HSBC Holdings plc
Annual Report and Accounts 2019
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.
We aim to deliver long-term value for our shareholders through...
...our extensive
international network...
...our access to
high-growth markets...
...and our balance sheet
strength.
We are a leading international
bank, serving more than
40 million personal, wealth
and corporate customers.
Our global footprint and market-
leading transaction banking
franchise provide extensive
access to faster-growing
markets, particularly in
Asia and the Middle East.
We continue to maintain a
strong capital, funding and
liquidity position with a
diversified business model.
Reported revenue by global business
RBWM 41%
CMB 27%
GB&M 27%
GPB 3%
Corporate Centre 2%
Total assets
Common equity tier 1 ratio
Reported revenue by region
$2.7tn
(2018: $2.6tn)
14.7%
(2018: 14.0%)
HSBC Holdings plc Annual Report and Accounts 2019
Asia 49%
Europe 29%
North America 11%
Latin America 5%
Middle East and North Africa 6%
Contents
Strategic report
Highlights
2
HSBC at a glance
4
Group Chairman’s statement
6
8
Group Chief Executive’s review
10 Global trends and strategic advantages
12 Delivering our strategy
14 How we do business
26
Financial overview
30 Global businesses
38 Risk overview
41
Long-term viability and going
concern statement
42 Board engagement with our
stakeholders
44 Remuneration
Financial review
47
Financial summary
56 Global businesses and
geographical regions
72 Other information
73 Risk
152 Capital
Corporate governance
156 Corporate governance report
158 Biographies of Directors and
senior management
171 Board committees
184 Directors’ remuneration report
211 Share capital and other disclosures
214
215 Employees
219 Directors’ responsibility statement
Internal control
Financial statements
220 Report of the independent auditors
228 Financial statements
240 Notes on the financial statements
Additional information
323 Shareholder information
327 Forward-looking statements/
Certain defined terms
329 Abbreviations
1
This Strategic Report was approved by the Board
on 18 February 2020.
Mark E Tucker
Group Chairman
A reminder
The currency we report in is 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 28.
None of the websites referred to in this Annual
Report and Accounts 2019 (including where a
link is provided), and none of the information
contained on such websites, are incorporated
by reference in this report.
Annual Report and Accounts 2019
HSBC Holdings plc
Cover image: Connecting
our customers through
blockchain
For centuries, international
trade has been reliant on paper
documents – from letters of
credit to bills of lading. Today,
HSBC is leading the way towards paperless
trade finance. We are working with our clients,
financial institutions and fintech partners to
pioneer digitisation of trade, which has made
doing business simpler and faster, improving
the working capital efficiency for our
customers. Paperless trade is becoming a
reality. We have used a blockchain-based
letter of credit platform, built on R3 Corda
blockchain technology, to complete digital
trade transactions for shipments of iron ore
from Australia to mainland China, and
soybeans from Argentina to Malaysia.
By investing in digital solutions such as
blockchain technology, we can help to
increase the velocity of trade globally.
HSBC Holdings plc Annual Report and Accounts 2019
Strategic report
Highlights
The macroeconomic environment and interest rate
outlook have changed since we set our strategic
priorities and financial targets in June 2018.
Financial performance
(vs 2018)
– Reported profit attributable to ordinary
shareholders down 53% to $6.0bn,
materially impacted by a goodwill
impairment of $7.3bn. Reported profit
before tax down 33% to $13.3bn.
Reported revenue up 4% and reported
operating expenses up 22% due to a
goodwill impairment of $7.3bn.
– Goodwill impairment of $7.3bn,
primarily $4.0bn related to Global
Banking and Markets (‘GB&M’) and
$2.5bn in Commercial Banking (‘CMB’)
in Europe. This reflected lower long-term
economic growth rate assumptions,
and additionally for GB&M, the planned
reshaping of the business.
– Adjusted revenue up 5.9% to $55.4bn
and adjusted profit before tax up 5%
to $22.2bn, reflecting good revenue
growth in Retail Banking and Wealth
Management (‘RBWM’), Global Private
Banking (‘GPB’) and CMB, together
with improved cost control.
– Adjusted revenue in Asia up 7% to $30.5bn
and adjusted profit before tax up 6%
to $18.6bn. Within this, there was a resilient
performance in Hong Kong, with adjusted
profit before tax up 5% to $12.1bn.
– Adjusted expected credit losses and
other credit impairment charges (‘ECL’)
up $1.1bn to $2.8bn from higher charges
in CMB and RBWM.
– Positive adjusted jaws of 3.1%,
reflecting improving cost discipline.
Adjusted operating expense growth
of 2.8%, well below the growth rate in
2018 (compared with 2017).
– Return on average tangible equity
(‘RoTE’) down 20 basis points (‘bps’)
to 8.4%, supported by a resilient Hong
Kong performance.
– Earnings per share of $0.30, including
a $0.36 per share impact of the goodwill
impairment.
2020 business update
In our business update, we have set out
our plans to improve the Group’s returns
by 2022 to allow us to meet our growth
ambition and sustain our current dividend
policy. We intend to reduce capital and costs
in our underperforming businesses to enable
continued investment in businesses with
stronger returns and growth prospects.
We also plan to simplify our complex
organisational structure, including a reduction
in Group and central costs, while improving
the capital efficiency of the Group.
The Group will target:
– a gross risk-weighted asset (‘RWA’)
reduction of over $100bn by the end
of 2022, with these RWAs to be reinvested,
resulting in broadly flat RWAs between
2019 and 2022;
– a reduced adjusted cost base of $31bn
or below in 2022, underpinned by a new
cost reduction plan of $4.5bn; and
– a reported RoTE in the range of 10%
to 12% in 2022, with the full benefit of
our cost reductions and redeployed RWAs
flowing into subsequent years.
To achieve our targets, we expect to incur
restructuring costs of around $6bn and asset
disposal costs of around $1.2bn during
the period to 2022, with the majority of
restructuring costs incurred in 2020 and 2021.
We intend to sustain the dividend and
maintain a common equity tier 1 (‘CET1’)
ratio in the range of 14% to 15%, and
plan to be at the top end of this range by
the end of 2022.
We plan to suspend share buy-backs
for 2020 and 2021, given the high level
of restructuring expected to be undertaken
over the next two years. We intend to
return to neutralising scrip dividend
issuance from 2022 onwards.
While much of our business has held up
well, particularly in Asia and the markets
served by our international network,
underperformance in other areas had
a negative impact on our returns.
We have tempered our revenue growth
expectations and adjusted our business plan
accordingly. Our 2020 business update aims
to increase returns for investors, create the
capacity to invest in the future and build
a platform for sustainable growth.
We continue to monitor the recent
coronavirus outbreak, which is causing
economic disruption in Hong Kong
and mainland China and may impact
performance in 2020.
Delivery against our June
2018 financial targets
Return on average tangible equity
8.4%
Target: >11% by 2020
(2018: 8.6%)
Adjusted jaws
3.1%
Target: positive adjusted jaws
(2018: (1.2)%)
Dividends per ordinary share
in respect of 2019
$0.51
Target: sustain
(2018: $0.51)
Further explanation of performance
against Group financial targets may
be found on page 26.
2
HSBC Holdings plc Annual Report and Accounts 2019
Highlights
Key financial metrics
Reported results
Reported revenue ($m)
Reported profit before tax ($m)1
Reported profit after tax ($m)1
Profit attributable to the ordinary shareholders of the parent company ($m)1
Basic earnings per share ($)1
Diluted earnings per share ($)1
Return on average ordinary shareholders’ equity (%)1
Return on average tangible equity (%)
Net interest margin (%)
Adjusted results
Adjusted revenue ($m)
Adjusted profit before tax ($m)
Adjusted jaws (%)
Cost efficiency ratio (%)
Expected credit losses and other credit impairment charges (‘ECL’) as % of average
gross loans and advances to customers (%)
Balance sheet
Total assets ($m)
Net loans and advances to customers ($m)
Customer accounts ($m)
Average interest-earning assets ($m)
Loans and advances to customers as % of customer accounts (%)
Total shareholders’ equity ($m)
Tangible ordinary shareholders’ equity ($m)
Net asset value per ordinary share at period end ($)2
Tangible net asset value per ordinary share at period end ($)
Capital, leverage and liquidity
Common equity tier 1 capital ratio (%)3
Risk-weighted assets ($m)3
Total capital ratio (%)3
Leverage ratio (%)3
High-quality liquid assets (liquidity value) ($bn)
Liquidity coverage ratio (%)
Share count
Period end basic number of $0.50 ordinary shares outstanding (millions)
Period end basic number of $0.50 ordinary shares outstanding and dilutive potential
ordinary shares (millions)
Average basic number of $0.50 ordinary shares outstanding (millions)
Dividend per ordinary share (in respect of the period) ($)
For the year ended
2018
53,780
19,890
15,025
12,608
0.63
0.63
7.7
8.6
1.66
52,331
21,182
(1.2)
61.0
0.17
At 31 December
2018
2,558,124
981,696
1,362,643
1,839,346
72.0
186,253
140,056
8.13
7.01
14.0
865,318
20.0
5.5
567
154
19,981
20,059
19,896
0.51
2019
56,098
13,347
8,708
5,969
0.30
0.30
3.6
8.4
1.58
55,409
22,212
3.1
59.2
0.27
2019
2,715,152
1,036,743
1,439,115
1,922,822
72.0
183,955
144,144
8.00
7.13
14.7
843,395
20.4
5.3
601
150
20,206
20,280
20,158
0.51
2017
51,445
17,167
11,879
9,683
0.48
0.48
5.9
6.8
1.63
50,173
20,556
1.0
60.3
0.18
2017
2,521,771
962,964
1,364,462
1,726,120
70.6
190,250
144,915
8.35
7.26
14.5
871,337
20.9
5.6
513
142
19,960
20,065
19,972
0.51
1 Includes the impact of a $7.3bn goodwill impairment in 2019.
2 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.
3 Unless otherwise stated, regulatory capital ratios and requirements are calculated in accordance with the transitional arrangements of the Capital Requirements
Regulation in force in the EU at the time, including the regulatory transitional arrangements for IFRS 9 ‘Financial Instruments’ in article 473a. The capital ratios and
requirements at 31 December 2019 are reported in accordance with the revised Capital Requirements Regulation and Directive (‘CRR II’), as implemented, whereas
prior periods apply the Capital Requirements Regulation and Directive (‘CRD IV’). Leverage ratios are calculated using the end point definition of capital.
3
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019 Strategic report
HSBC at a glance
About HSBC
With assets of $2.7tn and operations in 64 countries and territories at 31 December 2019, HSBC is one of the largest banking and financial services
organisations in the world.
More than
40 million
customers bank with us
We employ around
235,000
people around the world
(full-time equivalent staff)
We have around
197,000
shareholders in 130 countries and territories
Engaging with our
stakeholders
Building strong relationships with our
stakeholders helps enable us to deliver our
strategy in line with long-term values, and
operate the business in a sustainable way.
Our stakeholders are the people who work
for us, bank with us, own us, regulate us, and
live in the societies we serve and the planet
we all inhabit. These human connections are
complex and overlap. Many of our employees
are customers and shareholders, while our
business customers are often suppliers. We
exist to serve, creating value for our customers
and shareholders. Our size and global reach
mean our actions can have a significant
impact. We are committed to doing business
responsibly, and thinking for the long term.
This is key to delivering our strategy.
Our section 172 statement, detailing our
Directors’ responsibility to stakeholders,
can be found on page 42.
Our values
Our values help define who we are as an organisation, and are key to our long-term success. We aspire to be:
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.
4
EmployeesCommunitiesCustomersSuppliersRegulators and governmentsInvestorsSocietyHSBC Holdings plc Annual Report and Accounts 2019
HSBC at a glance
Our global businesses
We serve customers through four global businesses. On pages 30 to 37 we provide an overview of our performance in 2019 for each of the global
businesses, as well as our Corporate Centre.
Retail Banking and Wealth
Management (’RBWM’)
Commercial Banking
(‘CMB’)
Global Banking and Markets
(’GB&M’)
Global Private Banking
(‘GPB’)
We help millions of our customers
manage their day-to-day finances
and save for the future.
Our global reach and expertise
help domestic and international
businesses around the world
unlock their potential.
We provide a comprehensive
range of financial services
and products to corporates,
governments and institutions.
We serve high net worth and
ultra high net worth individuals
and families.
Our global reach
The map below represents customer accounts by country/territory at 31 December 2019.
North America
10%
UK
29%
Rest of Europe
8%
Mainland China
3%
Latin America
2%
Middle East and North Africa
3%
Hong Kong
Rest of Asia
10% 35%
See page 54 for further information on our customers and approach to geographical information.
Awards
Selected awards and recognitions
Asiamoney New Silk Road Finance
Awards 2019
Euromoney Cash Management Survey 2019
The Banker Transaction Banking Awards 2019
Best Global Cash Manager for Corporates
Best Global Transaction Bank
Best Bank for Cash Management
Best Overall International Bank for BRI
Euromoney Trade Finance Survey 2019
Euromoney Awards for Excellence 2019
World’s Best Bank for Sustainable Finance
World’s Best Bank for Public-Sector Clients
World’s Best Bank for SMEs
Hong Kong’s Best Bank
Mexico’s Best Bank
Top Global Trade Finance Bank
The Banker Investment Banking Awards 2019
Most Innovative Investment Bank
for Emerging Markets
PWM/The Banker Global Private Banking
Awards 2019
Best Private Bank in Hong Kong
Best Private Bank in the UK
5
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019
Strategic report
Group Chairman’s statement
The slowdown in global growth underlines the need to make
the most of the opportunities ahead.
areas of weakness, improve performance and
create capacity to invest. Since then, he has
worked closely with the Board to begin
delivering against this mandate. The Board has
endorsed a plan that aims to reallocate capital
to areas that can deliver stronger returns, to
reduce costs across the Group, and to simplify
the business.
Even in this increasingly challenging
competitive environment, there are many
opportunities for a bank of HSBC’s scale
and reach. We have made a good start in
capturing these opportunities, but we need
to go further and faster to capitalise fully on
our heritage, network and financial strength.
We are intent on driving through the
necessary change at pace.
Board of Directors
Our previous Group Chief Executive,
John Flint, left the Group in August 2019.
I am very grateful to John for his personal
commitment and dedication, and for the
significant contribution that he made over his
long career at HSBC. Noel Quinn joined the
Board as interim Group Chief Executive in
August 2019. The process for appointing a
permanent Group Chief Executive is ongoing
and we expect to make an appointment in
accordance with our original timetable.
José Antonio Meade Kuribreña joined the
Board as an independent non-executive
Director in March 2019.
Jonathan Evans (Lord Evans of Weardale)
retired from the Board in April 2019. Marc
Moses stepped down as an executive Director
and Group Chief Risk Officer at the end of
December 2019. Sir Jonathan Symonds
stepped down as Deputy Group Chairman
and Senior Independent Director today, and
is replaced in the role of Senior Independent
Director by David Nish. Kathleen Casey has
informed the Board that she will not stand
for re-election at the next AGM, in April 2020.
Jonathan, Marc, Jon and Kathy have all made
formidable and invaluable contributions to
the work of the Board and they leave with
our profound thanks and gratitude.
At the time of our interim results,
I said that the external environment
was becoming increasingly complex
and challenging. As our 2019 results
demonstrate, this has proven to be
the case.
An impairment of historical goodwill caused
our reported profit before tax to fall by 33%,
but the strength and resilience of our business
model delivered an adjusted profit before
tax of $22.2bn, up 5%. Retail Banking
and Wealth Management, Commercial
Banking and Global Private Banking
performed well, while our leading transaction
banking franchise again demonstrated the
effectiveness of our global network. This,
alongside the Group’s capital strength, has
given the Board the confidence to approve
an unchanged dividend of $0.51 for 2019.
Strategy
At the time of Noel Quinn’s appointment as
interim Group Chief Executive in August 2019,
the Board gave him full authority to address
Mark E Tucker
Group Chairman
6
HSBC Holdings plc Annual Report and Accounts 2019 Group Chairman’s statement
“ Even in this environment,
there are many
opportunities for a bank of
HSBC’s scale and reach.”
The global economy
HSBC is a global bank, albeit one closely
associated with mainland China, Hong Kong
and the UK. Each of these continues to face
major challenges.
We continue to monitor the coronavirus
outbreak very closely. Our priority is
always the well-being of our customers and
staff, and we will continue to do all we can
to ensure their safety and support them
through this difficult time.
Social unrest in Hong Kong has weighed on
the local economy and caused significant
disruption. We deplore all violence and
support a peaceful resolution under the
framework of ‘one country, two systems’.
I am enormously proud of the dedication
and perseverance of our people in Hong Kong,
who have continued to support our customers
to their utmost ability in spite of the difficulties
they have faced.
Now that the UK has officially left the
EU, negotiations can begin on their future
relationship. This has provided some
certainty, but no trade negotiation is ever
straightforward. It is essential that the eventual
agreement protects and fosters the many
benefits that financial services provide to
both the UK and the EU. At the same time
as remaining close to Europe, the UK must
also strengthen its links with other key
partners, including the US, China and
south-east Asia. We look forward to working
with governments to help achieve this.
The macroeconomic environment as a whole
remains uncertain. As a result of the impact
of the coronavirus outbreak, we have lowered
our expectations for growth in the Asian
economy in 2020. The main impact will
be in the first quarter, but we expect some
improvement as the virus becomes contained.
The agreement of a ‘phase one’ trade deal
between China and the US is a positive step,
but we remain cautious about the prospects
for a wider-ranging agreement given
disagreements that still exist, particularly
over technology. We expect growth in the
US to be resilient, but slower than in 2019.
Overall, we expect global growth to
stabilise over the course of 2020, albeit
at a slightly lower rate than in recent years.
This underlines the need to make the most
of the opportunities ahead.
Serving all our stakeholders
HSBC has long recognised its responsibilities
to its stakeholders. Being a responsible
corporate citizen is a principle that must
sit at the heart of any sustainable business.
I welcome the renewed focus and debate
around corporate purpose in the media and
elsewhere over the last 12 months. We are
committed to creating long-term value for all
those we work with and for – our investors,
customers, employees, suppliers and the
communities we serve.
Business also has a critical role to play in
the transition to a low-carbon future, and we
believe that we have an opportunity to be a
leader. Sustainability features prominently in
our strategy, as well as in the way we run the
business. We are absolutely committed to
working closely with our customers, regulators
and governments to accelerate progress
towards a cleaner and more sustainable world.
The steps we are taking to achieve this are
outlined in our ESG Update, which is also
published today.
Our people are the driving force behind
HSBC’s success. 2019 was a challenging
year, throughout which the professionalism
and expertise of our people were always
to the fore in even the most testing
circumstances. I am very grateful to them
for their hard work and their commitment
to our customers, and each other.
Mark E Tucker
Group Chairman
18 February 2020
7
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019 Strategic report
Group Chief Executive’s review
As we pursue our plan to deliver greater value for our
customers and shareholders, we will continue to seek
to grow the parts of the business where we are
strongest while addressing areas of underperformance.
digital capabilities, and to make it easier
for our customers to bank with us. This
has enhanced the service we offer, helping
to attract new customers and capture
market share in our major markets and
from our international network.
This was evident in a resilient performance in
2019. A strong first half, particularly in Asia,
was tempered by the impact of worsening
global economic conditions, geopolitical
uncertainty and a lower interest rate outlook
in the second half of the year. Much of our
business held up well, particularly in Asia
and the markets served by our international
network. However, underperformance in
other areas acted as a drag on the returns
of the Group.
As we pursue our plan to deliver greater
value for our customers and shareholders,
we will continue to seek to grow the parts of
the business where we are strongest. However,
given the changed economic environment, we
must also act decisively to reshape areas of
persistent underperformance, particularly in
Global Banking and Markets in Europe and
the US. We also aim to simplify the Group to
accelerate the pace of change and reduce the
size of its cost base. This should create a leaner,
simpler and more competitive Group that is
better positioned to deliver higher returns
for investors.
Financial performance
Group reported profit before tax was down
33% compared with 2018, due to a goodwill
impairment of $7.3bn. This arose from
an update to long-term economic growth
assumptions, which impacted a number of our
businesses, and from the planned reshaping
of Global Banking and Markets. Adjusted
profit before tax increased by 5%, reflecting
revenue growth in three of our four global
businesses. Disciplined cost management
helped secure positive adjusted jaws of 3.1%,
despite continued heavy investment in growth
and technology. Our Group return on average
tangible equity – our headline measure –
fell from 8.6% in 2018 to 8.4%.
We delivered good revenue growth in our
targeted areas. Our Hong Kong business and
our UK ring-fenced bank, HSBC UK, showed
great resilience to produce adjusted revenue
growth of 7% and 3% respectively, despite
the uncertainty affecting both places during
2019. Our businesses in Mexico, India, the
ASEAN region and mainland China also
performed well. The biggest areas of
Noel Quinn
Group Chief Executive
8
HSBC exists for a clear purpose – to
connect customers to opportunities. We
want to be where the growth is, enabling
businesses to thrive and economies to
prosper, and helping people to fulfil their
hopes and realise their ambitions.
For 155 years, this purpose has underpinned
all that we do, and it continues to guide us as
we seek to adapt HSBC to changing customer
expectations in an evolving economic, political
and digital landscape.
HSBC possesses a number of advantages that
set us apart from our competitors. We have
an extensive international footprint with
excellent access to faster-growing areas in
Asia and the Middle East; a market-leading
transaction banking franchise connecting
customers to opportunities around the world;
and full-scale retail banking operations in
Hong Kong, the UK and Mexico, with a
premier international wealth proposition.
In 2018, we began a programme of
investment to build on these strengths,
with our customers at the centre. We have
since invested more than $8.6bn – of which
$4.5bn was in 2019 – to connect more
customers to our international network, to
provide a better service through improved
HSBC Holdings plc Annual Report and Accounts 2019 Group Chief Executive’s review
“ Our immediate aims are to
increase returns, invest in the
future, and build a platform
for sustainable growth.”
underperformance were our businesses
in the US and our European non-ring-fenced
bank, both of which saw a reduction in
revenue and profit before tax.
Retail Banking and Wealth Management
had a good year, delivering adjusted revenue
growth of 9%. This reflected the impact
of investment in improved customer service
and growth, which helped us win new
customers, increase deposits, and grow
lending in our major markets, particularly
mortgage lending in the UK and Hong Kong.
Our Wealth business also benefited from
favourable market impacts in Insurance.
Commercial Banking grew adjusted revenue
by 6%, with increases in all major products
and regions. Investment in new platforms,
digital capabilities and increased lending
improved our ability to attract new customers
and capitalise on wider margins, particularly
in Global Liquidity and Cash Management and
Credit and Lending.
Global Banking and Markets had a
challenging year in which economic
uncertainty led to reduced client activity,
particularly in Europe and the US. Despite
this, adjusted revenue was just 1% lower
than 2018 due to strong performances
from our transaction banking businesses.
Global Private Banking continued to benefit
from close collaboration with our other global
businesses, attracting $23bn of net new
money and increasing adjusted revenue
by 5%.
2020 outlook
Since the start of January, the coronavirus
outbreak has created significant disruption for
our staff, suppliers and customers, particularly
in mainland China and Hong Kong. We
understand the difficulties this poses and have
put measures in place to support them through
this challenging time. Depending on how the
situation develops, there is the potential for any
associated economic slowdown to impact our
expected credit losses in Hong Kong and
mainland China. Longer term, it is also possible
that we may see revenue reductions from
lower lending and transaction volumes, and
further credit losses stemming from disruption
to customer supply chains. We continue to
monitor the situation closely.
Reshaping for sustainable growth
Our immediate aims are to increase returns,
create the capacity to invest in the future,
and build a platform for sustainable growth.
We intend to do this in three ways.
First, we plan to materially reshape the
underperforming areas of the Group. Around
30% of our capital is currently allocated to
businesses that are delivering returns below
their cost of equity, largely in Global Banking
and Markets in Europe and the US. We intend
to focus these businesses on our strengths as
a leading international bank and to simplify our
footprint, exiting businesses where necessary
and reducing both risk-weighted assets
and costs.
Second, we aim to reduce Group costs by
increasing efficiencies, sharing capabilities
and investing in automation and digitisation.
Third, we intend to simplify HSBC to increase
the pace of execution and agility. This includes
changing our matrix structure and reducing
fragmentation, simplifying the geographical
organisation of the Group, and combining Retail
Banking and Wealth Management and Global
Private Banking to create one of the world’s
largest wealth management businesses.
In total, we are targeting more than $100bn
of gross risk-weighted asset reductions, a
reduced cost base of $31bn or lower, and a
Group return on average tangible equity of
10% to 12% in 2022. We aim to reinvest the
risk-weighted assets saved into higher-growth,
higher-returning opportunities in other parts of
the business. We intend to do these things
while sustaining the dividend and maintaining
a CET1 ratio of 14% to 15%. This is described
in detail on pages 12 and 13.
Since my appointment in August, we have
reduced Group risk-weighted assets and
FTE headcount, and slowed our cost growth
considerably. We also began the run-down of
risk-weighted assets in our European business
in the fourth quarter of 2019. We will provide
an update on our progress as we report
future results.
Connecting customers to opportunities
The investment we are making in growth,
technology and innovation is improving our
service to customers and connecting them
to opportunities around the world.
For our retail customers, we introduced more
than 160 new digital features in 2019 to make
everyday banking easier, including improved
digital account opening, loan and mortgage
applications, and instant money transfers.
In Hong Kong, we have made it simpler and
faster for our Hong Kong customers to make
payments through our redesigned PayMe app,
and launched PayMe for Business, expanding
the PayMe ecosystem for the 1.9 million
individual account holders who use it as part
of their daily lives.
Global Banking and Markets launched
MyDeal in 2019 to make the deal execution
process in our primary capital markets
business more efficient for our clients. Our
Global Private Banking business also launched
a new online investment services portal to
give our customers more control over the
service they receive.
Commercial Banking launched Serai in 2019
to simplify international trade for SMEs with
global trade ambitions. It provides both a
digital lending product and a networking
platform to match buyers and sellers and
build trusted business relationships. We
also remained at the forefront of international
efforts to commercialise blockchain
technology to make trade finance easier, faster
and safer for businesses. As part of this, we
completed 11 letters of credit transactions
using blockchain technology in 2019, including
the first cross-border transaction in China.
Our people
It was a great honour to be asked to lead
HSBC on an interim basis and I am grateful to
John Flint for making the transition as smooth
as possible. John was an excellent servant of
HSBC for more than 30 years and leaves with
our good wishes.
I am proud to work with all of my colleagues
across 64 countries and territories who serve
HSBC and its customers with exceptional
dedication. I am particularly grateful to
colleagues in Hong Kong, mainland China
and the UK for their professionalism and
application during recent periods of high
uncertainty. I thank them sincerely for their
service and support.
Noel Quinn
Group Chief Executive
18 February 2020
9
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019
Strategic report
Global trends
and strategic advantages
We aim to be the world’s leading international bank, helping personal,
wealth and corporate clients thrive through our deep heritage in faster
growing, higher-returning markets, particularly in Asia and the Middle East.
