(1,670)
1,857
(1,369)
488
738
(1,255)
29
(42)
(42)
2,313
(2,355)
Total
$m
6,324
(3,630)
2,694
406
(670)
(532)
(23)
(44)
1,831
5,148
(3,317)
7,353
(2,813)
4,540
(1,024)
(890)
29
39
2,694
6,324
(3,630)
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 $4,450m (2017: $4,676m) and deferred tax
liabilities $2,619m (2017: $1,982m).
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 $1.8bn (2017: $2.7bn) includes $3.0bn (2017: $3.2bn) of deferred tax assets relating to the US, of which
$1bn relates to US tax losses that expire in 15–19 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.
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-abuse tax. The US deferred tax asset at 31 December 2017 was calculated using the rate of 21%. The
remeasurement of the deferred tax asset due to the reduction in tax rate resulted in charges of $1.3bn to the income statement and
$0.3bn to other comprehensive income during 2017. The impact of the base erosion anti-abuse tax is currently uncertain, and will depend
on the finalisation of regulatory guidance and the actions management may take. It is not currently expected that the base erosion anti-
abuse 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 $8.9bn (2017: $18.1bn). These amounts included unused state losses arising in the Group’s US operations of $0.8bn
(2017: $12.3bn). Of the total amounts unrecognised, $7.0bn (2017: $4.8bn) had no expiry date, $1.3bn (2017: $0.8bn) 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 $13.2bn
(2017: $12.1bn) and the corresponding unrecognised deferred tax liability is $0.9bn (2017: $0.8bn).
248
HSBC Holdings plc Annual Report and Accounts 2018
9
Dividends
Dividends to shareholders of the parent company
2018
Per
share
$
Total
$m
Settled
in scrip
$m
Per
share
$
2017
Total
$m
Settled
in scrip
$m
Per
share
$
2016
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)
Total coupons on capital securities classified as
equity
Dividends to shareholders
Total coupons on capital securities classified as equity
0.21
4,197
0.21
4,169
1,945
0.21
4,137
0.10
0.10
0.10
0.51
2,008
1,990
1,992
10,187
1,494
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
62.00
90
62.00
90
62.00
90
393
213
181
707
408
703
994
935
1,270
11,547
1,268
11,551
2018
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%
$2,350m issued at 6.250%
$1,800m issued at 6.500%
€1,500m issued at 5.250%
€1,000m issued at 6.000%
€1,250m issued at 4.750%
SGD1,000m issued at 4.700%
Total
Apr 2013
Dec 2015
Jan 2020
Jun 2021
Sep 2024
Mar 2025
May 2027
Mar 2023
Mar 2028
Sep 2022
Sep 2023
July 2029
$2.032
$2.000
$56.250
$68.750
$63.750
$63.750
$60.000
$62.500
$65.000
€52.500
€60.000
€47.500
Jun 2022
SGD47.000
1,090
11,279
2017
Total
$m
179
304
84
138
143
156
90
—
—
89
68
—
17
Total
$m
89
76
84
138
143
156
180
73
59
95
72
70
35
2016
Total
$m
179
304
84
69
143
156
—
—
—
88
67
—
—
1,270
1,268
1,090
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 32.
After the end of the year, the Directors declared a fourth interim dividend in respect of the financial year ended 31 December 2018 of
$0.21 per ordinary share, a distribution of approximately $4,205m. The fourth interim dividend will be payable on 8 April 2019 to holders
on the Principal Register in the UK, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register on 22 February
2019. No liability was recorded in the financial statements in respect of the fourth interim dividend for 2018.
On 4 January 2019, HSBC paid a coupon on its €1,250m subordinated capital securities, representing a total distribution of €30m ($34m).
On 17 January 2019, HSBC paid a coupon on its $1,500m subordinated capital 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 2018 in respect of these coupon payments.
10 Earnings per share
Basic earnings per ordinary share is calculated by dividing the profit attributable to ordinary shareholders of the parent company by the
weighted average number of ordinary shares outstanding, excluding own shares held. Diluted earnings per ordinary share is calculated
by dividing the basic earnings, which require no adjustment for the effects of dilutive potential ordinary shares, by the weighted average
number of ordinary shares outstanding, excluding own shares held, plus the weighted average number of ordinary shares that would be
issued on conversion of dilutive potential ordinary shares.
HSBC Holdings plc Annual Report and Accounts 2018
249
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
Profit attributable to the ordinary shareholders of the parent company
Profit attributable to shareholders of the parent company
Dividend payable on preference shares classified as equity
Coupon payable on capital securities classified as equity
Year ended 31 Dec
Basic and diluted earnings per share
2018
Profit
Number
of shares
Footnotes
$m (millions)
Basic
Effect of dilutive potential ordinary shares
Diluted
1
1
12,608
19,896
87
2018
$m
13,727
(90)
(1,029)
12,608
Per
share
$
0.48
2017
$m
10,798
(90)
(1,025)
9,683
2016
Number
of shares
Profit
$m
(millions)
1,299
19,753
92
2016
$m
2,479
(90)
(1,090)
1,299
Per
share
$
0.07
Per
share
$
0.63
2017
Number
of shares
Profit
$m
(millions)
9,683
19,972
100
12,608
19,983
0.63
9,683
20,072
0.48
1,299
19,845
0.07
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 (2017: nil; 2016: 10m).
11 Trading assets
Treasury and other eligible bills
Debt securities
Equity securities
Trading securities
Loans and advances to banks
Loans and advances to customers
Year ended 31 Dec
Footnotes
1, 2
1, 2
3
2018
$m
22,674
130,539
60,896
214,109
10,425
13,596
238,130
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 reverse repos, stock borrowing and other accounts.
2 Settlement accounts, cash collateral and margin receivables included within 'Loans and advances to banks' and 'Loans and advances to customers' were reclassified
from ‘Trading assets’ to ‘Other assets’ on 1 January 2018 and comparative data was not restated. This reclassification was in accordance with IFRS 9.
Information regarding the effects of adoption of IFRS 9 can be found in Note 37.
3
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
Footnotes
2
3
2018
$m
34,664
9,710
10,772
66,530
3,351
28,186
60,896
2017
$m
15,995
9,540
10,070
58,858
2,986
27,569
99,260
214,109
224,278
1
Included within these figures are debt securities issued by banks and other financial institutions of $18,918m (2017: $18,585m), of which $2,367m (2017: $906m) 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.
12 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.
250
HSBC Holdings plc Annual Report and Accounts 2018
Changes in fair value are generally subject to a profit and loss analysis process and are disaggregated into high-level categories including
portfolio changes, market movements and other fair value adjustments.
The majority of financial instruments measured at fair value are in GB&M. GB&M’s fair value governance structure comprises its Finance
function, Valuation Committees and a Valuation Committee Review Group. Finance is responsible for establishing procedures governing
valuation and ensuring fair values are in compliance with accounting standards. The fair values are reviewed by the Valuation
Committees, which consist of independent support functions. These committees are overseen by the Valuation Committee Review
Group, which considers all material subjective valuations.
Financial liabilities measured at fair value
In certain circumstances, HSBC records its own debt in issue at fair value, based on quoted prices in an active market for the specific
instrument. When quoted market prices are unavailable, the own debt in issue is valued using valuation techniques, the inputs for which
are either based on quoted prices in an inactive market for the instrument or are estimated by comparison with quoted prices in an active
market for similar instruments. In both cases, the fair value includes the effect of applying the credit spread that 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 recorded in other comprehensive income, 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
2018
Level 1
Level 2
Level 3
$m
$m
$m
Total
$m
Level 1
$m
2017
Level 2
$m
Level 3
$m
Total
$m
Recurring fair value measurements
at 31 Dec
Assets
Trading assets
Financial assets designated and otherwise
mandatorily measured at fair value through
profit or loss
Derivatives
Financial assets designated at fair value
Financial investments
Liabilities
Trading liabilities
Financial liabilities designated at fair value
Derivatives
178,100
53,271
6,759
238,130
181,168
101,775
5,052
287,995
23,125
12,494
1,868
N/A
203,534
N/A
263,885
78,882
66,300
6,815
2,845
18,073
136,362
201,234
5,492
2,423
N/A
2,000
58
5,328
1,756
41,111
207,825
N/A
N/A
1,017
24,622
N/A
216,357
3,382
344,767
227,943
104,692
84,431
148,505
205,835
62,710
4,164
1,635
117,451
90,265
213,242
N/A
2,444
1,460
3,432
4,200
—
1,944
N/A
219,818
29,464
336,067
184,361
94,429
216,821
The increase in Level 3 assets in 2018 was primarily due to new private equity investments and new derivative transactions with
unobservable inputs.
HSBC Holdings plc Annual Report and Accounts 2018
251
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
Transfers between Level 1 and Level 2 fair values
Assets
Liabilities
Designated
and
otherwise
mandatorily
measured at
fair value
$m
2
85
—
—
Trading
assets
$m
435
4,959
1,507
1,384
Financial
investments
$m
367
17,861
2,231
11,173
Derivatives
Trading
liabilities
Designated at
fair value
Derivatives
$m
1
128
—
—
$m
$m
79
1,821
35
683
—
—
—
—
$m
—
138
—
—
At 31 Dec 2018
Transfers from Level 1 to Level 2
Transfers from Level 2 to Level 1
At 31 Dec 2017
Transfers from Level 1 to Level 2
Transfers from Level 2 to Level 1
Transfers between levels of the fair value hierarchy are deemed to occur at the end of each quarterly 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.
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 15)
At 31 Dec
Bid-offer
2018
2017
GB&M
$m
1,042
430
99
442
(198)
256
13
79
79
—
85
Corporate
Centre
$m
138
76
6
52
—
4
—
3
3
—
—
1,206
141
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
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.
252
HSBC Holdings plc Annual Report and Accounts 2018
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.
Fair value valuation bases
Financial instruments measured at fair value using a valuation technique with significant unobservable inputs – Level 3
Assets
Liabilities
Designated
and
otherwise
mandatorily
measured
at fair value
through
profit or
loss Derivatives
$m
$m
5,106
32
49
—
—
—
—
—
—
—
65
2,358
—
Financial
investments
Held for
trading
$m
427
1,030
—
—
—
—
$m
20
1,140
—
3
—
—
Total
$m
5,553
2,202
49
3
65
2,358
6,444
Held for
trading
Designated
at fair value Derivatives
$m
$m
$m
12
—
—
46
—
—
—
58
—
—
—
5,328
—
—
—
—
—
—
—
—
1,755
1
Total
$m
12
—
—
5,374
—
1,755
1
543
2,000
5,596
6,759
305
5,492
2,423
16,674
5,328
1,756
7,142
Assets
Liabilities
Available
for sale
$m
2,012
1,300
—
—
—
—
120
3,432
Held for
trading
Designated
at fair value
Derivatives
$m
38
1,277
24
3
—
—
3,710
5,052
$m
$m
1,458
—
—
—
—
—
2
1,460
—
—
—
—
113
2,331
—
2,444
Total
$m
3,508
2,577
24
3
113
2,331
3,832
12,388
Held for
trading
Designated
at fair value
Derivatives
$m
20
—
—
4,180
—
—
—
4,200
$m
$m
—
—
—
—
—
—
—
—
—
—
—
—
—
1,944
—
1,944
Total
$m
20
—
—
4,180
—
1,944
—
6,144
Private equity including strategic
investments
Asset-backed securities
Loans held for securitisation
Structured notes
Derivatives with monolines
Other derivatives
Other portfolios
At 31 Dec 2018
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
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 fair value of a private equity investments (including strategic investments) 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 the asset-backed securities (‘ABSs’), 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.
HSBC Holdings plc Annual Report and Accounts 2018
253
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
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.
Reconciliation of fair value measurements in Level 3 of the fair value hierarchy
Movement in Level 3 financial instruments
Assets
Liabilities
Footnotes
Financial
investm
ents
$m
1,767
251
Designated
and
otherwise
mandatorily
measured
at fair value
through
profit or
loss Derivatives
$m
3,958
608
—
—
608
—
—
—
$m
2,444
597
597
—
—
—
—
—
Trading
assets
$m
5,080
284
284
—
—
—
—
—
(274)
(107)
(113)
—
—
—
(274)
4,377
975
(1,589)
(2,021)
(1,402)
1,329
6,759
(5)
(5)
—
—
—
—
6
—
(113)
2,172
—
(395)
(541)
(285)
82
—
6
—
(119)
—
—
—
(191)
(337)
23
5,492
2,423
199
—
—
199
—
342
342
—
—
—
Trading
liabilities
Designated
at fair
value Derivatives
$m
93
(4)
(4)
—
—
—
—
—
(3)
—
—
—
(3)
3
6
(11)
(2)
(24)
—
58
(5)
(5)
—
—
—
$m
4,107
(637)
—
—
(637)
—
—
—
$m
1,949
255
255
—
—
—
—
—
(144)
(82)
—
—
—
(144)
76
2,442
—
(32)
(1,112)
628
5,328
—
2
—
(84)
—
—
—
(18)
(464)
116
1,756
274
(351)
—
—
274
—
(351)
—
—
—
—
—
—
251
—
—
17
15
—
—
2
275
—
(51)
(141)
(685)
567
2,000
—
—
—
—
—
At 1 Jan 2018
Total gains/(losses) recognised in profit or loss
– net income from financial instruments held for trading or
managed on a fair value basis
– net income from assets and liabilities of insurance businesses,
including related derivatives, measured at fair value through
profit or loss
– changes in fair value of other financial instruments mandatorily
measured at fair value through profit or loss
– gains less losses from financial investments at fair value
through other comprehensive income
– expected credit loss charges and other credit risk charges
– fair value gains transferred to the income statement on disposal
Total gains/(losses) recognised in other comprehensive income
(‘OCI’)
1
– financial investments: fair value gains/(losses)
– cash flow hedges: fair value gains/(losses)
– fair value gains transferred to the income statement on disposal
– exchange differences
Purchases
New issuances
Sales
Settlements
Transfers out
Transfers in
At 31 Dec 2018
Unrealised gains/(losses) recognised in profit or loss relating to
assets and liabilities held at 31 Dec 2018
– net income from financial instruments held
for trading or managed on a fair value basis
– net income from assets and liabilities of
insurance businesses, including related derivatives
measured at fair value through profit or loss
– changes in fair value of other financial
instruments mandatorily measured at fair
value through profit or loss
– loan impairment recoveries and other credit
risk provisions
254
HSBC Holdings plc Annual Report and Accounts 2018
Movement in Level 3 financial instruments (continued)
Footnotes
At 1 Jan 2017
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 2017
Unrealised gains/(losses) recognised in profit or loss relating to
assets and liabilities held at 31 Dec 2017
– 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
Designated
at fair value
through
profit
or loss
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
$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
(110)
(110)
—
—
(146)
—
(146)
—
218
218
—
—
(117)
(117)
—
—
Liabilities
Designated
at fair value
through
profit
or loss
$m
37
(5)
—
(5)
—
—
1
—
—
1
—
—
—
—
Derivatives
$m
2,300
400
400
—
—
—
120
—
(35)
155
23
—
(12)
(123)
(33)
(1,030)
—
—
—
—
—
—
266
1,944
(397)
(397)
—
—
1
Included in ‘Available-for-sale investments: fair value gains/(losses)’ in prior years or 'Debt Instruments at fair value through other comprehensive income’ in 2018 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 quarterly reporting period. Transfers into and
out of levels of the fair value hierarchy are primarily attributable to observability of valuation inputs and price transparency.
Effect of changes in significant unobservable assumptions to reasonably possible alternatives
Sensitivity of Level 3 fair values to reasonably possible alternative assumptions
2018
2017
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
Footnotes
1
Derivatives, trading assets and
trading liabilities
Designated and otherwise
mandatorily measured at fair value
through profit or loss
Financial investments
At 31 Dec
$m
269
394
34
697
$m
(257)
(310)
(36)
(603)
$m
—
—
23
23
$m
—
—
(22)
(22)
$m
372
89
53
514
$m
(253)
(74)
(30)
(357)
$m
—
—
128
128
$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
Private equity including strategic investments
Asset-backed securities
Loans held for securitisation
Structured notes
Derivatives with monolines
Other derivatives
Other portfolios
At 31 Dec
2018
2017
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
400
62
1
13
—
157
64
697
$m
(317)
(34)
(1)
(13)
—
(153)
(85)
(603)
$m
—
23
—
—
—
—
—
23
$m
—
(22)
—
—
—
—
—
(22)
$m
142
66
1
12
—
249
44
514
$m
(105)
(39)
(1)
(9)
—
(150)
(53)
(357)
$m
117
3
—
—
—
—
8
128
$m
(102)
(39)
—
—
—
—
(8)
(149)
HSBC Holdings plc Annual Report and Accounts 2018
255
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
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.
Key unobservable inputs to Level 3 financial instruments
The following table lists key unobservable inputs to Level 3 financial instruments, and provides the range of those inputs at 31 December
2018. The core range of inputs is the estimated range within which 90% of the inputs fall.
Quantitative information about significant unobservable inputs in Level 3 valuations
Fair value
2018
2017
Assets Liabilities
Footnotes
$m
$m
Private equity including
strategic investments
Asset-backed securities
2
5,554
2,202
12
—
Valuation
techniques
Key
unobservable
inputs
Full range
of inputs
Core range
of inputs1
Full range
of inputs
Core range
of inputs1
Lower Higher
Lower Higher
Lower
Higher
Lower
Higher
See below
See below
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
– CLO/CDO
394
— Market proxy
Prepayment
rate
– 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:
1,808
— Market proxy
Bid quotes
Market proxy
Bid quotes
0%
10%
0
0
100
271
0%
50
71
10%
100
99
2%
0
0
7%
101
103
2%
6
34
7%
53
98
49
3
—
—
—
3
—
5,374
3,882
Model –
Option model
Equity
volatility
Model –
Option model
Equity
correlation
8%
79%
13%
53%
7%
47%
14%
30%
17%
93%
40%
77%
33%
95%
45%
72%
Model –
Option model
83
Fund
volatility
21%
21%
21%
21%
6%
15%
6%
15%
Model –
Option model
1,382
27
FX volatility
1%
27%
3%
25%
3%
20%
4%
13%
Model –
Discounted
cash flow
Credit
spread
65
—
2,358
1,755
0.2%
1% 0.2%
1%
0.4%
3%
1%
3%
securitisation swaps
233
700
long-dated swaptions
other
– FX derivatives:
FX options
other
– Equity derivatives:
long-dated single
stock options
other
– Credit derivatives:
other
Other portfolios
– structured certificates
– other
At 31 Dec 2018
3
1,019
250
186
113
215
310
32
6,443
3,013
3,430
27
148
244
77
267
216
76
1
—
1
16,674
7,142
Model –
Discounted
cash flow
Model –
Option model
Model –
Option model
Prepayment
rate
6%
7%
6%
7%
20%
90%
20%
90%
IR volatility
13%
39%
14%
36%
8%
41%
15%
31%
FX volatility
1%
27%
7%
12%
0.7%
50%
5%
11%
Model –
Option model
Equity
volatility
5%
83%
5%
81%
7%
84%
15%
44%
Model –
Discounted
cash flow
Credit
volatility
2%
4%
2%
4%
2%
4%
2%
4%
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 private equity 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
256
HSBC Holdings plc Annual Report and Accounts 2018
evidence, such as prepayment rates implied from proxy observable security prices, current or historical prepayment rates and
macroeconomic modelling.
Market proxy
Market proxy pricing may be used for an instrument when specific market pricing is not available but there is evidence from instruments
with common characteristics. In some cases it might be possible to identify a specific proxy, but more generally evidence across a wider
range of instruments will be used to understand the factors that influence current market pricing and the manner of that influence.
Volatility
Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by strike
and maturity of the option.
Certain volatilities, typically those of a longer-dated nature, are unobservable and are estimated from observable data. The range of
unobservable volatilities reflects the wide variation in volatility inputs by reference market price. The core range is significantly narrower
than the full range because these examples with extreme volatilities occur relatively rarely within the HSBC portfolio.
Correlation
Correlation is a measure of the inter-relationship between two market prices and is expressed as a number between minus one and one.
It is used to value more complex instruments where the payout is dependent upon more than one market price. There is a wide range of
instruments for which correlation is an input, and consequently a wide range of both same-asset correlations and cross-asset correlations
is used. In general, the range of same-asset correlations will be narrower than the range of cross-asset correlations.
Unobservable correlations may be estimated based upon a range of evidence, including consensus pricing services, HSBC trade prices,
proxy correlations and examination of historical price relationships. The range of unobservable correlations quoted in the table reflects
the wide variation in correlation inputs by market price pair.
Credit spread
Credit spread is the premium over a benchmark interest rate required by the market to accept lower credit quality. In a discounted cash
flow model, the credit spread increases the discount factors applied to future cash flows, thereby reducing the value of an asset. Credit
spreads may be implied from market prices and may not be observable in more illiquid markets.
Inter-relationships between key unobservable inputs
Key unobservable inputs to Level 3 financial instruments may not be independent of each other. As described above, market variables
may be correlated. This correlation typically reflects the manner in which different markets tend to react to macroeconomic or other
events. Furthermore, the effect of changing market variables on the HSBC portfolio will depend on HSBC’s net risk position in respect of
each variable.
HSBC Holdings
Basis of valuing HSBC Holdings’ financial assets and liabilities measured at fair value
Valuation technique using observable inputs: Level 2
Assets at 31 Dec
– derivatives
– financial investments
– designated and otherwise mandatorily measured at fair value through profit or loss
Liabilities at 31 Dec
– designated at fair value
– derivatives
2018
$m
707
—
23,513
25,049
2,159
2017
$m
2,388
4,264
11,944
30,890
3,082
HSBC Holdings plc Annual Report and Accounts 2018
257
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
13 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 2018
Assets
Loans and advances to banks
Loans and advances to customers
Reverse repurchase agreements – non-trading
Financial investments – at amortised cost
Liabilities
Deposits by banks
Customer accounts
Repurchase agreements – non-trading
Debt securities in issue
Subordinated liabilities
At 31 Dec 2017
Assets
Loans and advances to banks
Loans and advances to customers
Reverse repurchase agreements – non-trading
Financial investments – at amortised cost
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
—
—
81
1,790
—
—
—
—
—
—
—
—
1,363
—
—
1
—
—
68,378
10,518
241,407
60,073
56,308
1,362,794
165,884
85,430
24,968
87,384
20,029
200,012
52,707
69,862
1,353,017
129,995
65,138
23,740
3,791
974,559
1,369
216
—
151
—
—
373
3,007
944,176
1,526
17
30
11,608
—
—
355
Carrying
amount
$m
72,167
981,696
242,804
62,666
56,331
1,362,643
165,884
85,342
22,437
90,393
962,964
201,553
52,919
69,922
1,364,462
130,002
64,546
19,826
Total
$m
72,169
985,077
242,857
62,079
56,308
1,362,945
165,884
85,430
25,341
90,391
964,205
201,538
54,087
69,892
1,364,625
129,996
65,138
24,095
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
Non-bank financial institutions
At 31 Dec 2018
Loans and advances to customers
Personal
Corporate and commercial
Non-bank financial institutions
At 31 Dec 2017
Carrying amount
Not Impaired
Impaired
$m
387,957
524,531
61,102
973,590
370,842
510,784
71,377
953,003
$m
3,433
4,494
179
8,106
3,920
5,970
71
9,961
Total
$m
391,390
529,025
61,281
981,696
374,762
516,754
71,448
962,964
Fair value
Not Impaired
Impaired
$m
388,761
527,022
61,265
977,048
371,131
512,597
71,351
955,079
$m
3,249
4,600
180
8,029
3,257
5,769
100
9,126
Total
$m
392,010
531,622
61,445
985,077
374,388
518,366
71,451
964,205
Loans and advances to customers are classified as not credit impaired or credit impaired in accordance with the criteria described on
page 103.
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
258
HSBC Holdings plc Annual Report and Accounts 2018
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 expected credit losses 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 credit-
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 in debt securities is issue and subordinated liabilities 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 of repurchase and reverse repurchase agreements that are held on a non-trading basis provide approximate carrying amounts.