Our strategy is supported by
long-term global trends
Our strategic advantages help us to
connect customers to opportunities
Despite near-term headwinds from softening global growth
and lower interest rates, our industry continues to benefit
from positive long-term trends.
Asia is forecast to continue to take a larger share of global
GDP. Global wealth is expected to continue to rise, supported
by a faster pace of growth in Asia, Latin America and the
Middle East and Africa.
Global GDP (purchasing power parity)1 (%)
Asia
Rest of world
Europe
North America
60%
50%
40%
30%
20%
10%
0%
2000
2017
2040
Key:
Actual
Forecast
Global wealth2
($tn)
2023
2018
+5.7%
Compound annual
growth rate 2018–23
272
206
A leading international bank with access to
high-growth markets
We maintain a privileged position in high-growth
markets, particularly in Asia and the Middle East.
We have a strong wealth business with client assets
of $1.4tn, supported by a premier international wealth
proposition and leading, full-scale retail banking operations
in Hong Kong, the UK and Mexico.
We are a leading trade and payments and cash management
bank with $17bn of transaction banking adjusted revenue.
This is supported by our international network of 64 markets,
which covers approximately 90% of global GDP, trade
and capital flows.
11%
5%
6%
Geographical
revenue mix (%)
2019 adjusted
revenue1:
$55.4bn
29%
Asia
Europe
North America
Latin America
Middle East and North Africa
49%
1 Source: The Future of Asia, McKinsey Global Institute, 2019
2 Expected global wealth by 2023. Source: Global Wealth Report,
Boston Consulting Group, 2019
1 Adjusted basis, geographical view; regional percentage composition
calculated with regional figures that include intra-Group revenue.
Intra-Group revenue is excluded from the total Group revenue number.
10
HSBC Holdings plc Annual Report and Accounts 2019
Global trends and strategic advantages
Balance sheet strength
Multi-award winning
We maintain a strong capital, funding and liquidity position.
We operate a diversified business model with low
earnings volatility.
We have a foundation for sustaining our dividend and
a strong capacity for distribution to shareholders.
Common equity tier 1 ratio
(%)
14.7%
2019
2018
2017
2019
High-quality liquid assets
($bn)
$601bn
2019
2018
2017
2019
Customer accounts
($bn)
$1,439bn
2019
2018
2017
2019
14.7
14.0
14.5
601
567
513
1,439
1,363
1,364
The Banker Transaction Banking Awards 2019
Best Global Transaction Bank
Euromoney Trade Finance Survey, 2018–2020
Market Leader for Trade Finance, Global
WealthBriefingAsia Awards 2019
Overall Best Asia Private Bank
Euromoney Awards for Excellence 2019
World’s Best Bank for SMEs
Hong Kong’s Best Bank
Mexico’s Best Bank
World’s Best Bank for Sustainable Finance
The Banker Investment Banking Awards 2019
Most Innovative Investment Bank for
Emerging Markets
Insurance Asset Management Awards 2019
Emerging Markets Manager of the Year
Delivering our strategy
On the following two pages, we detail how we
performed on our strategy in 2019 and how we
intend to deliver our strategy going forward.
11
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019 Strategic report
Delivering our strategy
We will continue to grow the parts of our
business where we are strongest while
addressing areas of underperformance.
In June 2018, we set ourselves strategic
priorities and financial targets amid an
environment of rising interest rates,
resilient global economic growth and
moderate geopolitical risk.
In reviewing our businesses and geographies
today, while it is clear that many parts are
performing strongly, particularly in Asia and
the Middle East, as well as our market-leading
transaction banking services globally, other
parts of our business have underperformed.
The Group faces several structural issues and
we no longer expect to reach our 2020 return
on average tangible equity (‘RoTE’) target,
as stated in our third quarter 2019 results.
With the changed macroeconomic
environment and interest rate outlook,
we have tempered our revenue growth
expectations and adjusted our business
plan accordingly. We plan to raise the return
profile of our assets and improve the Group’s
efficiency to generate higher returns and
create more capacity for growth. Our business
update sets out how we intend to become a
leaner, simpler and more competitive Group
that is better positioned to be the world’s
leading international bank.
Our eight strategic priorities: 2019 outcomes
In our June 2018 Strategy Update, we outlined
eight strategic priorities across the themes
of ‘Deliver growth from areas of strength’,
‘Turnaround of low-returning businesses’,
‘Build a bank for the future that puts the
customer at the centre’ and ‘Empower our
people’. We ended 2019 on track in five of
our eight strategic priorities, partly on track
in two and off track in one. (The following
comparisons are against the previous year,
unless stated otherwise.)
We accelerated growth from our Asia
franchise and grew market share in our
UK ring-fenced bank, HSBC UK, which
we established in 2018. We improved
capital efficiency by growing our revenue
over risk-weighted assets ratio. The Group
made efficiency gains that helped achieve
positive adjusted jaws in 2019. We also
sustained a top-three rank and/or improved
by two ranks in customer satisfaction in
most of our key RBWM and CMB markets
compared with 2017.
We had mixed results in our priority to deliver
growth from our international network.
We gained market share in two of our four
transaction banking products, and grew
transaction banking revenue and international
client revenue below our target of mid-to-high
single digits. When it came to simplifying
the organisation and investing in future
skills, we delivered a mixed outcome, with
employee engagement unchanged at 66%,
falling below our target of improving each
year. However, we achieved a medium
environmental, social and governance (‘ESG’)
risk rating, outperforming a group of peers.
Our ratings provider, Sustainalytics, updated
its methodology during 2019. More details
on the approach, as well as further details on
our initiatives involving our customers and
employees, can be found in the ‘How we do
business’ section on pages 14 to 25 and
our ESG Update on www.hsbc.com.
We remained off track in turning around
our US business and do not expect to
achieve a US RoTE of 6% by 2020. We will
need to reshape the US business in order
to improve returns.
With the provision of our 2020 business
update below, we conclude reporting on
our eight strategic priorities. In their place,
we will report on our updated performance
programme going forward, which we set
out in the following section.
Introducing our 2020 business update
We are adjusting our plan in order to upgrade
the return profile of our risk-weighted assets
(‘RWAs’), reduce our cost base and streamline
our organisation. This aims to position the
Group to increase returns for investors, create
the capacity to invest in the future and build a
sustainable platform for growth.
In order to upgrade the return profile of
our RWAs, we intend to reallocate the
low-growth, low-returning assets in our
Europe and US businesses into high-growth,
higher-returning opportunities in other parts of
the Group. For clarity, European restructuring
will be focused on our operations in
continental Europe and the non-ring-fenced
bank in the UK, which is primarily our GB&M
activities in the UK. This does not include
our UK ring-fenced bank, HSBC UK, which
comprises the retail banking and commercial
banking businesses in the UK.
Restructuring for growth
We plan to remodel our Europe business
to focus on its strengths, reducing European
RWAs by around 35% and lowering costs.
To achieve this, we will focus our client
coverage on key international European
clients and connecting them to Asia and
the Middle East. In Global Markets, we aim
to continue to invest in transaction banking
and financing capabilities while reducing the
capital allocated to our Rates business, and
exiting G10 long-term derivative market-
making in the UK. Our investment banking
activities in the UK will focus on supporting
UK mid-market clients and international
corporate clients through our London hub.
In addition, we intend to reduce our sales
and research activities in European cash
equities. We also plan to transition our
structured product capabilities from the
UK to Asia.
12
HSBC Holdings plc Annual Report and Accounts 2019 Delivering our strategy
In the US, we require a new approach to
improve returns. We plan to reposition the
US business as an internationally focused
corporate bank, with a targeted retail offering,
principally for international and affluent
customers. We intend to consolidate select
Fixed Income activities with those in London
to maximise global scale, and reduce the
RWAs associated with our US Global Markets
business by around 45%. We aim to reinvest
these RWAs into CMB, as well as into retail
banking where we intend to increase
unsecured lending and increase our
investment in digital. We plan to reduce our US
branch network by around 30% and embark
on a programme to consolidate middle and
back office activities and streamline functions
to simplify our US business and lower costs.
Our plans for Europe and the US involve
significant changes, including capital
reductions, to our GB&M business. We
intend for GB&M to support corporate and
institutional clients with global operations who
value our international network. We plan to
accelerate investments in Asia and the Middle
East and shift more resources to those regions,
while continuing to strengthen our transaction
banking and financing capabilities. We intend
to strengthen our investment banking
capabilities in Asia and the Middle East,
while maintaining a global investment banking
hub in London. We also aim to build leading
emerging markets and financing capabilities in
Global Markets, and enhance our institutional
clients business. This remodelling of GB&M
will be underpinned by continued investment
in digital systems and solutions.
Investing in our opportunities
and areas of strength
The Group will continue to invest in
our growth opportunities, our customer
experience and delivering value to all of our
stakeholders. We intend to reinvest the RWAs
saved as a consequence of our restructuring
in our high-returning Asia and Middle East
businesses, HSBC UK, our market-leading
transaction banking franchise and the
international wealth opportunity. As part
of our customer experience initiatives, we
plan to improve digital capabilities to improve
customer satisfaction, evolve our product
suite and strengthen our internal processes.
As an example, we plan for the full launch of
HSBC Kinetic for small businesses in the UK
in 2020. We plan to continue to support the
global transition to a low-carbon economy,
demonstrated by our continued commitment
to provide and facilitate $100bn of sustainable
finance and investment by 2025. A set of
HSBC-specific ESG metrics and targets can be
found in the following ‘How we do business’
section on page 15.
Creating a simpler, more efficient and
empowered organisation
Our remodelling plans will be accompanied
by a substantial cost reduction programme
and a number of steps to simplify HSBC.
These aim to reduce our overall cost base
and to accelerate the pace of change. There
are three broad parts to these plans. First, we
aim to remove costs linked to discontinued
activities. Second, through further investments
in technology, we intend to re-engineer
processes to take out costs and improve the
customer experience. Third, we plan to simplify
our matrix organisational structure. As part
of this, we intend to move from four lines of
business to three, by merging GPB and RBWM
to create one new organisation, Wealth and
Personal Banking. We also plan to merge the
operational support infrastructure of CMB and
Global Banking, while maintaining separate
front-line teams, which should improve
collaboration between the two businesses.
Furthermore, we intend to reduce the number
of geographies represented on the Group
Management Board from seven to four. In
order to match the size and new structure
of our organisation, we plan to reorganise
our global functions and head office.
Our targets
The Group’s updated plan will have three
overarching 2022 targets. We will target a
gross RWA reduction of more than $100bn; we
intend to reduce our cost base to $31bn or less;
and we will target a RoTE in the range of 10%
to 12% in 2022 with the benefit of our cost
reductions and redeployed RWAs flowing into
subsequent years. Our gross RWA reductions
are expected to largely come from the
non-ring-fenced bank in Europe and the
UK, and the US. We also plan to redeploy
over $100bn to higher returning areas, which
will deliver strong growth in the rest of our
business. As a result, we intend for the Group’s
net RWA position to be similar to today, but
have a higher earning asset mix. We intend to
sustain our dividend policy and plan to suspend
share buy-backs in 2020 and 2021 as we go
through the period of restructuring.
2022 targets
Cumulative gross RWA reduction
by 2022 of
>$100bn
Adjusted cost base reduction in 2022 to
$31bn or less
RoTE in 2022 of
10% to 12%
2025 target
Provide and facilitate sustainable finance
and investment of
$100bn
13
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019 Strategic report
How we do business
Supporting sustainable growth
We conduct our business intent on supporting the sustained
success of our customers, people and other stakeholders.
Our approach
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 us to deliver our strategy and operate
our business in a way that is sustainable.
Non-financial information statement
We provide information about our customers,
employees and our approach to creating a
responsible business culture. We also provide
an update to our sustainability strategy,
including our progress towards our $100bn
sustainable finance commitment and our third
disclosure for the Task Force on Climate-
related Financial Disclosures (‘TCFD’).
Our Environmental, Social and Governance
(‘ESG’) Update provides further information
on the topics covered in this section. It is
available on our website at www.hsbc.com/
our-approach/esg-information.
This section primarily covers our non-financial
information statement guidance. Other
related information can be found as follows:
For further details on our business model,
see page 5.
For further details on our principal risks and
how they are managed, see pages 38 to 40.
For further details on Board diversity beyond
gender, see page 172.
Our stakeholders
How we listen
What we discuss1
Communities
We welcome dialogue with external stakeholders,
including non-governmental organisations (‘NGOs’)
and other civil society groups, including charities.
We engage directly on specific issues and by taking
part in external forums and round-tables.
Our customers’ voices are heard through
our interactions with them, surveys, listening
to and engaging with social media and from
their complaints.
We discuss how we support our customers with the
transition to a low-carbon economy and climate-related
risk management, covering sensitive sectors such as energy,
palm oil and forestry.
For further details on how we support sustainable growth,
see pages 20 to 23.
We discuss a range of subjects, including how we are making
banking accessible, how we are making our processes easier
and how we plan to communicate more simply and effectively.
For further details on how we support our customers,
see pages 16 to 17.
Our people’s voices are heard through our
employee survey Snapshot, Exchange meetings
and our ‘speak up’ channels, including our global
whistleblowing platform, HSBC Confidential.
We discuss a range of subjects including our ‘speak up’
culture, well-being and the importance of keeping our
employees engaged.
For further details on how we support our employees,
see pages 18 to 19.
We have shareholders in 130 countries. We engage with
our shareholders through our Annual General Meetings.
We also engage with our investors through bilateral
meetings, external events and our annual ESG survey.
We discuss our performance, as well as how we manage risk
and our governance processes.
For further details on how we are building a responsible business
culture, see pages 24 to 25.
Customers
Employees
Investors
Regulators and
governments
We proactively engage with regulators and
governments to facilitate strong relationships
and understand the expectations that are
critical to our business.
Suppliers
Our ethical and environmental code of conduct
for suppliers of goods and services sets out how
we engage with our suppliers on ethical and
environmental performance. The code is available
at: www.hsbc.com/our-approach/risk-and-
responsibility/working-with-suppliers.
Regulators and governments focus on our strategic response
to geopolitical and macroeconomic challenges. There is
also focus on non-financial risks, including on cyber and
operational resilience risks, as well as attention to conduct
and financial crime risks.
For further details on how we are building a responsible business
culture, see pages 24 to 25.
We discuss conduct requirements related to the economic,
environmental and social impacts associated with the supply
of goods or services.
For further details on our approach to our suppliers, see page 25.
1 These are summaries of the discussion points for each of our stakeholder groups and are not exhaustive or exclusive to one stakeholder group.
14
HSBC Holdings plc Annual Report and Accounts 2019 How we do business
Our ESG metrics and targets
We have established targets that guide how
we do business, including how we operate
and how we serve our customers. These
targets are designed to help us to make our
business – and those of our customers – more
environmentally sustainable. They also help us
to improve employee advocacy and diversity
at senior levels as well as strengthen our
market conduct.
The 2020 annual incentive scorecards of
the Group Chief Executive, Group Chief
Financial Officer and members of the Group
Management Board have 30% weightings
for measures linked to outcomes that
underpin the ESG metrics below.
ESG metrics are also included in the long-term
incentive (‘LTI’) scorecards of executive
Directors. The 2017 LTI scorecards of executive
Directors included achieving a cumulative
financing and investment target of $30bn
to $34bn for developing clean energy and
lower-carbon technologies and projects
that contribute to the delivery of the
Paris Agreement and the UN Sustainable
Development Goals. The 2018 LTI scorecards
of executive Directors included an ESG rank
measure based on a rating from Sustainalytics,
a third-party sustainability ratings agency. At
31 December 2019, HSBC achieved a medium
ESG risk rating using the new Sustainalytics
methodology. HSBC’s rating outperformed
compared with a peer set that included
10 global banks, three emerging markets-
based banks and one Asia-Pacific-based bank.
The 2019 LTI scorecard includes a customer
measure incentivising improvement in our
customer satisfaction scores in home and
scale markets and progress in meeting
customer-linked business objectives.
Target
Performance in 2019
Environmental
Sustainable finance and investment
Provide and facilitate1
$100bn
by the end of 2025
Reduce operational CO2 emissions 2.0
Climate-related disclosures
tonnes used per full-time
equivalent (‘FTE’) by the
end of 20202
Continued implementation
of the Financial Stability
Board’s TCFD
Social
Customer satisfaction
Customer satisfaction
improvements in
Employee advocacy
Employee gender diversity
Governance
8
scale markets3
69%
of employees recommending
HSBC as a great place to work
by the end of 20194
30%
women in senior leadership
roles by the end of 20205
Achieve sustained delivery of global
conduct outcomes and effective
financial crime risk management 98%
of staff to complete annual
conduct training
$52.4bn
cumulative progress since 20171
2.26
tonnes used per FTE2
We published our
3rd
TCFD, which can be found
on pages 22 and 23
6
4
RBWM markets
sustained top-three
rank and/or improved
in customer
satisfaction3
CMB markets
sustained top-three
rank and/or improved
in customer
satisfaction3
66%
of employees would recommend
HSBC as a great place to work4
(2018: 66%)
29.4%
women in senior
leadership roles5
98.2%
of staff completed conduct
training in 2019
1 The sustainable finance commitment and progress figure includes green, social and sustainability activities. For a full breakdown, see pages 20 and 21.
2 See reporting guidelines on www.hsbc.com/our-approach/esg-information/esg-reporting-and-policies for further detail on carbon emissions reporting.
As we define our new baseline for the next phase of our operational sustainability strategy, an updated reporting methodology for air travel – including
cabin seating class – will be incorporated as our new baseline.
3 Our customer satisfaction performance is based on improving from our 2017 baseline. Our scale markets are Hong Kong, the UK, Mexico, the Pearl River
Delta, Singapore, Malaysia, the UAE and Saudi Arabia.
4 Our target was to improve employee advocacy by three points each year through to 2020. Our employee advocacy score in 2018 was 66%. Performance
is based on our employee Snapshot results.
5 Senior leadership is classified as 0 to 3 in our global career band structure.
15
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019
Strategic report | How we do business
Customers
We aim to grow in a way that puts the customer at the centre
by improving performance with digital enhancements while
maintaining strong controls on the risk of financial crime.
At a glance
How we listen
When things go wrong
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. If things do go wrong, we aim to
take action 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.
Investment in technology
We have made a significant investment in
our digital transformation to improve access,
navigation and usability for all of our customers
across our businesses, driven by customer
needs and feedback.
For our retail customers in 2019, we upgraded
our public websites in all 38 markets, and
online banking platforms and mobile banking
apps in 16 markets. We also introduced more
than 160 new digital features to make everyday
banking easier across different markets,
including improved digital account opening,
loan and mortgage applications, and instant
money transfers. At the end of 2019, the
retail mobile banking app achieved an average
Apple app store rating of 4.8 in the UK and
4.7 in Hong Kong. While scores from Android
users were less favourable, at 4.0 in the UK and
3.6 in Hong Kong, these scores have increased
for the past two years due in part to our
improved support for Android biometric login.
In Hong Kong, our payments app PayMe
continued to grow, with approximately
1.9 million registered consumer accounts,
and expanded to include payments to
merchants for products and services.
16
We listen to our customers in a number
of different ways, including through our
interactions with them, surveys, social
media and through their complaints. We
use these insights to improve our services.
Customer recommendation index1
RBWM
UK
2019
2018
Hong Kong
2019
2018
2019
76%
75%
69%
71%
1 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.
Our retail customers are increasingly banking
online or on mobile, with nearly half (48%)
digitally active in November 2019, a seven
percentage point or 1.69 million increase
compared with December 2018. Similarly,
89% of retail transactions were digital in
November 2019, a five-point increase
compared with December 2018.
We continued to make it easier and more
secure to bank with us across our businesses,
including through technology. This included
investing in voice recognition for people
phoning our contact centres as well as face
and touch authentication for Apple and
Android devices.
For our retail customers, these capabilities are
live in 18 markets and used by approximately
50% of customers in those markets. HSBC
Voice ID is available to our telephone banking
customers in five markets with more than
three million registered users. We also
upgraded our digital security platform in
17 of our retail banking markets.
To improve our services we must be open to
feedback and acknowledge when things go
wrong. We listen to complaints to address
customers’ concerns and understand where
we can improve processes, procedures and
systems. We focus on staff training and
emphasise the importance of recording
complaints. This improves our complaint
handling expertise and helps ensure our
customers are provided with fair outcomes.
Complaints are monitored and reported to
governance forums, while senior executives
are measured against customer satisfaction
performance.
Complaint resolution
The time taken to resolve complaints (excluding
payment protection insurance complaints)
on the same or next working day remained
unchanged compared with 2018. However,
the time taken to resolve complaints beyond
five business days increased compared with
the previous year. This is primarily due to a
prioritisation of payment-related complaints
following regulatory changes in the UK.
RBWM
17%
6%
2019
77%
14%
9%
2018
77%
Key
Same day or next working day
Between 2–5 days
Longer than 5 days
HSBC Holdings plc Annual Report and Accounts 2019
How we do business
Acting on feedback
Acting on customer feedback helps us to improve our services, processes and communication. Here are some examples of actions that we have
taken in response to feedback:
Area of focus
Action
Making banking
accessible
We use facial and touch authentication on Apple and Android devices in 18 markets. HSBC Voice ID, which is
available to our telephone banking customers in five markets, had over three million registered users in 2019.
In November 2019, over 89% of customer transactions globally were conducted via mobile or online channels.
These included more than 32% of cards and deposit account sales and approximately 45% of loan sales.
In the UK, Hong Kong and Mexico, we introduced new no-cost or low-cost bank accounts to help more people access
financial services. In Hong Kong, we made it easier and faster to make payments through our PayMe app, using the
Faster Payment System, a more intuitive design and the ability to top up with a non-HSBC bank account.
Making our
processes easier
In the UK, our mortgage process simplification resulted in 75% of successful applications receiving an offer within
10 days, an improvement from 48% in 2018. We also made it easier for international customers to take out a
mortgage through new specialist teams who provide customers one point of contact for guidance.
Communicating
more simply and
proactively
In the UK and Canada, we launched digital investment advice platforms that offer low-cost multi-asset solutions
tailored to customers’ risk profiles. In Hong Kong, we introduced FlexInvest, which provides a simple mobile journey
for investment funds and makes investing accessible to more people through a low minimum investment amount
and zero transaction fees.
For customers who find insurance products difficult to understand, we aim to use plain language. In Hong Kong,
we launched an online platform that explains complicated insurance concepts through games, videos and articles.
In the UK and Hong Kong, we are proactive in sending digital messages to support our customers and treat them fairly,
from fraud prevention warnings to missed payment notifications to overdraft warnings. In the year to October 2019, we
sent over 11 million SMS messages notifying UK customers to make a deposit to avoid overdraft charges, which were
acted upon in 58% of cases in HSBC UK and 75% in our first direct brand. In 2019, some UK customers were not
provided overdraft warnings because of a policy to not disturb customers during late night hours and a technical issue.
We fixed this issue and will provide a refund to affected customers.
Communicating through social media
Social media channels help us communicate
with our customers. We keep them informed,
such as advising how to stay ahead of
fraudulent activity, while our sports
sponsorship content is some of our most liked
and shared. We use technology, like machine
learning and artificial intelligence (‘AI’), to help
us identify potential service issues. In 2019,
we created ‘pain point’ reports, highlighting
key issues raised by customers for multiple
markets. Making it easier for customers to
interact with us through social media remains
a priority and we have implemented a global
Facebook messenger ‘service bot’, which is
designed to help our international or travelling
customers direct their queries back to their
home market customer service team.
In 2019, we enhanced our social media
capabilities to improve how we support our
customers who use Chinese social networks,
such as WeChat and Sina Weibo. Through
new technology partnerships, we are now
better able to understand our customers’
views and feedback posted through these
channels, which can help us to identify
service issues and areas for improvement.
As the social media landscape continues to
evolve, we will continue to review the channels
where we have a presence and investigate
new opportunities to reach our customers.
In 2020, we expect to see an increased
presence on Instagram, which continues
to grow in popularity. We are also exploring
how popular messaging apps – like WhatsApp
– can be used to further improve customer
communications.
Branches of the future
Branches remain an important way in which we serve our customers
even as their expectations and preferences are changing. We are
improving the location, format and layout of our branches and fitting
them with new technology – but the role of our people remains key.
We continue to invest in our staff with the right training and tools to
support customers wherever they choose to bank, whether in person
or online. We expanded our development programme for our
customer-facing employees, giving them coaching to develop the
skills and confidence to resolve customers’ queries as their first point
of contact whenever possible. We have now trained approximately
6,000 employees in seven markets – the UK, Hong Kong, Mexico,
the US, Singapore, Indonesia and Canada – in these new roles.
6,000
Approximate number of employees
trained in Universal Banker roles
17
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019 Strategic report | How we do business
Employees
We have a total workforce equivalent to 235,000 full-time
employees, working across 64 countries and territories.
We are working to create the right environment to help
enable everyone to fulfil their potential.
At a glance
How we listen
Our people span many cultures,
communities and continents. By focusing
on employee well-being, diversity, inclusion
and engagement, as well as building our
peoples’ skills and capabilities for now and for
the future, we aim to create an environment
where our people can fulfil their potential.
We use confidential surveys to assess
progress and make changes. We want to
have an open culture where our people feel
connected, supported to speak up and where
our leaders encourage feedback. Where we
make organisational changes, we support
our people throughout the change and in
particular where there are job losses.
Employees (’FTEs’) by region
2019
Asia 54.7%
Europe 26.4%
Middle East and North Africa 3.9%
North America 6.6%
Latin America 8.4%
Acting on feedback
Area of focus
Action
It is vital we understand how our people feel,
as it helps us give them the right support to
thrive and serve our customers well. We
capture their views on a range of topics, such
as our strategy, culture, behaviour, well-being
and working environment, through our
employee survey, Snapshot. Results are
presented to the Group Management Board
and relevant executive committees. This allows
us to take action based on the feedback.
We track whether our people would
recommend HSBC as a great place to work,
which we define as employee advocacy.
At the end of 2019, 66% of our people
who completed Snapshot said they would
recommend HSBC, unchanged from the year
before. We recognise that this falls short of
our stated target of improving this measure by
three points each year through to the end of
2020, and we are aware that the context of
restructuring and redundancies in some areas
of our business has impacted our progress.
We also acknowledge that our people feel less
positive about the impact of our strategy and
are less confident about the future, particularly
in the US and Europe. This has come amid a
period of significant change within the Group,
underscoring the need for clear and consistent
messaging to support our 2020 business
update. We continue to support our people
closely through organisational change and
have used our business update to provide
greater clarity.
Employee Snapshot results
I am seeing the positive
impact of our strategy
I feel confident about
HSBC’s future
I trust the senior
leadership in my area
I am proud to say
I work for HSBC
I would recommend
this company as a
great place to work
Conditions in my job
allow me to be as
productive as I can be
I feel able to speak up
when I see behaviour
which I consider to
be wrong
I believe HSBC
is genuine in its
commitment to
encourage colleagues
to speak up
2019 2018
58% 67%
66% 75%
65% 64%
74% 76%
66% 66%
63% 65%
74% 74%
72% 74%
Employee retention
85.7%
(2018: 85.5%)
Improving trust in
speaking up
According to Snapshot, nearly three-quarters (74%) of our people feel able to speak up when they see behaviour that
they consider to be wrong, unchanged from 2018. Only 59% said they were confident that if they speak up, appropriate
action will be taken. We want more of our people to have confidence in speaking up to their line managers. In 2020, we
began a programme to raise awareness about how to speak up about different types of concerns, how concerns are
investigated and, crucially, what action we take as a result of concerns being raised.