This is due to the fact that 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
2018
Carrying
amount
$m
56,144
949
50,800
17,715
Fair
value1
$m
56,801
949
51,552
20,224
2017
Carrying
amount
$m
76,627
2,571
34,258
15,877
Fair
value1
$m
78,534
2,571
36,611
19,596
1 Fair values were determined using valuation techniques with observable inputs (Level 2).
14 Financial assets designated and otherwise mandatorily measured at fair value through profit
or loss
Securities
– treasury and other eligible bills
– debt securities
– equity securities
Loans and advances to banks and customers
Other
At 31 Dec
Footnotes
1
Designated at fair
value
Mandatorily measured
at fair value
Total
Designated at fair value
2018
2017
$m
2,349
641
1,708
—
—
—
2,349
$m
30,217
29
4,839
25,349
7,717
828
38,762
$m
32,566
670
6,547
25,349
7,717
828
41,111
$m
29,456
606
4,090
24,760
8
—
29,464
1
Information regarding the effects of adoption of IFRS 9 can be found in Note 37.
Securities1
UK Government
Hong Kong Government
Other governments
Asset-backed securities
Corporate debt and other securities
Equities
At 31 Dec
Footnotes
2
Designated at fair
value
Mandatorily measured
at fair value
Total
Designated at fair value
2018
2017
$m
—
4
673
—
1,672
—
2,349
$m
—
—
713
399
3,756
25,349
30,217
$m
—
4
1,386
399
5,428
25,349
32,566
$m
17
64
1,247
2
3,366
24,760
29,456
1
Included within these figures are debt securities issued by banks and other financial institutions of $2,537m (2017: $1,621m), of which nil (2017: $0.4m) are guaranteed
by various governments.
2 Excludes asset-backed securities included under US Treasury and US Government agencies.
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Notes on the financial statements
15 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
7,552,462
24,589,916
1,256,550
346,596
74,159
$m
29,969
163,271
—
—
—
$m
85,959
155,293
10,198
3,414
1,134
$m
458
1,080
—
—
—
Gross total fair values
33,819,683
193,240
255,998
1,538
Offset (Note 30)
At 31 Dec 2018
Foreign exchange
Interest rate
Equities
Credit
Commodity and other
Gross total fair values
Offset (Note 30)
At 31 Dec 2017
33,819,683
193,240
255,998
1,538
6,215,518
19,751,577
590,156
391,798
59,716
28,768
178,289
—
—
—
78,089
235,430
9,353
4,692
886
428
1,365
—
—
—
27,008,765
207,057
328,450
1,793
27,008,765
207,057
328,450
1,793
Total
$m
86,417
156,373
10,198
3,414
1,134
257,536
(49,711)
207,825
78,517
236,795
9,353
4,692
886
330,243
(110,425)
219,818
Fair value – Liabilities
Trading
Hedging
$m
82,494
154,257
10,750
3,776
1,355
$m
653
2,261
—
—
—
252,632
2,914
252,632
2,914
74,915
229,989
11,845
5,369
1,233
323,351
853
3,042
—
—
—
3,895
323,351
3,895
Total
$m
83,147
156,518
10,750
3,776
1,355
255,546
(49,711)
205,835
75,768
233,031
11,845
5,369
1,233
327,246
(110,425)
216,821
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 2018, driven by the adoption of Settled to Market accounting for cleared derivatives,
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
Foreign exchange
Interest rate
At 31 Dec 2018
Foreign exchange
Interest rate
At 31 Dec 2017
Use of derivatives
Notional contract amount
Assets
Liabilities
Trading
Hedging
Trading
Hedging
Total
Trading
Hedging
$m
16,623
44,059
60,682
20,484
41,061
61,545
$m
1,120
38,148
39,268
1,120
25,294
26,414
$m
207
283
490
588
1,364
1,952
$m
—
217
217
—
436
436
$m
207
500
707
588
1,800
2,388
$m
628
538
1,166
1,330
678
2,008
$m
155
838
993
110
964
1,074
Total
$m
783
1,376
2,159
1,440
1,642
3,082
For details regarding use of derivatives, see page 138 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 revenue 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 shown in the
following table:
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HSBC Holdings plc Annual Report and Accounts 2018
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
Footnotes
1
2018
$m
106
161
(158)
(96)
(2)
(60)
(4)
(19)
86
2017
$m
99
191
(187)
(85)
(2)
(100)
10
(7)
106
HSBC applies hedge accounting to manage the following risks: interest rate, foreign exchange and net investment in foreign operations.
Further details on how these risks arise and how they are managed by the Group can be found in the Report of the Directors.
Fair value hedges
HSBC enters into fixed-for-floating-interest-rate swaps to manage the exposure to changes in fair value caused by movements in market
interest rates on certain fixed-rate financial instruments that are not measured at fair value through profit or loss, including debt securities
held and issued.
HSBC hedging instrument by hedged risk
Hedging instrument
Carrying amount
Hedged risk
Interest rate3
At 31 Dec 2018
Notional amount1
Assets
Liabilities
Balance sheet
Change in fair value2
$m
123,551
123,551
$m
915
915
$m
2,123
2,123
presentation
Derivatives
$m
283
283
1 The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the
balance sheet date; they do not represent amounts at risk.
2 Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.
3 The hedged risk ‘interest rate’ includes inflation risk.
HSBC hedged item by hedged risk
Carrying amount
Accumulated fair value hedge adjustments included in
carrying amount2
Assets
Liabilities
Assets
Liabilities
Change in fair
value1
Recognised
in profit and
loss
Hedged risk
$m
$m
$m
$m
Balance sheet presentation
$m
$m
Profit and loss
presentation
Hedged item
Ineffectiveness
Interest rate3
93,469
1,455
231
(6)
At 31 Dec 2018
94,924
18,951
225
14,171
4,780
Financial assets designated
and otherwise mandatorily
measured at fair value
through other
comprehensive income
Loans and advances to
customers
Debt securities in issue
Deposits by banks
(155)
45
(110)
(425)
(4)
124
(15)
(320)
Net income from
financial
instruments held for
trading or managed
on a fair value basis
(37)
(37)
1 Used in effectiveness assessment; comprising amount attributable to the designated hedged risk that can be a risk component.
2 The accumulated amount of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be adjusted for hedging gains
and losses were assets of $93m for FVOCI and assets of $19m for debt issued.
3 The hedged risk ‘interest rate’ includes inflation risk.
HSBC Holdings hedging instrument by hedged risk
Hedging instrument
Carrying amount
Hedged risk
Interest rate3
At 31 Dec 2018
Notional amount1,4
Assets
Liabilities
$m
39,538
39,538
$m
217
217
$m
993
993
Balance sheet
presentation
Derivatives
Change in fair value2
$m
(231)
(231)
1 The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the
balance sheet date; they do not represent amounts at risk.
2 Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.
3 The hedged risk ‘interest rate’ includes foreign exchange risk.
4 The notional amount of non-dynamic fair value hedges is equal to $39,538m, of which the weighted-average maturity date is December 2026 and the weighted-average
swap rate is 1.34%. The majority of these hedges are internal to HSBC Group.
HSBC Holdings plc Annual Report and Accounts 2018
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Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
HSBC Holdings hedged item by hedged risk
Hedged risk
Carrying amount
Assets
Liabilities
$m
$m
Hedged item
Accumulated fair value hedge
adjustments included in
carrying amount2
Assets
$m
Liabilities Balance sheet
presentation
$m
Interest rate3
4,620
At 31 Dec 2018
4,620
33,874
33,874
29
29
Loans and
advances to
banks
Debt
securities
in issue
(763)
(763)
Ineffectiveness
Change in fair
value1
Recognised
in profit and
loss
$m
38
191
229
$m
Profit and loss presentation
Net income from financial
instruments held for trading or
managed on a fair value basis
(2)
(2)
1 Used in effectiveness assessment; comprising amount attributable to the designated hedged risk that can be a risk component.
2 The accumulated amount of fair value adjustments remaining in the statement of financial position for hedged items that have ceased to be adjusted for hedging gains
and losses were liabilities of $80m for debt issued.
3 The hedged risk ‘interest rate’ includes foreign exchange risk.
Sources of hedge ineffectiveness may arise from basis risk, including but not limited to the discount rates used for calculating the fair
value of derivatives, hedges using instruments with a non-zero fair value, and notional and timing differences between the hedged items
and hedging instruments.
For some debt securities held, HSBC manages interest rate risk in a dynamic risk management strategy. The assets in scope of this
strategy are high-quality fixed-rate debt securities, which may be sold to meet liquidity and funding requirements.
The interest rate risk of the HSBC fixed-rate debt securities issued is managed in a non-dynamic risk management strategy.
Cash flow hedges
HSBC’s cash flow hedging instruments consist principally of interest rate swaps and cross-currency swaps that are used to manage the
variability in future interest cash flows of non-trading financial assets and liabilities, arising due to changes in market interest rates and
foreign-currency basis.
HSBC applies macro cash flow hedging for interest rate risk exposures on portfolios of replenishing current and forecasted issuances of
non-trading assets and liabilities that bear interest at variable rates, including rolling such instruments. 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 cash flows
representing both principal balances and interest cash flows across all portfolios are used to determine the effectiveness and
ineffectiveness. Macro cash flow hedges are considered to be dynamic hedges.
HSBC also hedges the variability in future cash flows on foreign-denominated financial assets and liabilities arising due to changes in
foreign exchange market rates with cross-currency swaps, which are considered dynamic hedges.
Hedging instrument by hedged risk
Hedged risk
$m
$m
$m
Notional amount1
Assets
Liabilities
Balance sheet
presentation
Hedging instrument
Carrying amount
Hedged item
Ineffectiveness
Change in fair
value2
Change in fair
value3
Recognised in
profit and loss
$m
$m
Foreign currency
24,954
295
653
Derivatives
(198)
(200)
Interest rate
At 31 Dec 2018
39,720
64,674
165
460
138
791
Derivatives
(77)
(275)
(67)
(267)
1 The notional contract amounts of derivatives designated in qualifying hedge accounting relationships indicate the nominal value of transactions outstanding at the
balance sheet date; they do not represent amounts at risk.
2 Used in effectiveness testing; comprising the full fair value change of the hedging instrument not excluding any component.
3 Used in effectiveness assessment; comprising amount attributable to the designated hedged risk that can be a risk component.
Sources of hedge ineffectiveness may arise from basis risk, including but not limited to timing differences between the hedged items and
hedging instruments and hedges using instruments with a non-zero fair value.
Reconciliation of equity and analysis of other comprehensive income by risk type
Cash flow hedging reserve at 1 Jan 2018
Fair value gains/(losses)
Fair value (gains)/losses reclassified from the cash flow hedge reserve to the income statement in respect of:
Hedged items that have affected profit or loss
Income taxes
Others
Cash flow hedging reserve at 31 Dec 2018
Interest rate
Foreign currency
$m
(40)
(67)
90
(11)
2
(26)
$m
(187)
(200)
227
(13)
(9)
(182)
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HSBC Holdings plc Annual Report and Accounts 2018
Profit and loss
presentation
Net income from
financial
instruments held
for trading or
managed on a fair
value basis
$m
2
(10)
(8)
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 2018, the fair values of outstanding financial
instruments designated as hedges of net investments in foreign operations were assets of $163m (2017: $4m), liabilities of nil (2017:
$71m) and notional contract values of $5,000m (2017: $5,000m). Ineffectiveness recognised in ‘Net income from financial instruments
held for trading or managed on a fair value basis’ in the year ended 31 December 2018 was nil (2017: nil).
16 Financial investments
Carrying amount of financial investments
Financial investments measured at fair value through other comprehensive income
– treasury and other eligible bills
– debt securities
– equity securities
– other instruments
Debt instruments measured at amortised cost
– treasury and other eligible bills
– debt securities
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
Footnotes
1
2
2
3, 4
2018
$m
344,767
96,642
246,371
1,657
97
62,666
679
61,987
N/A
N/A
N/A
N/A
N/A
N/A
407,433
2017
$m
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
336,157
78,851
253,389
3,917
52,919
52,919
389,076
‘Other instruments’ comprises of loans and advances.
1
2 Fair value $62.1bn (2017: $54.1bn).
3 Categories of financial instruments are disclosed under IFRS 9 at 31 December 2018. These are not directly comparable with 31 December 2017, where the instruments
were categorised in accordance with IAS 39.
Information regarding the effects of adoption of IFRS 9 can be found in Note 37.
4
Equity instruments measured at fair value through other comprehensive income
Type of equity instruments
Investments required by central institutions
Business facilitation
Others
At 31 Dec 2018
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
Fair value
Dividends
recognised
$m
848
758
51
1,657
$m
34
21
9
64
Footnotes
2
2
3
2018
2017
Amortised cost
Fair value1
Amortised cost
Fair value1
$m
54,941
21,058
12,867
20,576
49,956
$m
54,763
20,580
12,701
21,083
49,955
142,495
144,099
3,579
97,286
1,353
3,390
98,419
1,657
404,111
406,647
$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
1
Included within ‘fair value’ figures are debt securities issued by banks and other financial institutions of $56bn (2017: $67bn), of which $8bn (2017: $15bn) 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.
HSBC Holdings plc Annual Report and Accounts 2018
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Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
Maturities of investments in debt securities at their carrying amount
Debt securities measured at fair value through other comprehensive
income
Debt securities measured at amortised cost
At 31 Dec 2018
Available-for-sale
Held to maturity
At 31 Dec 2017
Up to 1 year
1 to 5 years
5 to 10 years
Over 10 years
$m
$m
$m
$m
61,598
2,519
64,117
63,896
3,731
67,627
124,075
10,086
134,161
122,113
9,406
131,519
36,194
16,065
52,259
37,292
13,482
50,774
24,504
33,317
57,821
30,088
26,300
56,388
Total
$m
246,371
61,987
308,358
253,389
52,919
306,308
Contractual maturities and weighted average yields of investment debt securities
Debt securities measured at fair value through other
comprehensive income
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 2018
Total carrying value
Debt instruments measured at amortised cost
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 2018
Total carrying value
Up to 1 year
1 to 5 years
5 to 10 years
Over 10 years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
$m
%
$m
%
$m
%
$m
Yield
%
947
—
1,361
856
456
45,390
16
12,312
61,338
61,598
34
—
50
8
329
—
2,098
2,519
2,519
1.6
—
3.2
0.9
1.3
1.5
5.9
1.8
4.2
—
2.2
4.9
1.8
—
3.2
33,220
74
1,268
5,988
551
48,549
25
32,893
122,568
124,075
53
18
389
24
470
—
9,132
10,086
10,086
2.1
2.1
2.6
1.1
1.3
2.8
—
2.0
4.8
3.9
2.7
1.6
2.6
—
3.4
14,396
10
2,240
5,472
63
8,701
381
4,563
35,826
36,194
1
26
163
9
451
—
15,415
16,065
16,065
2.3
3.8
2.8
0.6
3.0
2.3
2.7
2.3
1.0
3.6
2.6
1.3
2.9
—
3.4
2,376
9,707
4,309
859
—
1,489
3,156
2,574
24,470
24,504
152
11,025
3,087
7
744
2
18,300
33,317
33,317
3.1
2.9
3.2
4.4
—
2.6
2.1
3.1
4.0
2.6
3.0
1.5
4.1
7.4
3.6
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 2018 by the
book amount of debt securities at that date. The yields do not include the effect of related derivatives.
17 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
Footnotes
1
1
1
2
2018
$m
11,470
151
51,659
95,210
22,510
34,028
2017
$m
10,183
14,518
68,336
96,245
33,209
2,743
215,028
225,234
1 Settlement accounts, cash collateral and margin receivables included within 'Loans and advances to banks' and 'Loans and advances to customers' were reclassified
from ‘Trading assets’ to ‘Other assets’ on 1 January 2018. Comparative data has not been restated.
2 Information regarding the effects of adoption of IFRS 9 can be found in Note 37.
Assets pledged as collateral include all assets categorised as encumbered in the disclosure on page 72 of the Pillar 3 Disclosures at 31 December 2018.
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 that has a floating charge over all the assets placed to secure any liabilities under settlement accounts.
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HSBC Holdings plc Annual Report and Accounts 2018
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
2018
$m
76,121
15,741
91,862
2017
$m
70,117
13,581
83,698
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 $482,818m (2017:
$387,678m). The fair value of any such collateral sold or repledged was $350,848m (2017: $243,531m).
HSBC is obliged to return equivalent securities. These transactions are conducted under terms that are usual and customary to standard
securities lending, reverse repurchase agreements and derivative margining.
Assets transferred
The assets pledged include transfers to third parties that do not qualify for derecognition, notably secured borrowings such as debt
securities held by counterparties as collateral under repurchase agreements and equity securities lent under securities lending
agreements, 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 2018
Repurchase agreements
Securities lending agreements
Other sales (recourse to transferred assets only)
At 31 Dec 2017
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
62,216
32,486
2,647
55,510
33,878
2,387
60,361
2,426
2,647
52,093
3,324
2,388
2,625
2,630
(5)
2,377
2,378
(1)
18 Interests in associates and joint ventures
Associates
At 31 December 2018, the carrying amount of HSBC’s interests in associates was $22,244m (2017: $22,577m).
Principal associates of HSBC
Bank of Communications Co., Limited
The Saudi British Bank
2018
2017
Carrying
amount
$m
17,754
3,557
Fair
value1
$m
10,991
5,222
Carrying
amount
$m
18,057
3,618
Fair
value1
$m
10,491
4,320
1 Principal associates are listed on recognised stock exchanges. The fair values are based on the quoted market prices of the shares held (Level 1 in the fair value
hierarchy).
Bank of Communications Co., Limited
The Saudi British Bank
Country of
incorporation and
principal place of
business
People’s Republic
of China
At 31 Dec 2018
Principal
activity
Banking services
Footnotes
1
Saudi Arabia
Banking services
HSBC’s
interest
%
19.03
40.00
1
In 2018, The Saudi British Bank announced a merger agreement with Alawwal Bank in Saudi Arabia. The merger, subject to shareholder and regulatory approval, is
expected to be completed in 2019 and would dilute HSBC’s shareholding in the merged bank from 40% to 29.2%.
HSBC Holdings plc Annual Report and Accounts 2018
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Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
A list of all associates and joint ventures is set out on page 302.
Bank of Communications Co., Limited (‘BoCom’)
The Group’s investment in BoCom is classified as an associate. Significant influence in BoCom was established via representation on
BoCom’s Board of Directors and participation in a technical cooperation and exchange programme (‘TCEP’). Under the TCEP, a number of
HSBC staff have been seconded to assist in the maintenance of BoCom’s financial and operating policies. Investments in associates are
recognised using the equity method of accounting in accordance with IAS 28, whereby the investment is initially recognised at cost and
adjusted thereafter for the post-acquisition change in the Group’s share of BoCom’s net assets. An impairment test is required if there is
any indication of impairment.
Impairment testing
At 31 December 2018, the fair value of HSBC’s investment in BoCom had been below the carrying amount for approximately 80 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 2018 as the recoverable amount as determined by a value-in-use (‘VIU’) calculation was higher than the
carrying value.
Bank of Communications Co., Limited
At 31 Dec 2018
VIU
Carrying value
$bn
18.0
$bn
17.8
Fair
value
$bn
11.0
At 31 Dec 2017
Carrying value
$bn
18.1
VIU
$bn
18.3
Fair
value
$bn
10.5
In future periods, the VIU may increase or decrease depending on the effect of changes to model inputs. The main model inputs are
described below and are based on factors observed at the period-end. The factors that could result in a change in the VIU and an
impairment include a short-term underperformance by BoCom, a change in regulatory capital requirements, or an increase in uncertainty
regarding the future performance of BoCom resulting in a downgrade of the future asset growth or profitability. An increase in the
discount rate as a result of an increase in the risk premium or risk-free rates could also result in a reduction of VIU and an impairment. At
the point where the carrying value exceeds the VIU, impairment would be recognised.
If the Group did not have significant influence in BoCom, the investment would be carried at fair value rather than the current carrying
value.
Basis of recoverable amount
The impairment test was performed by comparing the recoverable amount of BoCom, determined by a VIU calculation, with its carrying
amount. The VIU calculation uses discounted cash flow projections based on management’s estimates of future earnings available to
ordinary shareholders prepared in accordance with IAS 36. Significant management judgement is required in arriving at the best
estimate. There are two main components to the VIU calculation. The first component is management’s best estimate of BoCom’s
earnings which is based on management’s explicit forecasts over the short to medium term. This results in forecast earnings growth that
is lower than recent historical actual growth and also reflects the uncertainty arising from the current economic outlook. Earnings beyond
the short to medium term are then extrapolated in perpetuity using a long-term growth rate to derive a terminal value, which comprises
the majority of the VIU. The second component is the capital maintenance charge (‘CMC’) which is management’s forecast of the
earnings that need to be withheld in order for BoCom to meet regulatory capital requirements over the forecast period (i.e. CMC is
deducted when arriving at management’s estimate of future earnings available to ordinary shareholders). 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.
Key assumptions in value-in-use calculation
We used a number of assumptions in our VIU calculation, in accordance with the requirements of IAS 36:
• Long-term profit growth rate: 3% (2017: 3%) for periods after 2022, which does not exceed forecast GDP growth in mainland China
and is consistent with forecasts by external analysts.
• Long-term asset growth rate: 3% (2017: 3%) for periods after 2022, which is the rate that assets are expected to grow to achieve long-
term profit growth of 3%.
• Discount rate: 11.82% (2017: 11.85%), 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 10.4% to 15.0% (2017: 10.2% to 13.4%) indicated by external sources.
• Loan impairment charge as a percentage of customer advances: an increased range from 0.73% to 0.79% (2017: 0.66% to 0.82%) in
the short to medium term reflect US-China trade tensions. For periods after 2022, the ratio is 0.70% (2017: 0.70%), which is slightly
higher than the historical average.
• Risk-weighted assets as a percentage of total assets: 62% (2017: 62%) for all forecast periods. This is slightly higher than BoCom’s
actual results and slightly lower than the forecasts disclosed by external analysts.
• Cost-income ratio: ranges from 38.7% to 39.0% (2017: 37.1% to 38.0%) in the short to medium term. This is consistent with the
forecasts disclosed by external analysts.
• Effective tax rate: ranges from 13.8% to 22.3% (2017: 18.2% to 22.5%) in the short to medium term, reflecting an expected increase
towards the long-term assumption. For periods after 2022, the rate is 22.5% (2017: 22.5%), which is slightly higher than the historical
average.
• Regulatory capital requirements: capital adequacy ratio of 11.5% (2017:11.5%) and tier 1 capital adequacy ratio of 9.5% (2017: 9.5%),
based on the minimum regulatory requirements.
266
HSBC Holdings plc Annual Report and Accounts 2018
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
• Long-term effective tax rate
• Regulatory capital requirements – capital adequacy ratio
• Regulatory capital requirements – tier 1 capital adequacy ratio
Changes to key assumption to reduce headroom to nil
• decreases by 13 basis points
•
•
•
•
•
•
•
•
increases by 12 basis points
increases by 16 basis points
increases by 2 basis points
increases by 77 basis points
increases by 50 basis points
increases by 123 basis points
increases by 14 basis points
increases by 75 basis points
The following table further illustrates the impact 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 are largely based on external analysts’ forecasts,
which can change from period to period.