Raising awareness
of mental health
We worked with experts and colleagues to build a bespoke e-learning curriculum accessible to all 235,000 employees,
which was delivered in September 2019. We also built and began rolling out additional classroom learning for managers.
These were adapted to ensure they work for local cultures and languages.
18
HSBC Holdings plc Annual Report and Accounts 2019 How we do business
When things go wrong
We want a culture where our people feel
able to speak up. Individuals are encouraged
to raise concerns about wrongdoing or
unethical conduct through the usual escalation
channels. However, we understand that there
are circumstances where people need to raise
concerns more discreetly. HSBC Confidential is
a global whistleblowing platform that enables
our people, past and present, to raise concerns
in confidence. HSBC does not condone or
tolerate any acts of retaliation against those
who raise concerns.
Whistleblowing concerns are investigated
thoroughly and independently. Remedial action,
taken where appropriate, includes disciplinary
Diversity and inclusion
We are committed to a company-wide
approach to diversity and inclusion. We want
to embrace our people’s diverse ideas, styles
and perspectives to reflect and understand
our customers, communities, suppliers and
investors. Our actions are focused on ensuring
our people are valued, respected and
supported to fulfil their potential and thrive.
Our 30% commitment
In 2018, we signed up to a commitment, led
by the gender diversity campaign group 30%
Club, to reach 30% women in senior leadership
roles by 2020. To help us achieve that
aspirational target, we set ourselves a goal to
reach 29% by the end of 2019. We achieved
29.4% and are continuing to take action
towards more balanced leadership teams.
Gender #BalanceforBetter
Our people are supporting our goal to improve
gender diversity, and our #BalanceforBetter
campaign on International Women’s Day in
2019 was our most successful employee social
media campaign to date. Our global employee
network, Balance, has played a key role in
our work on gender. In 2019, we created a
series of safe and comfortable spaces for new
and expectant mothers. We equipped 125
parenting rooms in 2019, with more planned.
Our global diversity and inclusion strategy
In 2019, we began implementing a two-year
global diversity and inclusion strategy to
deliver more inclusive outcomes for our
Supporting our people through organisational change
To ensure we have the right roles in the right locations, our businesses regularly re-evaluate their
structures. We strive to support colleagues closely through all organisational change, which will
include those who will be affected by our business update. Our focus is to prioritise retention
of our permanent employees through mechanisms such as redeployment. Redundancies were
necessary in 2019, and we sought to treat people fairly and responsibly. Where appropriate,
we provided suitable notice periods and consulted with representative bodies. We use
objective and appropriate selection criteria for redundancies. We prohibit selection on grounds
linked to personal characteristics, for example gender, race, age or having raised past
concerns. In many markets, including the UK and Hong Kong, our severance payments
exceeded statutory minimums and our employees were additionally provided with access
to counselling via employee assistance programmes and career transition support.
action, dismissal, and adjustments to variable
pay and performance ratings. The Group Audit
Committee has overall responsibility for the
oversight of the Group’s whistleblowing
arrangements and receives regular updates.
We continued to promote the Group’s
whistleblowing arrangement through training
in 2019 and this has contributed to the
increase in the number of cases raised
compared with 2018.
For further information on our whistleblowing
platform, and also how we deal with personal
conduct including our training programme on
workplace harassment, see page 29 of the
ESG Update.
Whistleblowing cases raised
(subject to investigation)
2019
2018
Substantiated closed
whistleblowing cases1
2019
2018
2,808
2,068
33%
34%
2019
1 Cases where the investigation found the allegations
to be substantiated or partially substantiated.
Gender diversity statistics1,2
people, customers, suppliers and the
communities in which we operate. We are
working closely with our global employee
networks to help accelerate our progress.
In 2019, we carried out actions aligned to
our four strategic pillars below. For examples
of work we delivered in 2019, see the ESG
Update on page 31.
Beyond gender
We are expanding our focus beyond gender
to include global approaches to ethnicity,
disability and LGBT+ inclusion.
Our employee networks
We are investing in our employee networks
around the world to improve governance.
Beyond employees
We are extending our actions beyond
employees to integrate diversity and
inclusion into our commercial activities.
Enhancing our data
We are enhancing our data to support an
evidence-based approach to driving change.
1 Combined executive committee and direct
reports includes HSBC executive Directors,
Group Managing Directors, Group Company
Secretary and Chief Governance Officer and their
direct reports (excluding administrative staff).
2 Senior leadership refers to employees performing
roles classified as 0, 1, 2 and 3 in our global career
band structure.
Holdings
Board
Group
Management
Board
9
5
16
3
Combined
executive
committee and
direct reports
168
62
Senior
2019
leadership
Senior
leadership
RBWM
Senior
leadership
CMB
Senior
leadership
GB&M
Senior
2019
leadership
GPB
Senior
leadership
HOST
All
employees
6,915
2,882
748
353
715
284
2,327
623
386
193
751
276
116,157
124,801
Male
Female
64%
36%
84%
16%
73%
27%
71%
29%
68%
32%
72%
28%
79%
21%
67%
33%
73%
27%
48%
52%
19
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019 Strategic report | How we do business
Supporting sustainable growth
We recognise our wider role in society and
believe we can make a positive impact with
how we do business. We understand that the
global transition to a low-carbon economy is
necessary to combat climate change and
deliver a more sustainable future.
A key part of our sustainability strategy
involves supporting our customers and their
suppliers with their transition to a low-carbon
economy. We aim to achieve this by providing
sustainable finance, offering advice on how to
structure financing solutions that align to the
Paris Agreement and engaging with them on
transition and physical risk.
We believe that we have a role to play in
helping to address the challenges relating to
climate change, environmental degradation,
poverty, inequality, peace and justice, which
is why we have committed to provide and
facilitate $100bn of sustainable financing
by 2025. This forms part of our approach
to the United Nations (‘UN’) Sustainable
Development Goals (‘SDGs’).
The 17 goals and 169 targets that comprise
the SDGs form the globally agreed framework
designed not only to protect the planet,
but also to end poverty and ensure peace
and prosperity.
Our sustainable finance commitments
In November 2017, we published five sustainable finance commitments. In this section,
we summarise the progress made against these commitments:
Provide and facilitate $100bn of sustainable financing, facilitation and
investment by 2025
We have provided $52.4bn of financing, investing and facilitation since 1 January 2017 to a range
of clients and projects that are aligned to our environmental, social and governance qualifying
criteria, as set out in our sustainable finance data dictionary. Details of the projects that we have
financed are on the opposite page.
Our sustainable finance commitment does not include a number of other facilities that we
have provided to help clients with transition activities, including mergers and acquisitions for
renewable energy customers, facilities where the margin is linked to sustainability indicators
and sustainable supply chain finance solutions.
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 29.4% of our electricity
consumption, which is up 0.9 percentage points from 2018, and decreased energy
consumption per FTE by 23% since 2011 (details on our carbon dioxide emissions can
be found on page 72). In 2019, we achieved our energy reduction target of 1.2MWh/FTE
by 2020 with a final reduction of 1.4MWh/FTE.
Reduce our exposure to thermal coal and actively manage the transition path
for other high-carbon sectors
In 2019, we contributed $100.7m to charitable
programmes and our employees volunteered
257,000 hours to community activities during
the working day.
We continued to work on 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 22. Our sustainability risk policies are available at
www.hsbc.com/our-approach/risk-and-responsibility/sustainability-risk.
Adopt the recommendations of the TCFD to improve transparency
Further details of our third TCFD disclosure are on page 22.
Lead and shape the debate around sustainable finance and investment
We published 45 reports and articles on HSBC’s Centre of Sustainable Finance
(www.sustainablefinance.hsbc.com) in 2019. For these thought leadership pieces, we
built on our internal subject matter expertise and our external network of partners, which
came from numerous industry associations and top academic institutions. Pathways to
decarbonise hard-to-abate sectors such as shipping, steel and cement were among the
themes for 2019.
Improving access to trade finance in a sustainable supply chain
Walmart in 2017 announced ‘Project Gigaton’, an initiative to work with suppliers to reduce
or avoid one billion tonnes of greenhouse gases from the global supply chain by 2030.
Walmart also encourages its suppliers to participate in THESIS, a third-party programme
that scores suppliers on sustainability criteria and encourages continued improvement.
In April 2019, our teams in Asia, Europe and North America launched a sustainable supply chain
finance programme to support Walmart’s ambitions and help their suppliers with the transition
to a lower emissions world. This programme, which is the first of its type in the retail sector,
provides Walmart’s suppliers that show continued sustainability improvements with enhanced
access to trade finance at a price aligned to the suppliers’ performance. The collaboration with
its global reach demonstrates how financial institutions can accelerate customers’ efforts to
further sustainability.
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HSBC Holdings plc Annual Report and Accounts 2019 How we do business
Sustainable finance commitment
We are making good progress on our pledge to provide and facilitate
$100bn of sustainable financing and investment by 2025, having
already delivered $52.4bn of this commitment. We have supported
projects in 45 countries and territories, which have included those
addressing climate change and those seeking to benefit society,
such as clean water or housing. Our sustainable finance data
dictionary, including detailed definitions of contributing activities,
can be found on: www.hsbc.com/our-approach/esg-information/
esg-reporting-and-policies.
Facilitation
We provide advisory services to facilitate
the flow of capital and to provide access
to capital markets. Products include:
green, social and sustainable bonds;
finance advisory mandates; short-term
debt; debt capital markets; and equity
capital markets.
Financing
We provide lending for specific finance
activities. Products include project finance
(e.g. financing of renewable infrastructure
projects), and green loans (e.g. financing
of eligible green products).
Cumulative progress1,2 ($bn)
38.0
2019
2018
2017
16.6
11.1
10.3
Cumulative progress1,2 ($bn)
12.0
2019
2018
2017
Investments
We invest in funds that are defined as socially
responsible investments (‘SRI’). These funds
primarily avoid investing in companies that
can have a negative impact on society, such
as tobacco or gambling. Some of the SRI
funds are investing in companies that aim to
reduce the detrimental impacts that climate
change can create, while others have defined
transition strategies. These transition
strategies may include using alternative
energy, clean technology and developing
sustainable products and/or seeking to
increase the beneficial impacts on our society,
such as health, housing and clean water.
Cumulative progress1 ($bn)
2.4
2019
2018
2017
6.2
5.3
0.5
1.1
1.1
0.2
2019 highlights
– We ranked number two in Dealogic’s green, social and
sustainability bonds league table and number one in the
sustainability bonds table.
– We supported several green bond issuances that were
market firsts in the public and private sectors, including
as joint lead manager for the inaugural sovereign green
bonds for Hong Kong, Chile and the Republic of Ireland.
2019 highlights
– HSBC UK aligned its green lending offering to the Loan
Market Association’s green loan principles. The range,
which is available for SMEs through to large corporates,
includes a green loan, a UK industry first green revolving
credit facility and a green hire purchase, lease and
asset loan.
– We acted as a mandated lead arranger in the refinancing
of the Beatrice offshore wind farm off the north-east coast
of Scotland.
For further details on the refinancing of the Beatrice offshore
wind farm, see page 46.
2019 highlights
– HSBC Global Asset Management announced the creation
of a new green bond fund, the HSBC Real Economy Green
Investment Opportunity GEM Bond Fund. The fund’s aim
is to enable investors to achieve real economy impact to
deliver against the Paris Agreement and SDGs.
– We achieved a rating of A+/A using the United Nations
Principles of Responsible Investment (‘UN PRI’).
Geographical breakdown
of our progress
The geographical breakdown below
is based on the region where the
main client relationship is managed.
Green, social and sustainability
breakdown
Green, social and sustainability breakdown
Our progress against the $100bn commitment can be split into
three types:
$39.1bn
$8.8bn
$4.5bn
Key
Europe 50%
Asia 30%
Americas 16%
Middle East and North Africa 4%
Key
Green
Social
Sustainability
– Green: Projects that align to the eligible green project category
as defined by the International Capital Markets Association’s Green
Bond Principles, or a company whose core business operates in
one of the categories.
– Social: Projects that align to the eligible social project category
as defined by the International Capital Markets Association.
– Sustainability: Projects that mix green and social purposes that
align to the above principles.
1 PwC provided limited assurance over progress towards the $100bn
sustainable finance commitment as at 31 December 2019 in accordance
with the 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/esg-information/esg-reporting-and-policies.
2 Included within the facilitation total is $2.8bn-worth of advisory services on
HSBC-issued green/SDG bonds. Our green bond report summarises and our
asset register lists the loans that underpin our issuances. The latest report
includes $1.5bn of balances as at 30 June 2019 that have been included within
the financing total. The green report and asset register are available at www.
hsbc.com/investors/fixed-income-investors/green-and-sustainability-bonds.
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Strategic reportHSBC Holdings plc Annual Report and Accounts 2019 Strategic report | 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. We are a signatory
to the disclosure recommendations by the
Financial Stability Board’s task force. This
represents our third disclosure under the
framework.
climate risk forum and an ESG Steering
Committee also provides executive oversight
of climate commitments. We have formally
designated responsibility for managing the
financial risks from climate change through
the Senior Managers Regime for the
relevant entities.
Governance
We have an established governance
framework to help ensure that risks associated
with climate change are considered at the
most senior levels of our business.
At each Board meeting, the Directors are
presented with a risk profile report that
includes key risks for the business, which
may include climate risk where appropriate.
Independent non-executive Directors make
up the majority of the Board. Both the Group
Chief Executive and the Group Chief Financial
Officer are required to be members of the
Board. In 2019, the Group Chief Risk Officer
was also a member of the Board. With effect
from 1 January 2020, this role ceased to be
a Board member but the Group Chief Risk
Officer will still attend Board meetings. In this
role, the Group Chief Risk Officer raises any
concerns directly by providing verbal or written
updates on a regular basis to the Board and
Group Management Board.
The Board and regional executive
committees provide oversight of our
strategic commitments and are advised
by our climate business councils. The
Risk Management Meeting of the Group
Management Board (‘RMM’) provides
oversight of climate risk through the
‘top and emerging risk’ report, which is
reviewed on a monthly basis. A dedicated
In 2019, the Board held a one-day sustainable
finance and climate change ‘master class’; the
Group Risk Committee carried out a thematic
review of sustainability and climate change risk
management; and the Group Audit Committee
discussed ESG at four separate meetings. Our
people have also completed more than 5,300
sustainability training modules in 2019, a 41%
increase since the previous year.
For further details on how we incentivise
senior management and how climate-related
disclosures inform our strategy, see page 15.
Strategy
As part of our priority to support the transition
to a low-carbon economy, we pledged to
provide $100bn of sustainable finance,
facilitation and investment by 2025. At the
end of 2019, we reached $52.4bn of that
goal, of which $43.6bn relates to green or
sustainable products. In 2019, HSBC was
named the World’s Best Bank for Sustainable
Finance by Euromoney.
We recognise that many customers are
making shifts towards the low-carbon
economy and that our industry needs to
work together to find new ways to measure
these activities.
In 2019, HSBC participated in the CDP
(formerly the Carbon Disclosure Project)
working group to develop financial sector
disclosure. We also partnered with climate
change experts at MIT to produce exploratory
transition scenarios. These scenarios were
used to raise internal awareness of the
different speeds with which transition
could occur, the resulting investment
requirements, the implications for energy
system configuration and the broad
macroeconomic costs.
Risk management
We are in the process of incorporating
climate-related risk, both physical and
transition, into how we manage and
oversee risk. The Board-approved risk
appetite statement contains a qualitative
statement on our approach to climate risk.
We intend to further enhance the climate
risk statement in 2020.
In 2019, we also trained over 800 employees
on climate risk to strengthen engagement with
customers. For further information on how we
manage sustainability risks, see pages 42 to
43 of our ESG Update.
We report on the emissions of our own
operations via CDP and achieved a leadership
score of A- for our 2019 CDP disclosure.
Since the revision of the energy policy, we
have not agreed any project financing for any
new coal-fired power plants anywhere.
For further details of our sustainability
risk policies covering specific sectors, see:
www.hsbc.com/our-approach/risk-and-
responsibility/sustainability-risk.
For further details about the sustainability of
our own operations, see www.hsbc.com/
our-approach/building-a-sustainable-future/
sustainable-operations.
Table 1: Wholesale loan exposure to transition risk sectors
Transition risk sector
% of total wholesale loans
and advances to customers
and banks in 20191,2,3
% of total wholesale loans
and advances to customers
and banks in 20181,2,3
Oil and
gas
Building and
construction
Chemicals
Automotive
Power and
utilities
Metals and
mining
Total
≤ 3.8%
≤ 3.9%
≤ 3.9%
≤ 3.2%
≤ 3.2%
≤ 2.7% ≤ 20.6%
≤ 3.9%
≤ 3.8%
≤ 3.9%
≤ 3.4%
≤ 3.0%
≤ 2.8% ≤ 20.8%
1 Amounts shown in the table include green and other sustainable finance loans, which support the transition to the low-carbon economy. The methodology for
quantifying our exposure to higher transition risk sectors and the transition risk metrics will evolve over time as more data becomes available and is incorporated in
our risk management systems and processes.
2 Counterparties are allocated to the higher transition risk sectors via a two-step approach. Firstly, 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. Secondly, 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.
3 Total wholesale loans and advances to customers and banks amount to $680bn (2018: $668bn).
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HSBC Holdings plc Annual Report and Accounts 2019 How we do business
Task Force on Climate-related Financial Disclosures (‘TCFD’) continued
Developing our approach to transition risk
We have started to develop and publish new
transition metrics to help us gain a deeper
understanding of the complexities of this topic.
Transition risk is the possibility that a
customer will be unable to meet its financial
obligations due to the global movement from
a high-carbon to a low-carbon economy.
We are considering transition risk from three
perspectives: understanding our exposure to
transition risk; understanding how our clients
are managing transition risk; and measuring our
clients’ progress in reducing carbon emissions.
To better understand our exposure to transition
risk, we identified six higher transition risk
sectors in 2018, based on their contribution
to global carbon dioxide emissions and other
factors. These transition risk sectors and our
exposure to them are disclosed in table 1.
Figures in this table capture all lending activity
to customers within these sectors, including
those that are environmentally responsible
as well as sustainable financing activities.
This means that green financing for large
companies that work in higher transition
sectors is included. For further information
on how we designate counterparties as
‘higher transition risk’, see footnote 2 on
the previous page.
In 2019, to better understand how our clients
are managing transition risk, we had more than
3,000 engagements with customers through
meetings or phone calls, across all sectors,
to discuss their approach to climate change.
We also developed a questionnaire to improve
our understanding of our customers’ climate
transition strategies. We received responses
from over 750 customers within the six higher
risk transition sectors, which represented 34%
of our exposure. We are using this information
to inform our decision making and strategy.
For instance, this information is helping us
to understand which customers need to adapt,
their readiness to change and identify potential
business opportunities to support the
transition. This information is also being used
to supplement the management of transition
risk in our credit risk management processes.
are designed to help us identify key areas of
vulnerability to climate change, the associated
impact on property portfolios and economic
activity. We also aim to review our policies
and procedures with respect to physical risks
associated with climate change for our own
buildings and branches. These reviews will
help us to understand any gaps in policies
and procedures and will also improve our
understanding of our physical risk exposure
and how this might change over time.
To improve our understanding of the progress
our clients are making in reducing carbon
emissions, in 2019 we launched a pilot scheme
to develop a series of new transition metrics to
help disclose our customers’ progress towards
a low-carbon economy. As part of the pilot, we
calculated a weighted carbon-intensity ratio
for over 900 customers within the six high
risk transition sectors. We first obtained a
client’s total revenue carbon intensity from a
third-party provider, CDP. The revenue carbon
intensity ratio is effectively the carbon that is
emitted per million dollars of revenue. It was
calculated as emissions from both direct and
indirect emissions, known as scope 1 and 2
emissions, divided by total revenue. We then
weighted the revenue-carbon intensity ratio by
our exposure to that client, within the sector.
Next steps
In 2020, we intend to continue to explore
what data is available to provide us with
greater insight of our clients’ portfolio
emissions. We also aim to continue to review
our retail exposures on a geographical basis
in respect of natural hazard risk, for example
considering flood risk for properties that we
have provided financing on. These reviews
In next year’s TCFD disclosure, we also expect
to disclose more qualitative information on our
approach to climate stress testing.
Memberships
Founding member, the Climate
Finance Leadership Initiative
Founding member, Chapter Zero:
The Directors’ Climate Forum
Member, the FCA and PRA’s Climate
Financial Risk Forum (‘CFRF’)
Chair, climate risk working group
of the CFRF
For further details of our sustainability-
related memberships, see www.hsbc.com/
our-approach/esg-information/
sustainability-memberships.
Table 2: Customers’ questionnaire responses and pilot carbon intensity metrics
Oil and
gas
Building and
construction
Chemicals
Automotive
Power and
utilities
Metals and
mining
Proportion of sector for which
questionnaires were completed4
Proportion of questionnaire responses
that reported either having a board
policy or a management plan4
Sector weight as proportion of high
transition risk sector4
Pilot as % of total sector 4
Proportion of pilot that report carbon
intensity metric through CDP4
Weighted average carbon emissions
per million dollars of revenue (total
client emissions/revenue weighted
by exposure)4,5
33%
84%
18%
38%
49%
688
37%
51%
19%
41%
53%
408
27%
85%
19%
30%
38%
517
39%
64%
15%
52%
48%
301
30%
94%
15%
42%
38%
Total
34%
44%
62%
72%
13%
100%
46%
30%
41%
44%
7,235
787
4 All percentages are weighted by exposure.
5 Customer responses to CDP have been used to formulate the carbon intensity metrics in table 2. If a client does not complete the CDP questionnaire, information
is not included in the metrics. The CDP questionnaire is voluntarily completed by clients between April and July of a given year and may not all be from a single
point in time. Figures obtained from CDP have not been separately validated. The carbon intensity ratio is calculated by CDP using both reported figures and
estimated data. Carbon emissions are measured in tonnes of carbon dioxide equivalent (tCO2e) and revenue is measured in millions of US dollars.
23
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019
Strategic report | How we do business
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.
At a glance
We act on our responsibility to run our
business in a way that upholds high
standards of corporate governance.
We are committed to working with our
regulators to manage the safety of the
financial system, adhering to the spirit
and the letter of the rules and regulations
governing our industry. In our endeavour
to restore trust in our industry, we aim to
act with courageous integrity and learn from
past events to help prevent their recurrence.
We meet our responsibilities to society,
including through paying taxes and being
transparent in our approach. We also seek
to ensure we respect global standards on
human rights in our workplace and our supply
chains, and continually work to improve our
compliance management capabilities.
We acknowledge that increasing financial
inclusion is a continuing effort, and we are
carrying out a number of initiatives to
increase access to financial services.
For further details on our corporate governance,
see page 156.
For further details on our ‘Responsible business
culture’, see page 48 of our ESG Update, which
is available at www.hsbc.com/our-approach/
esg-information.
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 2019,
we continued to strengthen our approach to
managing non-financial risk, launching a
transformation programme to accelerate our
progress. The approach sets out non-financial
risk governance and our risk appetite, and
provides a single view of the non-financial
risks that matter the most and associated
controls. It incorporates a risk management
system to enable the active management of
risk. Our focus is on simplifying our approach
to risk management and driving more effective
oversight and better end-to-end identification
and management of risks. We aim to see
improvements by the end of the first half
of 2020, while building capability for the
long term.
Cybersecurity
We operate in an increasingly sophisticated
and hostile cyber-threat environment. In
response, we have invested in business
and technical controls to help prevent,
detect and react to these threats.
We continually evaluate threat levels for the
most prevalent attack types and their potential
outcomes. We strengthened our controls to
reduce the likelihood and impact of advanced
malware, data leakage, infiltration of payment
systems and denial of service attacks.
We continued to enhance our cybersecurity
capabilities, including threat detection and
access control as well as back-up and
recovery. An important part of our defence
strategy is ensuring our people remain aware
of cybersecurity issues and know how to
report incidents. In 2020, we plan to focus on
enhancing our use of data analytics, continue
to implement our cybersecurity education and
communication programme, and help ensure
our cyber controls are highly effective across
the organisation.
For further details on our ‘Top and emerging
risks’, see page 39.
For further details on how we protect our
customers’ data, see pages 24 and 25 of
the ESG Update.
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 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 more effectively. Our risk appetite has
been set formally.
For further details on our risk appetite statement,
see page 73.
Banking for vulnerable customers
After successfully trialling an approach to providing victims of human trafficking and modern
slavery in the UK with monitored bank accounts, the service was made more widely available in
2019. This was a first in the UK and our work was cited by the UN as an example of how banks
can support victims of trafficking. Over 300 people had been provided with accounts by
December 2019.
Our ‘no fixed address service’ also provides access to banking for the homeless. The service
enables vulnerable people without a fixed home address to receive wage and benefit payments,
as well as support in rebuilding their lives. As a result, HSBC UK was recognised by The Banker
as Bank of the Year 2019 for financial inclusion in the UK.
24
HSBC Holdings plc Annual Report and Accounts 2019 How we do business
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. Our policy
is supported by our continued investment
in technology and training. In 2019, 97% of
our workforce were trained via a mandatory
e-learning course and more than 2,900
received tailored role-based training. By the
end of 2020, more than 12,000 employees
– who undertake activities with a high risk of
bribery – will be targeted for specialist training.
Restoring trust
Restoration of trust in our industry remains
a significant challenge as past misdeeds
continue to remain in the spotlight. HSBC
has sought to learn from past mistakes and
is seeking to develop and implement specific
measures designed to prevent their recurrence
in the future. In the ESG Update, we provide
three examples of how we have sought to
learn from our past mistakes. These can be
found in the ESG Update on pages 50 to 52.
For further details on legal proceedings and
regulatory matters, see page 308.
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, aiming to
ensure 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.
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.
For further details on taxes that we have paid,
see page 72.
Taxes paid by region
($bn)
2019
Europe $3.1bn
Asia $1.5bn
Middle East and North Africa $0.3bn
North America $0.3bn
Latin America $0.4bn
Human rights
Our 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 approach with
our suppliers
We have globally consistent standards and
procedures for the onboarding and use of
external suppliers. We require suppliers to
meet our compliance and financial stability
requirements, as well as to keep to our
sustainability code of conduct. Payment on
time is of paramount importance, and as such
our commitment to paying our suppliers is in
line with local requirements, including the
Prompt Payment Code in the UK.
We have an ethical and environmental code
of conduct for suppliers of goods and services,
which must be complied with by all suppliers.
While our businesses and functions are
accountable for the suppliers they use, our
global procurement function owns the code
of conduct review process for them.
Our goal is to work collaboratively with
our supply chain partners on sustainability
at all times. When a supplier or one of its
sub-contractors is found to no longer be in
compliance with this code, we will work with
them on an improvement plan or, if deemed
necessary, terminate the relationship.