Sensitivity of VIU to reasonably possible changes in key assumptions
Favourable change
Unfavourable change
Increase
in VIU
bps
$bn
At 31 Dec 2018
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
Long term effective tax rate
Earnings in short to medium term – compound annual growth rate1
Regulatory capital requirements – capital adequacy ratio
Regulatory capital requirements - tier 1 capital adequacy ratio
At 31 Dec 2017
Long-term profit growth rate
Long-term asset growth rate
Discount rate
100
(10)
(142)
2018-22: 0.70%
2023 onwards: 0.65%
(140)
(160)
(280)
204
—
—
200
(20)
(35)
Loan impairment charge as a percentage of customer advances
Risk-weighted assets as a percentage of total assets
Cost-income ratio
Long-term effective tax rate
Earnings in short to medium term – compound annual growth rate1
Regulatory capital requirements – capital adequacy ratio
Regulatory capital requirements – tier 1 capital adequacy ratio
2017-20: 0.71%
2021 onwards: 0.70%
(60)
(173)
(120)
288
—
—
1 Based on management’s explicit forecasts over the short to medium term.
2.6
0.3
3.2
0.9
0.5
1.1
0.7
1.6
—
—
6.6
0.5
0.7
0.1
0.2
1.5
0.3
2.8
—
—
VIU
$bn
20.6
18.3
21.3
18.9
18.6
19.2
18.7
19.6
18.0
18.0
24.9
18.9
19.1
18.5
18.6
19.8
18.6
21.1
18.3
18.3
Decrease
in VIU
bps
$bn
(10)
100
28
2018-22: 0.83%
2023 onwards: 0.77%
80
200
250
(366)
258
243
—
200
65
2017-20: 0.90%
2021 onwards: 0.77%
30
—
250
(311)
248
234
(0.2)
(2.8)
(0.5)
(1.0)
(0.3)
(1.4)
(0.6)
(2.5)
(5.0)
(3.2)
—
(7.1)
(1.2)
(1.3)
(0.1)
—
(0.67)
(3.6)
(5.6)
(3.5)
VIU
$bn
17.8
15.3
17.5
17.0
17.8
16.7
17.5
15.5
13.0
14.8
18.3
11.2
17.1
17.0
18.2
18.3
17.7
14.7
12.7
14.8
Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of
VIU is $15.5bn to $19.6bn (2017: $14.7bn to $21.1bn). In 2018, the range is based on the favourable/unfavourable change in the earnings
in the short to medium-term and long-term LICs set out in the table above. All other long-term assumptions, the discount rate and the
basis of the CMC have been kept unchanged when determining the reasonably possible range of the VIU.
Selected financial information of BoCom
The statutory accounting reference date of BoCom is 31 December. For the year ended 31 December 2018, HSBC included the
associate’s results on the basis of the financial statements for the 12 months ended 30 September 2018, taking into account changes in
the subsequent period from 1 October 2018 to 31 December 2018 that would have materially affected the results.
HSBC Holdings plc Annual Report and Accounts 2018
267
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
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
Footnotes
At 30 Sep
2018
$m
125,414
102,980
686,951
408,136
42,106
2017
$m
146,029
120,403
662,706
386,067
58,202
1,365,587
1,373,407
304,395
829,539
94,900
36,332
366,993
747,882
123,751
32,568
1,265,166
1,271,194
1
100,421
102,213
1 Due to the adoption of IFRS9, the opening equity of BoCom at 1 January 2018 was reduced by $4,053m.
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
Change in expected credit losses/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
2018
$m
17,275
479
17,754
2017
$m
17,551
506
18,057
For the 12 months ended 30 Sep
2018
$m
19,295
6,245
(5,602)
(767)
(1,554)
11,116
190
11,306
611
2018
$m
4,482
20,470
15,675
959
487
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
At 31 December 2018, the carrying amount of HSBC’s interests in joint ventures was $163m (2017: $167m).
Associates and joint ventures
For the year ended 31 December 2018, HSBC’s share of associates’ and joint ventures’ tax on profit was $306m (2017: $440m ). This is
included within ‘Share of profit in associates and joint ventures’ in the ‘Consolidated income statement’.
268
HSBC Holdings plc Annual Report and Accounts 2018
Movements in interests in associates and joint ventures
As at 31 Dec 2017
Impact on transition to IFRS 9
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 $511m (2017: $521m).
19 Investments in subsidiaries
Main subsidiaries of HSBC Holdings
Footnotes
2018
$m
22,744
(942)
21,802
81
(85)
2,536
(910)
(1,018)
(64)
65
2017
$m
20,029
N/A
20,029
60
(67)
2,375
(740)
1,144
(43)
(14)
1
22,407
22,744
Europe
HSBC Bank plc
HSBC UK Bank plc
HSBC France
HSBC Trinkaus & Burkhardt AG
Asia
Hang Seng Bank Limited
HSBC Bank (China) Company Limited
HSBC Bank Malaysia Berhad
HSBC Life (International) Limited
The Hongkong and Shanghai Banking Corporation
Limited
Middle East and North Africa
HSBC Bank Middle East Limited
North America
HSBC Bank Canada
HSBC Bank USA, N.A.
Latin America
Place of
incorporation or
registration
HSBC’s
interest %
Share class
At 31 Dec 2018
England and
Wales
England and
Wales
France
Germany
100
£1 Ordinary, $0.01 Non-cumulative third Dollar Preference
100
99.99
80.67
£1 Ordinary
€5 Actions
Stückaktien no par value
Hong Kong
62.14
HK$5 Ordinary
People’s Republic
of China
Malaysia
Bermuda
Hong Kong
United Arab
Emirates
Canada
US
100
100
100
100
100
100
100
CNY1 Ordinary
RM0.50 Ordinary
HK$1 Ordinary
Ordinary no par value
$1 Ordinary and $1 Cumulative Redeemable Preference shares
(CRP)
Common no par value and Preference no par value
$100 Common and $0.01 Preference
HSBC Mexico, S.A., Institución de Banca Múltiple,
Grupo Financiero HSBC
Mexico
99.99
MXN2 Ordinary
Details of the debt, subordinated debt and preference shares issued by the main subsidiaries to parties external to the Group are included
in Notes 25 ‘Debt securities in issue’, 28 ‘Subordinated liabilities’ and 31 ‘Non-controlling interests’, respectively.
A list of all related undertakings is set out on pages 301 to 302. The principal countries of operation are the same as the countries and
territories 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 increase in HSBC Holding investments in subsidiaries of $67,300m during the year (2017: reduction of $2,920m) was
driven by $82,570m of restructuring and new capital injections (2017: $1,744m), $2,200m part reversal of the impairment previously
recognised in relation to HSBC Overseas Holdings (UK) Limited (2017: nil), $197m other movements (2017: reduction of $289m), partially
offset by $17,348m net return of capital from subsidiaries (2017: $4,070m), $136m movement in impairment (2017: $63m) and $183m
intra-Group disposals (2017: $242m). The part reversal of impairment in relation to HSBC Overseas Holdings (UK) Limited is due to an
increase in the future expected cash flows from this entity.
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 2018, 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,
HSBC Holdings plc Annual Report and Accounts 2018
269
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
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 33.
Information on structured entities consolidated by HSBC where HSBC owns less than 50% of the voting rights is included in Note 20
‘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 changes in expected credit losses and other credit impairment charges
– profit for the year
– total comprehensive income for the year
20 Structured entities
2018
2017
37.86%
37.86%
Hong Kong
Hong Kong
$m
1,194
6,637
647
197,867
179,450
5,294
3,159
2,950
$m
997
6,233
594
186,638
169,275
4,556
2,632
2,895
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 2018
At 31 Dec 2017
Conduits
Conduits
Securitisations
HSBC
managed funds
$bn
9.2
12.9
$bn
5.7
4.8
$bn
6.5
7.0
Other
$bn
4.4
3.2
Total
$bn
25.8
27.9
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.
• At 31 December 2018, Solitaire, HSBC’s principal SIC, held $2.3bn of ABSs (2017: $3.2bn). These are included within the disclosures
of ABSs on page 122. 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 2018, HSBC held $3.4bn of CP (2017: $4.6bn).
• Mazarin is funded by medium-term notes, and is no longer funded by repurchase agreements. HSBC’s primary exposure to Mazarin is
represented by the amortised cost of the debt required to support the non-cash assets of the vehicles. At 31 December 2018, this
amounted to $0.5bn (2017: $0.9bn). The first loss protection is provided through the capital notes issued by the vehicle, which are
held substantially by third parties.
• Barion and Malachite’s clean-up redemption conditions were triggered in March 2018 and August 2018 respectively, resulting in the
full redemption of these vehicles.
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 $16.1bn at 31 December 2018 (2017:
$15.7bn). First loss protection is provided by the originator of the assets, and not by HSBC, through transaction-specific credit
enhancements. A layer of secondary loss protection is provided by HSBC in the form of programme-wide enhancement facilities.
Securitisations
HSBC uses structured entities to securitise customer loans and advances it originates in order to diversify its sources of funding for asset
origination and capital efficiency purposes. The loans and advances are transferred by HSBC to the structured entities for cash or
synthetically through credit default swaps, and the structured entities issue debt securities to investors.
HSBC managed funds
HSBC has established a number of money market and non-money market funds. Where it is deemed to be acting as principal rather than
agent in its role as investment manager, HSBC controls these funds.
270
HSBC Holdings plc Annual Report and Accounts 2018
Other
HSBC has entered into a number of transactions in the normal course of business, which include asset and structured finance
transactions where it has control of the structured entity. In addition, HSBC is deemed to control a number of third-party managed funds
through its involvement as a principal in the funds.
Unconsolidated structured entities
The term ‘unconsolidated structured entities’ refers to all structured entities not controlled by HSBC. The Group enters into transactions
with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment
opportunities.
Nature and risks associated with HSBC interests in unconsolidated structured entities
Securitisations
HSBC managed
funds
Non-HSBC
managed funds
Other
Total
Total asset values of the entities ($m)
0–500
500–2,000
2,000–5,000
5,000–25,000
25,000+
Number of entities at 31 Dec 2018
Total assets in relation to HSBC’s interests in the unconsolidated
structured entities
– trading assets
– financial assets designated and otherwise mandatorily measured at fair
value
– 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 2018
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
76
10
1
—
—
87
$bn
3.8
—
—
3.8
—
—
—
—
0.8
4.6
78
6
—
2
—
86
$bn
4.0
—
—
—
4.0
—
—
—
—
—
4.0
243
56
17
5
2
323
$bn
8.3
0.1
7.3
—
0.9
—
—
—
0.1
8.4
321
56
17
10
2
406
$bn
9.1
0.2
8.0
—
—
0.9
—
—
—
0.1
9.2
906
570
230
90
10
1,806
$bn
8.9
0.3
7.9
0.3
0.4
—
—
—
3.3
12.2
930
578
235
104
11
1,858
$bn
9.3
0.2
8.3
—
—
0.8
—
—
—
2.2
11.5
79
5
—
1
—
85
$bn
4.7
1.3
—
2.7
0.3
0.4
0.2
0.2
1.0
5.5
210
3
—
1
—
214
$bn
4.1
2.4
—
0.1
1.1
0.1
0.4
0.3
0.3
0.3
4.4
1,304
641
248
96
12
2,301
$bn
25.7
1.7
15.2
6.8
1.6
0.4
0.2
0.2
5.2
30.7
1,539
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
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 that HSBC has entered into in order
to mitigate the Group'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 121.
HSBC Holdings plc Annual Report and Accounts 2018
271
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
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 65.
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.
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 the interests disclosed above, HSBC enters into derivative contracts, reverse repos and stock borrowing transactions with
structured entities. These interests arise in the normal course of business for the facilitation of third-party transactions and risk
management solutions.
HSBC sponsored structured entities
The amount of assets transferred to and income received from such sponsored structured entities during 2018 and 2017 were not
significant.
21 Goodwill and intangible assets
Goodwill
Present value of in-force long-term insurance business
Other intangible assets
At 31 Dec
Footnotes
1
2
2018
$m
12,986
7,149
4,222
24,357
2017
$m
13,588
6,610
3,255
23,453
1
2
Included within other intangible assets is internally generated software with a net carrying value of $3,632m (2017: $2,641m). During the year, capitalisation of internally
generated software was $1,781m (2017: $1,157m) and amortisation was $687m (2017: $570m).
Information regarding the effects of adoption of IFRS 9 can be found in Note 37.
Movement analysis of goodwill
Gross amount
At 1 Jan
Exchange differences
Other
At 31 Dec
Accumulated impairment losses
At 1 Jan
Exchange differences
Other
At 31 Dec
Net carrying amount at 31 Dec
Impairment testing
2018
$m
22,902
(617)
(105)
22,180
(9,314)
120
—
(9,194)
12,986
2017
$m
21,445
1,490
(33)
22,902
(9,115)
(327)
128
(9,314)
13,588
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 2018. 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 2017 and 2018. 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.
Key assumptions in VIU calculation
Cash-generating unit
Europe
RBWM
CMB
Global
GB&M
Goodwill at
1 Jul 2018
$m
Discount
rate
%
Nominal
growth rate
beyond initial
cash flow
projections
Goodwill at
1 Jul 2017
%
$m
3,565
2,626
4,045
8.1
9.4
9.8
3.8
3.7
5.6
3,508
2,570
4,000
Nominal
growth rate
beyond initial
cash flow
projections
%
3.7
3.6
5.8
Discount
rate
%
8.9
9.9
10.6
272
HSBC Holdings plc Annual Report and Accounts 2018
At 1 July 2018, aggregate goodwill of $3,061m (1 July 2017: $3,059m) 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
2018, management’s cash flow projections until the end of 2022 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 the 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
from which it derives revenue.
Sensitivities of key assumptions in calculating VIU
At 1 July 2018, 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 long-term (‘PVIF’) insurance business, 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 methodologies must be approved by
the Actuarial Control Committee.
Movements in PVIF
As at 31 Dec 2017
Impact on transition to IFRS 9
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
Exchange differences and other movements
At 31 Dec
Footnotes
1
2018
$m
6,610
(78)
6,532
673
1,117
(719)
292
(17)
(56)
7,149
2017
$m
6,502
N/A
6,502
24
919
(599)
(280)
(16)
84
6,610
1
‘Expected return’ represents the unwinding of the discount rate and reversal of expected cash flows for the period.
Assumption changes and experience variances
Included within this line item are:
• $(56)m (2017: $(98)m), directly offsetting regulatory-driven changes to the valuation of liabilities under insurance contracts.
• $455m (2017: $(141)m), 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.
• $(107)m (2017: $(41)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
2018
2017
Hong Kong
France1
Hong Kong
France1
%
2.29
5.90
3.00
%
1.52
2.35
1.70
%
2.02
6.20
3.00
%
1.50
2.20
1.48
1 For 2018, the calculation of France’s PVIF assumes a risk discount rate of 2.35% (2017: 2.20%) plus a risk margin of $109m (2017: $80m).
HSBC Holdings plc Annual Report and Accounts 2018
273
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
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 145 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 146 for further details on the impact of changes in non-economic assumptions on our insurance
manufacturing operations.
22 Prepayments, accrued income and other assets
Prepayments and accrued income
Settlement accounts
Cash collateral and margin receivables
Assets held for sale
Bullion
Endorsements and acceptances
Reinsurers’ share of liabilities under insurance contracts (Note 4)
Employee benefit assets (Note 6)
Property, plant and equipment
Other accounts
At 31 Dec
Footnotes
1, 2
1, 2
2018
$m
8,715
13,957
33,202
735
13,753
9,623
2,506
7,934
10,060
10,086
110,571
2017
$m
7,929
N/A
N/A
781
13,128
9,750
2,471
8,752
10,027
14,353
67,191
1 Settlement accounts, cash collateral and margin receivables were reclassified from ‘Trading assets’ to ‘Other assets’ on 1 January 2018 and comparative data was not
restated. This reclassification was in accordance with IFRS 9. See Note 37 for further details.
2 Settlement accounts, cash collateral and margin receivables were reclassified from ‘Loans and advances to banks and customers’ to ‘Other assets’ on 1 January 2018.
This reclassification is to better reflect the nature of these balances and ensure consistency of presentation. Comparative data was not restated as the reclassification is
not significant in the context of other changes to the balance sheet resulting from the adoption of IFRS 9. See Note 37 for further details.
Prepayments, accrued income and other assets include $74,151m (2017: $30,431m) of financial assets, the majority of which are
measured at amortised cost.
23 Trading liabilities
Deposits by banks
Customer accounts
Other debt securities in issue (Note 25)
Other liabilities – net short positions in securities
At 31 Dec
Footnotes
1, 2
1, 2, 3
4
2018
$m
4,871
8,614
1,400
69,546
84,431
2017
$m
23,297
52,595
40,734
67,735
184,361
‘Deposits by banks’ and ‘Customer accounts’ include repos, stock lending and other amounts.
1
2 Settlement accounts, cash collateral and margin payables included within ‘Deposits by banks’ and ‘Customer accounts’ were reclassified from ‘Trading liabilities’ to
‘Other liabilities’ on 1 January 2018. This reclassification is to better reflect the nature of these balances and ensure consistency of presentation. Structured liabilities
have moved from ‘Trading liabilities’ to ‘Financial liabilities designated at fair value’. Comparative data was not restated as the reclassification is not significant in the
context of other changes to the balance sheet resulting from the adoption of IFRS 9. See Note 37 for further details.
3 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.
4
24 Financial liabilities designated at fair value
HSBC
Deposits by banks and customer accounts
Liabilities to customers under investment contracts
Debt securities in issue (Note 25)
Subordinated liabilities (Note 28)
Preferred securities (Note 28)
At 31 Dec
Footnotes
1
1
2018
$m
19,003
5,458
109,351
14,282
411
148,505
2017
$m
145
5,635
64,359
23,831
459
94,429
1 Structured liabilities have moved from ‘Trading liabilities’ to ‘Financial liabilities designated at fair value’. Comparatives have not been restated. See Note 37 for further
detail.
274
HSBC Holdings plc Annual Report and Accounts 2018
The carrying amount of financial liabilities designated at fair value was $11,496m less than the contractual amount at maturity
(2017: $5,343m more). The cumulative amount of change in fair value attributable to changes in credit risk was $209m (2017: loss of
$4,107m).
HSBC Holdings
Debt securities in issue (Note 25)
Subordinated liabilities (Note 28)
At 31 Dec
2018
$m
17,767
7,282
25,049
2017
$m
17,496
13,394
30,890
The carrying amount of financial liabilities designated at fair value was $920m more than the contractual amount at maturity
(2017: $3,370m more). The cumulative amount of change in fair value attributable to changes in credit risk was a loss of $812m (2017:
loss of $2,209m).
25 Debt securities in issue
HSBC
Bonds and medium-term notes
Other debt securities in issue
Total debt securities in issue
Included within:
– trading liabilities (Note 23)
– financial liabilities designated at fair value (Note 24)
At 31 Dec
Footnotes
1
1
2018
$m
162,277
33,816
196,093
(1,400)
(109,351)
85,342
2017
$m
146,539
23,100
169,639
(40,734)
(64,359)
64,546
1 Structured liabilities (including debt securities in issue) have moved from ‘Trading liabilities’ to ‘Financial liabilities designated at fair value’. Comparatives have not been
restated. See Note 37 for further detail.
HSBC Holdings
Debt securities
Included within:
– financial liabilities designated at fair value (Note 24)
At 31 Dec
26 Accruals, deferred income and other liabilities
Accruals and deferred income
Settlement accounts
Cash collateral and margin payables
Endorsements and acceptances
Employee benefit liabilities (Note 6)
Liabilities of disposal groups held for sale
Other liabilities
At 31 Dec
2018
$m
2017
$m
68,567
51,754
(17,767)
50,800
(17,496)
34,258
Footnotes
1
1
2018
$m
11,296
13,022
41,044
9,633
2,167
313
19,905
97,380
2017
$m
11,521
N/A
N/A
9,746
2,152
1,286
21,202
45,907
1 Settlement accounts, cash collateral and margin payables were reclassified from ‘Trading liabilities’, ‘Deposits by banks’ and ‘Customer accounts’ to ‘Other liabilities’ on
1 January 2018. This reclassification is to better reflect the nature of these balances and ensure consistency of presentation. Comparative data was not restated as the
reclassification is not significant in the context of other changes to the balance sheet resulting from the adoption of IFRS 9. See Note 37 for further details.
Accruals, deferred income and other liabilities include $87,390m (2017: $34,048m) of financial liabilities, the majority of which are
measured at amortised cost.
HSBC Holdings plc Annual Report and Accounts 2018
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Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
27 Provisions
Provisions (excluding contractual commitments)
At 31 Dec 2017
Additions
Amounts utilised
Unused amounts reversed
Exchange and other movements
At 31 Dec 2018
Contractual commitments1
At 31 Dec 2017
Impact on transition to IFRS 9
Net change in expected credit loss provision and other
movements
At 31 Dec 2018
Total Provisions
At 31 Dec 2017
At 31 Dec 2018
Restructuring
costs
Legal proceedings
and regulatory
matters
Customer
remediation
Other
provisions
$m
334
73
(158)
(107)
(12)
130
$m
$m
1,501
1,132
(1,255)
(279)
29
1,128
1,454
288
(838)
(90)
(26)
788
$m
469
232
(143)
(131)
(70)
357
At 1 Jan 2017
Additions
Amounts utilised
Unused amounts reversed
Exchange and other movements
At 31 Dec 2017
Restructuring
costs
Contractual
commitments1
Legal
proceedings
and regulatory
matters
Customer
remediation
Other
provisions
$m
551
204
(353)
(103)
35
334
$m
298
87
(3)
(135)
6
253
$m
2,436
829
(850)
(980)
66
1,501
$m
1,124
820
(543)
(52)
105
1,454
$m
364
280
(133)
(107)
65
469
Total
$m
3,758
1,725
(2,394)
(607)
(79)
2,403
253
284
(20)
517
4,011
2,920
Total
$m
4,773
2,220
(1,882)
(1,377)
277
4,011
1 The contractual commitments provision at 31 December 2017 represented IAS 37 provisions on off-balance sheet loan commitments and guarantees, for which
expected credit losses are provided following transition to IFRS 9 on 1 January 2018. It further includes provisions in respect of insurance contracts.
Further details of ‘Legal proceedings and regulatory matters’ are set out in Note 35. Legal proceedings include civil court, arbitration or
tribunal proceedings brought against HSBC companies (whether by way of claim or counterclaim), or civil disputes that may, if not
settled, result in court, arbitration or tribunal proceedings. Regulatory matters refer to investigations, reviews and other actions carried
out by, or in response to the actions of, regulators or law enforcement agencies in connection with alleged wrongdoing by HSBC.
Customer remediation refers to 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.
Refer to Note 37 for further information on the impact of IFRS 9 on undrawn loan commitments and financial guarantees, presented in
‘Contractual commitments’. This provision results from the adoption of IFRS 9 and has no comparatives. Further analysis of the
movement in the expected credit loss provision is disclosed within the 'Reconciliation of allowances for loans and advances to banks and
customers including loan commitments and financial guarantees' table on page 100.
Payment protection insurance
At 31 December 2018, $555m (2017: $1,174m) of the customer remediation provision relates to the estimated liability for redress in
respect of the possible mis-selling of payment protection insurance (‘PPI’) policies in previous years.
An increase in provisions of $79m was recognised during the second half of 2018, primarily reflecting an adjustment to expected future
complaint volumes as a result of increased levels of observed complaints and of information requests during the year.
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 revenue of $3.3bn at 2018. The gross written
premiums on these policies were approximately $4.4bn.
At 31 December 2018, the estimated total complaints expected to be received were 2.3 million, representing 42% of total policies sold. It
is estimated that contact will be made with regard to 2.6 million policies, representing 49% of total policies sold. This estimate includes
inbound complaints as well as the Group’s proactive contact exercise on certain policies (‘outbound contact’).
276
HSBC Holdings plc Annual Report and Accounts 2018
The following table details the cumulative number of complaints received at 31 December 2018 and the number of claims expected in the
future:
Cumulative PPI complaints received to 31 December 2018 and future claims expected
Inbound complaints (000s of policies)
Outbound contact (000s of policies)
Response rate to outbound contact
Average uphold rate per claim
Average redress per claim ($)
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 2018
Future
expected
1
2
1,777
685
44%
77%
2,729
166
38%
183
—
n/a
83%
3,130
9
32%
A 100,000 increase/decrease in the total inbound complaints would increase/decrease the redress provision by approximately $260m at
2018 average exchange rates.
28 Subordinated liabilities
HSBC’s subordinated liabilities
At amortised cost
– subordinated liabilities
– preferred securities
Designated at fair value (Note 24)
– subordinated liabilities
– preferred securities
At 31 Dec
Issued by HSBC subsidiaries
Issued by HSBC Holdings
2018
$m
22,437
20,651
1,786
14,693
14,282
411
37,130
13,168
23,962
2017
$m
19,826
17,988
1,838
24,290
23,831
459
44,116
15,470
28,646
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 in the following table 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.
HSBC Holdings plc Annual Report and Accounts 2018
277
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
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
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.
$1,250m
$1,000m
$750m
$700m
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
Footnotes
First call date Maturity date
Jun 2030
Apr 2020
Nov 2031
Jun 1990
Sep 1990
Jun 1992
—
May 2025
2018
$m
892
892
411
894
1,305
750
500
300
300
2017
$m
892
892
459
946
1,405
750
500
300
375
1,850
1,925
Mar 2018
Mar 2023
—
Jul 2023
Nov 2025
Nov 2030
—
—
—
Aug 2033
Jan 2041
Mar 2046
—
382
513
757
286
758
496
405
584
912
303
802
4,546
5,427
Jul 1991
Nov 2022
Nov 2027
—
—
—
—
—
—
Sep 2020
Jul 2097
Aug 2020
Nov 2034
Aug 2035
Jan 2039
400
400
121
121
747
221
269
400
400
123
123
748
221
277
1,237
1,246
1,226
1,106
829
697
3,858
1,236
1,272
955
700
4,163
—
Jan 2021
507
1,092
1
1
2
3
4
5
Other subordinated liabilities each less than $150m
Oct 1996
Nov 2083
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
Jun 2014
Jun 2019
6, 7
2, 6
4
8
29
29
—
—
—
31
31
240
115
355
273
13,168
336
15,470
1 See paragraph below, ‘Guaranteed by HSBC Holdings or HSBC Bank plc’.
2 These securities were redeemed in the first quarter of 2018.
3 The interest rate payable after November 2025 is the sum of the three-month sterling Libor plus 1.50% percentage points.
4 Some securities included here are ineligible for inclusion in the capital base of HSBC.
5 HSBC tendered for these securities in 2017. In January 2018, a further tender was conducted. The principal balance is now $507m. The original notional of these
securities is $2,939m.
6 These securities are ineligible for inclusion in the capital base of HSBC.
7 Approximately $60m of these securities were held by HSBC Holdings.
8
Information regarding the effects of adoption of IFRS 9 can be found in Note 37.
HSBC Holdings’ subordinated liabilities
At amortised cost
Designated at fair value (Note 24)
At 31 Dec
278
HSBC Holdings plc Annual Report and Accounts 2018
2018
$m
17,715
7,282
24,997
2017
$m
15,877
13,394
29,271
HSBC Holdings’ subordinated liabilities in issue
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
£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
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
Footnotes
First call
date
Maturity
date
2,3
2
2
1
1
1
1
1
2,3
2
2
2
2
2
2
2,3
2
2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Jan 2019
—
—
Mar 2024
Aug 2025
Nov 2026
May 2032
Nov 2032
May 2036
Sep 2037
Jun 2038
Mar 2044
Dec 2027
Sep 2028
Apr 2038
Mar 2040
Mar 2018
Jun 2019
Jan 2024
Jun 2025
Jun 2028
2018
$m
2,001
1,494
1,470
549
246
2,040
2,419
1,489
1,661
960
826
992
1,156
—
2,125
1,719
1,725
1,233
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
Amounts owed to HSBC undertakings
$900m
10.176% subordinated step-up cumulative notes
Jun 2030
Jun 2040
At 31 Dec
24,105
28,379
892
892
892
892
24,997
29,271
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 These subordinated notes are measured at amortised cost in HSBC Holdings, where the interest rate risk is hedged using a fair value hedge, while they are measured at
fair value in the Group.
Additional tier 1 capital securities
Additional tier 1 capital securities are perpetual subordinated securities on which coupon payments may be deferred or cancelled at the
discretion of HSBC. The securities presented in this Note are accounted for as liabilities because HSBC has an obligation to pay dividends
in perpetuity. See Note 32 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
Capital securities guaranteed by HSBC Holdings or HSBC Bank plc were issued by the Jersey limited partnerships. The proceeds of these
were 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 also qualify as additional tier 1 capital for HSBC Bank plc (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 plc has insufficient distributable reserves
(as defined).
HSBC Holdings and HSBC Bank plc 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.
If the consolidated total capital ratio of HSBC Holdings falls below the regulatory minimum required, or if the Directors expect it to do so
in the near term, provided that proceedings have not been commenced for the liquidation, dissolution or winding up of HSBC Holdings,
the holders’ interests in the preferred securities guaranteed by HSBC Holdings will be exchanged for interests in preference shares issued
by HSBC Holdings that have economic terms which are in all material respects equivalent to the preferred securities and their guarantee.
If any of the two issues guaranteed by HSBC Bank plc are outstanding in April 2049 or November 2048 respectively, or if the
consolidated total capital ratio of HSBC Bank plc falls below the regulatory minimum required, or if the Directors expect it to do so in the
near term, provided that proceedings have not been commenced for the liquidation, dissolution or winding up of HSBC Bank plc, the
holders’ interests in the preferred securities guaranteed by HSBC Bank plc will be exchanged for interests in preference shares issued by
HSBC Bank plc that have economic terms which are in all material respects equivalent to the preferred securities and their guarantee.
Tier 2 capital securities
Tier 2 capital securities are either perpetual or dated subordinated securities on which there is an obligation to pay coupons. These
capital securities are included within HSBC's regulatory capital base as tier 2 capital under CRD IV by virtue of the application of
HSBC Holdings plc Annual Report and Accounts 2018
279
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
grandfathering provisions (with the exception of identified securities that are compliant with CRD IV end point rules). In accordance with
CRD IV, the capital contribution of all tier 2 securities is amortised for regulatory purposes in their final five years before maturity.
29 Maturity analysis of assets, liabilities and off-balance sheet commitments
The table on page 281 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.
280
HSBC Holdings plc Annual Report and Accounts 2018
HSBC
Maturity analysis of assets, liabilities and off-balance sheet commitments
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
Financial assets
Cash and balances at central banks
162,843
Items in the course of collection from
other banks
Hong Kong Government certificates of
indebtedness
Trading assets
Financial assets designated or
otherwise mandatorily measured 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
5,787
35,859
235,443
7,743
206,925
40,114
178,613
41,967
118,294
18,352
172,795
40,421
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
264
707
744
104
197
671
—
—
—
—
49
15
10,421
72,072
8,736
58,623
4,713
41,084
58,731
371
57
3,486
58,680
8,237
45,918
4,525
13,308
30,464
145
79
2,004
38,394
7,581
27,001
3,812
334
18
918
69
3,282
7,158
2,415
328
4,508
29,136
41,111
334
207,825
1,194
37,333
101,267
219,841
275,496
7,240
25,597
4,496
24,942
67,093
9,232
63,061
229,626
143,959
12,821
42,540
3,330
5,763
3,574
5,253
1,027
—
242,804
15,707
15,357
41,866
92,846
112,041
407,433
Total
$m
162,843
5,787
35,859
238,130
72,167
981,696
391,390
529,025
61,281
Financial assets at 31 Dec 2018
1,148,610
189,529
109,476
63,397
60,309
157,077
322,367
420,438
2,471,203
Non-financial assets
—
—
—
—
—
—
—
86,921
86,921
Total assets at 31 Dec 2018
1,148,610
189,529
109,476
63,397
60,309
157,077
322,367
507,359
2,558,124
62,067
6,893
2,403
561
307
349
731
2,237
75,548
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
Trading liabilities2
Financial liabilities designated at
fair value2
– 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
73,464
35,859
42,406
1,225,919
612,325
457,661
155,933
—
—
3,457
66,990
38,132
22,922
5,936
—
—
1,043
31,315
21,218
8,029
2,068
154,383
8,140
1,750
5,641
82,867
3,813
—
981
—
2,832
203,962
—
251
4,476
—
1,562
—
2,914
62
—
326
6,878
205
2,659
2,125
1,889
135
—
—
784
17,218
11,483
4,599
1,136
629
—
633
3,076
—
2,290
—
786
191
6,777
11,194
12,556
8,075
—
2,166
4,611
—
1,100
10,094
8,986
89
—
30
12,526
3,296
3
—
—
8,075
659
—
1
—
542
13,760
8,282
4,317
1,161
73
—
81
3
—
5,558
4,122
2,853
1,092
177
408
—
235
3,481
12,545
1,190
9,143
—
2,212
560
—
2,353
—
1,128
144
3,330
—
—
3,330
1,269
—
98
—
1,655
3,194
2,623
509
62
501
—
36
656
74,222
—
886
125
35,859
56,331
1,362,643
53
29
43
—
—
2
696,969
499,158
166,516
165,884
5,641
84,431
53,615
2,721
47,443
60,621
148,505
1,137
5,253
37,633
104,064
—
12,568
9,283
14,693
24,495
622
205,835
3,451
159
10,670
19,713
13,027
85,342
—
394
748
944
10,276
18,021
885
1,996
1,027
1,384
—
1,412
11,615
1,300
18,959
748
6,046
78,548
87,380
22,437
Accruals and other financial liabilities
69,958
Subordinated liabilities
6
Total financial liabilities at 31 Dec
2018
1,831,591
103,645
57,302
31,265
22,680
36,979
81,284
95,542
2,260,288
Non-financial liabilities
—
—
—
—
—
—
—
103,587
103,587
Total liabilities at 31 Dec 2018
1,831,591
103,645
57,302
31,265
22,680
36,979
81,284
199,129
2,363,875
Off-balance sheet commitments
given
Loan and other credit-related
commitments
– personal
– corporate and commercial
– financial
769,311
203,622
441,199
124,490
5,281
974
2,694
1,613
941
59
799
83
1,972
32
1,895
45
1,257
201
974
82
361
280
34
47
731
556
150
25
412
331
73
8
780,266
206,055
447,818
126,393
HSBC Holdings plc Annual Report and Accounts 2018
281
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
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 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
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
6,628
34,186
284,781
612
218,103
61,968
195,577
42,593
124,669
28,315
144,244
31,981
19,259
—
—
—
1,432
93
162
10,665
65,469
9,126
50,532
5,811
30,289
51,487
5,795
Financial assets at 31 Dec 2017
1,177,963
165,392
Non-financial assets
—
—
—
—
—
642
230
97
4,212
49,860
8,483
36,046
5,331
7,951
31,634
2,050
96,676
—
Off-balance sheet commitments received
Loan and other credit-related commitments3
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
36,200
34,186
56,829
1,269,003
648,040
458,937
162,026
113,208
6,850
145,028
80
—
55
—
25
213,011
6,081
—
3,479
2,602
18,009
—
—
—
1,961
44,129
22,938
16,496
4,695
14,042
—
2,026
281
—
95
—
186
79
6,295
—
4
6,291
9,547
1,918
—
—
1,097
21,596
13,489
6,983
1,124
1,592
—
2,177
2,094
—
2,087
—
7
141
5,228
—
—
5,228
2,798
73
Total
$m
180,624
6,628
34,186
287,995
29,464
219,818
90,393
962,964
374,762
516,754
71,448
—
—
—
—
2,068
592
2,491
218,784
61,238
144,451
13,095
—
—
—
—
25,546
464
1,412
268,926
214,837
49,762
4,327
—
—
—
—
162
124
2,344
34,107
7,441
22,932
3,734
2,194
13,446
358
—
—
—
1,140
197
42
1,502
37,176
7,492
26,577
3,107
3,960
17,647
411
—
—
—
—
556
234
5,799
93,065
23,552
61,785
7,728
1,072
40,582
652
4,598
7,245
201,553
90,366
111,933
389,076
513
2,046
31,084
52,735
62,075
141,960
319,412
417,572
2,433,785
—
—
—
—
87,986
87,986
—
—
616
—
—
157
11,570
10,757
5,727
3,970
1,060
—
—
—
—
361
4,527
2,753
1,705
69
—
—
—
—
7,393
2,257
1,557
641
59
1,000
—
—
—
1,508
623
119
451
53
—
—
36,200
34,186
69,922
1,364,462
701,433
492,895
170,134
130,002
6,850
3,077
5,038
12,814
12,071
184,361
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
21,482
5,551
1,637
2,415
34
1,193
1,188
938
13,799
94,429
4,569
59,790
24,290
5,780
216,821
64,546
48
7,690
56,808
35,334
19,826
6,810
3,712
1,048
160
—
2,130
271
209
62
—
—
140
5,795
—
—
5,795
749
36
Total financial liabilities at 31 Dec 2017
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 commitments3
– personal
– corporate and commercial
– financial
669,485
187,545
388,778
93,162
39,192
2,001
32,011
5,180
3,812
340
2,782
690
2,103
343
1,322
438
4,686
1,583
2,309
794
3,436
1,033
2,403
—
4,423
952
2,804
667
2,349
513
1,716
120
729,486
194,310
434,125
101,051
‘Customer accounts’ includes $364,729m (2017: $386,417m) insured by guarantee schemes.
1
2 Structured liabilities have moved from ’Trading liabilities’ to ‘Financial liabilities designated at fair value’. Comparatives have not been restated. See Note 37 for further
detail.
3 31 December 2017 balances have been restated to include $44bn of loan commitments given (unsettled reverse repurchase agreements) and $30bn of loan
commitments received (unsettled repurchase agreements) not previously identified for disclosure. The $30bn of loan commitments received are reported within ‘Due not
more than 1 month’.
282
HSBC Holdings plc Annual Report and Accounts 2018
HSBC Holdings
Maturity analysis of assets, liabilities and off-balance sheet commitments
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
3,509
540
—
—
—
—
—
—
3,052
11,563
158
968
—
—
33
—
—
27
7,134
11,590
—
—
7,134
11,590
—
—
—
—
1,321
—
319
—
1,640
—
1,640
949
—
—
—
—
—
353
—
1,302
—
1,302
—
—
—
158
—
158
—
2,125
—
2,125
—
—
188
2,313
—
2,313
—
—
—
968
—
968
—
—
—
—
—
—
36
—
36
—
36
—
—
—
—
—
—
1
—
—
—
1
—
1
—
—
—
—
—
—
5
—
5
—
5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
167
3,509
707
14,062
26,340
56,144
8,116
15,397
23,513
—
—
—
—
60
22,178
41,904
83,933
—
22,178
161,248
203,152
161,248
245,181
—
—
949
12,306
12,306
—
339
10,618
5,461
5,157
499
25,049
17,767
7,282
2,159
23,770
27,030
50,800
—
—
36,415
—
41
17,715
55,903
214
942
17,715
97,614
214
36,415
56,117
97,828
—
—
—
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 and
otherwise mandatorily measured
at fair value
Financial investments in HSBC
undertakings
Accrued income and other financial
assets
Total financial assets at
31 Dec 2018
Non-financial assets
Total assets at 31 Dec 2018
Financial liabilities
Amounts owed to HSBC undertakings
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
31 Dec 2018
Non-financial liabilities
Total liabilities at 31 Dec 2018
Off-balance sheet commitments
Undrawn formal standby facilities,
credit lines and other commitments
to lend
HSBC Holdings plc Annual Report and Accounts 2018
283
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
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
Amounts owed to HSBC undertakings
120
2,405
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
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
1,985
1,952
—
—
—
—
4,861
13,039
3,145
—
17
—
8,815
—
8,815
—
3
4
13,046
—
13,046
—
—
—
2,008
—
439
—
2,567
—
2,567
—
—
—
—
—
395
1,918
4,718
—
4,718
—
—
—
3,145
—
3,145
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
—
—
—
1,214
—
1,214
2,411
9,533
11,944
1,798
2,446
4,264
—
33,769
—
123
37,339
94,399
127
97,335
94,399
33,769
131,738
191,734
—
—
—
2,571
2,349
—
2,349
110
—
3
—
2,462
—
2,462
11,491
11,491
—
183
10,354
1
—
22,029
—
22,029
17,050
6,005
11,045
781
22,823
11
13,959
54,624
217
54,841
30,890
17,496
13,394
3,082
34,258
1,052
15,877
87,730
217
87,947
—
—
—
—
—
30 Offsetting of financial assets and financial liabilities
In the following table, 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 the legal right to set off remains appropriate.
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HSBC Holdings plc Annual Report and Accounts 2018
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 15)
Reverse repos, stock
borrowing and similar
agreements classified as:
– trading assets
– non-trading assets
Loans and advances to
customers
At 31 Dec 2018
Derivatives (Note 15)
Reverse repos, stock
borrowing and similar
agreements classified as:
– trading assets
– non-trading assets
Loans and advances to
customers
At 31 Dec 2017
Financial liabilities
Derivatives (Note 15)
Repos, stock lending and
similar agreements
classified as:
– trading liabilities
– non-trading liabilities
Customer accounts
At 31 Dec 2018
Derivatives (Note 15)
Repos, stock lending and
similar agreements
classified as:
– trading liabilities
– non-trading liabilities
Customer accounts
At 31 Dec 2017
1
2
3
1
2
3
1
2
4
1
2
4
250,275
(49,711)
200,564
(145,785)
(9,986)
(38,031)
6,762
7,261
207,825
18,217
(790)
17,427
(1,244)
(16,179)
372,358
(167,313)
205,045
(21,788)
(182,995)
—
(100)
4
162
853
18,280
37,759
242,804
40,534
(12,468)
28,066
(21,245)
—
—
6,821
536
28,602
681,384
(230,282)
451,102
(190,062)
(209,160)
(38,131)
13,749
46,409
497,511
322,422
(110,425)
211,997
(156,088)
(11,092)
(37,302)
7,515
7,821
219,818
15,893
265,666
—
(105,776)
15,893
159,890
(430)
(15,462)
(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
248,123
(49,711)
198,412
(145,785)
(14,895)
(29,998)
7,734
7,423
205,835
13,169
(790)
12,379
274,367
(167,313)
107,054
40,286
(12,468)
27,818
(1,244)
(21,788)
(21,245)
(11,133)
(85,087)
—
—
(164)
—
2
15
6,573
114
12,493
58,830
165,884
11
27,829
575,945
(230,282)
345,663
(190,062)
(111,115)
(30,162)
14,324
66,378
412,041
321,932
(110,425)
211,507
(156,072)
(14,342)
(28,666)
12,427
5,314
216,821
10,555
187,268
42,533
562,288
—
(105,776)
(10,424)
10,555
81,492
32,109
(430)
(7,165)
(26,390)
(9,615)
(74,048)
—
—
(240)
(188)
(226,625)
335,663
(190,057)
(98,005)
(29,094)
510
39
5,531
18,507
63
10,618
48,510
130,002
158
32,267
54,045
389,708
1 At 31 December 2018, the amount of cash margin received that had been offset against the gross derivatives assets was $3,935m (2017: $6,324m). The amount of cash
margin paid that had been offset against the gross derivatives liabilities was $5,888m (2017: $5,196m).
2 For the amount of repos, reverse repos, stock lending, stock borrowing and similar agreements recognised on the balance sheet within ‘Trading assets’ $18,280m (2017:
$17,120m) and ‘Trading liabilities’ $12,493m (2017: $10,618m), see the ‘Funding sources and uses’ table on page 134.
3 At 31 December 2018, the total amount of ‘Loans and advances to customers’ was $981,696m (2017: $962,964m), of which $28,066m (2017: $31,667m) was subject
to offsetting.
4 At 31 December 2018, the total amount of ‘Customer accounts’ was $1,362,643m (2017: $1,364,462m), of which $27,818m (2017: $32,109m) 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.
31 Non-controlling interests
Non-controlling interests attributable to holders of ordinary shares in subsidiaries
At 31 Dec
2018
$m
7,996
7,996
2017
$m
7,621
7,621
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 19.
HSBC Holdings plc Annual Report and Accounts 2018
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Notes on the financial statements
32 Called up share capital and other equity instruments
Called up share capital and share premium
HSBC Holdings ordinary shares of $0.50 each, issued and fully paid
At 1 Jan
Shares issued under HSBC employee share plans
Shares issued in lieu of dividends
Less: Shares repurchased and cancelled
At 31 Dec
2018
2017
Footnotes
Number
$m
Number
20,320,716,258
10,160
20,191,586,214
83,740,460
166,850,869
(210,466,091)
42
83
76,701,249
380,652,196
(105)
(328,223,401)
$m
10,096
38
190
(164)
1
20,360,841,496
10,180
20,320,716,258
10,160
HSBC Holdings 6.20% non-cumulative US Dollar Preference Shares, Series A
At 1 Jan and 31 Dec
HSBC Holdings share premium
At 31 Dec
Total called up share capital and share premium
At 31 Dec
2018
Footnotes
2
Number
1,450,000
$m
—
2017
Number
1,450,000
2018
$m
13,609
2018
$m
23,789
$m
—
2017
$m
10,177
2017
$m
20,337
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 6.20% non-cumulative US dollar preference shares, Series A of $0.01
HSBC Holdings pays dividends on 6.20% non-cumulative US dollar preference shares, Series A of $0.01 each (‘dollar preference shares’)
quarterly, at the 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 28 for additional tier 1 securities accounted for as liabilities.
Additional tier 1 capital securities
Additional tier 1 capital securities are perpetual subordinated securities on which coupon payments may be deferred at HSBC Holdings’
discretion. While any coupon payments are unpaid or deferred, HSBC Holdings will not declare or pay dividends or make distributions or
similar periodic payments in respect of any securities of lower or equal rank, or repurchase or redeem them. Such securities do not
generally carry voting rights, but rank higher than ordinary shares for coupon payments, and in the event of a winding-up. They do not
meet the identifying criteria in full for recognition as tier 1 capital under CRD IV, but are eligible as regulatory capital subject to
grandfathering limits and progressive phase-out.
At HSBC Holdings’ discretion, and subject to certain conditions being satisfied, the capital securities may be exchanged on any coupon
payment date for non-cumulative preference shares to be issued by HSBC Holdings and ranking pari passu with the dollar and sterling
preference shares in issue. The preference shares were 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 were redeemed by HSBC in June 2018.
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HSBC Holdings plc Annual Report and Accounts 2018
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
2018
$m
—
—
—
2017
$m
2,133
3,718
5,851
During 2018, 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
$2,350m
$1,800m
€1,500m
€1,000m
€1,250m
£1,000m
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
6.250% perpetual subordinated contingent convertible securities
6.500% 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
5.875% perpetual subordinated contingent convertible securities
SGD1,000m
4.700% perpetual subordinated contingent convertible securities
SGD750m
5.000% perpetual subordinated contingent convertible securities
At 31 Dec
Shares under option
First call
date
Jan 2020
Jun 2021
Sep 2024
Mar 2025
May 2027
Mar 2023
Mar 2028
Sep 2022
Sep 2023
Jul 2029
Sep 2026
Jun 2022
Sep 2023
2018
$m
1,494
1,998
2,244
2,460
2,997
2,347
1,798
1,943
1,120
1,420
1,299
723
549
2017
$m
1,494
1,998
2,244
2,460
2,997
—
—
1,943
1,120
1,420
—
723
—
22,392
16,399
For details of the options outstanding to subscribe for HSBC Holdings ordinary shares under the HSBC Holdings savings-related share
option plans, see Note 6.
Aggregate options outstanding under these plans
31 Dec 2018
31 Dec 2017
Number of
HSBC Holdings
ordinary shares
Period of exercise
Exercise price
57,065,513
2018 to 2024
£4.0472 – 5.9640
—
—
—
N/A
N/A
N/A
N/A
N/A
N/A
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
Maximum obligation to deliver HSBC Holdings ordinary shares
At 31 December 2018, 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 2011, was 152,667,912 (2017: 169,615,437). The total number of shares at 31 December
2018 held by employee benefit trusts that may be used to satisfy such obligations to deliver HSBC Holdings ordinary shares was
5,928,890 (2017: 5,883,444).
HSBC Holdings plc Annual Report and Accounts 2018
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Notes on the financial statements
33 Contingent liabilities, contractual commitments and guarantees
Guarantees and other contingent liabilities:
– financial guarantees
– performance and 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
HSBC
2018
$m
Footnotes
2
3
4
3
23,518
71,484
1,408
96,410
7,083
67,265
705,918
780,266
2017
$m
25,849
67,007
616
93,472
8,776
48,192
672,518
729,486
HSBC Holdings1
2018
$m
8,627
—
215
8,842
—
—
—
—
2017
$m
7,778
—
—
7,778
—
—
—
—
1 Guarantees by HSBC Holdings are all in favour of other Group entities.
2
‘Financial guarantees’ to which the impairment requirements in IFRS 9 are applied have been presented separately from other guarantees to align with credit risk
disclosures. Comparatives have been re-presented accordingly.
3 The 31 December 2017 balances have been restated to include $44bn of loan commitments (unsettled reverse repurchase agreements) and $3bn of performance and
4
other guarantees not previously identified for disclosure.
Includes $592,008m of commitments at 31 December 2018, to which the impairment requirements in IFRS 9 are applied where HSBC has become party to an
irrevocable commitment.