The ethical code of conduct, which we require
suppliers to adopt, sets out the standards for
economic, environmental and social impacts
and outlines the requirements of having a
governance and management structure to
help ensure compliance with this code.
Our supplier management conduct principles
also set out how we conduct business with
our third-party suppliers both in our legal and
commercial obligations. They also explain how
we treat suppliers fairly through our behaviour
and actions, in line with our values.
We have a connected global supply base and
inclusive sourcing strategies that reflect the
communities where we operate, and help
ensure we meet the needs of our diverse
customer base. Our supplier diversity and
inclusion action plan encourages the use of
minority owned and SME businesses.
Our supplier code of conduct and diversity
initiative are available at: www.hsbc.com/
our-approach/risk-and-responsibility/working-
with-suppliers.
25
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019 Strategic report
Financial overview
In assessing the Group’s financial performance, management
uses a range of financial measures that focus on the delivery
of sustainable returns for our shareholders and maintaining
our financial strength.
Executive summary
In 2019, reported profit before tax of
$13.3bn decreased by 33%, including a
$7.3bn impairment of goodwill in 2019, while
adjusted profit before tax of $22.2bn increased
by 5%. While much of our business has held
up well, underperformance in other areas
had a negative impact on our returns.
Our RBWM and CMB global businesses
delivered revenue growth, notably in Asia,
while GPB attracted net new money of $23bn
in the year. By contrast, revenue in GB&M fell
compared with 2018 due to ongoing economic
uncertainty and spread compression, which
negatively impacted Global Markets and Global
Banking, notably in Europe. Expected credit
losses and other credit impairment charges
(‘ECL’) increased compared with a benign 2018
and were 0.27% of average gross loans and
advances to customers. Operating expenses
have been closely managed, with the rate of
growth in adjusted operating expenses lower
than the previous year, while we continued to
invest. This helped us to deliver positive
adjusted jaws in 2019.
Our return on average tangible equity (‘RoTE’)
for 2019 was 8.4%. Challenges in the revenue
environment and a softer outlook mean
that we no longer expect to reach our 11%
RoTE target in 2020. To address this, we
plan to reshape the businesses that are
underperforming in order to reallocate
resources to higher-returning businesses,
address our significant cost base and
streamline the organisation.
Since the beginning of January 2020, the
coronavirus outbreak is causing economic
disruption in Hong Kong and mainland China
and may impact performance in 2020.
Delivery against our June 2018 financial targets
Return on average tangible equity (%)
8.4%
2019
2018
2017
2019
Adjusted
revenue up
5.9%
8.4%
8.6%
6.8%
Adjusted operating
expenses up
2.8%
Adjusted jaws
3.1%
Total dividends declared in respect
of the year ($bn)
$10.3bn
2019
2018
2017
2019
10.3
10.2
10.2
Return on average tangible equity
In 2019, we achieved a RoTE of 8.4%
compared with 8.6% in 2018.
When we set our strategy in June 2018, our
target was to achieve a reported RoTE of more
than 11% by the end of 2020. The revenue
environment is now more challenging, and
as a result we no longer expect to reach this
target by the end of 2020.
Adjusted jaws
Adjusted jaws measures the difference
between the rates of change in adjusted
revenue and adjusted operating expenses.
In 2019, adjusted revenue increased by
5.9%, while adjusted operating expenses
increased by 2.8%. Adjusted jaws was
therefore positive 3.1%.
Dividends
We plan to sustain the annual dividend in
respect of the year at its current level for the
foreseeable future. Sustaining our dividend
will depend on the overall profitability of the
Group, redeploying less efficiently used capital
and meeting regulatory capital requirements
in a timely manner.
2020 business update and new Group financial targets
Our business update outlines our intention
to materially improve the Group’s returns by
2022 to allow us to meet our growth plans and
sustain our current dividend policy. We plan to
reduce capital and costs in our underperforming
businesses to enable continued investment in
businesses with stronger returns and growth
prospects. We aim to simplify our complex
organisational structure, including a reduction
in Group and central costs, while improving
the capital efficiency of the Group.
Underpinning this plan is a target to reduce
gross RWAs by over $100bn by the end of 2022,
with these RWAs to be reinvested resulting in
broadly flat RWAs between 2019 and 2022; and
a new cost reduction plan of $4.5bn to lower
the adjusted cost base to $31bn or below in
2022. We are targeting a reported RoTE in the
range of 10% to 12% in 2022, with the full
benefit of our cost reductions and redeployed
RWAs flowing into subsequent years.
To achieve our targets, we expect to incur
restructuring costs of around $6bn, with the
majority of these costs incurred in 2020 and
2021. In addition, we expect to incur asset
disposal costs of around $1.2bn during the
period to 2022.
We intend to sustain the dividend and maintain
a common equity tier 1 (‘CET1’) ratio in the
range of 14% to 15%, and expect to be at
the top end of this range by the end of 2022.
We plan to suspend share buy-backs for
2020 and 2021, with an intention to return
to our policy of neutralising the scrip dividend
issuance from 2022 onwards.
26
HSBC Holdings plc Annual Report and Accounts 2019 Financial overview
Reported results
Reported profit
Reported profit after tax of $8.7bn was $6.3bn
or 42% lower than in 2018.
Reported results
Reported profit before tax of $13.3bn was
$6.5bn or 33% lower. This was mainly due
to higher reported operating expenses, which
included a $7.3bn impairment of goodwill,
primarily related to our GB&M business
globally and our CMB business in Europe.
This reflected lower long-term economic
growth rate assumptions, and also for GB&M,
the planned reshaping of this business. In
addition, reported operating expenses in
2019 included additional customer redress
provisions of $1.3bn and restructuring and
other related costs of $0.8bn. By contrast,
reported operating expenses in 2018 included
costs of $0.8bn related to settlements and
provisions in connection with legal and
regulatory matters.
Reported profit was also adversely impacted
by higher reported ECL, reflecting an increase
in charges notably in CMB and RBWM, and as
2018 benefited from a number of releases
against specific exposures.
These factors were partly offset by growth in
reported revenue in all our global businesses,
except GB&M. The increase in RBWM was
from favourable market impacts of $0.5bn and
favourable actuarial assumption changes of
$0.2bn, balance sheet growth and the impact
of previous interest rate increases on margins in
Retail Banking. In CMB, revenue grew, mainly
in Global Liquidity and Cash Management
(‘GLCM’) and Credit and Lending (‘C&L’). The
change in revenue also included an $828m
dilution gain following the merger of The Saudi
British Bank (‘SABB’) with Alawwal bank in
Saudi Arabia, a net favourable movement in
credit and funding valuation adjustments in
GB&M of $0.2bn, the non-recurrence of a 2018
adverse swap mark-to-market loss of $177m
on a bond reclassification in Corporate Centre
and 2019 disposal gains in RBWM and CMB
of $157m.
Excluding net adverse movements in
significant items of $7.1bn and adverse foreign
currency translation differences of $0.5bn,
profit before tax increased by $1.0bn.
Since the beginning of January 2020, the
coronavirus outbreak has caused disruption to
our staff, suppliers and customers, particularly
in Hong Kong and mainland China. The outlook
remains uncertain and we continue to monitor
the situation closely. Depending on the duration
Reported profit after tax
$8.7bn
(2018: $15.0bn)
Basic earnings per share
$0.30
(2018: $0.63)
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
Tax expense
Profit after tax
of the disruption caused by the virus, our results
could be adversely affected by increased ECL,
lower revenue and market volatility in our
insurance business. Further ECL could arise
from other parts of our business impacted by
the disruption to supply chains.
Reported revenue
Reported revenue of $56.1bn was $2.3bn or
4% higher than in 2018, reflecting growth in
RBWM and CMB, as discussed above, and in
Corporate Centre, partly offset by lower
revenue in GB&M.
Net favourable movements in significant
items of $0.9bn, which largely comprised
the $828m dilution gain in Saudi Arabia and
favourable fair value movements on financial
instruments of $0.2bn, were more than offset
by adverse foreign currency translation
differences of $1.6bn.
Excluding significant items and currency
translation differences, revenue increased
by $3.1bn or 6%.
Reported ECL
Reported ECL of $2.8bn were $1.0bn or
56% higher than in 2018, driven by increased
charges in CMB and RBWM, and as 2018
benefited from a number of releases against
specific exposures, notably in GB&M and
CMB. ECL in 2019 included a charge to reflect
the economic outlook in Hong Kong, as well
as a release of allowances related to UK
economic uncertainty.
Excluding currency translation differences,
ECL increased by $1.1bn or 63%.
Reported operating expenses
Reported operating expenses of $42.3bn were
$7.7bn or 22% higher than in 2018, mainly due
to a net adverse movement in significant items
of $7.9bn, which included:
– a $7.3bn impairment of goodwill, primarily
$4.0bn related to our GB&M business,
reflecting lower long-term economic
growth rate assumptions and the planned
reshaping of this business, and $2.5bn in
CMB in Europe, reflecting lower long-term
economic growth rate assumptions;
2019
$m
56,098
(2,756)
53,342
(42,349)
10,993
2,354
13,347
(4,639)
8,708
2018
$m
53,780
(1,767)
52,013
(34,659)
17,354
2,536
19,890
(4,865)
15,025
2017
$m
51,445
(1,769)
49,676
(34,884)
14,792
2,375
17,167
(5,288)
11,879
– customer redress programme costs of
$1.3bn, of which $1.2bn related to payment
protection insurance (‘PPI’), mainly driven
by a higher than expected increase in the
volume of complaints prior to the deadline
in August 2019, compared with $0.1bn in
2018; and
– restructuring and other related costs of
$0.8bn, which included $753m of severance
costs, related to cost efficiency measures
across our global business and functions.
We expect annualised cost savings from
these measures to be approximately equal
to 2019 severance costs.
These were partly offset by:
– the non-recurrence of settlements and
provisions in connection with legal and
regulatory matters of $0.8bn in 2018.
Excluding significant items and favourable
foreign currency translation differences of
$1.1bn, operating expenses increased by
$0.9bn or 3%.
Reported share of profit in associates
and joint ventures
Reported share of profit in associates of
$2.4bn was $0.2bn or 7% lower than in
2018. This included adverse foreign currency
translation differences of $0.1bn. The reduction
also reflected lower share of profit from
SABB as a result of higher ECL charges
and other expenses relating to the merger
with Alawwal bank, partly offset by higher
income from Bank of Communications Co.,
Limited (‘BoCom’).
Tax expense
The tax expense of $4.6bn was $0.2bn lower
than in 2018, although the effective tax rate
for 2019 of 34.8% was higher than the 24.5%
for 2018, mainly due to the impairment of
goodwill in 2019, which is not deductible
for tax purposes.
Dividend
On 18 February 2020, the Board
announced a fourth interim dividend
of $0.21 per ordinary share.
27
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019 Strategic report | Financial overview
Adjusted performance
Our reported results are prepared in
accordance with IFRSs as detailed in
the financial statements on page 240.
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. Alternative performance
measures are highlighted with the following
symbol:
To derive adjusted performance, we adjust for:
– the year-on-year effects of foreign currency
translation differences; and
– the effect of significant items that distort
year-on-year comparisons, which are
excluded in order to improve understanding
of the underlying trends in the business.
The results of our global businesses are
presented on an adjusted basis, which is
consistent with how we manage and assess
global business performance.
For reconciliations of our reported results to an
adjusted basis, including lists of significant items,
see page 56.
%
6%
(63)%
(3)%
6%
(4)%
5%
2018
$m
19,890
(520)
1,812
361
93
165
100
—
228
66
816
(17)
21,182
Adjusted results
2019
$m
2018
$m
Adverse
$m
Favourable
$m
Net operating income before change in expected credit
losses and other credit impairment charges (‘revenue’)
55,409
52,331
3,078
(2,756)
(1,689)
(32,795)
(31,906)
(1,067)
(889)
19,858
2,354
22,212
18,736
2,446
21,182
(92)
1,122
1,030
Reconciliation of reported to adjusted profit before tax
Reported profit before tax
Currency translation
Significant items:
– costs of structural reform
– customer redress programmes
– disposals, acquisitions and investment in new
businesses
– fair value movements on financial instruments
– goodwill impairment
– 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
Adjusted profit before tax
2019
$m
13,347
—
8,865
158
1,444
(768)
(84)
7,349
—
827
(61)
—
22,212
ECL/LICs
Total operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
Adjusted profit before tax
Adjusted profit before tax of $22.2bn
was $1.0bn or 5% higher than in 2018.
Adjusted revenue increased by $3.1bn,
primarily reflecting growth in RBWM and
CMB, although revenue in GB&M fell.
The increase in revenue was broadly offset
by higher adjusted ECL (up $1.1bn) and a
rise in adjusted operating expenses of
$0.9bn, which included investments to
grow the business and investments in
digital capabilities.
The effects of hyperinflation accounting in
Argentina resulted in a $0.1bn decrease in
adjusted profit before tax, compared with
a $0.2bn decrease in 2018.
Adjusted revenue
Adjusted revenue of $55.4bn increased
by $3.1bn or 6%, reflecting strong
performances in RBWM and CMB, notably in
Asia, partly offset by lower revenue in GB&M.
– In RBWM, revenue increased by $2.0bn
or 9%, mainly in Retail Banking, reflecting
growth in deposit and lending balances,
primarily in Hong Kong and the UK. Margins
remained stable compared with 2018,
although they began to contract during
the second half of 2019. In Wealth
Management, revenue growth reflected
higher insurance manufacturing revenue,
which included a favourable movement in
market impacts of $0.5bn, as 2019 recorded
a favourable movement of $0.1bn compared
with an adverse movement of $0.3bn
in 2018, and more favourable actuarial
assumption changes of $0.2bn. These
increases were partly offset by lower
investment distribution revenue, mainly
in Hong Kong, reflecting less favourable
market conditions compared with 2018.
28
HSBC Holdings plc Annual Report and Accounts 2019
Financial overview
Adjusted performance continued
– In CMB, revenue increased by $0.8bn or
6%, with growth in all major products and
regions. Growth was primarily in GLCM,
particularly in Hong Kong from wider
deposit margins, and in the UK and Latin
America from wider margins and growth
in average deposit balances. While deposit
margins were wider than in 2018, they
began to contract during the second half of
2019 following interest rate cuts. Revenue
increased in C&L due to balance sheet
growth in most markets, partly offset by
margin compression.
– In GB&M, revenue decreased by $0.1bn
or 1%. This reflected a reduction in revenue
in Global Markets and Global Banking as
economic uncertainty resulted in lower
market activity, primarily in Europe. These
decreases were partly offset by a strong
performance in GLCM, GTRF and Securities
Services businesses as we continued to
grow balances. Revenue included a net
favourable movement of $0.2bn on credit
and funding valuation adjustments.
– In GPB, revenue increased by $0.1bn or
5%, mainly reflecting growth in investment
revenue and lending revenue, primarily in
Asia and Europe. These increases were
partly offset by lower deposit revenue,
notably in the US and Europe.
– In Corporate Centre, revenue increased by
$0.2bn. This was mainly in Central Treasury
from favourable fair value movements in
2019 of $147m relating to the economic
hedging of interest rate and exchange rate
Balance sheet and capital
Balance sheet strength
Total reported assets of $2.7tn were $157bn
or 6% higher than at 31 December 2018
on a reported basis, and 5% higher on a
constant currency basis. Loans and advances
to customers increased to over $1.0tn at
31 December 2019, as we continued to grow
lending, notably in Hong Kong and the UK.
Distributable reserves
The distributable reserves of HSBC Holdings
at 31 December 2019 were $31.7bn,
compared with $30.7bn at 31 December
2018. The increase was primarily driven by
distributable profits generated of $11.5bn
net of distributions to shareholders of
$9.0bn and $1.0bn of share buy-backs.
risk on our long-term debt with long-term
derivatives (2018: $136m adverse) and from
a non-repeat of a 2018 swap mark-to-market
loss on a bond reclassification of $177m,
although there was lower revenue in
Balance Sheet Management (‘BSM’).
Adjusted ECL
Adjusted ECL of $2.8bn were $1.1bn higher
than in 2018, mainly reflecting an increase in
charges in CMB, RBWM and GB&M. ECL in
2019 included a charge of $138m to reflect
the economic outlook in Hong Kong, as well
as a $99m release of allowances related to
UK economic uncertainty. Adjusted ECL as
a percentage of average gross loans and
advances to customers was 0.27%,
compared with 0.17% at 2018.
In CMB, ECL increased by $0.5bn, primarily
in Europe and Hong Kong, while in North
America the prior year benefited from net
releases that did not recur. ECL increased in
RBWM by $0.3bn, notably against unsecured
lending, mainly in the US, Mexico and Hong
Kong. In addition ECL in 2019 included
charges related to Argentinian sovereign bond
exposures in our insurance business.
In GB&M, ECL charges were $0.2bn in 2019.
This compared with net releases of $31m in
2018 as charges were more than offset by
releases that largely related to exposures
within the oil and gas sector in the US.
Adjusted operating expenses
Adjusted operating expenses of $32.8bn
were $0.9bn or 3% higher than in 2018.
This was a slower growth rate than in
2018 (compared with 2017), while we
have continued to invest. Expenditure on
investments increased by $0.4bn, reflecting
initiatives to grow the business, mainly in
RBWM and CMB, as well as continued
investment in our digital capabilities across
all global businesses. Volume-related growth
also increased costs by $0.2bn. The impact
of cost-saving efficiencies more than offset
the effects of inflation.
The number of employees expressed in
full-time equivalent staff at 31 December
2019 was 235,351, an increase of 134 from
31 December 2018. Our investments in
business growth programmes, notably in
RBWM and CMB, resulted in an increase
of approximately 8,300 FTEs, but this
was largely offset by the impact of our
restructuring programmes. Additionally,
the number of contractors at 31 December
2019 was 7,411, a decrease of 3,443 from
31 December 2018.
Adjusted share of profit in associates
and joint ventures
Adjusted share of profit in associates of $2.4bn
was $0.1bn or 4% lower than in 2018, mainly
due to a reduction in SABB from higher ECL
charges and other expenses relating to the
merger with Alawwal bank, partly offset by
higher income from BoCom.
Capital position
We actively manage the Group’s capital
position to support our business strategy and
meet our regulatory requirements at all times,
including under stress, while optimising our
capital efficiency. To do this, we monitor our
capital position using a number of measures.
These include: our capital ratios, the impact
on our capital ratios as a result of stress,
and the degree of double leverage being
run by HSBC Holdings. Double leverage is
a constraint on managing our capital position,
given the complexity of the Group’s subsidiary
structure and the multiple regulatory regimes
under which we operate. For further details,
see page 130.
Our CET1 ratio at 31 December 2019 was
14.7%, up from 14.0% at 31 December 2018.
This increase was primarily driven by a
reduction in RWAs.
Liquidity position
We actively manage the Group’s liquidity
and funding to support our business strategy
and meet regulatory requirements at all times,
including under stress. To do this, we monitor
our position using a number of risk appetite
measures, including the liquidity coverage
ratio and the net stable funding ratio. At
31 December 2019, we held high-quality
liquid assets of $601bn.
Total assets
($bn)
$2,715bn
Common equity tier 1 ratio
(%)
14.7%
2019
2018
2017
2019
2,715
2019
2,558
2018
2,522
2017
2019
14.7
14.0
14.5
29
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019
Strategic report | Global businesses
Retail Banking and
Wealth Management
Contribution to Group adjusted profit
before tax
$8.0bn
(36%)
RBWM performed well in 2019, growing
adjusted revenue in Hong Kong, the
UK, and high-growth markets in Asia
and Latin America, as we continued to
win new customers, increase deposit
balances and grow lending. We remain
focused on making it easier for
customers to bank with us, improving
customer service and onboarding
journeys, and enhancing our digital
banking offerings.
We help 39 million active customers across
the world to manage their finances, buy their
homes, save and invest for the future.
For our customers’ everyday banking
needs, we offer a full range of products
and services tailored locally and accessible
across multiple channels. Our strong
global presence provides for customers
with international needs.
Adjusted results
2019
$m
2018
$m
2017
$m
Net operating income
23,400
21,374
19,708
2019 vs 2018
$m
2,026
%
9
ECL/LICs
(1,390)
(1,134)
(941)
(256)
(23)
Operating expenses
(14,017)
(13,255)
(12,386)
Share of profit in associates
and JVs
Profit before tax
RoTE excluding significant items
and UK bank levy (%)
55
33
12
8,048
20.5
7,018
21.0
6,393
21.6
(762)
22
(6)
67
1,030
15
Connecting our customers
through digital innovation
We are committed to making mobile
banking quick, safe and accessible. Our
award-winning PayMe app lets people in
Hong Kong send money instantly and free
of charge to friends and family. It can also
be used to split bills and make payments
at thousands of merchants. PayMe has
attracted 1.9 million users since it was
launched in 2017. At busy times, the app
processes more than 200,000 peer-to-peer
payments in a single day. It is so much a
part of everyday life that it’s becoming
part of the language. ‘PayMe’ is now a
colloquial way to describe transferring
money through a mobile app.
68%
Market share of peer-to-peer payments by
transaction value for the third quarter of 2019
(total market value: www.hkma.gov.hk;
HSBC contribution: HSBC data)
30
HSBC Holdings plc Annual Report and Accounts 2019
Global businesses | Retail Banking and Wealth Management
Management view of adjusted revenue
Retail Banking
Current accounts, savings and deposits
Personal lending
– mortgages
– credit cards
– other personal lending
Wealth Management
– investment distribution
– life insurance manufacturing
– asset management
Other1
Net operating income2
2019
$m
2018
$m
15,840
14,866
9,492
6,348
1,610
2,893
1,845
6,746
3,269
2,455
1,022
814
8,356
6,510
1,867
2,804
1,839
5,986
3,324
1,625
1,037
522
2017
$m
13,107
6,146
6,961
2,301
2,814
1,846
6,103
3,229
1,835
1,039
498
2019 vs 2018
$m
974
1,136
(162)
(257)
89
6
760
(55)
830
(15)
292
23,400
21,374
19,708
2,026
%
7
14
(2)
(14)
3
—
13
(2)
51
(1)
56
9
1 ‘Other’ mainly includes the distribution and manufacturing (where applicable) of retail and credit protection insurance.
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.
Divisional highlights
1.5 million
increase in active customers
$16bn
growth in mortgage book in the UK (up 7%)
and Hong Kong (up 9%)
Adjusted profit before tax
($bn)
+15%
2019
2018
2017
2019
Net operating income
($bn)
+9%
2019
2018
2017
2019
Financial performance
Adjusted profit before tax of $8.0bn was
$1.0bn or 15% higher than in 2018. This
increase reflected strong balance sheet
growth, favourable market impacts of $0.5bn
in life insurance manufacturing and disposal
gains of $0.1bn. This was partly offset by
increased adjusted operating expenses, driven
by higher staff costs, inflation and strategic
investments, as well as higher adjusted ECL.
RBWM’s reported profit before tax of
$6.4bn was $0.5bn or 7% lower. This included
customer redress programme costs of $1.3bn,
mainly driven by a higher than expected
increase in the volume of complaints prior to
the deadline in respect of the mis-selling of PPI
in the UK. These costs are excluded from our
adjusted performance.
8.0
7.0
6.4
Adjusted revenue of $23.4bn was $2.0bn
or 9% higher, with strong performances
in Hong Kong, Latin America, the UK and
mainland China, partly offset by lower revenue
in the US. Revenue also included disposal
gains in Argentina and Mexico of $133m.
– In Retail Banking, revenue was up $1.0bn
or 7% driven by growth in Hong Kong, Latin
America and the UK, partly offset by lower
revenue in the US. The increase in revenue
reflected deposit balance growth of $40bn
or 6%, particularly in Hong Kong, the UK and
North America and lending balance growth
of $27bn or 7%, notably from mortgages in
the UK and Hong Kong. A favourable interest
rate environment contributed to higher retail
margins in the first half of 2019, which began
to contract in the second half following policy
rate reductions. Overall, margin remained
stable compared with 2018.
– In Wealth Management, revenue of $6.7bn
was up $0.8bn or 13%. This increase reflected
23.4
21.4
19.7
higher life insurance manufacturing revenue
(up $0.8bn or 51%), primarily in Hong Kong,
France and mainland China. This was driven
by favourable market impacts of $0.5bn as
2019 recorded a favourable movement of
$0.1bn, compared with an adverse movement
of $0.3bn in 2018. This increase also reflected
more favourable actuarial assumption
changes of $0.2bn and growth in the value
of new business written (up $0.1bn or 12%).
The increase in life insurance manufacturing
revenue was partly offset by lower investment
distribution revenue (down $0.1bn or 2%),
mainly in Hong Kong, driven by lower fees
from less favourable market conditions
compared with 2018 and a change in the
product mix of clients’ investments to lower
risk and lower margin products.
Adjusted ECL were $1.4bn, up $0.3bn or 23%
from 2018, driven by higher charges related
to unsecured lending, reflecting our growth
strategy, notably in the US, Mexico and Hong
Kong. ECL as a percentage of lending within
Retail Banking remained in line with 2018, at
0.33%, while ECL related to unsecured lending
remained low at 2.2%, compared with 2.1% in
2018. In addition, ECL in 2019 included $91m
charges in Argentina related to government
bond exposures in our insurance business,
as well as $52m charges related to economic
uncertainty in Hong Kong. The net write-off in
2019 remained stable compared with 2018.
Adjusted operating expenses of $14.0bn
were $0.8bn or 6% higher, driven by inflation
and higher staff costs (up $0.3bn) as the
business grew. Investment in strategic
initiatives increased by $0.2bn to grow Wealth
Management in Asia, enhance our digital
capabilities and drive growth in key markets
through lending. IT system and infrastructure
costs rose $0.2bn.
A reminder
Our global businesses are presented on an adjusted basis, which is consistent with the way in which we manage and assess the performance of
our global businesses. The management view of adjusted revenue table provides a breakdown of adjusted revenue by major products, and reflects
the basis on which each business is managed and assessed.
31
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019 Strategic report | Global businesses
Commercial Banking
Contribution to Group adjusted
profit before tax
$7.3bn
(33%)
CMB delivered broad-based adjusted
revenue growth across all main products
and regions in 2019. We continued to
invest in solutions to make banking with
us easier, including improved customer
journeys, new digital platforms and
mobile apps.
We support approximately 1.4 million
business customers in 53 countries and
territories, ranging from small enterprises
focused primarily on their domestic markets
to large companies operating globally.
We help entrepreneurial businesses grow by
supporting their financial needs, facilitating
cross-border trade and payment services, and
providing access to products and services
offered by other global businesses.
Adjusted results
2019
$m
2018
$m
2017
$m
Net operating income
15,292
14,465
12,883
2019 vs 2018
$m
827
%
6
ECL/LICs
(1,184)
(712)
(468)
(472)
(66)
Operating expenses
(6,801)
(6,275)
(5,770)
Share of profit in associates
and JVs
Profit before tax
RoTE excluding significant items
and UK bank levy (%)
—
—
—
7,307
12.4
7,478
14.0
6,645
14.0
(526)
—
(8)
—
(171)
(2)
Helping our customers
manage cash globally
When China’s largest hotel chain Jin Jiang
bought Radisson late in 2018, it wanted its
new US subsidiary to be served by a bank
with a truly global outlook. Our existing
relationship with Jin Jiang goes back more
than 10 years, which puts us in a strong
position to support the customer. Today,
we are providing credit to support
Radisson’s investment in a new global
platform for booking and reservations.
Our market-leading international
transaction banking capabilities and
geographic network mean we can
provide cash management services to
Radisson in markets including China,
India and the US, giving its management
team greater control and visibility over
their global cash position than ever before.
32
HSBC Holdings plc Annual Report and Accounts 2019 Global businesses | Commercial Banking
Management view of adjusted revenue
Global Trade and Receivables Finance
Credit and Lending
Global Liquidity and Cash Management
Markets products, Insurance and Investments and Other1
2019
$m
1,833
5,441
5,978
2,040
2018
$m
1,807
5,168
5,647
1,843
2017
$m
1,782
4,960
4,644
1,497
Net operating income2
15,292
14,465
12,883
2019 vs 2018
$m
26
273
331
197
827
%
1
5
6
11
6
1 ‘Markets products, Insurance and Investments and Other’ includes revenue from Foreign Exchange, insurance manufacturing and distribution, interest rate
management and global banking products.
2 Net operating income before change in expected credit losses and other credit impairment charges/Loan impairment charges and other credit risk provisions,
– Revenue growth in ‘Other’ products
included net gains on the revaluation
of shares of $43m in Europe, and a
disposal gain of $24m in Latin America.
– Revenue across our three main products
was adversely affected by customer
redress provisions of $0.1bn in the UK.
Adjusted ECL of $1.2bn were $0.5bn higher
than in 2018, driven by an increase mainly in
the UK, France and Germany, partly offset by
a reduction in MENA. In addition, there were
ECL charges in 2019, notably in Asia, which
compared with 2018 where we recorded a low
level of charges in Hong Kong and net releases
in North America.
Adjusted operating expenses of $6.8bn were
$0.5bn or 8% higher, reflecting increased
investment in digital capabilities, to help
enable us to reduce average onboarding time
for our relationship-managed and international
customers, improve our business banking
apps, and provide clients with a faster, simpler
and more secure payment experience through
real-time payments.
Financial performance
Adjusted profit before tax of $7.3bn was
$0.2bn or 2% lower, as higher adjusted
revenue was more than offset by an increase
in adjusted ECL charges and higher adjusted
operating expenses, as we continued to invest.
Reported results included a goodwill
impairment of $3.0bn, including $2.5bn
in our business in Europe, $0.3bn in Latin
America and $0.1bn in the Middle East,
reflecting lower long-term economic growth
rate assumptions. This impairment is excluded
from our adjusted performance.
Adjusted revenue of $15.3bn was $0.8bn
or 6% higher, with growth in all regions,
particularly in our largest market Hong Kong
(up 6%), and across all main products.
– In GLCM, revenue was $0.3bn or 6% higher,
with growth across all regions except North
America. The increase was mainly in Hong
Kong, primarily reflecting wider margins,
and in Latin America and the UK from wider
margins and growth in average deposit
balances. While deposit margins were wider
than in 2018, they began to contract during
the second half of 2019 following interest
rate cuts.
– In C&L, revenue growth of $0.3bn or 5%
reflected continued lending growth in all
regions, partly offset by the effects of
margin compression.
– In GTRF, revenue increased by $26m or 1%,
mainly from wider margins in Asia, partly
offset by lower balances in Hong Kong.
Revenue increased across all other regions,
primarily reflecting balance growth.
also referred to as revenue.
Divisional highlights
$9.0bn
Growth in loans and advances
to customers in 2019
+8%
Increase in corporate customer value from
international subsidiary banking
This relates to corporate client income,
covering all CMB products, as well as total
income from GB&M synergy products,
including FX and debt capital markets,
used by international CMB subsidiaries.
This measure differs from reported revenue
in that it excludes Business Banking and
Other and internal cost of funds.
Adjusted profit before tax
($bn)
-2%
2019
2018
2017
2019
Net operating income
($bn)
+6%
2019
2018
2017
2019
7.3
7.5
6.6
15.3
14.5
12.9
33
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019
Strategic report | Global businesses
Global Banking
and Markets
Contribution to Group adjusted profit
before tax
GB&M’s performance in 2019 reflected
ongoing economic uncertainty and
spread compression, which negatively
impacted Global Markets and Global
Banking in Europe, although there
was a strong performance across
all businesses in Asia compared with
2018. Globally our industry-leading
GLCM and Securities Services
businesses performed strongly.
We continue to invest in digital
capabilities to provide value to
our clients and improve efficiency.
We support major government, corporate
and institutional clients worldwide. Our
product specialists deliver a comprehensive
range of transaction banking, financing,
advisory, capital markets and risk
management services.
$5.3bn
(24%)
Adjusted results
2019
$m
2018
$m
2017
$m
Net operating income
14,916
15,025
14,823
2019 vs 2018
$m
(109)
%
(1)
ECL/LICs
(153)
31
(439)
(184)
(594)
Operating expenses
(9,417)
(9,170)
(8,709)
Share of profit in associates
and JVs
Profit before tax
RoTE excluding significant items
and UK bank levy (%)
—
—
—
5,346
9.2
5,886
10.5
5,675
10.6
(247)
—
(3)
—
(540)
(9)
—
Landmark deal for HSBC
Qianhai Securities
HSBC Qianhai Securities, our securities joint
venture based in mainland China, helped one
of the world’s largest construction companies
complete a major deal in January 2019. HSBC
Qianhai Securities advised a subsidiary of China
State Construction and Engineering Corporation
when it took a controlling stake in SCIMEE, a
company specialising in water purification
technology. The transaction marked the first time
a Chinese state-owned enterprise had acquired
a controlling stake in a privately owned company
listed on the ChiNext Board of the Shenzhen Stock
Exchange through a share transfer agreement.
The deal cemented our relationship with the
client and underlined our ability to offer strategic
support and innovative solutions in China’s
onshore capital market.
34
HSBC Holdings plc Annual Report and Accounts 2019 Global businesses | Global Banking and Markets
Management view of adjusted revenue
Global Markets
– FICC
Foreign Exchange
Rates
Credit
– Equities
Securities Services
Global Banking
Global Liquidity and Cash Management
Global Trade and Receivables Finance
Principal Investments
Credit and funding valuation adjustments1
Other2
Net operating income3
2019
$m
5,763
4,770
2,690
1,465
615
993
2,030
3,905
2,753
808
260
44
(647)
14,916
2018
$m
6,274
5,093
2,916
1,432
745
1,181
1,922
4,005
2,583
787
216
(181)
(581)
2017
$m
6,800
5,544
2,556
2,071
917
1,256
1,730
3,942
2,169
743
319
(262)
(618)
15,025
14,823
2019 vs 2018
$m
(511)
(323)
(226)
33
(130)
(188)
108
(100)
170
21
44
225
(66)
(109)
%
(8)
(6)
(8)
2
(17)
(16)
6
(2)
7
3
20
124
(11)
(1)
1 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.
Comparatives have not been restated.
2 ‘Other’ includes 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’.
3 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.
Divisional highlights
48%
Percentage of 2019 adjusted revenue
generated in Asia
$23bn
Reduction in reported RWAs compared with
31 December 2018
Adjusted profit before tax
($bn)
-9%
2019
2018
2017
2019
Net operating income
($bn)
-1%
2019
2018
2017
2019
5.3
5.9
5.7
14.9
15.0
14.8
Financial performance
Adjusted profit before tax of $5.3bn was
$0.5bn or 9% lower, driven by increased
investment in the business and lower adjusted
revenue, while adjusted ECL were at low
levels against a net release in 2018.
Reported results included a goodwill
impairment of $4.0bn, primarily reflecting
lower long-term economic growth rate
assumptions, and the planned reshaping of
the business. This impairment is excluded
from our adjusted performance.
Adjusted revenue of $14.9bn was $0.1bn
or 1% lower, and included a net favourable
movement of $225m on credit and funding
valuation adjustments.
– Global Markets revenue decreased by
$0.5bn or 8%, driven by low market
volatility and reduced client activity due
to ongoing economic uncertainty, as well
as continued spread compression.
– Global Banking revenue decreased $0.1bn
or 2%, reflecting a non-repeat of gains in
2018 on corporate lending restructuring,
lower fees from reduced event-driven
activity and the impact of tightening
credit spreads on portfolio hedges. These
reductions were partly offset by higher
lending revenue as we grew balances,
notably in Asia.
– GLCM revenue increased by $0.2bn or 7%,
primarily driven by higher average deposit
balances in Asia and Latin America, and
wider margins in the UK from an interest
rate rise in 2018, partly offset by lower
revenue in the US due to lower average
balances and interest rate decreases.
– Securities Services revenue rose by $0.1bn
or 6% mainly from higher interest rates in
Hong Kong and the UK, as well as increased
fee income reflecting higher assets
under custody (up 6%) and assets under
management (up 9%), although this was
partly offset by margin compression.
– GTRF revenue increased by 3% from
growth in all regions except Europe,
particularly from wider spreads and
higher fees in Asia, while we continued
to reduce RWAs in all regions.
Adjusted ECL charges were $0.2bn, up
$0.2bn compared with a net release in 2018.
ECL charges in 2018 were more than offset
by releases that largely related to exposures
within the oil and gas sector in the US.
Adjusted operating expenses increased
$0.2bn or 3%, as we invested in GLCM
and Securities Services to support business
growth, in regulatory programmes, and
from higher amortised investment costs,
which more than offset lower performance-
related pay.
35
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019 Strategic report | Global businesses
Global Private Banking
Contribution to Group adjusted profit
before tax
$0.4bn
(2%)
Divisional highlights
Net new money in 2019 of
$23bn
This is the highest inflow since 2008
Adjusted profit before tax
($m)
+19%
2019
2018
2017
2019
GPB performed well in 2019, growing
adjusted profit before tax by 19%. Net
new money inflows were $23bn, the
highest inflow since 2008, with more
than 60% from collaboration with our
other global businesses.
We serve high net worth and ultra high net
worth individuals and families, including those
with international banking needs. Services
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.
Adjusted results
Net operating income
ECL/LICs
Operating expenses
Profit before tax
RoTE excluding significant items
and UK bank levy (%)
2019
$m
1,848
(22)
2018
$m
1,757
7
2017
$m
1,698
(17)
(1,424)
(1,425)
(1,384)
402
11.1
339
9.9
297
7.1
2019 vs 2018
$m
91
%
5
(29)
(414)
1
63
—
19
Financial performance
Adjusted profit before tax of $0.4bn increased
by $63m or 19%, primarily reflecting higher
adjusted revenue in Asia, as we continued
to invest in business growth initiatives.
Reported results included a goodwill
impairment of $0.4bn relating to our business
in North America, reflecting lower long-term
economic growth rate assumptions. This
impairment is excluded from our adjusted
performance.
from increased marketable securities-
backed lending.
– Deposit revenue fell by $29m or 6%, mainly
in the US from margin compression and the
impact of repositioning, and in Europe from
margin compression. This was partly offset by
balance growth and wider margins in Asia.
In 2019, we attracted $23bn of net new money
inflows, of which $9bn related to discretionary
and advisory client mandate flows, mainly in
Asia and Europe.
402
339
297
Adjusted revenue of $1.8bn increased by $91m
or 5%, primarily reflecting growth in Asia.
– Investment revenue increased by $71m
or 10%, mainly in Asia and Europe from
higher brokerage revenue, and in Europe
from increased annuity fee income as a
result of growth in discretionary and
advisory client mandates.
– Lending revenue was $41m or 11% higher,
with growth in most of our markets, notably
Adjusted operating expenses of $1.4bn were
broadly unchanged, despite an increase in
Asia, reflecting investments we have made to
support business growth. This increase was
substantially offset by reductions in Europe,
and in the US following actions to mitigate
lower revenue, together with a partial release
of a provision associated with the wind-down
of our operations in Monaco.
2019
2018
2017
2019 vs 2018
Management view of adjusted revenue
Investment revenue
Lending
Deposit
Other
$m
777
424
462
185
$m
706
383
491
177
$m
690
385
400
223
Net operating income1
1,848
1,757
1,698
$m
71
41
(29)
8
91
%
10
11
(6)
5
5
1 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.
36
HSBC Holdings plc Annual Report and Accounts 2019
Global businesses
Supporting female entrepreneurs
We work in partnership with AllBright, a network for women entrepreneurs, to help provide
networking opportunities, role models and insight into the pitching process. We support
their monthly ‘pitch days’ where women present business proposals to a team of potential
investors. We give applicants feedback and provide some with further coaching. Growing
enterprises create wealth, support jobs and pioneer new products and services. We are
proud to help a new generation of business leaders take the next step forward.
Corporate Centre
Corporate Centre includes Central Treasury,
including Balance Sheet Management
(‘BSM’), our legacy businesses, interests
in our associates and joint ventures, central
stewardship costs, the impact of hyperinflation
in Argentina and the UK bank levy.
Financial performance
Adjusted profit before tax of $1.1bn was
$0.6bn or 141% higher than 2018.
Adjusted revenue of negative $47m in
2019 was $0.2bn favourable compared
with 2018, largely reflecting higher revenue
in Central Treasury.
Central Treasury revenue of $0.9bn was
$0.3bn higher, reflecting:
– favourable fair value movements relating to
the economic hedging of interest rate and
exchange rate risk on our long-term debt
with long-term derivatives of $147m in
2019, compared with adverse movements
of $136m in 2018; and
– the non-recurrence of a $177m loss in 2018
arising from adverse swap mark-to-market
movements following a bond reclassification
under IFRS 9 ‘Financial Instruments’.
Adjusted ECL charges of $7m in 2019
compared with a net release of $119m in
2018. The 2019 ECL includes charges related
to BSM’s exposure to government bonds in
Argentina, and we recorded lower net releases
in 2019 related to our legacy portfolios in the
UK than in 2018.
These were partly offset by:
– lower revenue in BSM reflecting a fall in
net interest income as our holdings of
low yielding, liquid assets increased.
Other income decreased by $85m. In
2019, this included $166m of lease finance
expenses following the adoption of IFRS 16
‘Leases’ from 1 January 2019. Prior to this,
lease expenses were recorded within operating
expenses. This reduction was partly offset by
a favourable impact of $88m relating to
hyperinflation accounting in Argentina.
Adjusted operating expenses of $1.1bn
were $0.6bn or 36% lower. This reflected
a change in the allocation of certain costs
to global businesses, which reduced costs
retained in Corporate Centre, the impact of
the adoption of IFRS 16 ‘Leases’ and lower
costs relating to legacy portfolios.
Adjusted income from associates decreased
by $0.1bn or 5%, reflecting a lower share
of profit from SABB as a result of higher ECL
charges and other expenses relating to the
merger with Alawwal bank, although share
of profit from BoCom increased.
Management view of adjusted revenue
Central Treasury
– Balance Sheet Management1
– Holdings net interest expense
– Valuation differences on long-term debt
and associated swaps
– Other central treasury
Legacy portfolios
Other
Net operating income2
2019
$m
859
2,292
(1,325)
147
(255)
(111)
(795)
(47)
2018
$m
511
2,402
(1,337)
(313)
(241)
(91)
(710)
(290)
RoTE excluding significant items and UK bank levy (%)
(3.5)%
(5.7)%
2017
$m
1,710
2,663
(888)
120
(185)
(29)
(620)
1,061
(5.2)%
2019 vs 2018
$m
348
(110)
12
460
(14)
(20)
(85)
243
%
68
(5)
1
147
(6)
(22)
(12)
84
1 BSM revenue includes 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’.
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.
37
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019
Strategic report
Risk overview
Active risk management helps us to achieve our strategy,
serve our customers and communities and grow our
business safely.
Managing risk
We have maintained a consistent approach
to risk throughout our 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 our people are responsible for the
management of risk, with the ultimate
accountability residing with the Board.
Our Global Risk function, led by the Group
Chief Risk Officer, plays an important role
in reinforcing the Group’s culture and values.
It focuses on creating an environment that
encourages our people to speak up and
do the right thing.
Global Risk is independent from the global
businesses, including our sales and trading
functions, to provide challenge, oversight
and appropriate balance in risk/reward
decisions. It oversees a comprehensive
risk management framework that is applied
throughout the Group, with governance
and corresponding risk management tools,
underpinned by the Group’s culture and
reinforced by the HSBC Values.
Our risk appetite
Our risk appetite defines our desired
forward-looking risk profile, and informs
the strategic and financial planning process.
It provides an objective baseline to guide
strategic decision making, helping to ensure
that planned business activities provide an
appropriate balance of return for the risk
assumed, while remaining within acceptable
risk levels.
Our risk appetite also provides an anchor
between our global businesses and the Global
Key risk appetite metrics
Component Measure
Returns
Capital
Return on average tangible equity (‘RoTE’)
CET1 ratio – end point basis1
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
Change in expected credit losses and other credit
impairment charges as a % of advances:
wholesale (CMB, GB&M and GPB)
1 The CET1 ratio risk appetite increased to 13.75% from 1 January 2020.
Risk
appetite
≥11.0%
≥13.5%
≤0.50%
2019
8.4%
14.7%
0.35%
≤0.45%
0.20%
Risk and Global Finance functions, helping to
enable our senior management to allocate
capital, funding and liquidity optimally to
finance growth, while monitoring exposure
and the cost impacts of managing non-
financial risks.
our strategic goals against a backdrop of
economic and geopolitical uncertainty. A
specific emphasis was placed on capital risk
and non-financial risks, with the inclusion of
third-party risk management and enhanced
model risk oversight.
Our risk appetite 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, market risk,
and capital and liquidity risk, which are
controlled through both active risk
management and our risk appetite;
– risks that we incur as part of doing business,
such as non-financial risks, which are
actively managed to remain below an
acceptable appetite; and
– risks for which we have zero tolerance,
such as knowingly engaging in activities
where foreseeable reputational risk has
not been considered.
In 2019, we continued to refine and evolve our
risk appetite, by enhancing both the financial
and non-financial aspects of our risk appetite
statements to ensure we are able to support
Stress tests
We regularly conduct stress tests to assess
the resilience of our balance sheet and our
capital adequacy, as well as to provide insights
into our financial stability. They are used to
consider our risk appetite and review the
robustness of our strategic and financial
plans, helping to empower management
with decision making. Stress testing analysis
helps management understand the nature
and extent of vulnerabilities to which the
Group is exposed. The results from the stress
tests drive recovery and resolution planning
to protect the Group’s financial stability under
various macroeconomic scenarios.
Risk assessment through internal stress
tests is used to assess the impacts of
macroeconomic, geopolitical and other
HSBC-specific risks. The selection of stress
scenarios is based upon the output of our
top and emerging risks identified and our
risk appetite.
Technology targets financial crime
We are developing advanced analytics to increase the speed and effectiveness of how we
spot and report financial crimes such as money laundering. These systems build a rich picture
of customer and counterparty trade information and transactional data to identify financial
crime risk. We are already using this technology to review international trade transactions,
monitoring hundreds of thousands of payments each month for indicators of money
laundering. We also have systems that use advanced algorithms and machine-learning
technology to automatically check for compliance with sanctions regulations. Investing
in technology helps us play our part in protecting the integrity of the financial system
and tackling financial crime.
38
HSBC Holdings plc Annual Report and Accounts 2019 Risk overview
In 2019, HSBC participated in the Bank of
England’s (‘BoE’) annual cyclical stress test,
which showed that our capital ratios, after
taking account of CRD IV restrictions and
strategic management actions, exceeded the
BoE’s requirements. We also participated in
the biennial exploratory scenario stress test,
which explored the implications of a severe
and broad-based liquidity shock affecting the
major UK banks simultaneously over a
12-month horizon.
Our operations
Continued geopolitical risks have negative
implications for economic growth. Central
banks are likely to see little need to raise
their policy interest rates above current levels
and may even resort to lowering rates
to accommodate the risks to growth.
We anticipate that a low interest-rate
environment could impact business
profitability, which we will look to mitigate
through our business operations. Our business
update focuses on material restructuring in the
near to medium term, particularly within our
GB&M business, Europe (excluding our UK
ring-fenced bank, HSBC UK) and the US,
as well as changes to our organisational
structure. This entails meaningful change for
our people, processes and structures with
which we currently operate. We continue to
prepare mitigating actions to manage the
attendant risks of the restructuring, which
include execution, operational, governance,
reputational and financial risks.
We are committed to investing in the reliability
and resilience of our IT systems and critical
services that support all parts of our business.
We do so to protect our customers, affiliates
and counterparties, and help ensure that we
minimise any disruption to services that could
result in reputational and regulatory damage.
We continue to operate in a challenging cyber
threat environment, which requires ongoing
investment in business and technical controls
to defend against these threats.
Our resilience strategy is focused on the
establishment of robust business recovery
plans including detailed response methods,
alternative delivery channels and recovery
options.
For further details on ‘Resilience Risk’,
see page 143.
UK withdrawal from the European Union
The UK left the European Union (‘EU’) on 31
January 2020 and entered a transition period
until 31 December 2020. During the transition
period the UK will continue to be bound by EU
laws and regulations. Beyond that date there
is no certainty on what the future relationship
between the UK and the EU will be. This
creates market volatility and economic risk,
particularly in the UK. Our global presence
and diversified customer base should help us
to mitigate the impact on us of the UK’s
withdrawal from the EU. 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 BoE 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.
Our approach to the UK’s withdrawal from the
EU is described in more detail in ‘Areas of special
interest’ on page 81.
For further details of all scenarios used in
impairment measurements, see ‘Measurement
uncertainty and sensitivity analysis of ECL
estimates’ on page 92.
Ibor transition
As a result of the likely cessation of the
London interbank offered rate (‘Libor’) and
the Euro Overnight Index Average (‘Eonia’)
in 2021, we have established an interbank
offered rate (‘Ibor’) transition programme with
the objective of facilitating an orderly transition
from Libor and Eonia to the new replacement
rates for our business and our customers.
In addition to the conduct and execution risk,
the process of adopting replacement reference
rates may expose the Group to an increased
level of operational and financial risks, such
as potential earnings volatility resulting from
contract modifications and a large volume
of product and associated process changes.
Furthermore, the transition to alternative
reference rates could have a range of adverse
impacts on our business, including legal
proceedings or other actions regarding the
interpretation and enforceability of provisions
in Ibor-based contracts and regulatory
Risks to our operations and portfolios in Asia-Pacific
investigations or reviews in respect of our
preparation and readiness for the replacement
of Ibor with replacement reference rates.
Our approach to Ibor transition is described
in more detail in ‘Areas of special interest’
on page 81.
In 2019, we saw heightened levels of risk in the
Asia-Pacific region, in particular with domestic
social unrest in Hong Kong and trade and
technology tension between the US and China.
We recognised that domestic social unrest in
Hong Kong is impacting the local economy and
dampening investor and business sentiment in
some sectors, while a unilateral approach by the
US and China to deal with issues such as trade
and technology could result in an increasingly
fragmented trade and regulatory environment.
The coronavirus outbreak in China is a new
emerging risk to the economy across mainland
China and Hong Kong, and could further
dampen investor and business confidence in
the region. Our business could be materially
impacted by higher ECL and lower revenue
either as a direct impact on our Hong Kong
and mainland China portfolios or from broader
impacts on global supply chains. We have
invoked our business continuity plans to help
ensure the safety and well-being of our staff
while enhancing our ability to support our
customers and maintain our business
operations. These actions help to ensure
business resilience and that we remain within
our risk appetite.
Our approach to the risks to our operations and
portfolios in Asia-Pacific is described in more
detail in ‘Areas of special interest’ on page 82.
For further details of all scenarios used in
impairment measurements, see ‘Measurement
uncertainty and sensitivity analysis of ECL
estimates’ on page 92.
Top and emerging risks
Our top and emerging risks report helps 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.
Although we made no changes to our
top and emerging risk themes in 2019, we
continue to closely monitor the identified risks
and ensure robust management actions are
in place as required.
Our suite of top and emerging risks are subject
to regular review by senior governance forums.
39
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019 Strategic report | Risk overview
Risk
Trend Mitigants
Externally driven
Economic outlook
and capital flows
Geopolitical risk
The credit cycle
We actively monitor our credit and trading portfolios, in particular the UK and Hong Kong given the
developments in 2019. We undertake stress tests to identify sectors and customers that may come
under stress due to: escalating tariffs and other trade restrictions; an economic slowdown in the
eurozone, Hong Kong and mainland China; and adverse outcomes of trade negotiations following
the UK’s exit from the EU. In light of the coronavirus outbreak, we are reviewing our credit portfolios
and operations to help maintain continued business resilience.
We continually assess the impact of geopolitical events in Asia-Pacific, Europe and the Middle East
on our businesses and exposures, and take steps to mitigate them, where required, to help ensure
we remain within our risk appetite. We strengthen physical security at our premises where the
threat landscape is heightened.
We undertake detailed reviews of our portfolios and proactively assess customers and sectors likely
to come under stress as a result of geopolitical or macroeconomic events, in particular in the UK and
Hong Kong, reducing limits where appropriate.
Cyber threat and unauthorised
access to systems
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 actively engage in national
cyber resilience programmes as we execute our cybersecurity maturity improvement programme.
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
Data management
We engage with regulators to help ensure new regulatory requirements such as the Basel III
programme are effectively implemented, and work with them in relation to their investigations
into historical activities.
In 2019, we continued to improve our financial crime risk management capabilities and to integrate
those capabilities into our day-to-day operations. We are investing in the next generation of tools to
fight financial crime through the application of advanced analytics and artificial intelligence.
We are focused on developing alternative rate products, and the supporting processes and systems,
to replace Ibors to make them available to our customers.
Our programme is concurrently developing the capability to transition, through repapering, outstanding
Libor and Eonia contracts. We continue to engage with industry participants and the official sector to
support an orderly transition.
We continue to incorporate climate-related risk, both physical and transition, into how we manage
and oversee risks. Our Board-approved risk appetite statement contains a qualitative statement which will
be further enhanced in 2020. Our risk management priorities focus on assessing the transition and physical
risk in our wholesale credit portfolio, reviewing retail mortgage exposures in respect of natural hazard risk,
and developing scenarios for internal use in risk management, planning and bottom-up stress testing. We
continue to proactively engage our customers, investors and regulators in order to support the transition to
a low-carbon economy, in particular with regard to compiling the related data and disclosures.
We actively monitor and improve service resilience across our technology infrastructure. We are
enhancing the end-to-end mapping of key processes, and strengthening 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 our 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 have set up a third-party risk management programme so that we can better identify, understand,
mitigate and manage the risks that arise from the outsourcing of services. The programme aims to ensure
adherence to our internal third-party risk policy and framework, which seeks to create a consistent
approach to the understanding and effective management of the risks associated with our third-party
service providers. The programme was established to oversee and monitor this work through to conclusion
in the second half of 2020.
We continue to strengthen the second line of defence Model Risk Management function and model
oversight. We have Model Risk Committees in our key regions, an enhanced model risk governance
framework and we include model risk management as a standing agenda item in each of the global
business risk management meetings.
We continue to enhance and advance our data insights, data aggregation, reporting and decisions.
We carry out ongoing improvement and investments in data governance, data quality, data privacy,
data architecture, machine learning and artificial intelligence capabilities.