The preceding table discloses the nominal principal amounts of off-balance sheet liabilities and commitments for the Group, which
represent the maximum amounts at risk should the contracts be fully drawn upon and the clients default. As a significant portion of
guarantees and commitments are expected to expire without being drawn upon, the total of the nominal principal amounts is not
indicative of future liquidity requirements. The expected credit loss provision relating to guarantees and commitments under IFRS 9 is
disclosed in Note 27.
Approximately half the guarantees have a term of less than one year, while guarantees with terms of more than one year are subject to
HSBC’s annual credit review process.
Contingent liabilities arising from legal proceedings, regulatory and other matters against Group companies are disclosed in Notes 27
and 35.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme (‘FSCS’) has provided compensation to consumers following the collapse of a number of
deposit takers. The compensation paid out to consumers was funded through loans from HM Treasury, which have now been repaid
(2017: $6.3bn (£4.7bn)). The Group could be liable to pay a proportion of any future amounts that the FSCS borrows from HM Treasury.
The ultimate FSCS levy to the industry as a result of a collapse 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, contractual commitments and guarantees amounted to $48.5bn at 31 December 2018
(2017: $46.3bn). No matters arose where HSBC was severally liable.
34 Lease commitments
Operating lease commitments
At 31 December 2018, future minimum lease payments under non-cancellable operating leases for land, buildings and equipment were
$3,435m (2017: $3,950m).
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
2018
Unearned
finance
income
$m
$m
2,229
7,420
5,032
(196)
(628)
(619)
Present
value
$m
2,033
6,792
4,413
14,681
(1,443)
13,238
Total future
minimum
payments
2017
Unearned
finance
income
$m
$m
3,523
7,033
4,784
15,340
(326)
(696)
(669)
(1,691)
Present
value
$m
3,197
6,337
4,115
13,649
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HSBC Holdings plc Annual Report and Accounts 2018
35 Legal proceedings and regulatory matters
HSBC is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations.
Apart from the matters described below, HSBC considers that none of these matters are material. The recognition of provisions is
determined in accordance with the accounting policies set out in Note 1. While the outcome of legal proceedings and regulatory matters
is inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in
respect of these matters as at 31 December 2018 (see Note 27). Where an individual provision is material, the fact that a provision has
been made is stated and quantified, except to the extent that 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 as at 30 November 2008,
the purported aggregate value of these funds was $8.4bn, including fictitious profits reported by Madoff.
Based on information available to HSBC, the funds’ actual transfers to Madoff Securities minus their actual withdrawals from Madoff
Securities during the time HSBC serviced the funds are estimated to have totalled approximately $4bn. Various HSBC companies have
been named as defendants in lawsuits arising out of Madoff Securities’ fraud.
US litigation: The Trustee has brought lawsuits against various HSBC companies and others in the US Bankruptcy Court, seeking
recovery of transfers from Madoff Securities to HSBC in an amount not yet pleaded or determined. HSBC and other parties to the actions
have moved to dismiss the Trustee’s claims. 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 Trustee appealed the US Bankruptcy Court’s decision, and the case remains
pending before the US Court of Appeals for the Second Circuit (the ‘Second Circuit Court of Appeals’).
Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (together, ‘Fairfield’) (in liquidation since July 2009) have
brought a lawsuit in the US against fund shareholders, including HSBC companies that acted as nominees for clients, seeking restitution
of redemption payments. In December 2018, the US Bankruptcy Court issued an opinion, which ruled in favour of the defendants’ motion
to dismiss in respect of certain claims by the liquidators for Fairfield and granted a motion by the liquidators for Fairfield to file amended
complaints.
In December 2014, SPV Optimal SUS Ltd (‘SPV OSUS’), the purported assignee of the Madoff-invested company, Optimal Strategic US
Equity Ltd, 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. In April 2018, HSBC transferred the case to the US District Court for the
Southern District of New York (the ’New York District Court’). In February 2019, SPV OSUS withdrew its action with prejudice against
HSBC.
UK litigation: The Trustee has filed a claim against various HSBC companies in the High Court of England and Wales, seeking recovery
of transfers from Madoff Securities to HSBC in an amount not yet pleaded or determined. The deadline for service of the claim has been
extended to September 2019 for UK-based defendants and November 2019 for all other defendants.
Bermuda litigation: In January 2009, Kingate Global Fund Limited and Kingate Euro Fund Limited (together, ‘Kingate’) brought an
action against HSBC Bank Bermuda Limited (‘HBBM’) for recovery of funds held in Kingate’s accounts, fees and dividends. This action is
pending, but is not expected to move forward until the resolution of the Trustee’s US actions against Kingate and HBBM.
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 and the
defendants cross-appealed in respect of certain of the trial court’s findings. The appeals are pending before the court for a decision.
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 that 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 Luxembourg Court of Appeal, where the matter is
pending. In late 2018, Herald brought additional claims against HSSL and HSBC Bank plc before the Luxembourg District Court, seeking
further restitution and damages.
In October 2009, Alpha Prime Fund Limited (‘Alpha Prime’) brought an action against HSSL before the Luxembourg District Court,
seeking the restitution of securities, or the cash equivalent, or money damages. This action has been temporarily suspended at the
plaintiffs’ request. In December 2018, Alpha Prime brought additional claims before the Luxembourg District Court seeking damages
against various HSBC companies.
In December 2014, Senator Fund SPC (‘Senator’) brought an action against HSSL before the Luxembourg District Court, seeking
restitution of securities, or the cash equivalent, or money damages. In April 2015, Senator commenced a separate action against the
Luxembourg branch of HSBC Bank plc asserting identical claims before the Luxembourg District Court. In December 2018, Senator
brought additional claims against HSSL and HSBC Bank plc Luxembourg branch before the Luxembourg District Court, seeking
restitution of Senator’s securities or money damages.
HSSL has also been named as a defendant in various actions by shareholders in Primeo Select Fund, Herald, Herald (Lux) SICAV and
Hermes International Fund Limited. Most of these actions have been dismissed, suspended or postponed.
Ireland litigation: In November 2013, Defender Limited brought an action against HSBC Institutional Trust Services (Ireland) Limited
(‘HTIE’) and others, based on allegations of breach of contract and claiming damages and indemnification for fund losses. The trial
commenced in October 2018. In December 2018, the Irish High Court issued a judgment in HTIE’s favour on a preliminary issue, holding
that Defender Limited had no effective claim against HTIE. This judgment concluded the trial without further issues in dispute being
heard. In February 2019, Defender Limited appealed the judgment.
HSBC Holdings plc Annual Report and Accounts 2018
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Notes on the financial statements
In December 2014, SPV OSUS filed an action against HTIE and HSBC Securities Services (Ireland) Limited alleging breach of contract and
claiming damages and indemnification for fund losses, which was dismissed on the basis of a preliminary issue by the Irish High Court in
October 2015. In July 2018, following further appeals by SPV OSUS, the Irish Supreme Court affirmed the dismissal on a final basis.
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 securitisation activity and litigation
HSBC Bank USA N.A. (‘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 $3.8bn as at
31 December 2018. In addition, HSI served as an underwriter on securitisations issued by HSBC Finance Corporation (‘HSBC Finance’) or
third parties, and HSBC Bank USA served as a trustee on behalf of various mortgage securitisation trusts.
Mortgage trustee matters: 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 a 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. In February 2018, one of these matters was
dismissed on procedural grounds. The plaintiff in that action has appealed the decision and has also filed another proceeding in New York
state court, which is currently stayed pending appeal. The motion for class certification filed by certain plaintiffs has been denied, as has
their request for a review of that decision by the Second Circuit Court of Appeals.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters.
Loan repurchase matters: Since 2013, 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. One of the two remaining actions against HSBC Bank USA was dismissed on appeal in December 2017;
however, the New York Court of Appeals granted the plaintiffs’ request for further review in September 2018. The second remaining
action is currently pending before the New York state court.
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.
RMBS investigations: Since 2010, various HSBC entities have received subpoenas and requests for information from the US
Department of Justice (the ‘DoJ’) and the Massachusetts Attorney General, seeking the production of documents and information
regarding HSBC’s involvement in certain residential mortgage-backed securities (‘RMBS’) transactions as an issuer, sponsor, underwriter,
depositor, trustee, custodian or servicer.
In August and October 2018, HSBC resolved the Massachusetts Attorney General’s civil investigation, and the DoJ’s civil claims, relating
to HSBC’s legacy RMBS origination and securitisation activities from 2005 to 2007, which entailed a payment to the DoJ of a civil money
penalty of $765m.
Anti-money laundering and sanctions-related matters
In 2010, HSBC Bank USA entered into a consent cease-and-desist order with the Office of the Comptroller of the Currency (‘OCC’), and
HSBC North America Holdings Inc. (‘HNAH’) entered into a consent cease-and-desist order with the Federal Reserve Board (‘FRB’). In
2012, HSBC Bank USA further entered into an enterprise-wide compliance consent order with the OCC (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 anti-money laundering (‘AML’) compliance. In 2012,
an additional consent order was entered into with the OCC that 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 approval. Between June and September 2018,
following implementation of the required remediation actions by HNAH and HSBC Bank USA, the FRB and OCC terminated each of these
orders.
In December 2012, among other agreements, HSBC Holdings plc (‘HSBC Holdings’) agreed to an undertaking with the UK Financial
Conduct Authority (‘FCA’) and consented to a cease-and-desist order with the FRB, both of which contained certain forward-looking AML
and sanctions-related obligations. HSBC also agreed to retain an independent compliance monitor (who is, for FCA purposes, a ‘Skilled
Person’ under section 166 of the Financial Services and Markets Act and, for FRB purposes, an ‘Independent Consultant’) to produce
periodic assessments of the Group’s AML and sanctions compliance programme (the ‘Skilled Person/Independent Consultant’). In
December 2012, HSBC Holdings also entered into an agreement with the Office of Foreign Assets Control (‘OFAC’) regarding historical
transactions involving parties subject to OFAC sanctions. The Skilled Person/Independent Consultant will continue to conduct country
reviews and provide periodic reports for a period of time at the FCA’s and FRB’s discretion. The role of the Skilled Person/Independent
Consultant is discussed on page 85.
Through the Skilled Person/Independent Consultant’s country-level reviews, as well as internal reviews conducted by HSBC, certain
potential AML and sanctions compliance issues have been identified that HSBC is reviewing further with the FRB, FCA and/or OFAC. The
Financial Crimes Enforcement Network of the US Treasury Department, 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 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
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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 five-year deferred prosecution agreement with the DoJ, entered into in December
2012. In November 2015, the New York state court granted the Nominal Corporate Defendants’ motion to dismiss. In November 2018,
the appellate court reversed the New York state court’s decision and reinstated the action. In December 2018, the Nominal Corporate
Defendants filed a motion for reargument or, in the alternative, for leave to appeal to the New York Court of Appeals. In February 2019,
the Nominal Corporate Defendants and most of the Individual Defendants filed a motion to dismiss in the New York state court, where
the matter is pending.
In July 2014, a claim was filed in the Ontario Superior Court of Justice against HSBC Holdings and a former employee purportedly
on behalf of a class of persons who purchased HSBC common shares and American Depositary Shares between July 2006 and July
2012. The complaint, which seeks monetary damages of up to CA$20bn, alleges that the defendants made statutory and common law
misrepresentations in documents released by HSBC Holdings and its wholly owned indirect subsidiary, HSBC Bank Canada, relating to
HSBC’s compliance with BSA, AML, sanctions and other laws. 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 and, in July 2018, that appeal was dismissed. In October 2018, the plaintiff applied for leave to appeal to the Supreme Court of
Canada, where this matter is currently pending.
Since November 2014, a number of lawsuits have been filed in federal courts in the US against various HSBC companies and others on
behalf of plaintiffs who are, or are related to, victims of terrorist attacks in the Middle East 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. Nine actions are currently pending in federal court in New York, with one on appeal. In July 2018, in one case, the New York District
Court granted HSBC’s motion to dismiss, while in a different case, the magistrate judge issued a recommendation that the New York
District Court should deny the defendants’ motion to dismiss. The plaintiffs appealed the decision in the case granting dismissal and that
appeal is pending. Motions to dismiss remain pending in two other cases. In December 2018, three new cases and two cases relating to
existing actions were filed in the New York District Court. These new actions are at a very early stage.
In July 2018, a claim was issued against HSBC Holdings in the High Court of England and Wales alleging that HSBC Holdings made
untrue and/or misleading statements and/or omissions in public statements between 2007 and 2012 regarding compliance by the HSBC
Group with AML, anti-terrorist financing and sanctions laws, regulations and requirements, and the regulatory compliance of the HSBC
Group more generally.
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. These investigations remain pending.
In November 2014, HSBC Swiss Private Bank was placed under formal criminal examination in Belgium for alleged tax-related offences.
In June 2017, Belgian authorities also placed HSBC Holdings and HSBC Private Bank Holdings (Suisse) SA, a Swiss holding company,
under formal criminal examination. HSBC is cooperating with this ongoing investigation.
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. HSBC is cooperating with this ongoing investigation.
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 cause as to 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 this ongoing investigation.
As at 31 December 2018, HSBC has recognised a provision for these various matters in the amount of $626m. 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 $800m, 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.
London interbank offered rates, European interbank offered rates and other benchmark interest rate
investigations and litigation
In December 2016, the European Commission (the ‘EC’) 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 EC 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
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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.
In 2017 and 2018, HSBC reached agreements with plaintiffs to resolve putative class actions brought on behalf of the following five
groups of plaintiffs: persons who purchased US dollar Libor-indexed bonds; persons who purchased US Libor-indexed exchange-traded
instruments; US-based lending institutions that made or purchased US dollar Libor-indexed loans (the ‘Lender class’); persons who
purchased US dollar Libor-indexed interest rate swaps and other instruments directly from the defendant banks and their affiliates (the
‘OTC class’); and persons who purchased US dollar Libor-indexed interest rate swaps and other instruments from certain financial
institutions that are not the defendant banks or their affiliates. During 2018, the New York District Court granted final approval of the
settlements with the OTC and Lender classes. The remaining settlements are subject to final court approval. Additionally, a number of
other US dollar Libor-related actions remain pending against HSBC in the New York District Court and the Second Circuit Court of
Appeals.
Intercontinental Exchange (‘ICE’) Libor: In January 2019, 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 purchased over-the-counter instruments paying interest indexed to
ICE Libor from a panel bank. The complaint alleges, among other things, misconduct related to the suppression of this benchmark rate in
violation of US antitrust and state law. This matter is at a very early stage.
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. Following a decision in October 2018 on the defendants’ motion to dismiss in the Sibor/SOR litigation, the claims against a
number of HSBC entities were dismissed, and the Hongkong and Shanghai Banking Corporation Limited remains the only HSBC
defendant in this action. In October 2018, the Hongkong and Shanghai Banking Corporation Limited filed a motion for reconsideration of
the decision based on the issue of personal jurisdiction. The plaintiff filed a third amended complaint in October 2018 naming only the
Sibor panel members. In November 2018, the defendants moved to dismiss the third amended complaint, and this motion remains
pending.
In November 2018, the court granted in part and denied in part the defendants’ motion to dismiss the BBSW case and dismissed all
foreign defendants, including all the HSBC entities, on personal jurisdiction grounds. The plaintiff sought leave to file a second amended
complaint in January 2019.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be
significant.
Foreign exchange-related investigations and litigation
Various regulators and competition authorities around the world, including in the EU, Switzerland, Brazil and South Africa, are conducting
investigations and reviews into trading by HSBC and others on the foreign exchange markets. HSBC is cooperating with these
investigations and reviews.
In 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 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 December 2016, Brazil’s Administrative Council of Economic Defense (‘CADE’) publicly announced that it is initiating an investigation
into the onshore foreign exchange market and has identified a number of banks, including HSBC, as subjects of its investigation.
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 Bank plc 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. HSBC Bank USA has objected to the provisional referral.
These proceedings are at an early stage.
In October 2018, HSBC Holdings and HSBC Bank plc received an information request from the EC concerning potential coordination in
foreign exchange options trading. This matter is at an early stage.
In late 2013 and early 2014, various HSBC companies 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, and the court granted final approval of the settlement in August 2018.
A putative class action complaint making similar allegations on behalf of retail customers of foreign exchange products was filed in the
US District Court for the Northern District of California in 2015, and was subsequently transferred to the New York District Court where it
remains pending. In 2017, putative class action complaints making similar allegations on behalf of purported ‘indirect’ purchasers of
foreign exchange products were filed in New York and were subsequently consolidated in the New York District Court, where they remain
pending.
In September 2018, various HSBC companies and other banks were named as defendants in a class action complaint filed in Israel that
alleges foreign exchange-related misconduct and, in November and December 2018, complaints alleging foreign exchange-related
misconduct were filed in the New York District Court and the High Court of England and Wales against HSBC and other defendants, by
certain plaintiffs that opted out of the US class action settlement. These matters are at an early stage. It is possible that additional actions
will be initiated against HSBC in relation to its historical foreign exchange activities.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be
significant.
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Precious metals fix-related investigations and litigation
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 2019, the DoJ closed its investigation without taking any
action against HSBC.
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, the 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 the plaintiffs leave to file a third amended complaint, naming a new
defendant. The court has denied the pre-existing defendants’ request for leave to file a joint motion to dismiss, and discovery is
proceeding.
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, the 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 the 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, and discovery is proceeding.
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. The 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, the plaintiffs filed a
third amended complaint. The defendants filed a joint motion to dismiss, which remains pending.
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.
Film finance litigation
In July and November 2015, respectively, two actions were brought by individuals against HSBC Private Bank (UK) Limited (‘PBGB’) in
the High Court of England and Wales seeking damages on various alleged grounds, including breach of duty to the claimants, in
connection with their participation in certain Ingenious film finance schemes. These actions are ongoing.
In December 2018, a further action was brought against PBGB in the High Court of England and Wales by multiple claimants seeking
damages for alleged unlawful means conspiracy and dishonest assistance in connection with lending provided by PBGB to third parties in
respect of certain Ingenious film finance schemes in which the claimants participated. In February 2019, PBGB received a letter before
claim by investors in Eclipse film finance schemes asserting various claims against PBGB and others in connection with their roles in
facilitating the design, promotion and operation of such schemes. These matters are at very early stages.
It is possible that additional actions or investigations will be initiated against PBGB as a result of its historical involvement in the provision
of certain film finance-related services.
Based on the facts currently known, it is not practicable to predict the resolution of these matters, including the timing or possible
aggregate impact, which could be significant.
Other regulatory investigations, reviews and litigation
HSBC Holdings and/or certain of its affiliates are subject to a number of other investigations and reviews by various regulators and
competition and law enforcement authorities, as well as litigation, in connection with various matters relating to the firm’s businesses
and operations, including:
• requests for information from various tax administration or regulatory authorities relating to Mossack Fonseca & Co., or Fédération
Internationale de Football Association (‘FIFA’);
• an investigation by the DoJ regarding US Treasury securities trading practices;
• an investigation by the US Commodity Futures Trading Commission regarding trading screens used to price certain derivative
products;
• an investigation by the Swiss Competition Commission in connection with the setting of Euribor and Japanese yen Libor;
• an information request from the UK Competition and Markets Authority concerning the financial services sector;
• an investigation by the US Securities and Exchange Commission of multiple 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;
• putative individual and class actions brought in the New York District Court relating to the Canadian dealer offered rate, the credit
default swap market and the Mexican government bond market, and putative class actions brought in the New York District Court and
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in the Superior and Federal Courts in Canada relating to the market for US dollar-denominated supranational sovereign and agency
bonds; and
• putative class actions brought in the US District Court for the Northern District of Texas and a claim issued in the High Court of
England and Wales in connection with HSBC Bank plc’s role as a correspondent bank to Stanford International Bank Ltd from 2003 to
2009.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be
significant.
36 Related party transactions
Related parties of the Group and HSBC Holdings include subsidiaries, associates, joint ventures, post-employment benefit plans for HSBC
employees, Key Management Personnel (‘KMP’) as defined by IAS 24, close family members of KMP and entities that 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, Group Chief Human Resources Officer, Group Chief Compliance Officer, Chief Communications
Officer and Group Chief of Staff 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 172 to 206. IAS 24
‘Related party disclosures’ requires the following additional information for key management compensation.
Compensation of Key Management Personnel
Short-term employee 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
2018
$m
52
6
34
92
2017
$m
43
5
35
83
2018
(000s)
24
17,940
17.964
2016
$m
41
5
37
83
2017
(000s)
15
22,609
22,624
Key Management Personnel
Advances and credits
Guarantees
Deposits
Footnotes
1
2
2018
2017
Balance at
31 Dec
Highest amounts
outstanding
during year
Balance
at 31 Dec
Highest amounts
outstanding
during year
$m
169
0.6
352
$m
288
0.6
924
$m
329
6
300
$m
334
52
893
1
Includes Key Management Personnel, close family members of Key Management Personnel and entities that 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 2018 with Directors, disclosed pursuant to Section 413 of the Companies Act 2006, totalled
$1m (2017: $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 18.
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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
Amounts due to joint ventures
Guarantees and commitments
2018
2017
Highest balance
during the year
Balance at
31 Dec
Highest balance
during the year
Balance at
31 Dec
$m
130
3,887
—
2,020
22
790
$m
115
3,000
—
273
22
523
$m
138
3,104
411
2,617
—
654
$m
119
2,537
411
1,232
—
665
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 2018, $4.4bn (2017: $5.3bn) of HSBC post-employment benefit plan assets were under management by
HSBC companies, earning management fees of $8m in 2018 (2017: $8m). At 31 December 2018, HSBC’s post-employment
benefit plans had placed deposits of $297m (2017: $875m) with its banking subsidiaries, earning interest payable to the schemes
of nil (2017: nil). The above outstanding balances arose from the ordinary course of business and on substantially the same terms,
including interest rates and security, as for comparable transactions with third-party counterparties.
The HSBC Bank (UK) Pension Scheme enters into swap transactions with HSBC to manage inflation and interest rate sensitivity of its
liabilities and selected assets. At 31 December 2018, the gross notional value of the swaps was $10.5bn (2017: $11.3bn); these swaps
had a positive fair value to the scheme of $1.0bn (2017: $1.0bn); and HSBC had delivered collateral of $1.0bn (2017: $1.0bn) to the
scheme in respect of these arrangements. All swaps were executed at prevailing market rates and within standard market bid/offer
spreads.
HSBC Holdings
Details of HSBC Holdings’ subsidiaries are shown in Note 39.
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
2018
2017
Highest balance
during the year
Balance at
31 Dec
Highest balance
during the year
$m
$m
$m
16,473
23,513
1,235
77,311
—
160,231
278,763
2,040
3,639
892
6,571
11,629
3,509
23,513
707
56,144
—
160,231
244,104
949
2,159
892
4,000
8,627
Balance at
31 Dec
$m
1,985
11,944
2,388
76,627
4,264
92,930
1,985
11,944
2,796
89,810
4,264
95,850
206,649
190,138
2,906
4,904
892
8,702
9,692
2,571
3,082
892
6,545
7,778
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 6.
HSBC Holdings plc Annual Report and Accounts 2018
295
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
37 Effects of reclassification upon adoption of IFRS 9
Reconciliation of consolidated balance sheet at 31 December 2017 and 1 January 2018
IFRS 9 reclassification to
IAS 39
carrying
amount at
31 Dec
2017
Other
changes
in
classifi-
cation
Fair
value
through
profit
and loss
Fair
value
through
other
compre-
hensive
income
Amorti-
sed cost
IFRS 9
remeasure
ment
including
expected
credit
losses4
Carrying
amount
post
reclassifi-
cation
IFRS 9
carrying
amount at
1 Jan 2018
IAS 39
measurement
category
IFRS 9
measurement
category
Footnotes
$m
$m
$m
$m
$m
$m
$m
$m
Assets
Cash and balances
at central banks
Items in the course
of collection from
other banks
Hong Kong
Government
certificates of
indebtedness
Amortised
cost
Amortised
cost
180,624
Amortised
cost
Amortised
cost
6,628
—
—
Amortised
cost
Amortised
cost
34,186
—
Trading assets
1, 3
FVPL
FVPL
287,995
4,329
—
—
—
9
—
—
—
180,624
(3)
180,621
—
6,628
—
6,628
—
—
34,186
— (37,924)
254,409
—
1
34,186
254,410
Financial assets
designated and
otherwise
mandatorily
measured at fair
value through profit
or loss
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
2,5,6,7
1, 2, 3
1, 2, 3
FVPL
FVPL
Amortised
cost
Amortised
cost
FVPL
FVPL
Amortised
cost
Amortised
cost
29,464
313
10,055
219,818
—
—
90,393
(7,099)
(712)
962,964
(7,458)
(3,903)
Amortised
cost
Amortised
cost
201,553
—
—
(3)
—
—
—
—
(115)
39,714
219,818
32
—
39,746
219,818
82,582
(23)
82,559
—
—
24
951,627
(1,890)
949,737
—
201,553
—
201,553
5, 13
6, 13
5
1, 7
8
9
FVOCI
(Available-for-
sale – debt
instruments)
FVOCI
(Available-for-
sale – equity
instruments)
FVOCI
332,240
— (3,131)
83
(7,026)
322,166
(3)
322,163
FVOCI
3,917
— (2,104)
—
—
1,813
—
1,813
Amortised
cost
Amortised
cost
Amortised
cost
Amortised
cost
52,919
—
—
(80)
7,141
59,980
(457)
59,523
67,191
9,915
(214)
— 37,900
114,792
(15)
114,777
N/A
N/A
N/A
N/A
N/A
1,006
N/A
22,744
N/A
N/A
23,453
4,676
2,521,771
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,006
—
1,006
22,744
(942)
21,802
23,453
4,676
(79)
38
23,374
4,714
— 2,521,771
(3,341) 2,518,430
For footnotes, see page 299.
296
HSBC Holdings plc Annual Report and Accounts 2018
Reconciliation for consolidated balance sheet at 31 December 2017 and 1 January 2018 (continued)
IFRS 9 reclassification to
IAS 39
carrying
amount at
31 Dec 2017
Other
changes in
classification
Fair
value
through
profit
and
loss
Fair value
through other
comprehensive
income
Amortised
cost
Carrying
amount post-
reclassification
IFRS 9
remeasurement
including
expected credit
losses4
IFRS 9
carrying
amount at
1 Jan 2018
$m
$m
$m
$m
$m
$m
$m
$m
Footnotes
Measurement
category13
1
1
Amortised
cost
Amortised
cost
Amortised
cost
Amortised
cost
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
34,186
—
69,922
(5,430)
1,364,462
(4,235)
130,002
Amortised
cost
6,850
—
—
Trading liabilities
1, 11
FVPL
184,361
(103,497)
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
9, 10, 11
10
1, 10
FVPL
FVPL
Amortised
cost
Amortised
cost
94,429
216,821
64,546
59,267
—
—
45,907
53,895
N/A
928
9
14
10
N/A
N/A
N/A
Amortised
cost
85,667
4,011
1,982
19,826
2,323,900
—
—
—
—
—
—
For footnotes, see page 299.
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
34,186
64,492
—
—
34,186
64,492
1,360,227
— 1,360,227
130,002
—
130,002
2,095
66,641
(105)
66,536
(9,699)
—
143,997
216,821
124
99,926
6,850
80,864
928
85,667
4,011
—
—
9
—
6,850
80,864
144,006
216,821
—
—
99,926
928
(69)
284
85,598
4,295
1,982
(368)
1,614
7,480
27,306
(1,445)
25,861
—
2,323,900
(1,694) 2,322,206
IAS 39 carrying
amount at 31 Dec
2017
IFRS 9
reclassification
Carrying amount
post
reclassification
IFRS 9
remeasurement
including expected
credit losses
Carrying amount
at 1 January 2018
Footnotes
$m
12
14
10,160
10,177
22,250
7,664
139,999
190,250
7,621
197,871
$m
—
—
—
(960)
960
—
—
—
$m
10,160
10,177
22,250
6,704
140,959
190,250
7,621
197,871
$m
—
—
—
(61)
(1,545)
(1,606)
(41)
(1,647)
$m
10,160
10,177
22,250
6,643
139,414
188,644
7,580
196,224
Equity
Called up share capital
Share premium account
Other equity instruments
Other reserves
Retained earnings
Total shareholders equity
Non-controlling interests
Total equity
For footnotes, see page 299.
HSBC Holdings plc Annual Report and Accounts 2018
297
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
Reconciliation of impairment allowance under IAS 39 and provision under IAS 37 to expected credit losses under IFRS 9
Reclassification to
Remeasurement
Fair value
through
profit and
loss
Fair value
through other
comprehensive
income Amortised cost
Stage 3
Stage 1 &
Stage 2
Total
IAS 39 measurement
category
$m
$m
$m
$m
$m
$m
Financial assets at amortised cost
IAS 39 impairment allowance at 31 Dec 2017
Cash and balances at central banks
Items in the course of collection from other banks
Hong Kong Government certificates of
indebtedness
Loans and advances to banks
Loans and advances to customers
Reverse repurchase agreements – non-trading
Financial investments
Prepayments, accrued income and other assets
Expected credit loss allowance at 1 Jan 2018
Loan commitments and financial guarantee
contracts
IAS 37 provisions at 31 Dec 2017
Provisions (loan commitments and financial
guarantees)
Expected credit loss provision at 1 Jan 2018
Amortised cost (Loans
and receivables)
Amortised cost (Loans
and receivables)
Amortised cost (Loans
and receivables)
Amortised cost (Loans
and receivables)
Amortised cost (Loans
and receivables)
Amortised cost (Loans
and receivables)
Amortised cost (Held to
maturity)
Amortised cost (Loans
and receivables)
—
—
—
—
(31)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
—
7,532
3
—
—
3
—
—
22
23
—
—
—
1
629
1,261
1,859
—
—
—
—
13
47
—
16
47
9,480
253
284
537
N/A
N/A
N/A
N/A
74
210
The pre-tax net asset impact of additional impairment allowances on adoption of IFRS 9 is $2,232m; $1,948m in respect of financial
assets at amortised cost and $284m related to loan commitments and financial guarantee contracts. Total expected credit loss allowance
at 1 January 2018 is $9,480m in respect of financial assets at amortised cost, and $537m related to loan commitments and financial
guarantee contracts.
Effects of reclassification upon adoption of IFRS 9
Reclassified from available-for-sale to amortised cost
Other financial assets held at amortised cost
5,781
5,876
Carrying amount
at 31 Dec 2018
Fair value at
31 Dec 2018
Footnotes
$m
$m
Reclassified from fair value through profit and loss to
amortised cost or fair value though other
comprehensive income
Debt securities in issue
Subordinated liabilities
For footnotes, see page 299.
15
16
1,939
5,872
1,823
6,635
Assuming no reclassification
Fair value
gains/(losses)
recognised in
profit or loss
Fair value gains/
(losses)
recognised in
other
comprehensive
income
$m
N/A
60
246
$m
(438)
237
644
Interest
revenue/
(expense)
$m
N/A
(80)
(323)
298
HSBC Holdings plc Annual Report and Accounts 2018
Footnotes to ‘Effect of reclassification upon
adoption of IFRS 9’
1
2
3
4
5
6
7
8
Settlement accounts, cash collateral and margin receivables of $37,900m
have been reclassified from ‘Trading assets’ to ‘Prepayments, accrued
income and other assets’ as a result of the assessment of the business
model in accordance with IFRS 9.
Settlement accounts, cash collateral and margin receivables previously
presented as ‘Loans and advances to banks' of $5,939m and 'Loans and
advances to customers’ of $3,976m have been re-presented in
‘Prepayments, accrued income and other assets’ to ensure consistent
presentation of all such balances. Settlement accounts, cash collateral
and margin payables previously presented as ‘Trading liabilities’ of
$44,230m, ‘Deposits by banks’ of $5,430m and ‘Customer accounts’ of
$4,235m have been re-presented in 'Accruals, deferred income and other
liabilities’. This change in presentation for financial liabilities is considered
to provide more relevant information, given the change in presentation
for the financial assets. These changes in presentation for financial assets
and liabilities have had no effect on measurement of these items and
therefore on ‘Retained earnings’.
'Loans and advances to customers' of $3,903m and 'Loans and advances
to banks' of $712m did not meet the 'solely payments of principal and
interest' (‘SPPI’) requirement for amortised cost classification under IFRS
9. As a result, these financial assets were reclassified to ‘Financial assets
designated and otherwise mandatorily measured at fair value through
profit or loss’.
Stock borrowing assets of $4,642m have been reclassified from ‘Loans
and advances to banks and customers’ to ‘Trading assets’. The change in
measurement is a result of the determination of the global business
model for this activity and will align the presentation throughout the
Group.
IFRS 9 ECL decreased net assets by $2,232m, principally comprising of
$1,890m reduction in the carrying value of assets classified as 'Loans and
advances to customers' and $284m increase in 'Provisions' relating to
expected credit losses on loan commitments and financial guarantee
contracts.
Debt instruments of $3,131m previously classified as available-for-sale
under IAS 39 did not meet the SPPI requirement for FVOCI classification.
As a result, these financial assets were classified as ‘Financial assets
designated and otherwise mandatorily measured at fair value through
profit or loss’ upon adoption of IFRS 9. Debt instruments of $7,026m
previously classified as available-for-sale under IAS 39, have been
reclassified to amortised cost as a result of ‘hold to collect’ business
model classification under IFRS 9. This resulted in a $441m downward
remeasurement of the financial assets now measured at amortised cost
excluding expected credit losses.
$2,104m of available-for-sale non-traded equity instruments have been
reclassified as ‘Financial assets designated and otherwise mandatorily
measured at fair value through profit or loss’ in accordance with IFRS 9.
The Group has elected to apply the FVOCI option under IFRS 9 for the
remaining $1,813m.
$214m of other financial assets measured at amortised cost under IAS 39
did not meet the SPPI requirement for amortised cost classification under
IFRS 9. As a result, these financial assets were classified as ‘Financial
assets designated and otherwise mandatorily measured at fair value
through profit or loss’.
'Interests in associates and joint ventures' includes the consequential
downward remeasurement of our interests in associates and joint
ventures as a result of these entities applying IFRS 9 of $942m. The effect
of IFRS 9 on the carrying value of investments in associates has been
updated from the estimate disclosed in our Annual Report and Accounts
2017 as a result of those entities publicly reporting their expected
transition impacts.
9
10
Changes in the classification and measurement of financial assets held in
our insurance business and the recognition of ECL under IFRS 9 has
resulted in secondary impacts on the present value of in-force long-term
insurance business ('PVIF') and liabilities to holders of insurance and
investment contracts. The gross carrying value of PVIF reported in
‘Goodwill and intangible assets’ and liabilities reported in ‘Liabilities under
insurance contracts’ has decreased by $79m and $69m respectively.
Liabilities reported under ‘Financial liabilities designated at fair value’
have increased by $9m.
As permitted by IFRS 9, fair value designations have been revoked for
certain long-dated liabilities where the accounting mismatch will be
better mitigated by undertaking fair value hedge accounting, resulting in
reclassifications of $7,110m from 'Financial liabilities designated at fair
value’ to 'Subordinated liabilities' measured at amortised cost and
$2,095m from ‘Financial liabilities designated at fair value’ to ‘Debt
securities in issue’ measured at amortised cost. A further $124m of
associated accrued interest has been reclassified to ‘Accruals, deferred
income and other liabilities’. In addition, as required by IFRS 9, fair value
designations have been revoked where accounting mismatches no longer
exist, resulting in a further $370m of ‘Subordinated liabilities' being
measured at amortised cost. Together, these changes result in the
financial liabilities now being measured at amortised cost, decreasing
'Debt securities in issue' by $105m and 'Subordinated Liabilities' by
$1,445m.
11 We have considered market practices for the presentation of $59,267m
of financial liabilities containing both deposit and derivative components.
We have concluded that a change in accounting policy and presentation
from ‘Trading liabilities’ would be appropriate, since it would better align
with the presentation of similar financial instruments by peers and
therefore provide more relevant information about the effect of these
financial liabilities on our financial position and performance. As a result,
rather than being classified as held for trading, we will designate these
financial liabilities as at fair value through profit or loss since they are
managed and their performance evaluated on a fair value basis.
Consequently, changes in fair value of these instruments attributable to
changes in own credit risk are recognised in other comprehensive
income rather than profit or loss. For 2017, a restatement would have
increased ‘Net income from financial instruments held for trading or
managed on a fair value basis’ by $545m and increased tax expense by
$168m, with an equivalent net decrease in other comprehensive income.
12 While IFRS 9 ECL has no effect on the carrying value of FVOCI financial
assets, which remain measured at fair value, the adoption of IFRS 9
results in a transfer from the FVOCI reserve (formerly AFS reserve) to
retained earnings to reflect the cumulative impairment recognised in
profit or loss in accordance with IFRS 9 (net of impairment losses
previously recognised in profit or loss under IAS 39). The amount
transferred from 'Other reserves' to 'Retained earnings' was $61m. The
resulting cumulative expected credit losses recognised in ‘Retained
earnings’ on financial assets measured at FVOCI on adoption of IFRS 9 is
$184m. In addition, the cumulative AFS reserve relating to financial
investments reclassified to 'Financial assets designated and otherwise
mandatorily measured at fair value through profit or loss’ in accordance
with IFRS 9 has been transferred to retained earnings.
13 Measurement refers to that under IAS 39 and IFRS 9. Financial
investments measured under fair value through other comprehensive
income were measured as available-for-sale instruments under IAS 39.
14
15
16
The effect of IFRS 9 remeasurement has been updated from the estimate
disclosed in our Annual Report and Accounts 2017 as a result of our
associates publicly reporting their transition impacts.
The effective interest rate on the issued debt security reclassified at 1
January 2018 was 4.05%.
Effective interest rate on subordinated liabilities reclassified at 1 January
2018 were 3.16%, 5.34%, 6.57% and 7.69%.
HSBC Holdings plc Annual Report and Accounts 2018
299
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
Reconciliation of HSBC Holdings balance sheet at 31 December 2017 and 1 January 2018
IFRS 9 reclassification to
IAS 39
carrying
amount at
31 Dec
2017
Other
changes
in
classifi-
cation
Fair
value
through
profit
and loss
Fair
value
through
other
compre-
hensive
income
Carrying
amount
post-
reclassifi-
cation
Amorti-
sed
cost
IFRS 9
remeasur-
ment
including
expected
credit
losses
IFRS 9
carrying
amount at
1 Jan 2018
IAS 39
measurement
category
IFRS 9
measurement
category
Footnotes
$m
$m
$m
$m
$m
$m
$m
$m
1
1
Assets
Cash and balances
with HSBC
undertakings
Financial assets
designated and
otherwise
mandatorily
measured at fair
value through profit
or loss
Derivatives
Loans and advances
to HSBC
undertakings
Financial investments
Prepayments,
accrued income and
intangible assets
Current tax assets
Investment in
subsidiaries
Deferred tax assets
Total assets
Amortised
cost Amortised cost
1,985
—
—
—
—
1,985
—
1,985
FVPL
FVPL
Amortised
FVPL
FVPL
11,944
2,388
cost Amortised cost
76,627
—
—
—
4,264
—
—
—
—
—
—
—
16,208
2,388
—
—
16,208
2,388
—
76,627
—
76,627
FVOCI
(Available for
sale – debt
instruments)
FVOCI
(Available for
sale – equity
instruments)
Amortised
cost (Debt
instruments
held to
FVPL
4,264
— (4,264)
—
—
FVOCI
—
—
—
—
—
maturity) Amortised cost
—
Amortised
cost Amortised cost
N/A
N/A
N/A
N/A
N/A
N/A
662
379
92,930
555
191,734
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
662
379
92,930
555
191,734
—
—
—
—
—
—
(175)
(175)
—
—
—
662
379
92,930
380
191,559
IFRS 9 reclassification to
IAS 39
measurement
category
IAS 39
carrying
amount at
31 Dec 2017
Other
changes in
classification
Fair
value
through
profit
and
loss
Fair value
through other
comprehensive
income
Amortised
cost
Carrying
amount post-
reclassification
IFRS 9
remeasurement
including
expected credit
losses
IFRS 9
carrying
amount at
1 Jan 2018
Footnotes
$m
$m
$m
$m
$m
$m
$m
$m
Liabilities
Amount 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
2
2
2
Amortised
cost
2,571
FVPL
30,890
Amortised
cost
Amortised
cost
Amortised
cost
Amortised
cost
3,082
34,258
1,269
15,877
87,947
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,571
(5,402)
25,488
—
—
75
5,327
—
3,082
34,258
1,344
21,204
87,947
—
—
—
—
—
2,571
25,488
3,082
34,258
1,344
(1,065)
20,139
(1,065)
86,882
300
HSBC Holdings plc Annual Report and Accounts 2018
Reconciliation for HSBC Holdings balance sheet at 31 December 2017 and 1 January 2018 (continued)
Equity
Called up share capital
Share premium account
Other equity instruments
Other reserves
Retained earnings
Total equity
IAS 39 carrying
amount at 31 Dec
2017
IFRS 9
reclassification
Carrying amount
post-
reclassification
IFRS 9
remeasurement
including expected
credit losses
Carrying amount
at 1 January 2018
Footnotes
$m
10,160
10,177
22,107
37,440
23,903
103,787
$m
—
—
—
(59)
59
—
$m
10,160
10,177
22,107
37,381
23,962
103,787
$m
—
—
—
—
890
890
$m
10,160
10,177
22,107
37,381
24,852
104,677
1
2
$4,264 of available-for-sale assets have been reclassified as ‘Financial assets designated and otherwise mandatorily measured at fair value through profit or loss’ in
accordance with IFRS 9.
As permitted by IFRS 9, fair value designations have been revoked for certain long-dated liabilities where the accounting mismatch will be better mitigated by
undertaking fair value hedge accounting, resulting in reclassifications of $5,402m from 'Financial liabilities designated at fair value’ to ‘Subordinated liabilities’ measured
at amortised cost.
38 Events after the balance sheet date
In its assessment of events after the balance sheet date, HSBC considered, among others, the events related to the process of the UK’s
withdrawal from the European Union that occurred between 31 December 2018 and the date when the financial statements were
authorised for issue, and concluded that no adjustments to the financial statements were required.
A fourth interim dividend for 2018 of $0.21 per ordinary share (a distribution of approximately $4,205m) was declared by the Directors
after 31 December 2018. These accounts were approved by the Board of Directors on 19 February 2019 and authorised for issue.
39 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 2018 are disclosed below.
Unless otherwise stated, the share capital comprises ordinary or common shares that are held by Group subsidiaries. The ownership
percentage is provided for each undertaking. The undertakings below are consolidated by HSBC unless otherwise indicated.
HSBC Holdings plc Annual Report and Accounts 2018
301
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
Subsidiaries
Subsidiaries
% 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)
ACN 087 652 113 Pty Limited (in liquidation)
100.00
Almacenadora Banpacifico S.A. (in liquidation)
99.99
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
Billingsgate Nominees Limited
Canada Crescent Nominees (UK) Limited
Canada Square Nominees (UK) Limited
Canada Water Nominees (UK) Limited (in
liquidation)
Capco/Cove, Inc.
Card-Flo #1, Inc.
Card-Flo #3, Inc.
CC&H Holdings LLC
CCF & Partners Asset Management 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
n/a
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
n/a
99.99
CCF Charterhouse GmbH & Co Asset Leasing
KG (in liquidation)
n/a
CCF Charterhouse GmbH (in liquidation)
100.00
(99.99)
CCF Holding (LIBAN) S.A.L. (in liquidation)
74.99
Charterhouse Administrators (D.T.) Limited
100.00
(99.99)
Charterhouse Development Limited (in
liquidation)
Charterhouse Management Services Limited
Charterhouse Pensions Limited
Chongqing Dazu HSBC Rural Bank Company
Limited
Chongqing Fengdu HSBC Rural Bank
Company Limited
Chongqing Rongchang HSBC Rural Bank
Company Limited
CL Residential Limited (in liquidation)
COIF Nominees Limited
Cordico Management AG
Corhold Limited
100.00
100.00
100.00
100.00
100.00
100.00
100.00
n/a
100.00
100.00
Corsair IV Financial Services Capital Partners
n/a
Dalian Pulandian HSBC Rural Bank Company
Limited
Decision One Mortgage Company, LLC
Dem 5
Dem 9
Dempar 1
Dempar 4
100.00
n/a
100.00
100.00
100.00
100.00
Desarrollo Turistico, S.A. de C.V. (in liquidation) 99.99
Elysees GmbH (in liquidation)
Elysées Immo Invest
Equator Holdings Limited (in liquidation)
100.00
100.00
100.00
(99.99)
(99.99)
(99.99)
(99.99)
(99.99)
(99.99)
(99.99)
16
18
19
19
19
19
19
19
19
19
20
19
19
19
19
21
22
22
23
24
7, 25
12, 26
19
19
19
19
27
28
29
7, 30
19
7, 31
4, 31
1, 32
19
36
19
19
12, 33
12, 34
12, 35
36
7, 19
37
38
7, 49
12, 39
7, 40
4, 41
4, 41
4, 42
4, 42
18
11, 31
4, 43
19
302
HSBC Holdings plc Annual Report and Accounts 2018
Eton Corporate Services Limited
Far East Leasing SA (in liquidation)
Fdm 5 SAS
FEPC Leasing Ltd. (in liquidation)
Finanpar 2
Finanpar 7
Flandres Contentieux S.A.
Foncière Elysées
Forward Trust Rail Services Limited (in
liquidation)
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
(99.99)
(99.99)
(99.99)
(99.99)
(99.99)
Footnotes
22
44
4, 41
3, 45
4, 43
4, 43
1, 4, 46
4, 42
19
12, 47
Fulcher Enterprises Company Limited
100.00
(62.14)
48
Fundacion HSBC, A.C.
Giller Ltd.
Global Payments Technology Mexico
S.A. De C.V.
GPIF Co-Investment, LLC
Griffin International Limited
Grundstuecksgesellschaft Trinkausstrasse
Kommanditgesellschaft
Grupo Financiero HSBC, S. A. de C. V.
Guangdong Enping HSBC Rural Bank
Company Limited
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 (in liquidation)
Hang Seng Indexes Company Limited
Hang Seng Insurance Company Limited
Hang Seng Investment Management Limited
Hang Seng Investment Services Limited
Hang Seng Life Limited
Hang Seng Real Estate Management Limited
Hang Seng Securities Limited
Hang Seng Security Management Limited
Hang Seng Qianhai Fund Management
Company Limited
Haseba Investment Company Limited
HFC Bank Limited (in liquidation)
Hg Janus A Co-Invest L.P.
High Time Investments Limited
HITG Administration GmbH
Honey Green Enterprises Ltd.
Hongkong International Trade Finance
(Holdings) Limited (in liquidation)
Household Capital Markets LLC
Household Finance Corporation III
Household International Europe Limited (in
liquidation)
Household Pooling Corporation
HRMG Nominees Limited
HSBC (BGF) Investments Limited
HSBC (General Partner) Limited
HSBC (Guernsey) GP PCC Limited
HSBC (Kuala Lumpur) Nominees Sdn Bhd
HSBC (Malaysia) Trustee Berhad
HSBC (Singapore) Nominees Pte Ltd
99.99
100.00
100.00
(99.99)
n/a
100.00
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(43.49)
(62.14)
(62.14)
n/a
99.99
100.00
100.00
100.00
100.00
62.14
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
70.00
100.00
100.00
n/a
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
1, 11, 18
27
18
7, 29
19
7, 50
18
12, 51
48
12, 54
48
48
48
48
48
48
48
48
48
48
48
48
48
48
48
48
12, 189
48
36
7, 210
48
55
56
19
7, 29
29
3, 36
58
22
19
2, 60
22
61
62
63
% 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
Subsidiaries
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 (in
liquidation)
HSBC Asset Finance M.O.G. Holdings (UK)
Limited
HSBC Asset Management (India) Private
Limited
HSBC Assurances Vie (France)
HSBC Australia Holdings Pty Limited
HSBC Bank (Chile)
HSBC Bank (China) Company Limited
HSBC Bank (General Partner) Limited
HSBC Bank (Mauritius) Limited
HSBC Bank (RR) (Limited Liability Company)
HSBC Bank (Singapore) Limited
HSBC Bank (Taiwan) Limited
HSBC Bank (Uruguay) S.A.
HSBC Bank (Vietnam) Ltd.
HSBC Bank A.S.