Risk heightened during 2019
Risk remained at the same level as 2018
40
HSBC Holdings plc Annual Report and Accounts 2019 Long-term viability and going
concern statement
Under the UK Corporate Governance Code,
the Directors are required to provide a viability
statement that 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 2022. 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:
– This period is representative of the
time horizon to consider the impact
of ongoing regulatory changes in the
financial services industry.
– Details of the updated business plan
for 2020–2024.
The Board, having made appropriate enquiries,
is satisfied that the Group as a whole has
adequate resources to continue operations for
a period of at least 12 months from the date of
this report, and it therefore continues to adopt
the going concern basis in preparing the
financial statements.
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 the emerging and principal risks facing the
Group to determine 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 page 40.
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 2019, there
were six heightened top and emerging
risks: economic outlook and capital
flows; geopolitical risk; the credit cycle;
Ibor transition; climate-related risks;
and enhanced model risk management
expectations.
In carrying out their assessment of the
principal risks, the Directors considered
a wide range of information including:
– details of the Group’s business and
operating models, and strategy;
– details of the Group’s approach to
managing risk and allocating capital;
– a summary of the Group’s financial position
considering performance, its ability to
maintain minimum levels of regulatory
capital, liquidity funding and the minimum
requirements for own funds and eligible
liabilities over the period of the assessment.
Notable are the risks which the Directors
believe could cause the Group’s future
results or operations to adversely impact
any of the above;
– enterprise risk reports, including the
Group’s risk appetite profile (see page 73)
and top and emerging risks (see page 76);
– reports and updates regarding regulatory
and internal stress testing exercises (see
page 131). In 2019, 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;
– reports and updates on regulatory
developments;
– legal proceedings and regulatory matters set
out in Note 34 on the financial statements;
– reports and updates from management on
the operational resilience of the Group; and
– the impact on the economy and the Group
by the UK’s departure from the EU, trade-
and tariff-related tensions between the US
and China, the situation in Hong Kong and
the coronavirus outbreak.
Having considered all the factors outlined
above, the Directors confirm that they 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
the assessment up to 31 December 2022.
Aileen Taylor
Group Company Secretary
and Chief Governance Officer
18 February 2020
41
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019 Strategic report
Board engagement
with our stakeholders
Section 172(1) statement
Section 172 of the Companies Act 2006
requires a Director of a company to act in the
way he or she considers, in good faith, would
be most likely to promote the success of the
company for the benefit of its members as a
whole. In doing this, section 172 requires a
Director to have regard, among other matters,
to: the likely consequences of any decision in
the long term; the interests of the company’s
employees; the need to foster the company’s
business relationships with suppliers,
customers and others; the impact of the
company’s operations on the community
and the environment; the desirability of the
company maintaining a reputation for high
standards of business conduct; and the need
to act fairly with members of the company.
The Directors give careful consideration to
the factors set out above in discharging their
duties under section 172. The stakeholders
we consider in this regard are the people who
work for us, bank with us, own us, regulate
us, and live in the societies we serve and the
planet we all inhabit. The Board recognises
that building strong relationships with our
stakeholders will help us to deliver our
strategy in line with our long-term values, and
operate the business in a sustainable way.
Stakeholder engagement
The Board is committed to effective
engagement with all of its stakeholders.
Depending on the nature of the issue in
question, the relevance of each stakeholder
group may differ and, as such, as part of its
engagement with stakeholders, the Board
seeks to understand the relative interests and
priorities of each group and to have regard to
these, as appropriate, in its decision making.
However, the Board acknowledges that not
every decision it makes will necessarily result
in a positive outcome for all stakeholders.
You can find further information about who
our key stakeholders are and how we engage
with them on page 4 and pages 14 to 25.
During 2019, the Directors’ Handbook was
updated and includes information on the
Directors’ section 172 duty and other legal
duties. For further details of how the Board
operates and the way in which it makes
decisions, including key activities during 2019,
Board governance and Board training and
development, see pages 164 to 169 and
the Board committee reports thereafter.
The Board regularly receives reports
from management on issues concerning
customers, the environment, communities,
suppliers, employees, regulators, governments
and investors, which it takes into account
in its discussions and in its decision-making
process under section 172. The Board
undertakes training to further develop its
understanding of key issues impacting its
stakeholders, such as the sustainable finance
and climate change ‘masterclass’, which
supported the Group Audit Committee’s
discussions on ESG matters. In addition
to this, the Board seeks to understand
the interests and views of the Group’s
stakeholders by engaging with them directly
as appropriate. Some of the ways in which the
Board has engaged directly with stakeholders
over the year are shown below.
Customers
In addition to the Board receiving updates
from senior management on the Group’s
interaction with customers, members
of the Board regularly meet customers.
Additionally, events were held with key
customers around Board meetings in
various countries during 2019.
Employees
In addition to the Board receiving updates
from senior management on various metrics
and feedback tools in relation to employees,
members of the Board engage with the
Group’s employees in a variety of ways.
These include attending town halls and
Exchange sessions with employees, meeting
with representatives of the Group’s employee
resource groups and visiting branches. In
2019, members also met with employees in
various countries when Board meetings were
held in those countries. Further information
on the Board’s engagement with employees
is provided on page 172.
Investors
The Board regularly receives updates
on feedback from investors from senior
management. In addition, various members
of the Board, including the Group Chairman
meet frequently with institutional investors
to discuss and provide updates about – and
seek feedback on – the business, strategy,
long-term financial performance, Directors’
remuneration policy, forward-looking
Directors’ remuneration policy and dividend
policy to the extent appropriate. Members of
the Board also met shareholders in Hong Kong
immediately prior to the 2019 AGM and at the
AGM itself, as well as receiving briefings from
the Company Secretary on shareholders.
Regulators/governments
Members of the Board proactively and
regularly meet with the Group’s regulators
around the world. In addition, members of
the Board regularly meet with governments
in the markets in which the Group operates.
Decision making
We set out below two examples of how the
Directors have had regard to the matters set
out in section 172(1)(a)-(f) when discharging
their duties under section 172 and the effect of
that on certain of the decisions taken by them.
Pensions contributions
The Board was required to consider and make
a decision regarding an element of the UK
defined benefit pension scheme in 2019.
A group of current employees, ex-employees
and pensioners of the HSBC Bank (UK)
Pension Scheme, consisting of approximately
8,400 members, organised a ‘Midland
Clawback Campaign’ group, which aimed to
prevent HSBC and the pension scheme trustee
from deducting an element linked to the UK
state pension from the pension it provides to
members when they reach state retirement
age. State deduction, which is also referred to
as ’pension integration’ because it combines
the UK scheme pension with the state pension
to target an overall level of benefits, is a
long-standing and recognised feature of
schemes such as the HSBC Bank UK defined
benefit pension scheme.
42
HSBC Holdings plc Annual Report and Accounts 2019 Board engagement with our stakeholders
Bank (UK) Pension Scheme. The incumbent
executive Directors also voluntarily agreed
to have their allowance reduced to 10% of
salary with effect from 1 April 2019; and
– included an objective linked to HSBC’s
environment and climate commitments in
the Group Chief Executive’s annual incentive
scorecard for 2020.
The Group Remuneration Committee
Chair also regularly meets with our primary
regulators to understand their expectations,
and to discuss our remuneration framework
and practices and demonstrate how they
promote sound and effective risk management
while supporting our business objectives.
A key area of focus for the regulators is how
financial and non-financial risks, including
cyber and operational resilience, conduct and
financial crime risks are taken into account in
assessing performance and determining pay.
We ensure these factors are taken into
account by including relevant performance
measures in scorecards, as well as attaching
appropriate capital and risk and compliance
underpins.
To ensure the customer voice and the
employees’ views are given due regard in
decision making by the executive Directors
and senior management, scorecard measures
aligned to customer satisfaction and employee
Snapshot survey results are included for
executive Directors and senior management,
directly influencing their pay outcomes.
Customer satisfaction is now one of three
equally-weighted measures we use in the LTI
scorecards for our executive Directors, and
both customer and employee-focused
measures are included in the annual
scorecards of our executive Directors.
Further information on the work of the Group
Remuneration Committee and Directors’
remuneration policy is provided on pages
184 to 190.
In making its decision on whether to remove
the state deduction, the Board took into
account the following information:
– HSBC had invited all scheme members
subject to the state deduction to a town
hall (with an audio line made available for
those not able to attend in person) with
senior management and an independent
expert on the topic.
– HSBC had written directly to all 52,000
members of this section of the scheme,
including a comprehensive set of
frequently asked questions.
– HSBC met with committee members
of the campaign group to discuss the
communication to be sent by the Group,
and the detail to be included in the
frequently asked questions.
– HSBC had established, through its pension
scheme administrator, a specific mailbox
to receive and respond to any questions
on this topic.
– HSBC had met with Unite and the chair
of HSBC’s employee representative body
to explain the background to the state
deduction and the comprehensive review
that had been undertaken by the Group
since this issue was raised by the
campaign group.
– HSBC had responded to questions raised
by, and met with, an all party parliamentary
group formed in response to requests from
the campaign group.
– HSBC had responded to informal enquiries
presented by the Equality and Human Rights
Commission further to requests from the
campaign group.
This engagement ensured the Board
understood the views of the campaign
group, and could balance these views
with the interests of the wider employee
group and other relevant stakeholders in
making their decision.
Having taken external legal advice on the
implications of their request, after careful
consideration the Board concluded that to
further enhance the pension benefits to this
group of members would be unfair to others
whose pension arrangements are already
less favourable.
As required by the campaign group, the Board
included a resolution on the abolishment of
the state deduction in the 2019 notice of AGM,
with 96% of shareholders voting against
abolishing the deduction.
Remuneration policy
The Group Remuneration Committee, on
behalf of the Board, is responsible for the
determination and implementation of the
Directors’ remuneration policy, applicable
to executive and non-executive Directors.
The Chair of the Group Remuneration
Committee engaged with a number
of our large shareholders and institutional
shareholder bodies during 2018 and 2019
in relation to the review of the Directors’
remuneration policy, which was approved
at the 2019 AGM for a three-year term, with
more than 97% of the votes cast in favour
of the policy. Engagement with shareholders
continued during 2019 in respect of the
implementation and operation of the policy.
The Board believes regular dialogue with
our shareholders is critical to ensure
our remuneration policy aligns with their
expectations wherever possible, and we
found this engagement meaningful and
useful in achieving that aim.
It was clear from the dialogue with
shareholders that there was a considerable
desire for companies to simplify remuneration
structures and for the total remuneration
outcome to be transparent and aligned
to shareholder experience. Shareholders
have also expressed a preference for the
use of ESG measures, including firm-specific
environmental targets, in executive
Directors’ scorecards.
Based on the preferences expressed by
shareholders, the Board has:
– simplified the long-term incentive (‘LTI’)
scorecard for executive Directors, with the
use of fewer performance measures and a
significant weighting to performance
measures that are linked to our financial
targets and align reward with shareholder
experience;
– reduced the cash in lieu of pension
allowance for new executive Directors from
30% of base salary to 10% of base salary, to
align with the contribution that HSBC can
make for a majority of employees who are
defined contribution members of the HSBC
43
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019 Strategic report
Remuneration
Our remuneration policy supports the achievement of
our strategic objectives by aligning reward with our long-
term sustainable performance.
Our remuneration principles
Our pay and performance strategy is designed
to reward competitively the achievement of
long-term sustainable performance. It aims
to 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, while
performing their role in the long-term
interests of our stakeholders.
The key principles that underpin pay and
performance decisions for our workforce
are as follows:
– We seek to ensure pay is fair, appropriate
and free from bias.
– We reward and recognise sustainable
performance and values-aligned behaviour.
– We pay competitive, simple and transparent
compensation packages.
– We support a culture of continuous
feedback through manager and employee
empowerment.
Variable pay
Our variable pay pool was $3,341m, a
decrease of 3.8% compared with 2018.
($m)
2019
2018
2019
3,341
3,473
Embedding our values in our remuneration framework
Instilling the right behaviours and driving and encouraging actions that are aligned to our values and expectations are essential. We have a number
of mechanisms to reinforce our values.
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 how it is achieved.
Performance
management
Performance objectives define what, how and when our people need to achieve, in line with business and role
priorities. Objectives are initially created by our employees at the start of the year. Objectives are tracked and
updated by employees throughout the year as priorities change.
Performance management for all our people is underpinned by our ‘Everyday Performance and Development’
programme. This involves frequent, holistic and meaningful conversations throughout the year between a manager
and employee. The conversations provide an opportunity to discuss progress and provide feedback. They also
help to recognise behaviours, identify any support that may be needed and address issues that could be affecting
the employee’s well-being.
Conduct recognition
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.
44
HSBC Holdings plc Annual Report and Accounts 2019 Remuneration
Remuneration for our executive Directors
Our remuneration policy for executive Directors was approved at our
AGM in 2019 and is intended to apply for three performance years until
the AGM in 2022. Details of the policy can be found on page 187 of the
Directors’ remuneration report.
Executive Directors’ annual incentive
(% of maximum awarded)
Variable pay for our executive Directors is driven by scorecard
achievement. Targets in the scorecard are set according to our key
performance indications to ensure linkages between our strategy
and remuneration policies and outcomes.
Group Chief Executive
Group Chief Financial Officer
Group Chief Risk Officer
66.4%
77.5%
66.3%
The table below shows the amount our executive Directors earned in 2019. For details of Directors’ pay and performance for 2019, see the
Directors’ remuneration report on page 192.
Single figure of remuneration
Base
salary
Fixed pay
allowance
Cash in
lieu of
pension
Taxable
benefits4
Non-
taxable
benefits4
Total
fixed
Annual
incentive5
AML
DPA
award6
Replacement
award8
Notional
returns9
Total
variable
LTI7
Total
fixed
and
variable
(£000)
Noel
Quinn1
2019
503
2018
–
John Flint2 2019
730
Ewen
Stevenson
Marc
Moses3
2018
1,028
2019
719
2018
2019
2018
–
719
700
695
–
1,005
1,459
950
–
950
950
50
–
134
308
107
–
107
210
41
–
91
40
16
–
40
13
23 1,312
–
–
31 1,991
28 2,863
665
–
891
1,665
28 1,820
1,082
–
–
33 1,849
–
926
–
–
–
–
–
–
–
–
–
–
–
–
– 1,709
38 1,911
1,324
695
–
–
–
–
–
1,974
–
–
–
–
–
40
54
–
–
17
33
665
1,977
–
–
931
2,922
1,719
4,582
3,056
4,876
–
–
2,652
4,501
2,052
3,963
1 Noel Quinn succeeded John Flint as interim Group Chief Executive with effect from 5 August 2019 and the remuneration included in the single figure table above
is in respect of services provided as an executive Director.
2 John Flint stepped down as an executive Director and Group Chief Executive on 5 August 2019. His remuneration details for 2019 are in respect of services
provided as an executive Director. Details of John Flint’s departure terms are provided on page 198.
3 Marc Moses stepped down as an executive Director and Group Chief Risk Officer on 31 December 2019. Details of Marc Moses’ departure terms are provided on
page 198.
4 Taxable benefits include the provision of medical insurance, car and tax return assistance (including any associated tax due, where applicable). Non-taxable
benefits include the provision of life assurance and other insurance cover.
5 To meet regulatory deferral requirements for 2019, 60% of the annual incentive award for John Flint and Marc Moses 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 shares will be subject to a one-year retention period.
The deferred awards are subject to the executive Director maintaining good leaver status during the deferral period. Noel Quinn will have 60% of his annual incentive
award deferred, and in line with regulatory requirements, it will be split equally between cash and shares subject to the same vesting and retention conditions.
6 The 2012 annual incentive for Marc Moses had a 60% deferral. The vesting of this deferred award was subject to a service condition and satisfactory completion of the
five-year deferred prosecution agreement (‘AML DPA’) with the US Department of Justice. The AML DPA condition was satisfied in March 2018 and the awards were
released. The value of Marc Moses’ award in the table above reflects his time as an executive Director between 1 January 2014 and the vesting date.
7 An LTI award was made in February 2017 (in respect of 2016) at a share price of £6.503 for which the performance period ended on 31 December 2019. The value has
been computed based on a share price of £5.896, the average share price during the three-month period to 31 December 2019. This includes dividend equivalents of
£237,030, equivalent to 40,202 shares at a share price of £5.896. See the ‘Determining executive Directors’ performance’ section of the Directors’ remuneration report
for details of the assessment outcomes.
8 As set out in the 2018 Directors’ remuneration report, in 2019 Ewen Stevenson was granted replacement awards to replace unvested awards, which were forfeited
as a result of him joining HSBC. The awards, 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. The values included in the table relate to Ewen Stevenson’s 2015 and 2016 LTI awards
granted by The Royal Bank of Scotland Group plc (‘RBS’) for performance years 2014 and 2015, respectively, and replaced with HSBC shares when Ewen
Stevenson joined HSBC. These awards are not subject to further performance conditions and commenced vesting in March 2019. The total value is an aggregate
of £1,121,308 for the 2015 LTI and £852,652 for the 2016 LTI. The 2016 LTI award value has been determined by applying the performance assessment outcome of
27.5% as disclosed in RBS’s Annual Report and Accounts 2018 (page 70) to the maximum number of shares subject to performance conditions.
9 ‘Notional returns’ refers to the notional return on deferred cash for awards made in prior years. The deferred cash portion of the annual incentive granted in prior
years 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 for their
services as an executive Director since the 2016 financial year.
45
Strategic reportHSBC Holdings plc Annual Report and Accounts 2019 Financial
review
47
56
72
73
Financial summary
Global businesses and geographical regions
Other information
Risk
152 Capital
Supporting the transition
to a low-carbon economy
We acted as a mandated lead arranger in the refinancing
of the £2.5bn Beatrice offshore wind farm off the north-east
coast of Scotland, which is jointly owned by UK energy
firm SSE, Danish fund manager Copenhagen Infrastructure
Partners and Edinburgh-based energy firm Red Rock Power
Limited, a subsidiary of Beijing-headquartered SDIC Power.
To encourage low-carbon electricity generation and
ensure progress towards carbon neutrality by 2050, the
UK government awarded Beatrice a 15-year contract for
difference, a mechanism in which public funding underpins
power revenues that could otherwise fluctuate with swings
in electricity prices.
Beatrice is one of the largest wind farms globally with
a capacity of 580MW, which is capable of powering
approximately 450,000 homes.
46
HSBC Holdings plc Annual Report and Accounts 2019 Financial summary
Use of non-GAAP financial measures
Changes from 1 January 2019
Critical accounting estimates and judgements
Consolidated income statement
Income statement commentary
Consolidated balance sheet
Page
47
47
47
48
49
52
Use of non-GAAP financial measures
Our reported results are prepared in accordance with IFRSs
as detailed in the financial statements starting on page 229.
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 are presented on an
adjusted basis in accordance with IFRS 8 ‘Operating Segments’,
as detailed in Note 10: Segmental analysis on page 263.
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 56 to 59 and pages 63 to 68 detail the effects
of significant items on each of our global business segments and
geographical regions in 2019, 2018 and 2017.
Foreign currency translation differences
Foreign currency translation differences reflect the movements of
the US dollar against most major currencies during 2019.
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.
Foreign currency translation differences
Foreign currency translation differences for 2019 are computed by
retranslating into US dollars for non-US dollar branches, subsidiaries, joint
ventures and associates:
• the income statements for 2018 and 2017 at the average rates of
exchange for 2019; and
• the balance sheets at 31 December 2018 and 31 December 2017 at the
prevailing rates of exchange on 31 December 2019.
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
have 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 have been translated at the appropriate exchange
rates applied in the current period on the basis described above.
Changes from 1 January 2019
IFRS 16 ‘Leases’
On 1 January 2019, HSBC adopted the requirements of IFRS 16
‘Leases’ retrospectively, with the cumulative effect of initially
applying the standard recognised as an adjustment to the opening
balance of retained earnings at that date. Comparatives were not
restated. The adoption of the standard increased assets by $5bn
and increased financial liabilities by the same amount with no
effect on net assets or retained earnings.
Interest rate benchmark reform: Amendments to
IFRS 9 and IAS 39 ‘Financial Instruments’
Amendments to IFRS 9 and IAS 39 issued in September 2019
modify specific hedge accounting requirements so that entities
apply those hedge accounting requirements assuming that the
interest rate benchmark on which the hedged cash flows and cash
flows of the hedging instrument are based is not altered as a result
of interest rate benchmark reform. These amendments apply from
1 January 2020 with early adoption permitted. HSBC has adopted
the amendments that apply to IAS 39 from 1 January 2019 and
has made the additional disclosures as required by the
amendments.
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 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 246.
• Deferred tax assets: The most significant judgements relate to
judgements made in respect of expected future profitability.
See Note 1.2(l) on page 250.
• 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 244.
•
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 242.
• 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 242.
• Provisions: Significant judgement may be required due to the
high degree of uncertainty associated with determining
whether a present obligation exists, and estimating the
HSBC Holdings plc Annual Report and Accounts 2019
47
Financial review Report of the Directors | Financial summary
probability and amount of any outflows that may arise. See
Note 1.2(m) on page 250.
• Post-employment benefit plans: The calculation of the defined
benefit pension obligation involves the determination of key
assumptions including discount rate, inflation rate, pension
payments and deferred pensions, pay and mortality. See Note
1.2(k) on page 249.
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.
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
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 designated debt and related derivatives
1
Changes in fair value of other financial instruments mandatorily measured at fair value
through profit or loss
Footnotes
Gains less losses from financial investments
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 excluding goodwill impairment
Goodwill impairment
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 ordinary shareholders’ equity
Return on average tangible equity
Effective tax rate
2019
$m
30,462
12,023
10,231
2018
$m
30,489
12,620
9,531
3,478
(1,488)
90
812
335
10,636
2,957
71,024
(14,926)
(97)
695
218
10,659
960
63,587
(9,807)
2017
$m
28,176
12,811
8,426
2,836
155
N/A
1,150
9,779
443
63,776
(12,331)
2016
$m
29,813
12,777
7,521
1,262
(1,997)
N/A
1,385
9,951
(876)
59,836
2015
$m
32,531
14,705
8,717
565
973
N/A
2,068
10,355
1,178
71,092
(11,870)
(11,292)
2
56,098
53,780
51,445
47,966
59,800
(2,756)
(1,767)
N/A
53,342
N/A
52,013
N/A
(1,769)
49,676
N/A
(3,400)
44,566
N/A
(3,721)
56,079
(35,000)
(34,659)
(34,884)
(36,568)
(39,768)
—
(3,240)
(7,349)
10,993
2,354
13,347
(4,639)
8,708
—
17,354
2,536
19,890
(4,865)
15,025
5,969
12,608
90
1,324
1,325
8,708
2019
$
0.30
0.30
0.51
%
172.2
0.3
3.6
8.4
34.8
Footnotes
3
4
90
1,029
1,298
2018
$
0.63
0.63
0.51
%
81.0
0.6
7.7
8.6
24.5
14,792
2,375
17,167
(5,288)
11,879
9,683
90
1,025
1,081
2017
$
0.48
0.48
0.51
%
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
%
106.3
728.6
0.5
5.9
6.8
30.8
0.1
0.8
2.6
51.5
—
16,311
2,556
18,867
(3,771)
15,096
12,572
90
860
1,574
15,096
2015
$
0.65
0.64
0.50
%
76.5
0.6
7.2
8.1
19.99
15,025
11,879
For footnotes, see page 55.
Unless stated otherwise, all tables in the Annual Report and Accounts 2019 are presented on a reported basis.
For a summary of our financial performance in 2019, see page 27.
For further financial performance data for each global business and geographical region, see pages 56 to 59 and 61 to 69, respectively. The global business
segmental results are presented on an adjusted basis in accordance with IFRS 8 ‘Operating Segments’, in Note 10: Segmental analysis on page 263.
48
HSBC Holdings plc Annual Report and Accounts 2019
Income statement commentary
The following commentary compares Group financial performance for the years ended 2019 with 2018.
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 55.
Footnotes
5
5
6
7
2019
$m
54,695
(24,233)
30,462
2018
$m
49,609
(19,120)
30,489
2017
$m
40,995
(12,819)
28,176
1,922,822
1,839,346
1,726,120
%
2.84
(1.48)
1.36
1.58
%
2.70
(1.21)
1.49
1.66
%
2.37
(0.88)
1.49
1.63
Summary of interest income by type of asset
2019
2018
Average
balance
Interest
income
Yield
Average
balance
Interest
income
$m
$m
%
$m
$m
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
212,920
2,411
1,021,554
35,578
224,942
4,690
417,939
10,705
45,467
1,311
1,922,822
54,695
Summary of interest expense by type of liability and equity
Footnotes
8
9
10
2019
Average
balance
Interest
expense
$m
52,515
$m
702
1,149,483
11,238
160,850
211,229
59,980
4,023
6,522
1,748
1,634,057
24,233
Deposits by banks
Customer accounts
Repurchase agreements – non-trading
Debt securities in issue – non-trading
Other interest-bearing liabilities
Total interest-bearing liabilities
For footnotes, see page 55.
1.13
3.48
2.08
2.56
2.88
2.84
Cost
%
1.34
0.98
2.50
3.09
2.91
1.48
233,637
2,475
972,963
205,427
386,230
41,089
33,285
3,739
9,166
944
1,839,346
49,609
2018
Average
balance
Interest
expense
$m
44,530
1,138,620
161,204
183,434
53,731
$m
506
8,287
3,409
5,675
1,243
1,581,519
19,120
Yield
%
1.06
3.42
1.82
2.37
2.30
2.70
Cost
%
1.14
0.73
2.11
3.09
2.31
1.21
2017
Average
balance
Interest
income
$m
$m
236,126
2,030
902,214
173,760
389,807
24,213
28,751
2,191
7,440
583
1,726,120
40,995
2017
Average
balance
Interest
expense
$m
47,337
1,094,920
136,561
169,243
7,009
$m
451
5,405
1,665
4,391
Yield
%
0.86
3.19
1.26
1.91
2.41
2.37
Cost
%
0.95
0.49
1.22
2.59
907
12.94
1,455,070
12,819
0.88
Net interest income (‘NII’) of $30.5bn was broadly unchanged
compared with 2018. Interest income associated with the increase
in average interest-earning assets (‘AIEA’) of 5% was offset by
higher funding costs, reflecting higher average interest rates
compared with the previous year.
Excluding the adverse effects of significant items and foreign
currency translation differences, NII increased by $1.0bn.
Net interest margin (‘NIM’) of 1.58% was 8 basis points (‘bps’)
lower than in 2018 as the higher yield on AIEA of 14bps was offset
by the rise in funding costs of average interest-bearing liabilities of
27bps.
The decrease in NIM in 2019 included the adverse effects of
foreign currency translation differences and significant items.
Excluding these, NIM fell by 6bps.
Interest income increased by $5.1bn or 10% compared with
2018, benefiting from growth in AIEA of 5% and higher average
interest rates compared with the previous year, with the yield on
AIEA increasing by 14bps.
Interest income on loans and advances to customers increased by
$2.3bn. This was mainly driven by higher average interest rates
compared with the previous year, with yields increasing by 6bps
and 5% volume growth in AIEA, notably in term lending in Asia,
and growth in mortgages in Asia and Europe.