HSBC Bank Argentina S.A.
HSBC Bank Armenia cjsc
HSBC Bank Australia Limited
HSBC Bank Bermuda Limited
HSBC Bank Canada
HSBC Bank Capital Funding (Sterling 1) LP
HSBC Bank Capital Funding (Sterling 2) LP
HSBC Bank Egypt S.A.E
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 Securities (Asia) Limited
(99.65)
(99.99)
(99.99)
(99.99)
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
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
70.00
100.00
100.00
100.00
n/a
n/a
94.54
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
HSBC Broking Securities (Hong Kong) Limited
100.00
HSBC Broking Services (Asia) Limited
HSBC Canadian Covered Bond (Legislative) GP
Inc
HSBC Canadian Covered Bond (Legislative)
Guarantor Limited Partnership
HSBC Capital (USA), Inc.
HSBC Capital Funding (Dollar 1) L.P.
HSBC Capital Limited
HSBC Card Services Inc.
100.00
100.00
n/a
100.00
n/a
100.00
100.00
64
65
7, 66
19
61
9, 61
29
67
19
3, 19
2, 68
5, 19
19
19
19
3, 69
4, 46
3, 5, 16
70
12, 71
60
72
13, 73
63
74
75
76
77
67
78
16
23
3, 79
7, 60
7, 60
80
61
81
5, 82
83
85
86
19
3, 19
3, 87
3, 88
19
89
89
68
68
68
68
68
68
90
7, 90
29
7, 60
68
29
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
99.99
100.00
100.00
100.00
HSBC Client Share Offer Nominee (UK) Limited 100.00
HSBC Columbia Funding, LLC
n/a
HSBC Corporate Advisory (Malaysia) Sdn Bhd
100.00
HSBC Corporate Finance (Hong Kong) Limited
100.00
HSBC Corporate Trustee Company (UK)
Limited
HSBC Custody Nominees (Australia) Limited
HSBC Custody Services (Guernsey) Limited
HSBC Daisy Investments (Mauritius) Limited
100.00
100.00
100.00
100.00
HSBC Diversified Loan Fund General Partner
Sarl
n/a
HSBC Electronic Data Processing (Guangdong)
Limited
HSBC Electronic Data Processing (Malaysia)
Sdn Bhd
100.00
100.00
HSBC Electronic Data Processing (Philippines),
Inc.
99.99
HSBC Electronic Data Processing India Private
Limited
HSBC Electronic Data Processing Lanka
(Private) Limited
HSBC Electronic Data Service Delivery (Egypt)
S.A.E.
HSBC Enterprise Investment Company (UK)
Limited
HSBC Epargne Entreprise (France)
HSBC Equator (UK) Limited (in liquidation)
HSBC Equipment Finance (UK) Limited
HSBC Equity (UK) Limited
HSBC Europe B.V.
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 (active proposal
to strike off)
HSBC Germany Holdings GmbH
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
99.60
100.00
100.00
99.99
92.95
100.00
100.00
100.00
100.00
18
92
19
19
19
7, 29
61
68
19
16
22
94
7, 95
12, 96
97
98
99
100
101
19
(99.99)
4, 46
(99.99)
19
19
19
19
19
4, 42
102
2, 19
29
19
103
2, 19
104
105
106
4, 42
108
19
50
3, 23
79
50
HSBC Global Asset Management
(Deutschland) GmbH
100.00
(80.67)
HSBC Global Asset Management (France)
100.00
(99.99)
4, 110
HSBC Global Asset Management (Hong Kong)
Limited
HSBC Global Asset Management
(International) Limited (in liquidation)
100.00
100.00
HSBC Global Asset Management (Japan) K. K.
100.00
HSBC Global Asset Management (Malta)
Limited
100.00
(70.03)
25
111
112
113
HSBC Holdings plc Annual Report and Accounts 2018
303
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Notes on the financial statements
Subsidiaries
% of share class
held by immediate
parent company (or
by the Group where
this varies)
HSBC Global Asset Management (México),
S.A. de C.V., Sociedad Operadora de Fondos
de Inversión, Grupo Financiero HSBC
99.99
HSBC Global Asset Management (Oesterreich)
GmbH
100.00
(80.67)
HSBC Global Asset Management (Singapore)
Limited
100.00
HSBC Global Asset Management (Switzerland)
AG
100.00
(90.33)
HSBC Global Asset Management (Taiwan)
Limited
100.00
HSBC Global Asset Management (UK) Limited
100.00
HSBC Global Asset Management (USA) Inc.
100.00
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 (Canada) Limited
100.00
100.00
100.00
100.00
100.00
HSBC Global Services (China) Holdings Limited 100.00
HSBC Global Services (Hong Kong) Limited
HSBC Global Services (UK) Limited
HSBC Global Services Limited
HSBC Global Shared Services (India) Private
Limited (in liquidation)
HSBC Group Management Services Limited
HSBC Group Nominees UK Limited
HSBC Holdings B.V.
HSBC IM Pension Trust Limited
HSBC Infrastructure Limited
HSBC INKA Investment-AG TGV
HSBC Inmobiliaria (Mexico), S.A. de C.V.
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
116
19
117
118
2, 19
19
19
3, 119
19
68
19
2, 19
65
19
1, 2, 19
3, 19
1, 19
19
(99.99)
(80.67)
14, 120
HSBC Institutional Trust Services (Asia) Limited 100.00
HSBC Institutional Trust Services (Bermuda)
Limited
100.00
HSBC Institutional Trust Services (Ireland) DAC 100.00
(99.99)
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
HSBC Insurance (Singapore) Pte. Limited
HSBC Insurance Agency (USA) Inc.
HSBC Insurance Brokers (Philippines) Inc
HSBC Insurance Holdings Limited
HSBC Insurance Management Services
Limited (in liquidation)
HSBC Insurance Services (Lebanon) S.A.L. (in
liquidation)
HSBC Insurance Services Holdings Limited
HSBC International Finance Corporation
(Delaware)
HSBC International Holdings (Jersey) Limited
(in liquidation)
HSBC International Limited (in liquidation)
HSBC International Nominees 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 (in liquidation)
HSBC InvestDirect (India) Limited
(99.99)
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
97.70
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)
18
68
23
121
122
63
124
5, 125
23
63
117
127
2, 19
128
129
19
130
85
85
1, 131
10, 132
63
131
70
70
133
304
HSBC Holdings plc Annual Report and Accounts 2018
% of share class
held by immediate
parent company (or
by the Group where
this varies)
Footnotes
Footnotes
Subsidiaries
18
6, 114
63
HSBC InvestDirect Financial Services (India)
Limited
HSBC InvestDirect Sales & Marketing (India)
Limited
HSBC InvestDirect Securities (India) Private
Limited
HSBC Investment Bank Holdings B.V.
4, 115
HSBC Investment Bank Holdings Limited
HSBC Investment Company (Egypt) S.A.E (in
liquidation)
HSBC Investment Funds (Canada) Inc.
HSBC Investment Funds (Hong Kong) Limited
HSBC Investment Funds (Luxembourg) SA
HSBC Invoice Finance (UK) Limited
HSBC Iris Investments (Mauritius) Ltd (in
liquidation)
HSBC Issuer Services Common Depositary
Nominee (UK) Limited
HSBC Issuer Services Depositary Nominee
(UK) Limited
HSBC Latin America B.V.
HSBC Latin America Holdings (UK) Limited
HSBC Leasing (Asia) Limited
HSBC Leasing (France)
HSBC Life (International) Limited
HSBC Life (Property) Limited
HSBC Life (UK) Limited
HSBC Life Assurance (Malta) Limited
HSBC Life Insurance Company Limited
HSBC Lodge Funding (UK) Holdings (active
proposal to strike off)
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
100.00
(99.54)
99.99
(98.54)
99.99
(99.61)
(94.54)
(99.99)
(70.03)
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
50.00
100.00
100.00
100.00
100.00
100.00
100.00
(99.99)
HSBC Middle East Finance Company Limited
80.00
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 Nominees (Asing) Sdn Bhd
HSBC Nominees (Hong Kong) Limited
HSBC Nominees (New Zealand) Limited
HSBC Nominees (Tempatan) Sdn Bhd
HSBC North America Holdings Inc.
HSBC Odeme Sistemleri Bilgisayar Teknolojileri
Basin Yayin Ve Musteri Hizmetleri
HSBC Operational Services GmbH
HSBC Overseas Holdings (UK) Limited
HSBC Overseas Investments Corporation (New
York)
HSBC Overseas Nominee (UK) Limited
HSBC Participaciones (Argentina) S.A.
HSBC PB Corporate Services 1 Limited
HSBC PB Services (Suisse) SA
HSBC Pension Trust (Ireland) DAC
HSBC Pensiones, S.A.
HSBC PI Holdings (Mauritius) Limited
HSBC Portfoy Yonetimi A.S.
HSBC Preferential LP (UK)
HSBC Private Bank (C.I.) Limited
HSBC Private Bank (Luxembourg) S.A.
HSBC Private Bank (Monaco) SA
HSBC Private Bank (Suisse) SA
HSBC Private Bank (UK) Limited
100.00
n/a
49.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
99.99
n/a
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
99.99
100.00
100.00
(99.99)
(99.98)
133
65
3, 133
19
19
1, 134
5, 135
25
136
138
139
19
19
19
2, 19
68
4, 41
23
124
19
113
140
19
19
22
29
19
18
141
2, 3, 82
7, 142
9, 143
144
29
61
68
145
61
3, 29
146
7, 147
2, 19
149
19
67
150
151
121
152
122
153
19
22
136
4, 155
151
19
Subsidiaries
% 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
HSBC Private Bank International
HSBC Private Banking Holdings (Suisse) SA
HSBC Private Banking Nominee 3 (Jersey)
Limited
HSBC Private Equity Advisors LLC
100.00
100.00
100.00
n/a
HSBC Private Equity Investments (UK) Limited
100.00
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 Provident Fund Trustee (Hong Kong)
Limited
HSBC Qianhai Securities Limited
HSBC Rail (UK) Limited (in liquidation)
HSBC Real Estate Leasing (France)
HSBC Realty Credit Corporation (USA)
HSBC REIM (France)
HSBC Representative Office (Nigeria) Limited
100.00
100.00
98.61
100.00
100.00
100.00
100.00
100.00
99.00
100.00
100.00
100.00
HSBC Retirement Benefits Trustee (UK) Limited 100.00
HSBC Retirement Services Limited
HSBC Savings Bank (Philippines) Inc.
HSBC Securities (Asia) Limited
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
100.00
99.99
100.00
100.00
100.00
100.00
99.99
100.00
100.00
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 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 Services USA Inc.
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 Stockbrokers Nominee (UK) Limited
HSBC Technology & Services (China) Limited
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
99.99
100.00
99.99
100.00
100.00
99.99
99.99
99.99
100.00
100.00
100.00
100.00
100.00
100.00
100.00
156
151
150
7, 29
19
68
3, 157
65
19
19
68
HSBC Technology & Services (USA) Inc.
HSBC Transaction Services GmbH
100.00
100.00
HSBC Trinkaus & Burkhardt (International) S.A. 100.00
HSBC Trinkaus & Burkhardt AG
80.67
(80.67)
(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)
HSBC Trust Company (Delaware), National
Association
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
99.98
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
(80.67)
(80.67)
(80.67)
(62.14)
(62.14)
(51.00)
12, 158
HSBC Trust Company (UK) Limited
19
4, 46
3, 29
4, 46
159
1, 2, 19
1, 19
161
68
119
80
19
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 Client Nominee Limited
HSBC UK Holdings Limited
HSBC USA Inc.
(99.99)
(94.54)
1, 162
HSBC Violet Investments (Mauritius) Limited
(99.99)
(99.99)
63
163
164
29
5, 65
165
68
68
68
23
22
121
136
131
121
67
67
3, 152
167
4, 42
168
169
18
18
4, 46
170
12, 171
172
97
5, 19
19
12, 173
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
Imenson Limited
InfraRed NF China Real Estate Investments LP
n/a
INKA Internationale Kapitalanlagegesellschaft
mbH
100.00
(80.67)
(98.91)
(99.99)
(99.99)
(99.99)
(99.99)
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 (in liquidation)
James Capel & Co. Limited
James Capel (Channel Islands) Nominees
Limited (in liquidation)
James Capel (Nominees) Limited
James Capel (Second Nominees) Limited (in
liquidation)
James Capel (Taiwan) Nominees Limited
Jasmine22 Limited
John Lewis Financial Services Limited
Keyser Ullmann Limited
Kings Meadow Nominees Limited (in
liquidation)
Legend Estates Limited (in liquidation)
Lion Corporate Services Limited
Lion International Corporate Services Limited
Lion International Management Limited
Lion Management (Hong Kong) 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
29
6, 174
136
14, 50
50
50
6, 50
50
6, 50
144
175
19
37
150
176
22
68
177
63
178
19
2, 19
3, 149
94
19
153
29
48
19
12, 182
12, 183
12, 184
12, 185
48
7, 53
174
18
18
18
18
186
19
111
19
36
19
187
19
19
188
19
68
131
131
68
HSBC Holdings plc Annual Report and Accounts 2018
305
Strategic ReportFinancial Review Corporate Governance Additional 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)
Sun Hung Kai Development (Lujiazui III)
Limited
100.00
Swan National Leasing (Commercials) Limited
100.00
Swan National Limited
Thasosfin
The Hongkong and Shanghai Banking
Corporation Limited
The Venture Catalysts Limited
Timberlink Settlement Services (USA) Inc.
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
(99.99)
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
(80.67)
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)
Trinkaus Immobilien-Fonds Verwaltungs-GmbH 100.00
11, 41
Wayfoong Finance Limited (in liquidation)
Trinkaus Private Equity Management GmbH
Trinkaus Private Equity Verwaltungs GmbH
Tropical Nominees Limited
Turnsonic (Nominees) Limited
Vadep Holding AG (in liquidation)
Valeurs Mobilières Elysées
Wardley Limited
Wayfoong Credit Limited (in liquidation)
Wayfoong Nominees Limited
Wayhong (Bahamas) Limited
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
n/a
100.00
100.00
(80.67)
(80.67)
(80.67)
(99.99)
(62.14)
Footnotes
12, 206
19
19
4, 46
68
19
29
1, 2, 19
207
50
6, 50
50
6, 50
6, 50
50
6, 50
193
19
209
4, 52
68
68
68
68
118
7, 29
23
48
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 Saudi Arabia
ProServe Bermuda Limited
Sino AG
The London Silver Market Fixing Limited
Vaultex UK Limited
% of share class
held by immediate
parent company
(or by the Group
where this varies)
50.99
25.00
49.00
49.00
50.00
24.94
n/a
50.00
(69.40)
(20.11)
Footnotes
36
15
12, 93
191
107
208
1, 7, 180
109
Notes on the financial statements
Subsidiaries
Lyndholme Limited
Marks and Spencer Financial Services plc
Marks and Spencer Retail Financial Services
Holdings Limited (in liquidation)
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
MIL (Jersey) Limited
MW Gestion SA
Promocion en Bienes Raices, S.A. de C.V.
Prudential Client HSBC GIS Nominee (UK)
Limited
PT Bank HSBC Indonesia
PT HSBC Sekuritas Indonesia
R/CLIP Corp.
Real Estate Collateral Management Company
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 Guangzhou
Saf Zhu Jiang
Saf Zhu Jiang Jiu
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
SAS Bosquet -Audrain
SAS Cyatheas Pasteur
SAS Orona
SCI HSBC Assurances Immo
SFM
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. (in
liquidation)
Société Française et Suisse
Societe Immobiliere Atlas S.A. (in liquidation)
Somers Dublin DAC
Somers Nominees (Far East) Limited
Sopingest
South Yorkshire Light Rail Limited
St Cross Trustees Limited
100.00
100.00
100.00
100.00
100.00
100.00
100.00
99.90
100.00
100.00
100.00
100.00
100.00
100.00
99.99
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
99.97
100.00
100.00
100.00
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
60.00
100.00
100.00
100.00
100.00
100.00
99.64
100.00
100.00
100.00
100.00
100.00
100.00
100.00
(99.98)
(0.99)
(98.93)
(85.00)
(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)
(99.08)
(99.99)
(99.99)
(99.99)
68
188
188
188
188
67
19
18
19
19
19
193
150
67
3, 18
19
195
196
29
29
22
117
19
19
4, 43
4, 43
4, 43
4, 43
4, 43
4, 43
4, 43
4, 43
4, 43
4, 43
4, 43
4, 199
4, 41
1, 4, 200
11, 46
4, 42
163
12, 201
202
1, 11, 203
11, 43
1, 11, 43
11, 46
1, 11, 43
1, 11, 43
1, 4, 43
1, 4, 43
1, 4, 43
1, 32
4, 43
151
121
23
4, 43
19
19
306
HSBC Holdings plc Annual Report and Accounts 2018
Associates
The undertakings below are associates and equity accounted.
(33.99)
(33.99)
(33.99)
(20.50)
1, 12, 181
% of share class
held by immediate
parent company
(or by the Group
where this varies)
19.03
24.64
24.48
8.02
26.00
33.33
99.98
99.99
100.00
40.58
33.00
n/a
n/a
100.00
(33.99)
33.33
20.08
33.99
n/a
n/a
n/a
33.46
7.06
10.51
14.35
n/a
40.00
17.95
8.52
Footnotes
9, 126
137
140
3, 9, 17
148
1, 3, 154
1, 160
1, 166
1 , 179
68
7, 190
7,192
123
142
197
198
7, 57
7, 57
7, 57
91
1, 205
9, 204
4, 9, 59
1, 7, 180
194
9, 123
9, 84
Associates
Bank of Communications Co., Ltd.
Barrowgate Limited
BGF Group PLC
Bud Financial Limited
Canara HSBC Oriental Bank of Commerce Life
Insurance Company Limited
CFAC Payment Scheme Limited
Chemi & Cotex (Rwanda) Limited
Chemi & Cotex Kenya Limited
Chemi and Cotex Industries Limited
EPS Company (Hong Kong) Limited
GZHS Research Co Ltd
HSBC Mortgage Limited Liability Partnership
(in liquidation)
Icon Brickell LLC (in liquidation)
Jeppe Star Limited
MENA Infrastructure Fund (GP) Ltd
Northstar Trade Finance Inc.
Novo Star Limited
PEF 2005 (A) Limited Partnership
PEF 2005 (D) Limited Partnership
PEF 2010 (A) Limited Partnership
Peregrine Capital (India) Private Limited
Prisma Medios de Pago S.A.
Quantexa Limited
Services Epargne Entreprise
The London Gold Market Fixing Limited
The Saudi British Bank
Vizolution Limited
We Trade Innovation Designated Activity
Company
Footnotes for Note 39
1
2
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
Description of shares
3
4
5
6
7
8
9
10
11
12
13
14
Preference Shares
Actions
Redeemable Preference Shares
GmbH Anteil
This undertaking is a partnership and does not have share capital
Liquidating Share Class
HSBC Holdings plc exercises control or significant influence over this
undertaking notwithstanding its equity interest
Non-Participating Voting Shares
Parts
Registered Capital Shares
Russian Limited Liability Company Shares
Stückaktien
Registered offices
15
16
17
18
19
20
Lot 6.05, Level 6, KPMG Tower 8 First Avenue, Bandar Utama Petaling
Jaya Selangor, Darul Ehsan, Malaysia 47800
Level 36 Tower 1 International Towers Sydney, 100 Barangaroo Avenue,
Sydney, New South Wales, Australia, 2000
First Floor The Bower, 207 Old Street, London, England, EC1V 9NR
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
Registered offices
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
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
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, Strathvale House, Ground Floor, 90 North Church Street,
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
95 Washington Street, Buffalo, New York, United States Of America,
14203
1209 Orange Street, Wilmington, Delaware, United States Of America,
19801
c/o The Corporation Trust Company, 1209 Orange Street, Wilmington,
Delaware, United States Of America, 19801
Corporation Service Company, 251 Little Falls Drive, Wilmington,
Delaware, United States Of America, 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
First & Second Floor, No.3 Nanshan Road, Pulandian, Dalian, Liaoning,
China
CT Corporation System, 225 Hillsborough Street, Raleigh, North Carolina,
United States Of America, 27603
39, rue de Bassano, Paris, France, 75008
103, avenue des Champs-Elysées, Paris, France, 75008
64, rue Galilée, Paris, France, 75008
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
c/o Maples Corporate Services Limited, Ugland House, PO Box 309,
Grand Cayman, KY1-1104, Cayman Islands
Königsallee 21/23, Düsseldorf, Germany, 40212
No. 44, Xin Ping Road Central, Encheng, Enping, Guangdong, China,
529400
109 avenue des Champs-Elysees, Paris, France, 75008
Regency Court, Glategny Esplanade, St. Peter Port, Guernsey GY1 1WW
34/F and 36/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road,, China
(Shanghai) Pilot Free Trade Zone,, Shanghai, China, 200120
11-17 Ludwig-Erhard-Str., Hamburg, Germany, 20459
Commerce House, Wickhams Cay 1, P.O. Box 3140, Road Town, Tortola,
Tortola, British Virgin Islands
Suite 1020, 885 West Georgia Street, Vancouver, BC, V6C 3E8
The Corporation Trust Company of Nevada 311 S. Division Street, Carson
City, Nevada, United States Of America, 89703
32 Rue du Champ de Tir, 44300 Nantes
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
557 Bouchard, Level 22, Ciudad de Buenos Aires, Capital federal,
Argentina, C1106ABG
1 Queen's Road Central, Hong Kong
3rd Floor, Merchantile Bank Chamber 16, Veer Nariman Road, Fort,
Mumbai, India, 400001
HSBC Holdings plc Annual Report and Accounts 2018
307
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
Notes on the financial statements
Registered offices
Registered offices
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
25 de Mayo 471, Montevideo, Uruguay, 11000
The Metropolitan 235 Dong Khoi Street, District 1, Ho Chi Minh City, Viet
Nam
Esentepe mah. Büyükdere Caddesi, No.128 Istanbul 34394, Turkey
66 Teryan Street, Yerevan, Armenia, 0009
885 West Georgia Street, 3rd Floor, Vancouver, British Columbia, Canada,
V6C 3E9
306 Corniche El Nil, Maadi, Egypt, 11728
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 20000, Morocco
10 Earlsfort Terrace, Dublin, Ireland D02 T380
HSBC House Esplanade, St. Helier, Jersey, JE1 1HS
Al Khuwair Office, PO Box 1727 PC111 CPO Seeb, Muscat, Oman
116
117
24th Fl., 97-99, Sec.2, Tunhwa S. Rd., Taipei, Taiwan, R.O.C., Taiwan
452 Fifth Avenue, New York NY10018, United States Of America
118 Mareva House, 4 George Street, Nassau, Bahamas
119
120
121
70 York Street, Toronto, Ontario, Canada, M5H 1S9
Breite Str. 29/31, Düsseldorf, Germany, 40213
1 Grand Canal Square, Grand Canal Harbour, Dublin 2, D02 P820, Ireland
122 HSBC Centre Eighteen, Cybercity, Ebene, Mauritius
Office Block A, Bay Studios Business Park, Fabian Way, Swansea, United
Kingdom, SA1 8QB
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 SAR,
Hong Kong
No.188, Yin Cheng Zhong Road China (Shanghai) Pilot Free Trade Zone,
Shanghai, China
7/F HSBC Centre 3058 Fifth Ave West, Bonifacio Global City, Taguig City,
Philippines
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
Of America, 19801
123
124
125
126
127
128
129
130
Rondo ONZ 1, Warsaw, Poland, 00-124
131
Craigmuir Chambers, PO Box 71, Road Town, Tortola, British Virgin Islands
1800 Tysons Corner, Boulevard Suite 50, Tysons Corner, Virginia, United
States Of America, 22102
Rua Funchal, nº 160, SP Corporate Towers, Torre Norte, 19° andar, cj
191A - Parte, São Paulo, Brazil, 04551-060
66 Wellington Street West, Suite 5300, Toronto, Ontario, Canada, M5K
1E6
Rahejas, 4th Floor, Corner of Main Avenue & V.P. Road, Santacruz (West),
Mumbai - 400054
90 North Church Street, Strathvale House - Ground Floor, PO Box 1109,
George Town, Grand Cayman, Grand Cayman, Cayman Islands, KY1-1102
17F, HSBC Building, Shanghai ifc 8 Century Avenue, Pudong, Shanghai,
China
c/o Rogers Capital, 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
Smart Village 28th Km Cairo- Alexandria Desert Road Building, Cairo,
Egypt
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
First Floor, Building No. 5, Emaar Square, P.O. Box 502601, Dubai, Dubai,
United Arab Emirates, 00000
World Trade Center Montevideo Avenida Luis Alberto de Herrera 1248,
Torre 1, Piso 15, Oficina 1502, Montevideo, Uruguay, CP 11300
c/o MUFG Fund Services (Bermuda) Limited, The Belvedere Building, 69
Pitts Bay Road, Pembroke, Bermuda, HM08
Level 12, HSBC Building 37, Chilpae-ro, Jung-gu, Seoul, Korea, Republic
Of (South)
All Saints Triangle, Caledonian Road, London, United Kingdom, N19UT
Immeuble Coeur Défense 110, Esplanade du Général de Gaulle- La
défense 4, Courbevoie, France, 92400
111 HSBC House Esplanade, St. Helier, Jersey, JE4 8WP
112
113
HSBC Building 11-1, Nihonbashi 3-chome, Chuo-ku, Tokyo, Japan,
103-0027
80 Mill Street, Qormi, Malta, QRM 3101
114 Herrengasse 1-3, Wien, Austria, 1010
115
Gartenstrasse 26, Zurich, Switzerland
308
HSBC Holdings plc Annual Report and Accounts 2018
132 Woodbourne Hall, Road Town PO Box 916, Tortola, British Virgin Islands
133
134
135
136
137
138
139
140
141
142
143
144
9-11 Floors, NESCO IT Park Building No. 3 Western Express Highway,
Goregaon (East), Mumbai, India, 400063
3, Aboul Feda Street, Zamalek, Cairo, Egypt
300 - 885 West Georgia Street, Vancouver, British Columbia, Canada, V6C
3E9
16 Boulevard d'Avranches, Luxembourg, L-1160
49/F, The Lee Gardens, 33 Hysan Avenue, Hong Kong
21 Farncombe Rd, Worthing, Sussex, BN11 2BW
c/o Kross Border Trust Services Limited St. Louis Business Centre, Cnr
Desroches & St Louis Streets, Port Louis, Mauritius
13 - 15 York Buildings, London, United Kingdom, WC2N 6JU
Plot No.312-878 Mezzanine Floor, Bldg. of Sheikh Hamdan Bin Rashid,
Dubai Creek, 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
885 West Georgia Street Suite 300, Vancouver, British Columbia, Canada,
V6C 3E9
145 HSBC House, Level 9, One Queen Street, Auckland, New Zealand, 1010
146
147
148
149
Büyükdere Cad. No.122 D Blok Esentepe Sisli Istanbul, Turkey
21-23 Yorckstraße, Düsseldorf, Nordrhein-Westfalen, Germany, 40476
Unit No. 208, 2nd Floor, Kanchenjunga Building 18 Barakhamba Road,
New Delhi - 110001, India
The Corporation Trust Incorporated, 2405 York Road, Suite 201, Lutherville
Timonium, Maryland, United States Of America, 21093
150 HSBC House Esplanade, St. Helier, Jersey, JE1 1GT
151 Quai des Bergues 9-17, Geneva, Switzerland, 1201
152
153
154
155
156
157
158
159
160
161
162
163
164
165
Paseo de la Reforma 359, 6th Floor, Mexico, 06500
Büyükdere Cad. No.128 D Blok Esentepe Sisli Istanbul, Turkey
6th Floor, 65 Gresham Street, London, United Kingdom, EC2V 7NQ
17, avenue d'Ostende, Monaco, 98000
1441 Brickell Avenue, Miami, Florida, United States Of America, 33131
2910 Virtual Way, Vancouver, British Columbia, Canada, V5M 0B2
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
Kacyiru BP 3094, Kigali, Rwanda
Unit 1 GF The Commercial Complex, Madrigal Avenue, Ayala Alabang
Village, Muntinlupa City, Philippines, 1770
7/F The Enterprise Centre - Tower I, 6766 Ayala Avenue corner Paseo De
Roxas, Makati City, Philippines
2 Exchange Square, 85 Maude Street, Sandown, Sandton, South Africa,
2196
13F 333 Keelung Road, Sec.1, Taipei, Taiwan, 110
Palm Grove House PO Box 438, Road Town, Tortola, British Virgin Islands
Registered offices
R No. 1758/13 Grevella Grove Road, Kalamu House PO Box 47323-00100,
Nairobi, Kenya
Kapelanka 42A, Krakow, Poland, 30-347
MB&H Corporate Services Ltd, Mareva House, 4 George Street, Nassau,
Bahamas
The Corporation Trust Company, 820 Bear Tavern Road, West Trenton,
New Jersey, United States Of America, 08628
Suite 2400, 745 Thurlow Street, Vancouver, Canada, BC V6E 0C5
L22, Office Tower 2, Taikoo Hui, 381 Tianhe Road, Tianhe District,
Guangzhou, Guangdong, 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
Of America, 19801
PO Box 484, Strathvale House, Ground Floor, 90 North Church Street,
George Town, Grand Cayman, Cayman Islands, KY1-1106
c/o HSBC Bank (Mauritius) Limited, 6th Floor, HSBC Centre, 18 Cyber
City, Ebene, Mauritius
1 Centenary Square, Birmingham, United Kingdom, B1 1HQ
Plot No. 89-90 Mbezi Industrial Area Box 347, Dar es Salaam City
c/o Hackwood Secretaries Limited, One Silk Street, London, United
Kingdom, EC2Y 8HQ
Room 1303, 106 Feng Ze Dong Road, Nansha District, Guangzhou,
Guangdong, China
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182 No. 56, Yu Rong Street, Macheng, China, 438300
183 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
1 Queen's Road Central, Hong Kong
Kings Meadow Chester Business Park, Chester, United Kingdom, CH99
9FB
2-3/F, Unit 21A, Qianhai Enterprise Dream Park, No. 63 Qian Wan Yi
Road,, Qianhai Shenzhen-Hongkong Cooperation Zone, Shenzhen, China
40a Station Road, Upminster, United Kingdom, RM14 2TR
HSBC Building 7267 Olaya - Al Murrooj, Riyadh, Saudi Arabia, 12283 -
2255
C T Corporation System, 1200 South Pine Island Road, Plantation, Florida,
United States Of America, 33324
PO Box 1109, Strathvale House, 90 North Church Street, George Town,
Grand Cayman, Cayman Islands
Al Amir Abdulaziz Ibn Mossaad Ibn Jalawi Street, Riyadh, Saudi Arabia
World Trade Center 1, Floor 8-9 Jalan Jenderal Sudirman Kavling 29 - 31,
Jakarta, Indonesia, 12920
5th Floor, World Trade Center, J1, Jend. Sudirman Kav. 29-31, Jakarta,
Indonesia, 12920
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
15 rue Guynemer BP 412, Noumea, 98845
10, rue Jean Jaurès BP Q5, Noumea, New Caledonia, 98845
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
199
200
201 No.198-2, Chengshan Avenue (E), Rongcheng, China, 264300
202 Woodbourne Hall, Road Town PO Box 3162, Tortola, British Virgin Islands
203
204
205
206
207
208
209
210
43 rue de Paris, Saint Denis, 97400
75 Park Lane, Croydon, Surrey, United Kingdom, CR9 1XS
Avda. Corrientes 1437, 2° y 3° piso Ciudad Autonoma de Buenos Aires
Argentina C1042AAA
RM 2112, HSBC Building, Shanghai ifc No. 8 Century Road, Pudong,
Shanghai, China, 200120
11 Dr. Roy’s Drive PO Box 694GT, Grand Cayman, Cayman Islands,
KY1-1107
Ernst-Schneider-Platz 1, Duesseldorf, Germany, 40212
Philippe Kaiser Baarerstrasse 8, Zug, Switzerland, 6300
1 Royal Plaza, Royal Avenue, St Peter Port, Guernsey, Channel Islands,
GY1 2HL
HSBC Holdings plc Annual Report and Accounts 2018
309
Strategic ReportFinancial Review Corporate Governance Additional Information Financial Statements
Additional information
Shareholder information
Fourth interim dividend for 2018
Interim dividends for 2019
2018 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
310
310
311
311
311
312
312
312
314
315
316
A glossary of terms used in this Annual Report and Accounts can be found in
the Investors section of www.hsbc.com.
Fourth interim dividend for 2018
The Directors have declared a fourth interim dividend for 2018 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 6 March 2019. 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 2018 and/or Strategic Report 2018 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.
Footnotes
19 February 2019
21 February 2019
1
22 February 2019
6 March 2019
21 March 2019
25 March 2019
8 April 2019
Interim dividends for 2019
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 2019
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.
Other equity instruments
Additional tier 1 capital – contingent convertible securities
HSBC continues 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. These securities are marketed principally and subsequently allotted to corporate investors and
fund managers. The net proceeds of the issuances are used for HSBC’s 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 five-year periods based on credit
spreads, fixed at issuance, above 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 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 therefore rank 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 anti-dilution adjustments.
310
HSBC Holdings plc Annual Report and Accounts 2018
Additional tier 1 capital instruments issued during 2018
$2,350m 6.250% perpetual subordinated contingent convertible securities
$1,800m 6.500% perpetual subordinated contingent convertible securities
$m
2,350
1,800
%
100.00
100.00
%
93.80
91.75
%
100.00
100.00
SGD750m 5.000% perpetual subordinated contingent convertible securities
550
100.00
100.29
100.00
£1,000m 5.875% perpetual subordinated contingent convertible securities
1,301
100.00
95.89
100.00
23 March 2018
23 March 2018
24 September
2018
28 September
2018
Nominal
Issue price Market price
Net price
Issue date
2018 Annual General Meeting
All resolutions considered at the 2018 Annual General Meeting held at 11.00am on 20 April 2018 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 3 May 2019 and 28 October 2019. The interim results for the six months to
30 June 2019 are expected to be issued on 5 August 2019.
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
37 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.
HSBC Holdings plc Annual Report and Accounts 2018
311
Strategic ReportFinancial Review Corporate Governance Financial Statements Additional Information Additional information
Shareholders who wish to receive a hard copy should contact HSBC’s Registrars. Please visit www.hsbc.com/investors/investor-contacts
for further information. You can also download an online version of the report from www.hsbc.com.
Electronic communications
Shareholders may at any time choose to receive corporate communications in printed form or to receive notifications of their availability
on HSBC’s website. To receive notifications of the availability of a corporate communication on HSBC’s website by email, or revoke or
amend an instruction to receive such notifications by email, go to www.hsbc.com/ecomms. If you provide an email address to receive
electronic communications from HSBC, we will also send notifications of your dividend entitlements by email. If you received a
notification of the availability of this document on HSBC’s website and would like to receive a printed copy, or if you would like to receive
future corporate communications in printed form, please write or send an email (quoting your shareholder reference number) to the
appropriate Registrars at the address given above. Printed copies will be provided without charge.
Chinese translation
A Chinese translation of this Annual Report and Accounts 2018 will be available upon request after 6 March 2019 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)
*HSBC’s Primary market
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
Email: investorrelations@hsbc.com.hk
Where more information about HSBC is available
This Annual Report and Accounts 2018, 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
2018 by 31 December 2019. This information will be available on HSBC’s website: www.hsbc.com/tax.
312
HSBC Holdings plc Annual Report and Accounts 2018
Taxation of shares and dividends
Taxation – UK residents
The following is a summary, under current law and the current
published practice of UK HM Revenue and Customer (“HMRC”), 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 for the tax year beginning 6 April 2018 is £2,000. 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 2017 fourth interim dividend
and the first, second and third interim dividends for 2018 was set
out in the Secretary’s letters to shareholders of 7 March, 31 May,
29 August and 24 October 2018. In no case was the difference
between the cash dividend forgone and the market value of the
scrip dividend in excess of 15% of the market value. Accordingly,
for individual shareholders, the amount of the dividend income
chargeable to tax, and the acquisition price of the HSBC Holdings
ordinary shares for UK capital gains tax purposes, was the cash
dividend forgone.
Taxation of capital gains
The computation of the capital gains tax liability arising on
disposals of shares in HSBC Holdings by shareholders subject to
UK tax on capital gains can be complex, partly depending on
whether, for example, the shares were purchased since April 1991,
acquired in 1991 in exchange for shares in The Hongkong and
Shanghai Banking Corporation Limited, or acquired subsequent to
1991 in exchange for shares in other companies.
For capital gains tax purposes, the acquisition cost for ordinary
shares is adjusted to take account of subsequent rights and
capitalisation issues. Any capital gain arising on a disposal of
shares in HSBC Holdings by a UK company may also be adjusted
to take account of indexation allowance if the shares were
acquired before 1 January 2018, although the level of indexation
allowance that is given in calculating the gain would be frozen at
the value that would apply to the disposal of assets acquired on or
after 1 January 2018. 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 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.
At Autumn Budget 2017, the UK government announced that it
will continue its policy of not charging a 1.5% stamp duty and
stamp duty reserve tax on issues of shares to overseas clearance
services and depositary receipt issuers following the UK’s
departure from the European Union, although no further
confirmations or assurances have been given since then.
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 (by vote or value) of the 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 2018 is for informational purposes only; it was not
HSBC Holdings plc Annual Report and Accounts 2018
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Strategic ReportFinancial Review Corporate Governance Financial Statements Additional Information Additional information
intended or written to be used, and cannot be used, for the
purpose of avoiding US federal tax penalties.
Taxation of dividends
Currently, no tax is withheld from dividends paid by HSBC
Holdings. For US tax purposes, a US holder must include cash
dividends paid on the shares or ADSs in ordinary income on the
date that such holder or the ADS depositary receives them,
translating dividends paid in UK pounds sterling into US dollars
using the exchange rate in effect on the date of receipt. A US
holder that elects to receive shares in lieu of a cash dividend must
include in ordinary income the fair market value of such shares on
the dividend payment date, and the tax basis of those shares will
equal such fair market value.
Subject to certain exceptions for positions that are held for less
than 61 days, 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
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HSBC Holdings plc Annual Report and Accounts 2018
instrument of transfer or written agreement to transfer remain at
all times outside the UK, and provided further that any such
transfer or written agreement to transfer is not executed in the UK.
No stamp duty reserve tax will be payable on a transfer of, or
agreement to transfer, an ADS effected by the transfer of an ADR.
US backup withholding tax and information reporting
Distributions made on shares or ADSs and proceeds from the sale
of shares or ADSs that are paid within the US, or through certain
financial intermediaries to US holders, are subject to information
reporting and may be subject to a US ‘backup’ withholding tax.
General exceptions to this rule happen when the US holder:
establishes that it is a corporation (other than an S corporation) or
other exempt holder; or provides a correct taxpayer identification
number, certifies that no loss of exemption from backup
withholding has occurred and otherwise complies with the
applicable requirements of the backup withholding rules. 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 2018 contains certain forward-
looking statements with respect to HSBC’s financial condition,
results of operations and business, including the strategic
priorities and 2020 financial, investment and capital targets
described herein.
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, including the accounting impact
resulting from financial reporting in respect of hyperinflationary
economies; 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
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.
the market segments we serve; and deviations from the market
and economic assumptions that form the basis for our ECL
measurements;
• Changes in government policy and regulation, including the
monetary, interest rate and other policies of central banks and
other regulatory authorities; initiatives to change the size,
scope of activities and interconnectedness of financial
institutions in connection with the implementation of stricter
regulation of financial institutions in key markets worldwide;
revised capital and liquidity benchmarks which could serve to
deleverage bank balance sheets and lower returns available
from the current business model and portfolio mix; imposition
of levies or taxes designed to change business mix and risk
appetite; the practices, pricing or responsibilities of financial
institutions serving their consumer markets; expropriation,
nationalisation, confiscation of assets and changes in
legislation relating to foreign ownership; changes in bankruptcy
legislation in the principal markets in which we operate and the
consequences thereof; general changes in government policy
that may significantly influence investor decisions;
extraordinary government actions as a result of current market
turmoil; other unfavourable political or diplomatic
developments producing social instability or legal uncertainty
which in turn may affect demand for our products and services;
the costs, effects and outcomes of product regulatory reviews,
actions or litigation, including any additional compliance
requirements; and the effects of competition in the markets
where we operate including increased competition from non-
bank financial services companies, including securities firms.
• 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 69 to 73.
HSBC Holdings plc Annual Report and Accounts 2018
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Strategic ReportFinancial Review Corporate Governance Financial Statements Additional Information Additional information
Abbreviations
Currencies
£
CA$
€
HK$
MXN
RMB
SGD
$
A
ABS¹
ADR
ADS
AFS
AGM
AIEA
British pound sterling
Canadian dollar
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
ALCM
ALCO
AML
AML DPA
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
ASEAN
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 for International Settlements
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
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
Capital Requirements Regulation and Directive
Customer risk rating
Credit support annex
Credit valuation adjustment
AT1
B
Basel
Basel II¹
Basel III¹
BIS
BoCom
BoE
Bps¹
BSA
BSM
BVI
C
C&L
CAPM
CCAR
CDOs
CDS¹
CEA
CET1¹
CGUs
CMB
CMC
CML¹
CODM
COSO
CP¹
CRD¹
CRD IV
CRR¹
CSA
CVA¹
D
DDOS
Holdings ordinary shares to which the employee will become
entitled, generally between one and seven years from the
date of the award, and normally subject to the individual
remaining in employment
Dodd-Frank
Dodd-Frank Wall Street Reform and Consumer Protection
Act (US)
316
HSBC Holdings plc Annual Report and Accounts 2018
DoJ
DPD
DPF
DVA¹
E
EAD¹
EBA
EC
ECB
EEA
ECL
EL¹
ESG
EU
US Department of Justice
Days past due
Discretionary participation feature of insurance and
investment contracts
Debit valuation adjustment
Exposure at default
European Banking Authority
European Commission
European Central Bank
European Economic Area
Expected credit losses. In the income statement, ECL is
recorded as a change in expected credit losses and other
credit impairment charges. In the balance sheet, ECL is
recorded as an allowance for financial instruments to which
only the impairment requirements in IFRS 9 are applied.
Expected loss
Environmental, Social and Governance
European Union
Euribor
Euro interbank offered rate
EVE
F
FCA
FFVA
FPA
FRB
FRC
FSB
FSCS
FSVC
FTE
FTSE
FuM
FVOCI¹
FVPL¹
FX DPA
G
GAAP
GAC
GB&M
GDP
GDPR
GLCM
Economic value of equity
Financial Conduct Authority (UK)
Funding fair value adjustment estimation methodology on
derivative contracts
Fixed pay allowance
Federal Reserve Board (US)
Financial Reporting Council
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
Gross domestic product
General Data Protection Regulation
Global Liquidity and Cash Management
Global Markets
HSBC’s capital markets services in Global Banking and
Markets
GMB
GMP
GPB
GPSP
GRC
Group
GSM
GTRF
H
Group Management Board
Guaranteed minimum pension
Global Private Banking, a global business
Group Performance Share Plan
Group Risk Committee
HSBC Holdings together with its subsidiary undertakings
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.
Hong Kong Special Administrative Region of the People’s
Republic of China
HSBC Operations Services and Technology
High-quality liquid assets
HSBC Holdings together with its subsidiary undertakings
HOST
HQLA
HSBC
HSBC Bank
HSBC Bank plc
Distributed denial of service
Holdings ALCO
HSBC Holdings Asset and Liability Management Committee
Deferred Shares Awards of deferred shares define the number of HSBC
Hong Kong
HSBC Bank
Middle East
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 UK
HSBC USA
HSI
HSSL
HTIE
HTM
I
IAS
IASB
Ibor
ICAAP
IFRSs
ILAAP
IRB¹
IRRBB
ISDA
J
Jaws
K
KMP
L
LCR
LFRF
LGBT+
LGD¹
Libor
LICs
LMA
LTI
LTV¹
M
HSBC UK Bank plc
The sub-group, HSBC USA Inc (the holding company of
HSBC Bank USA) and HSBC Bank USA, consolidated for
liquidity purposes
HSBC Securities (USA) Inc.
HSBC Securities Services (Luxembourg)
HSBC International Trust Services (Ireland) Limited
Held to maturity
International Accounting Standards
International Accounting Standards Board
Interbank offered rate
Internal capital adequacy assessment process
International Financial Reporting Standards
Individual liquidity adequacy assessment process
Internal ratings-based
Interest rate risk in the banking book
International Swaps and Derivatives Association
Adjusted jaws measures the difference between the rates of
change in adjusted revenue and adjusted operating
expenses.
Key Management Personnel
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
Loan Markets Association
Long-term incentive
Loan-to-value ratio
Mainland China
People’s Republic of China excluding Hong Kong
Malachite
Mazarin
MBS
MENA
MOCs
Monoline
MRT¹
N
NII
NSFR
NYSE
O
OCC
OCI
OECD
OFAC
ORMF
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 insurance company
Material Risk Taker
Net interest income
Net stable funding ratio
New York Stock Exchange
Office of the Comptroller of the Currency (US)
Other comprehensive income
Organisation of Economic Co-operation and Development
Office of Foreign Assets Control
Operational risk management framework
OTC¹
P
PD¹
Performance
shares¹
Ping An
POCI
PBT
PIT
PPI
PRA
PRC
Over-the-counter
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
Profit before tax
Point-in-time
Payment protection insurance
Prudential Regulation Authority (UK)
People’s Republic of China
Principal plan
HSBC Bank (UK) Pension Scheme
PVIF
PwC
R
RAS
RBWM
Repo¹
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
Sale and repurchase transaction
Reverse repo
Security purchased under commitments to sell
RFB
RFR
RMM
RNIV
RoE
Ring-fenced bank
Risk-free rate
Risk Management Meeting of the Group Management Board
Risk not in VaR
Return on equity
RoRWA
Return on average risk-weighted assets
RoTE
RWA¹
S
SAPS
SDG
SE¹
SEC
Return on tangible equity
Risk-weighted asset
Self-administered pension scheme
United Nation’s Sustainable Development Goals
Structured entity
Securities and Exchange Commission (US)
ServCo group
Separately incorporated group of service companies planned
in response to UK ring-fencing proposals
SFR
Sibor
SIC
SID
SME
Solitaire
SPE¹
SPPI
SRI
T
T1
T2
TCFD¹
TLAC¹
TSR¹
U
UAE
UK
UN
UN PRI
US
US run-off
portfolio
V
VaR¹
VIU
Stable funding ratio
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
Special purpose entity
Solely payments of principal and interest
Socially responsible investment
Tier 1
Tier 2
Task Force on Climate-related Financial Disclosures
Total loss-absorbing capacity
Total shareholder return
United Arab Emirates
United Kingdom
United Nations
United Nations Principles of Responsible Investment
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
2018 which is available at www.hsbc.com/investors.
HSBC Holdings plc Annual Report and Accounts 2018
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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
37 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
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HSBC Holdings plc Annual Report and Accounts 2018
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
Corporate Brokers
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 2019
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
Highlights (pages 2 to 3): Lavender field in Provence, France.
Taken by Andrea A Attard, who works in our corporate treasury
solutions team in Malta
Our strategy (pages 10 to 13): Boat navigating off the coast of
Thailand. Taken by Joanna S Ellis, who supports with retail
customer due diligence and is based in India
Global businesses (pages 18 to 21): Hong Kong skyline at night.
Taken by John Oldham, who works in the legal team in the UK
How we do business (pages 22 to 23): Fish off Raja Ampat,
Indonesia, one of the world’s most diverse marine regions. Taken
by Faith Li, who works in asset management in China
How we do business (pages 28 to 29): Thrunton Woods,
Northumberland. Taken by Ciara Jennings, who works in the UK’s
digital technology team
Risk overview (pages 30 to 31): Raindrops on a peacock feather.
Taken by Noman Anwar, who works in communications in
Bangladesh
Inside back cover: Crowds below an escalator in Incheon Airport,
South Korea. Taken by Michael Hu, who works in China’s finance
team
Group Chairman and Group Chief Executive portraits: Taken by
Charles Best
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®.
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HSBC Holdings plc
8 Canada Square
London E14 5HQ
United Kingdom
Telephone: +44 (0)20 7991 8888
www.hsbc.com