Interest income on short-term funds and financial investments
increased by $1.5bn, reflecting higher average interest rates
compared with the previous year.
The increase in interest income included $1.6bn in relation to the
adverse effects of significant items and foreign currency
translation. Excluding these, interest income increased by $6.7bn.
Interest expense increased by $5.1bn or 27% compared with
2018. This reflects growth in average interest-bearing liabilities of
3% and an increase in funding cost of 27bps, predominantly in
customer accounts.
Interest expense on interest-bearing customer accounts was
$3.0bn higher, mainly in Asia, reflecting higher average interest
rates compared with the previous year together with an increase
in customer accounts, primarily towards term deposits.
Interest expense on debt securities in issue was $0.8bn higher.
This was mainly as a result of debt issuances by HSBC Holdings to
meet regulatory requirements, which contributed $0.5bn towards
the increase.
The increase in interest expense included the favourable effects of
significant items and foreign currency translation differences of
$0.6bn. Excluding these impacts, interest expense was $5.7bn
higher.
HSBC Holdings plc Annual Report and Accounts 2019
49
Financial review Report of the Directors | Financial summary
Net fee income of $12.0bn was $0.6bn lower compared with
2018, including adverse foreign currency translation differences of
$0.3bn. The remaining reduction primarily reflected lower net fee
income in RBWM and GB&M.
In RBWM, the reduction reflected lower fees from broking and unit
trusts in Hong Kong due to lower volumes as investor confidence
was weaker compared with a strong 2018. In addition, funds
under management fees also reduced, reflecting a change in mix
of clients’ investments to lower risk and lower margin products.
$0.2bn reflected higher new business volumes, particularly in
Hong Kong, Singapore and UK, partly offset by higher reinsurance
ceded in Hong Kong.
Other operating income of $2.9bn in 2019 increased by $2.0bn
compared with 2018. This was primarily due to a higher favourable
change in the present value of in-force long-term insurance
business (‘PVIF’) in 2019 (up $1.1bn), and a $0.8bn dilution gain in
2019 following the merger of The Saudi British Bank with Alawwal
bank in Saudi Arabia.
In GB&M, net fee income was lower, mainly in the UK and the US.
This was primarily due to lower corporate finance fees, which
reflected reduced client activity. This was partly offset by higher
underwriting fees, notably in Asia, France and the US, from higher
volumes.
Net income from financial instruments held for trading or
managed on a fair value basis increased by $0.7bn and
included a favourable fair value movement on non-qualifying
hedges of $0.3bn, offset by adverse movements in foreign
currency translation differences of $0.5bn.
The increase was mainly in Asia, notably in Hong Kong, reflecting
favourable market conditions and increased client activity in our
Rates, Credit and Equities businesses, and from gains in Balance
Sheet Management (‘BSM’) on funding swaps due to favourable
movements on yield curves. In Latin America, income in BSM
increased, primarily from gains on debt securities in Argentina and
a favourable impact of hyperinflation, as well as increased client
activity in GB&M in Mexico. Income increased in the US from
increased client activity on US Treasuries and emerging markets
interest rate swaps, partly offset by lower revenue from precious
metals trading.
In the UK, income fell as subdued market conditions resulted in
lower Global Markets revenue, notably in Rates, Credit and
Equities.
Net income from assets and liabilities of insurance
businesses, including related derivatives, measured at fair
value through profit or loss was $3.5bn, compared with a net
expense of $1.5bn in 2018. This increase primarily reflected more
favourable equity market performance in Hong Kong and France,
resulting in revaluation gains on the equity and unit trust assets
supporting insurance and investment contracts.
This positive movement resulted in a corresponding movement in
liabilities to policyholders and the present value of in-force long-
term insurance business (see ‘Other operating income’ below),
reflecting the extent to which the policyholders and shareholders
respectively participate in the investment performance of the
associated assets.
Change in fair value of designated debt and related
derivatives were $0.1bn favourable in 2019, compared with
adverse movements of $0.1bn in 2018. These movements were
driven by changes in interest rates between the periods, notably in
US dollars and pounds sterling.
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 53.
Gains less losses from financial investments of $0.3bn
increased by $0.1bn compared with 2018, reflecting higher gains
from the disposal of debt securities.
Net insurance premium income was broadly unchanged
compared with 2018, and included adverse effects of foreign
currency translation differences. Excluding these, the increase of
This increase in PVIF reflected a favourable movement in
‘assumption changes and experience variances’ of $1.1bn. This
was primarily in Hong Kong due to the effect of interest rate
changes on the valuation of the liabilities under insurance
contracts, which has a corresponding increase in ‘net insurance
claims and benefits paid and movement in liabilities to
policyholders’. For further details, see Note 21 on the financial
statements.
In 2019, we recognised a gain in Argentina following the sale of a
stake in the payment processing company Prisma Medios de Pago
S.A., and a gain in Mexico associated with the launch of a
merchant acquiring services joint venture with Global Payments
Inc. By contrast, 2018 included a loss of $0.1bn on the early
redemption of subordinated debt linked to the US run-off portfolio.
Net insurance claims and benefits paid and movement in
liabilities to policyholders were $5.1bn higher, primarily due to
higher returns on financial assets supporting contracts where the
policyholder is subject to part or all of the investment risk, and the
impact of higher new business volumes, particularly in Hong Kong
and Singapore. These were partly offset by the impact of higher
reinsurance ceded in Hong Kong.
Changes in expected credit losses and other credit
impairment charges (‘ECL’) of $2.8bn were $1.0bn higher
compared with 2018. This was mainly driven by higher charges in
CMB, RBWM and GB&M. ECL in 2019 included a charge to reflect
the economic outlook in Hong Kong, as well as a partial release of
allowances related to UK economic uncertainty. See page 95 for
more information on the impact of alternative/additional scenarios.
The effects of foreign currency translation differences between the
periods were minimal.
•
•
•
•
In CMB, ECL charges of $1.2bn were $0.5bn higher reflecting
increases in Europe and Hong Kong, while the previous year
benefited from net releases in North America that did not recur.
The movements were partly offset by a reduction in ECL
charges in MENA.
In RBWM, ECL charges of $1.4bn were $0.3bn higher, driven
by increased ECL related to unsecured lending, notably in the
US, Mexico, and Hong Kong. In addition, ECL in 2019 included
charges in Argentina related to government bond exposures in
our insurance business.
In GB&M, net ECL charges of $0.2bn compared with a net
release of $31m in 2018. Releases in the previous period more
than offset ECL charges and primarily related to a small
number of clients within the oil and gas sector in the US.
In Corporate Centre, net ECL charges of $7m compared with a
net release of $119m in 2018. The ECL in 2019 included
charges related to BSM’s exposure to government bonds in
Argentina. There were also lower net releases recorded in 2019
related to our legacy portfolios in the UK, compared with 2018.
On a constant currency basis, ECL as a percentage of average
gross loans and advances to customers was 0.27%, compared
with 0.17% in 2018.
50
HSBC Holdings plc Annual Report and Accounts 2019
Operating expenses – currency translation and significant items
Significant items
– costs of structural reform
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– goodwill impairment
– 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
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
Operating expenses of $42.3bn were $7.7bn or 22% higher than
in 2018 and included favourable foreign currency translation
differences of $1.1bn, which were more than offset by net adverse
movements in significant items of $7.9bn.
Significant items included:
• a $7.3bn impairment of goodwill, which included $4.0bn
related to our global GB&M business, resulting from an update
in long-term assumptions and the planned reshaping of the
business, and $2.5bn in our CMB business in Europe, $0.4bn in
GPB in North America, and $0.4bn in CMB in Latin America
and MENA reflecting lower long-term economic growth rate
assumptions. For further details, see Note 21 on the financial
statements;
• customer redress programme costs of $1.3bn in 2019, $1.2bn
of which related to the mis-selling of payment protection
insurance (‘PPI’) mainly driven by a higher than expected
increase in the volume of complaints prior to the deadline in
August 2019. This compared with $0.1bn in 2018. For further
details, see Note 10 on the financial statements; and
• restructuring and other related costs of $0.8bn in 2019, which
included $753m of severance costs arising from cost efficiency
measures across our global businesses and functions. We
expect annualised cost savings from these measures to be
approximately equal to 2019 severance costs.
These were partly offset by:
• the non-recurrence of settlements and provisions in connection
with legal and regulatory matters of $0.8bn in 2018;
•
lower costs of structural reform of $0.2bn, which included
costs associated with the UK’s withdrawal from the European
Union; and
• the non-recurrence of a provision in relation to past service
costs of guaranteed minimum pension obligations in 2018 of
$0.2bn.
Excluding significant items and foreign currency translation
differences, operating expenses of $32.8bn were $0.9bn or 2.8%
higher than in 2018. The increase primarily reflected investments
to grow the business (up $0.4bn), notably in RBWM and CMB, as
well as continued investment in digital capabilities across all of our
global businesses.
Volume-related growth increased operating expenses by $0.2bn,
and the UK bank levy of $988m was $24m higher than in 2018.
The impact of our cost-saving efficiencies broadly offset inflation.
2019
$m
9,554
158
1,281
—
7,349
—
827
(61)
9,554
2018
$m
1,644
361
146
52
—
228
66
816
(25)
1,109
2,753
2019
2018
2017
134,296
133,644
129,402
44,503
48,459
6,767
1,326
44,805
48,500
6,819
1,449
44,871
45,725
7,250
1,439
235,351
235,217
228,687
The number of employees expressed in full-time equivalent staff
(‘FTEs’) at 31 December 2019 was 235,351, an increase of 134
from 31 December 2018. This largely reflected an increase in FTEs
associated with our investment initiatives, which was broadly
offset by reductions following our restructuring programmes. The
number of contractors at 31 December 2019 was 7,411, a
decrease of 3,443 from 31 December 2018.
The 2020 business update sets a target of reducing adjusted
operating expenses to $31bn or lower by 2022. To achieve this
reduction, we expect to incur restructuring costs of $6bn during
the period to 2022.
Share of profit in associates and joint ventures was $2.4bn,
a decrease of $0.2bn or 7% compared with 2018, and included the
adverse effects of foreign currency translation differences of
$90m.
Excluding the effects of foreign currency translation differences,
our share of profit in associates and joint ventures decreased by
$92m compared with 2018. This reflected lower income from The
Saudi British Bank due to higher ECL charges and other expenses
relating to the merger with Alawwal bank, partly offset by higher
income from BoCom.
At 31 December 2019, 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 of $4.6bn was $0.2bn lower than in 2018.
The effective tax rate for 2019 of 34.8% was higher than the
24.5% for 2018 due to the impairment of goodwill in 2019, which
is not deductible for tax purposes.
This impairment charge increased the 2019 effective tax rate by
12.3%.
Further details are provided in Note 7 on the financial statements.
HSBC Holdings plc Annual Report and Accounts 2019
51
Financial review Report of the Directors | Financial summary
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
Footnotes
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
2019
$m
154,099
254,271
43,627
N/A
242,995
69,203
11
1,036,743
240,862
443,312
230,040
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
$m
98,934
224,837
N/A
23,852
288,476
90,401
924,454
146,255
428,955
183,492
2,715,152
2,558,124
2,521,771
2,374,986
2,409,656
59,022
56,331
69,922
59,939
54,371
1,439,115
1,362,643
1,364,462
1,272,386
1,289,586
140,344
83,170
164,466
239,497
104,555
97,439
194,876
165,884
84,431
148,505
205,835
85,342
87,330
167,574
130,002
184,361
94,429
216,821
64,546
85,667
113,690
88,958
153,691
86,832
279,819
65,915
75,273
109,595
80,400
141,614
66,408
281,071
88,949
69,938
139,801
2,522,484
2,363,875
2,323,900
2,192,408
2,212,138
183,955
8,713
192,668
186,253
7,996
194,249
190,250
7,621
197,871
175,386
7,192
182,578
188,460
9,058
197,518
Total liabilities and equity at 31 Dec
2,715,152
2,558,124
2,521,771
2,374,986
2,409,656
For footnotes, see page 55.
A more detailed consolidated balance sheet is contained in the financial statements on page 231.
Five-year selected financial information
Called up share capital
Capital resources
Undated subordinated loan capital
Preferred securities and dated subordinated loan capital
Risk-weighted assets
Total shareholders’ equity
Less: preference shares and other equity instruments
Total ordinary shareholders’ equity
Less: goodwill and intangible assets (net of tax)
Tangible ordinary shareholders’ equity
Financial statistics
Loans and advances to customers as a percentage of customer accounts
Average total shareholders’ equity to average total assets
Net asset value per ordinary share at year-end ($)
Tangible net asset value per ordinary share at year-end ($)
Tangible net asset value per fully diluted share at year-end ($)
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 55.
Footnotes
12
13
14
2019
$m
10,319
172,150
1,968
33,063
843,395
183,955
(22,276)
161,679
(17,535)
144,144
72.0%
6.97%
8.00
7.13
7.11
20,639
20,206
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
6.98
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
7.22
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
6.88
20,192
19,838
2015
$m
9,842
189,833
2,368
42,844
1,102,995
188,460
(16,517)
171,943
(24,626)
147,317
71.7%
7.31%
8.77
7.51
7.46
19,685
19,604
20,280
20,059
20,065
19,933
19,744
0.756
0.890
0.783
0.873
0.740
0.834
0.811
0.949
0.675
0.919
52
HSBC Holdings plc Annual Report and Accounts 2019
Balance sheet commentary compared with
31 December 2018
At 31 December 2019, our total assets were $2.7tn, an increase of
$157bn or 6% on a reported basis and $126bn or 5% on a
constant currency basis.
Our ratio of customer advances to customer accounts of 72.0%
was unchanged from 31 December 2018.
Assets
Loans and advances to customers of $1.0tn increased by
$55bn or 6% on a reported basis. This included a favourable effect
of foreign currency translation differences of $13bn, resulting in
growth of $42bn or 4% on a constant currency basis, which was
mainly due to continued growth in Asia and Europe, notably in
Hong Kong and the UK.
Customer lending in Asia increased by $25bn, with growth in all
global businesses. The increase in RBWM (up $13bn) reflected
growth in Hong Kong (up $8bn) and Australia (up $3bn), primarily
due to increased mortgage lending. In GPB (up $6bn), the increase
was mainly in Hong Kong, driven by growth in marketable
securities-backed lending transactions, and in Singapore from
increased term lending. Lending growth in GB&M (up $4bn) and
CMB (up $3bn) reflected higher corporate term lending 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 $12bn, notably in HSBC
UK (up $11bn). This primarily reflected growth in mortgage
balances in RBWM (up $9bn) due to our continued focus on
broker-originated mortgages, and in CMB (up $2bn) where term
lending increased.
Cash and balances at central banks decreased by $9bn or 5%
and included a favourable effect of foreign currency translation
differences of $1bn. Excluding this, cash and balances at central
banks decreased by $10bn, mainly in the US, reflecting the
redeployment of our commercial surplus.
Trading assets increased by $16bn or 7%, which included a
favourable effect of foreign currency translation differences of
$3bn. Excluding this, trading assets increased by $13bn due to an
increase in equity security holdings, notably in Hong Kong, the US
and the UK, in part due an increase in client activity compared
with 2018. This was partly offset by a decrease in debt securities
held in the US.
Derivative assets increased by $35bn or 17% and included a
favourable effect of foreign currency translation differences of
$5bn. Excluding this, derivative assets increased by $31bn,
primarily from mark-to-market gains in the UK. The increase in
derivative assets was consistent with the increase in derivative
liabilities as the underlying risk is broadly matched.
Financial investments increased by $36bn or 9%, which
included a favourable effect of foreign currency translation
differences of $3bn. Excluding this, financial investments
increased by $33bn, mainly due to an increase in debt securities,
notably in the UK, and to a lesser extent in Singapore and the US.
This was partly offset by a decrease in investments in government
bonds in Hong Kong.
Liabilities
Customer accounts of $1.4tn increased by $76bn or 6% on a
reported basis, including the favourable effect of foreign currency
translation differences of $17bn. On a constant currency basis,
current accounts increased by $59bn or 4%, with growth across
all regions, mainly in Asia, Europe and North America.
In Asia, we grew customer accounts by $30bn or 4%, notably in
RBWM (up $20bn) and CMB (up $5bn), primarily from an increase
in time deposits, reflecting higher customer inflows due to
competitive rates. Growth in GB&M (up $5bn) was mainly in
Singapore as we continued to target this market for growth.
Customer accounts increased in Europe by $13bn. This was driven
by growth in RBWM (up $11bn), mainly due to higher savings
balances, notably in the UK, and in CMB (up $10bn), reflecting
growth in Global Liquidity and Cash Management (‘GLCM’). These
increases were partly offset by a decrease in GB&M balances
(down $9bn) mainly in the UK in GLCM.
In North America, customer accounts increased by $11bn, notably
in RBWM (up $7bn) reflecting growth in savings and deposits from
recent promotions. Growth in CMB (up $7bn), was notably in the
US from an increase in demand deposits.
Repurchase agreements – non-trading decreased by $26bn or
15%, primarily in the US from a decreased use of repurchase
agreements for funding in our Global Markets business.
Financial liabilities designated at fair value were $16bn or
11% higher. This was mainly due to increased issuances of senior
debt during the year by HSBC Holdings and increased issuances
of structured notes in the UK and France.
Derivative liabilities increased by $34bn or 16%, including a
favourable effect of foreign currency translation differences of
$5bn. Excluding this, derivative liabilities increased by $29bn,
which is consistent with the increase in derivative assets, since the
underlying risk is broadly matched.
Debt securities in issue rose by $19bn or 23%, reflecting an
increase in certificates of deposits, primarily in Europe, Asia and
North America. This was partly offset by a decrease in commercial
paper, notably in the UK, and a decrease in medium term notes in
North America.
Equity
Total shareholders’ equity of $184bn decreased by $2bn or 1%.
The reduction was mainly due to dividends paid to shareholders of
$12bn and adverse movements of $2bn related to fair value
attributable to changes in own credit risk. These reductions were
partly offset by profits generated in the period of $7bn, shares
issued in lieu of dividends of $3bn and a $1bn decrease in
accumulated foreign exchange losses.
Risk-weighted assets
Risk-weighted assets (‘RWAs’) totalled $843.4bn at 31 December
2019, a $21.9bn decrease. Excluding foreign currency translation
differences, RWAs decreased by $26.9bn in 2019.
A $32.2bn decrease in RWAs as a result of methodology and
policy changes was mostly due to management initiatives in CMB
and GB&M, including risk parameter refinements, a change to our
best estimate of expected loss on corporate exposures, and
securitisation transactions. A $7.7bn decrease due to model
updates included global corporate model changes in CMB and
GB&M, and changes to Private Banking credit risk models in Asia
and North America. A $9.0bn increase in RWAs due to asset size
movements predominantly reflected RWA increases due to
lending growth of $26.2bn, which were partly offset by reductions
due to active portfolio management of $17.2bn. Changes in asset
quality caused a $3.7bn rise in RWAs.
HSBC Holdings plc Annual Report and Accounts 2019
53
Financial review 2019
$m
528,718
419,642
47,699
19,361
6,558
35,458
697,358
499,955
48,569
48,323
23,191
14,935
14,624
14,668
4,732
28,361
38,126
17,949
3,870
5,186
11,121
146,676
90,834
48,425
7,417
28,237
23,051
5,186
2018
$m
503,154
399,487
45,169
16,713
6,315
35,470
664,824
484,897
42,323
45,712
20,649
14,210
13,904
13,602
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
USD
19,386
177,696
197,082
23,508
360,462
383,970
USD
23,469
176,907
200,376
17,802
348,741
366,543
GBP
3,245
264,029
267,274
7,537
358,764
366,301
GBP
4,351
243,541
247,892
5,777
340,244
346,021
At
31 Dec 2019
EUR
4,266
84,919
89,185
11,154
122,988
134,142
At
31 Dec 2018
EUR
3,462
86,583
90,045
15,923
116,095
132,018
HKD
6,242
234,945
241,187
1,865
299,049
300,914
HKD
3,241
220,458
223,699
3,748
290,748
294,496
1,439,115
1,362,643
CNY
5,772
34,338
40,110
4,265
52,216
56,481
CNY
7,418
29,973
37,391
4,065
49,596
53,661
Others15
30,292
240,816
271,108
10,693
245,636
256,329
Others15
30,226
224,234
254,460
9,016
217,219
226,235
Total
69,203
1,036,743
1,105,946
59,022
1,439,115
1,498,137
Total
72,167
981,696
1,053,863
56,331
1,362,643
1,418,974
Report of the Directors | Financial summary
Customer accounts by country/territory
Europe
– UK
– France
– Germany
– Switzerland
– other
Asia
– Hong Kong
– Singapore
– mainland China
– Australia
– India
– Malaysia
– Taiwan
– 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
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
$m
Loans and advances to banks
Loans and advances to customers
Total loans and advances
Deposits by banks
Customer accounts
Total deposits
54
HSBC Holdings plc Annual Report and Accounts 2019
Footnotes to financial summary
1 The debt instruments, issued for funding purposes, are designated
under the fair value option to reduce an accounting mismatch.
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.
3 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.
10 ‘Financial liabilities designated at fair value – own debt issued’ and
‘Debt securities’ lines have been merged into one new line: ‘Debt
securities in issue – non-trading’. Interest expense on financial
liabilities designated at fair value is reported as ‘Net income/
(expense) from financial instruments held for trading or managed on
a fair value basis’ in the consolidated income statement, other than
interest on own debt, which is reported in ‘Interest expense’.
11 Net of impairment allowances.
12 Capital resources are regulatory capital, the calculation of which is
set out on page 152.
13 Including perpetual preferred securities, details of which can be
4 Dividends per ordinary share expressed as a percentage of basic
found in Note 28 on the financial statements.
earnings per share.
5 Gross interest yield is the average annualised interest rate earned on
average interest-earning assets (‘AIEA’). Cost of funds is the average
annualised interest cost as a percentage on average interest-bearing
liabilities.
6 Net interest spread is the difference between the average annualised
interest rate earned on AIEA, net of amortised premiums and loan
fees, and the average annualised interest rate payable on average
interest-bearing funds.
7 Net interest margin is net interest income expressed as an annualised
percentage of AIEA.
8
9
Including interest-bearing bank deposits only.
Including interest-bearing customer accounts only.
14 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 own shares held by the company, including those
purchased and held in treasury.
15 ‘Others’ includes items with no currency information available
($9,334m for loans to banks, $62,037m for loans to customers,
$15m for deposits by banks and $33m for customer accounts).
HSBC Holdings plc Annual Report and Accounts 2019
55
Financial review Report of the Directors | Global businesses
Global businesses and
geographical regions
Reconciliation of reported and adjusted items – global businesses
Supplementary global business disclosures
Analysis of reported results by geographical regions
Reconciliation of reported and adjusted items – geographical regions
Analysis by country
Summary
Page
56
59
61
63
69
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’ and are presented in Note 10: Segmental analysis on
page 263.
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.
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.
Reconciliation of reported and adjusted items – global businesses
Supplementary unaudited analysis of significant items by global business is presented below.
Retail Banking
and Wealth
Management
Commercial
Banking
2019
Global
Banking and
Markets
Global
Private
Banking
Corporate
Centre
Footnotes
$m
$m
$m
$m
$m
Total
$m
56,098
(689)
163
(768)
(84)
55,409
23,192
15,285
14,840
1,848
208
156
52
—
7
7
—
—
76
—
—
76
—
—
—
—
23,400
15,292
14,916
1,848
933
(980)
—
(820)
(160)
(47)
(1,390)
(1,390)
(15,429)
1,412
—
1,264
—
148
—
(1,184)
(1,184)
(9,829)
3,028
4
17
2,956
51
—
(153)
(153)
(22)
(22)
(7)
(7)
(2,756)
(2,756)
(13,640)
(1,817)
(1,634)
(42,349)
4,223
42
—
3,962
217
393
—
—
431
32
2
(70)
498
112
—
—
379
7
9,554
158
1,281
7,349
827
(61)
(14,017)
(6,801)
(9,417)
(1,424)
(1,136)
(32,795)
55
55
6,428
1,620
208
1,412
8,048
—
—
4,272
3,035
7
3,028
7,307
—
—
1,047
4,299
76
4,223
5,346
—
—
9
393
—
393
402
2,299
2,299
1,591
(482)
(980)
498
1,109
2,354
2,354
13,347
8,865
(689)
9,554
22,212
395,393
395,393
346,060
346,060
246,266
246,266
47,593
47,593
1,431 1,036,743
1,431 1,036,743
689,283
689,283
386,522
386,522
292,284
292,284
62,943
62,943
8,083 1,439,115
8,083 1,439,115
1
2
3
Revenue
Reported
Significant items
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– fair value movements on financial instruments
Adjusted
ECL
Reported
Adjusted
Operating expenses
Reported
Significant items
– costs of structural reform
– customer redress programmes
– goodwill impairment
– 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 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 71.
56
HSBC Holdings plc Annual Report and Accounts 2019
Reconciliation of reported and adjusted items (continued)
2018
Retail
Banking and
Wealth
Management
Commercial
Banking
Global
Banking and
Markets
Footnotes
$m
$m
$m
1
2
3
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
ECL
Reported
Currency translation
Adjusted
Operating expenses
Reported
Currency translation
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
– 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 71.
21,928
(562)
8
—
7
—
1
14,938
15,634
(423)
(50)
(53)
—
—
3
(489)
(120)
—
—
(122)
2
Global
Private
Banking
$m
1,790
(28)
(5)
—
(5)
—
—
Corporate
Centre
$m
(510)
(115)
335
—
111
222
2
Total
$m
53,780
(1,617)
168
(53)
113
100
8
21,374
14,465
15,025
1,757
(290)
52,331
(1,177)
43
(1,134)
(13,902)
467
180
2
173
—
—
—
16
(11)
(739)
27
(712)
(6,480)
203
2
8
(5)
—
—
—
—
(1)
26
5
31
8
(1)
7
115
4
119
(1,767)
78
(1,689)
(9,348)
(1,550)
(3,379)
(34,659)
287
(109)
41
(22)
—
—
—
(131)
3
28
97
—
—
52
—
7
42
(4)
124
1,474
310
—
—
228
59
889
(12)
1,109
1,644
361
146
52
228
66
816
(25)
(13,255)
(6,275)
(9,170)
(1,425)
(1,781)
(31,906)
33
—
33
6,882
(52)
188
8
180
—
—
—
7,719
(193)
(48)
(50)
2
7,018
7,478
361,872
6,045
367,917
640,924
8,248
649,172
333,162
3,937
337,099
357,596
4,678
362,274
—
—
—
6,312
(197)
(229)
(120)
(109)
5,886
244,978
2,147
247,125
290,914
3,670
294,584
—
—
—
2,503
(90)
2,413
2,536
(90)
2,446
248
(1,271)
19,890
(1)
92
(5)
97
339
39,217
385
39,602
64,658
395
65,053
(77)
1,809
335
1,474
461
(520)
1,812
168
1,644
21,182
2,467
981,696
66
12,580
2,533
994,276
8,551
1,362,643
104
17,095
8,655
1,379,738
HSBC Holdings plc Annual Report and Accounts 2019
57
Financial review Report of the Directors | Global businesses
Reconciliation of reported and adjusted items (continued)
2017
Retail
Banking and
Wealth
Management
Commercial
Banking
Global
Banking and
Markets
Footnotes
$m
$m
$m
Global
Private
Banking
$m
Corporate
Centre
$m
Total
$m
51,445
(1,344)
72
108
(274)
245
(7)
20,519
13,120
14,617
1,723
1,466
(578)
(233)
3
(235)
—
(1)
(336)
99
103
—
—
(4)
(264)
470
2
99
373
(4)
(5)
(20)
—
(20)
—
—
(161)
(244)
—
(118)
(128)
2
19,708
12,883
14,823
1,698
1,061
50,173
(980)
39
(941)
(13,734)
471
877
6
270
637
—
(26)
—
(10)
(496)
28
(468)
(6,001)
178
53
3
44
16
—
(9)
—
(1)
(459)
20
(439)
(16)
(1)
(17)
182
(3)
179
(1,769)
83
(1,686)
(8,723)
(1,586)
(4,840)
(34,884)
133
(119)
8
240
2
—
(9)
(376)
16
9
193
—
3
—
31
(3)
164
(2)
124
2,706
403
2,445
—
22
(141)
14
(37)
915
3,710
420
3,002
655
53
(188)
(198)
(34)
(12,386)
(5,770)
(8,709)
(1,384)
(2,010)
(30,259)
18
(6)
12
5,823
(74)
644
(233)
877
6,393
346,148
(8,380)
337,768
639,592
(10,150)
629,442
—
—
—
6,623
(130)
152
99
53
6,645
316,533
(7,663)
308,870
362,908
(6,420)
356,488
—
—
—
5,435
(111)
351
470
(119)
5,675
252,474
(5,584)
246,890
283,943
(7,309)
276,634
—
—
—
121
3
173
(20)
193
297
40,326
(313)
40,013
66,512
(1,021)
65,491
2,357
(41)
2,316
(835)
(81)
2,462
(244)
2,706
1,546
2,375
(47)
2,328
17,167
(393)
3,782
72
3,710
20,556
7,483
962,964
(101)
(22,041)
7,382
940,923
11,507
1,364,462
(490)
(25,390)
11,017
1,339,072
1
2
3
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 71.
58
HSBC Holdings plc Annual Report and Accounts 2019
Reconciliation of reported and adjusted risk-weighted assets
At 31 Dec 2019
Retail
Banking and
Wealth
Management
Commercial
Banking
Global
Banking and
Markets
Global Private
Banking
Corporate
Centre
Risk-weighted assets
Reported
Adjusted
Risk-weighted assets
Reported
Currency translation
Disposals
– operations in Brazil
Adjusted
Risk-weighted assets
Reported
Currency translation
Disposals
– operations in Brazil
Adjusted
For footnotes, see page 71.
Footnotes
$bn
$bn
$bn
4
4
4
134.0
134.0
316.7
316.7
258.2
258.2
At 31 Dec 2018
126.9
321.2
281.0
0.7
—
—
3.4
—
—
1.1
—
—
127.6
324.6
282.1
At 31 Dec 2017
121.5
(2.5)
—
—
301.0
(8.0)
—
—
299.3
(4.6)
—
—
119.0
293.0
294.7
$bn
14.0
14.0
16.8
0.1
—
—
16.9
16.0
(0.1)
—
—
15.9
$bn
120.5
120.5
Total
$bn
843.4
843.4
119.4
865.3
0.4
(0.8)
(0.8)
5.7
(0.8)
(0.8)
119.0
870.2
133.5
(1.4)
(2.6)
(2.6)
129.5
871.3
(16.6)
(2.6)
(2.6)
852.1
Supplementary global business disclosures
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 channels5
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
ECL
Net operating income
Total operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax of insurance manufacturing operations
Annualised new business premiums of insurance manufacturing operations
Insurance distribution income earned by HSBC bank channels
For footnotes, see page 71.
Footnotes
2019
2018
2017
RBWM
$m
2,131
(690)
104
(794)
All global
businesses
$m
2,306
(739)
129
(868)
RBWM
$m
2,026
(569)
181
(750)
All global
businesses
$m
2,196
(558)
274
(832)
RBWM
$m
1,977
(489)
232
(721)
All global
businesses
$m
2,174
(496)
330
(826)
(44)
(29)
(521)
167
(51)
1
3,568
3,554
(897)
(1,559)
2,830
5
5
58
57
10,054
10,718
10,054
10,541
1,765
1,696
1,787
1,749
709
637
767
679
23
9,312
62
12
2,771
31
9,938
96
22
16,789
17,602
10,860
11,611
13,664
14,515
(14,192)
(14,891)
(9,079)
(9,596)
(11,732)
(12,323)
1
6
2,597
(104)
2,493
(520)
1,973
44
2,017
3,296
913
2,711
(115)
2,596
(505)
2,091
44
2,135
3,382
1,039
1,781
(2)
1,779
(455)
1,324
31
1,355
3,153
923
2,015
1,932
2,192
(1)
2,014
(478)
1,536
32
1,568
3,231
1,039
—
1,932
(388)
1,544
10
1,554
2,647
889
—
2,192
(422)
1,770
10
1,780
2,706
1,012
HSBC Holdings plc Annual Report and Accounts 2019
59
Financial review Report of the Directors | Global businesses | Geographical regions
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 $2.1bn increased by $0.6bn or 36%.
This was mainly due to favourable market impacts of $0.1bn in
2019, primarily driven by strong equity market performance in
Hong Kong, compared with adverse market impacts of $(0.3)bn in
2018. It also reflected a $0.1bn increase in the value of new
business written.
Net operating income before change in expected credit losses and
other credit impairment charges was $0.7bn or 35% higher than
2018. This reflected the following:
•
‘Net income from assets and liabilities of insurance businesses,
including related derivatives, measured at fair value through
profit or loss’ of $3.6bn compared with a net expense of $1.6bn
in 2018, due to favourable equity market performance in Hong
Kong and France in 2019 compared with 2018, resulting in
revaluation gains on equity and unit trust assets supporting
insurance and investment contracts. This positive movement
resulted in a corresponding movement in liabilities to
policyholders and PVIF (see ‘Other operating income’ below),
reflecting the extent to which the policyholders and
shareholders respectively participate in the investment
performance of the associated assets portfolio.
•
‘Net insurance premium income’ of $10.7bn was $0.2bn
higher. This was driven by higher new business volumes across
all entities, and particularly in Hong Kong, Singapore and UK,
partly offset by higher reinsurance ceded in Hong Kong.
•
•
‘Other operating income’ of $1.8bn increased by $1.0bn. This
increase in PVIF reflected a favourable movement in
‘assumption changes and experience variances’ of $1.1bn,
primarily in Hong Kong due to the effect of interest rate
changes on the valuation of the liabilities under insurance
contracts. In addition, the value of new business written
increased by $0.1bn to $1.2bn. For further details, see Note 21
on the financial statements.
‘Net insurance claims and benefits paid and movement in
liabilities to policyholders’ of $14.9bn were $5.3bn higher than
2018. This increase was primarily due to higher returns on
financial assets supporting contracts where the policyholder is
subject to part or all of the investment risk and the impact of
higher new business volumes, particularly in Hong Kong and
Singapore. This was partly offset by the impact of higher
reinsurance ceded in Hong Kong.
Adjusted ECL of $0.1bn in 2019 primarily related to government
bond exposures in Argentina.
Adjusted operating expenses of $0.5bn increased by $27m or 6%
compared with 2018, reflecting investment in core insurance
functions and capabilities, including preparation for the
implementation of IFRS 17 ‘Insurance Contracts’.
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 in most entities, with the
main contribution coming from Hong Kong, mainland China and
the UK.
Insurance distribution income from HSBC channels included
$665m (2018: $651m) on HSBC manufactured products, for which
a corresponding fee expense is recognised within insurance
manufacturing, and $375m (2018: $389m) on products
manufactured by third-party providers. The RBWM component of
this distribution income was $589m (2018: $581m) from HSBC
manufactured products and $325m (2018: $343m) from third-party
products.
Asset Management: Funds under management
The following table shows the funds under management of our Asset Management business.
Asset Management – reported funds under management7
Opening balance
Net new money
Value change
Exchange and other
Closing balance
Asset Management – reported funds under management by geography
Europe
Asia
MENA
North America
Latin America
Closing balance
For footnotes, see page 71.
2019
$bn
444
30
30
2
506
2019
$bn
287
161
6
44
8
506
2018
$bn
462
8
(14)
(12)
444
2018
$bn
235
164
2
36
7
444
2017
$bn
410
8
24
20
462
2017
$bn
249
168
1
37
7
462
Funds under management represents assets managed, either
actively or passively, on behalf of our customers. At 31 December
2019, Asset Management funds under management amounted to
$506bn, an increase of $62bn or 14%. The increase reflected
positive market performance and foreign exchange, together with
strong net new money, primarily from money market solutions and
discretionary products, notably in the UK.
GB&M: Securities Services
Assets held in custody7
Custody is the safekeeping and servicing of securities and other
financial assets on behalf of clients. At 31 December 2019, we
held $8.5tn of assets as custodian, 16% higher than at 31
December 2018. This increase was driven by the onboarding of
assets for new clients globally, and the incremental net asset
inflows for existing clients together with favourable market
movements mainly in Asia.
60
HSBC Holdings plc Annual Report and Accounts 2019
Assets under administration
Our assets under administration business, which includes the
provision of bond and loan administration services, transfer
agency services and the valuation of portfolios of securities and
other financial assets on behalf of clients, complements the
custody business. At 31 December 2019, the value of assets held
GPB client assets
The following table shows the client assets of our GPB business.
GPB – reported client assets
under administration by the Group amounted to $4.0tn, which was
20% higher than at 31 December 2018. This increase was mainly
driven by the onboarding of significant new client assets in
Europe, together with incremental net assets inflows for existing
clients in both Europe and Asia.
At 1 Jan
Net new money
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 71.
2019
$bn
309
23
23
—
6
361
2019
$bn
171
151
39
—
—
361
2018
$bn
330
10
(17)
—
(14)
309
2018
$bn
149
124
36
—
—
309
2017
$bn
298
—
21
—
11
330
2017
$bn
161
130
39
—
—
330
Footnotes
8
Analysis of reported results by geographical regions
HSBC reported profit/(loss) before tax and balance sheet data
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)
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 excluding goodwill
Goodwill impairment
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
Footnotes
Europe
$m
5,601
3,668
Asia
$m
16,607
5,325
MENA
$m
1,781
685
2019
North
America
Latin
America
$m
3,241
1,804
$m
2,061
540
Intra-HSBC/
Global
impairment
$m
1,171
1
Total
$m
30,462
12,023
3,785
4,735
327
873
883
(372)
10,231
1,656
1,803
—
—
14
5
3,478
9
1
1,516
1,830
28
1,921
1
916
31
638
41
(23)
(805)
(6,190)
812
(908)
18,056
30,419
3,710
6,587
3,516
(6,190)
56,098
(938)
(724)
17,118
29,695
(19,237)
(13,297)
(2,522)
(4,641)
(12)
(4,653)
%
(34.9)
120.5
$m
—
16,398
2,070
18,468
%
138.4
43.7
$m
393,850
477,727
1,248,205
1,102,805
528,718
280,983
697,358
366,375
10
(117)
3,593
(1,452)
(97)
2,044
283
2,327
%
17.4
41.8
$m
28,556
65,369
38,126
57,492
(237)
6,350
(5,152)
(431)
767
—
767
%
5.7
84.8
$m
(740)
2,776
(2,052)
(337)
387
13
400
%
3.0
67.9
$m
—
(2,756)
(6,190)
6,190
(3,962)
(3,962)
—
(3,962)
$m
53,342
(35,000)
(7,349)
10,993
2,354
13,347
%
100.0
75.5
$m
113,474
377,095
146,676
121,953
23,136
52,879
28,237
38,460
— 1,036,743
(131,201)
2,715,152
— 1,439,115
—
843,395
HSBC Holdings plc Annual Report and Accounts 2019
61
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)
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
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/recoveries and other credit risk provisions
Loan impairment (charges)/recoveries 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
For footnotes, see page 71.
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
9
1
10
(789)
(717)
601
3,113
(26)
3,609
—
(1)
33
—
18
36
586
27
(237)
—
58
(5,171)
(1,488)
695
1,933
17,704
28,784
2,687
6,725
3,062
(5,182)
53,780
(609)
17,095
(17,934)
(839)
24
(815)
%
(4.1)
101.3
$m
(602)
28,182
(12,466)
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
6,970
4,161
14,153
5,631
1,752
619
223
6,948
(6,149)
799
—
799
%
4.0
91.4
$m
108,146
390,410
133,291
131,582
2017
3,441
1,880
(570)
2,492
(1,935)
557
2
559
%
2.8
63.2
$m
21,108
51,923
25,966
38,341
—
(5,182)
5,182
—
—
—
$m
—
(1,767)
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
2,098
520
(238)
—
28,176
12,811
11,12
4,066
2,929
180
527
486
238
8,426
769
2,003
—
—
64
—
2,836
9,12
1
N/A
1,454
N/A
1,090
N/A
109
N/A
865
N/A
57
N/A
(4,379)
N/A
(804)
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
10
(207)
2,453
(1,394)
1,059
442
1,501
%
8.7
52.4
$m
28,050
57,469
34,658
59,196
189
6,902
(5,305)
1,597
4
1,601
%
9.3
79.0
$m
107,607
391,292
143,432
131,276
(523)
2,702
(2,109)
593
7
600
%
3.5
65.4
$m
19,789
48,413
23,795
36,372
—
(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
62
HSBC Holdings plc Annual Report and Accounts 2019
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
ECL
Reported
Adjusted
Operating expenses
Reported
Significant items
– costs of structural reform
– customer redress programmes
– goodwill impairment
– restructuring and other related costs
– settlements and provisions in connection with legal and regulatory matters
Adjusted
Share of profit/(loss) 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 71.
Footnotes
Europe
$m
Asia
$m
MENA
$m
North
America
Latin
America
$m
$m
Total
$m
2019
1
11
2
11
18,056
30,419
26
163
—
(137)
35
—
—
35
3,710
(828)
—
(828)
—
6,587
3,516
56,098
68
—
59
9
10
—
1
9
(689)
163
(768)
(84)
18,082
30,454
2,882
6,655
3,526
55,409
(938)
(938)
(724)
(724)
(117)
(117)
(237)
(237)
(740)
(740)
(2,756)
(2,756)
11, 14
(21,759)
(13,297)
(1,549)
(5,583)
(2,389)
(42,349)
14
3
14
14
14
14
14
4,435
154
1,281
2,522
538
(60)
126
112
4
—
—
123
(1)
—
—
97
15
—
544
—
—
431
113
—
375
—
—
337
38
—
9,554
158
1,281
7,349
827
(61)
(17,324)
(13,171)
(1,437)
(5,039)
(2,014)
(32,795)
(12)
(12)
2,070
2,070
283
283
(4,653)
18,468
2,327
4,461
26
4,435
161
35
126
(716)
(828)
112
—
—
767
612
68
544
(192)
18,629
1,611
1,379
13
13
400
385
10
375
785
2,354
2,354
13,347
8,865
(689)
9,554
22,212
393,850
477,727
28,556
113,474
23,136 1,036,743
393,850
477,727
28,556
113,474
23,136 1,036,743
528,718
697,358
38,126
146,676
28,237 1,439,115
528,718
697,358
38,126
146,676
28,237 1,439,115
HSBC Holdings plc Annual Report and Accounts 2019
63
Financial review Report of the Directors | Geographical regions
Reconciliation of reported and adjusted items (continued)
Footnotes
UK
$m
2019
Hong
Kong
Mainland
China
$m
$m
US
$m
Mexico
$m
Revenue
Reported
Significant items
– customer redress programmes
– disposals, acquisitions and investment in new businesses
– fair value movements on financial instruments
Adjusted
ECL
Reported
Adjusted
Operating expenses
Reported
Significant items
– costs of structural reform
– customer redress programmes
– restructuring and other related costs
– settlements and provisions in connection with legal and regulatory matters
Adjusted
Share of profit/(loss) in associates and joint ventures
1
2
3
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 71.
13,538
19,412
3,101
4,638
2,555
23
162
—
(139)
26
—
—
26
1
—
—
1
66
—
59
7
8
—
—
8
13,561
19,438
3,102
4,704
2,563
(714)
(714)
(459)
(459)
(129)
(129)
(170)
(170)
(491)
(491)
(16,157)
(6,935)
(2,111)
(4,033)
(1,390)
1,795
101
1,281
405
8
64
4
—
61
(1)
6
—
—
6
—
93
—
—
93
—
20
—
—
20
—
(14,362)
(6,871)
(2,105)
(3,940)
(1,370)
(12)
(12)
31
31
2,016
2,016
(3,345)
12,049
2,877
1,818
23
1,795
90
26
64
7
1
6
(1,527)
12,139
2,884
—
—
435
159
66
93
594
13
13
687
28
8
20
715
303,041
306,964
303,041
306,964
42,380
42,380
63,588
63,588
20,426
20,426
419,642
499,955
419,642
499,955
48,323
48,323
90,834
90,834
23,051
23,051
64
HSBC Holdings plc Annual Report and Accounts 2019
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
Change in expected credit losses and other credit impairment charges
Reported
Currency translation
Adjusted
Operating expenses
Reported
Currency translation
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
– 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 71.
Footnotes
Europe
$m
Asia
$m
MENA
$m
North
America
Latin
America
$m
$m
Total
$m
2018
1
11
11
2
11
11
11
3
17,704
28,784
(914)
103
(53)
(5)
156
5
(316)
(36)
—
—
(38)
2
2,687
(18)
(1)
—
—
(1)
—
6,725
(40)
97
—
103
(8)
2
3,062
(389)
53,780
(1,617)
5
—
15
(9)
(1)
168
(53)
113
100
8
16,893
28,432
2,668
6,782
2,678
52,331
(609)
12
(597)
(602)
5
(597)
(209)
9
(200)
223
(1)
222
(570)
53
(517)
(1,767)
78
(1,689)
(17,934)
(12,466)
(1,357)
(6,149)
(1,935)
(34,659)
664
652
352
146
52
228
46
(147)
(25)
175
16
9
—
—
—
7
—
23
—
—
—
—
—
—
—
—
23
976
—
—
—
—
13
963
—
284
—
—
—
—
—
—
—
—
1,109
1,644
361
146
52
228
66
816
(25)
11
(16,618)
(12,275)
(1,334)
(5,150)
(1,651)
(31,906)
24
—
24
(815)
(238)
755
103
652
2,074
(89)
1,985
17,790
(225)
(20)
(36)
16
436
—
436
1,557
14
(1)
(1)
—
—
—
—
799
(18)
1,073
97
976
2
(1)
1
559
(53)
5
5
—
2,536
(90)
2,446
19,890
(520)
1,812
168
1,644
(298)
17,545
1,570
1,854
511
21,182
373,073
450,545
28,824
108,146
21,108
981,696
8,887
1,875
(84)
2,067
(165)
12,580
381,960
452,420
28,740
110,213
20,943
994,276
503,154
664,824
35,408
133,291
25,966
1,362,643
12,796
3,016
58
2,163
(938)
17,095
515,950
667,840
35,466
135,454
25,028
1,379,738
HSBC Holdings plc Annual Report and Accounts 2019
65
Financial review 1
2
3
UK
$m
Hong
Kong
$m
2018
Mainland
China
$m
Footnotes
13,597
18,231
(713)
114
(53)
—
162
5
6
5
—
—
5
—
2,888
(125)
(1)
—
—
(1)
—
US
$m
Mexico
$m
4,741
2,294
—
97
—
103
(6)
—
(1)
(8)
—
—
(7)
(1)
12,998
18,242
2,762
4,838
2,285
(516)
9
(507)
(214)
(1)
(215)
(143)
4
(139)
199
—
199
(463)
—
(463)
(14,502)
(6,539)
(1,920)
(4,987)
(1,303)
494
511
294
146
—
228
39
(176)
(20)
(2)
15
9
—
—
—
7
—
(1)
81
—
—
—
—
—
—
—
—
—
920
—
—
—
—
11
908
1
—
—
—
—
—
—
—
—
—
(13,497)
(6,526)
(1,839)
(4,067)
(1,303)
25
(1)
24
36
—
36
(1,396)
11,514
(211)
625
114
511
3
20
5
15
2,033
(90)
1,943
2,858
(130)
(1)
(1)
—
(982)
11,537
2,727
—
—
—
(47)
—
1,017
97
920
970
—
—
—
528
(1)
(8)
(8)
—
519
287,144
290,547
38,979
64,011
17,895
10,190
1,609
(477)
—
763
297,334
292,156
38,502
64,011
18,658
399,487
484,897
45,712
82,523
19,936
14,173
2,686
(559)
—
856
413,660
487,583
45,153
82,523
20,792
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
Change in expected credit losses and other credit impairment charges
Reported
Currency translation
Adjusted
Operating expenses
Reported
Currency translation
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
– 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 71.
66
HSBC Holdings plc Annual Report and Accounts 2019
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
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 obligations
– 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 71.
Footnotes
Europe
$m
Asia
$m
MENA
$m
North
America
Latin
America
$m
$m
Total
$m
2017
1
11
11
2
11
11
11
3
17,420
25,806
(165)
61
108
(98)
54
(3)
(418)
118
—
(27)
148
(3)
2,660
(93)
1
—
—
1
—
6,713
(36)
(94)
—
(130)
37
(1)
3,225
(661)
51,445
(1,344)
(14)
—
(19)
5
—
72
108
(274)
245
(7)
17,316
25,506
2,568
6,583
2,550
50,173
(658)
26
(632)
—
(570)
9
(561)
—
(207)
5
(202)
—
189
—
189
—
(523)
43
(480)
—
(1,769)
83
(1,686)
—
(18,665)
(11,790)
(1,394)
(5,305)
(2,109)
(34,884)
135
2,810
420
1,908
655
36
—
(215)
6
229
622
—
623
—
—
—
17
(18)
87
25
—
34
—
—
—
—
(9)
21
199
—
371
—
17
(188)
—
(1)
472
54
—
66
—
—
—
—
(12)
915
3,710
420
3,002
655
53
(188)
(198)
(34)
11
(15,720)
(10,939)
(1,282)
(5,085)
(1,583)
(30,259)
39
(2)
37
1,883
(40)
1,843
442
—
442
4
—
4
(1,864)
15,329
1,501
1,601
(6)
2,871
61
2,810
1,001
(220)
740
118
622
(1)
26
1
25
(15)
105
(94)
199
15,849
1,526
1,691
7
(5)
2
600
(151)
40
(14)
54
489
2,375
(47)
2,328
17,167
(393)
3,782
72
3,710
20,556
381,547
425,971
28,050
107,607
19,789
962,964
(11,204)
(6,374)
(1,328)
(1,373)
(1,762)
(22,041)
370,343
419,597
26,722
106,234
18,027
940,923
505,182
657,395
34,658
143,432
23,795
1,364,462
(14,581)
(5,882)
(963)
(1,555)
(2,409)
(25,390)
490,601
651,513
33,695
141,877
21,386
1,339,072
HSBC Holdings plc Annual Report and Accounts 2019
67
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 obligations
– 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 71.
UK
$m
Hong
Kong
$m
2017
Mainland
China
$m
Footnotes
US
$m
Mexico
$m
1
2
3
12,922
16,117
2,379
4,876
(129)
50
108
(78)
24
(4)
(87)
(52)
—
(126)
75
(1)
(52)
100
—
99
2
(1)
—
(99)
—
(130)
31
—
2,160
(47)
5
—
—
5
—
12,843
15,978
2,427
4,777
2,118
(492)
21
(471)
(396)
4
(392)
(67)
1
(66)
108
—
108
(473)
11
(462)
(15,086)
(6,131)
(1,687)
(4,267)
(1,297)
100
2,476
410
1,766
655
—
—
(362)
7
31
306
—
291
—
—
—
17
(2)
39
68
—
69
—
—
—
—
(1)
—
119
—
290
—
17
(188)
—
—
25
46
—
46
—
—
—
—
—
(12,510)
(5,794)
(1,580)
(4,148)
(1,226)
38
(1)
37
8
—
8
1,863
(40)
1,823
(2,618)
9,598
2,488
(9)
2,526
50
2,476
(101)
(52)
254
(52)
306
(52)
168
100
68
9,800
2,604
295,538
268,966
(6,336)
904
289,202
269,870
401,733
477,104
(8,593)
1,605
393,140
478,709
40,686
(2,666)
38,020
45,991
(3,013)
42,978
—
—
—
717
—
20
(99)
119
737
65,168
1
65,169
89,887
—
89,887
—
—
—
390
(11)
51
5
46
430
15,172
679
15,851
17,809
798
18,607
68
HSBC Holdings plc Annual Report and Accounts 2019
Analysis by country
Profit/(loss) before tax by country/territory within global businesses
Europe
– UK
– of which: HSBC UK Bank plc (RFB)
– HSBC Bank plc (NRFB)
– Holdings and other
– 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
GB&M goodwill impairment
Year ended 31 Dec 2019
For footnotes, see page 71.
Retail Banking
and Wealth
Management
Commercial
Banking
Global
Banking
and Markets
Global
Private
Banking
Corporate
Centre
$m
(760)
(815)
(399)
202
(618)
45
6
(1)
5
6,935
6,550
121
48
12
(74)
85
114
41
38
190
44
127
(3)
22
(219)
(323)
44
60
282
279
3
—
$m
(889)
1,365
1,497
271
(403)
119
37
7
(2,417)
4,266
3,107
108
181
49
296
66
80
23
356
174
65
91
—
18
807
365
406
36
(86)
166
(252)
—
6,428
4,272
$m
(474)
(650)
70
(223)
(497)
(66)
74
(3)
171
3,793
1,663
168
466
123
498
184
219
91
381
722
222
241
13
246
608
452
120
36
360
217
143
(3,962)
1,047
$m
72
(44)
16
39
(99)
9
7
90
10
381
366
(1)
—
—
(5)
—
22
—
(1)
1
—
1
—
—
(445)
(14)
—
(431)
—
—
—
—
9
$m
(2,602)
(3,201)
123
(419)
(2,905)
(71)
37
(2)
635
3,093
363
48
311
32
2,162
7
43
6
121
1,240
79
(35)
1,145
51
16
(45)
48
13
(156)
25
(181)
—
1,591
Footnotes
12
13
13
13
13
13
Total
$m
(4,653)
(3,345)
1,307
(130)
(4,522)
36
161
91
(1,596)
18,468
12,049
444
1,006
216
2,877
342
478
161
895
2,327
410
425
1,155
337
767
435
618
(286)
400
687
(287)
(3,962)
13,347
HSBC Holdings plc Annual Report and Accounts 2019
69
Financial review Report of the Directors | Geographical regions
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 UK Bank plc (RFB)
– HSBC Bank plc (NRFB)
– Holdings and other
Footnotes
12
– 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
539
548
(611)
(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
934
1,394
(427)
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
4
795
(390)
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 UK Bank plc (RFB)
– HSBC Bank plc (NRFB)
– Holdings and other
12
– 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
Year ended 31 Dec 2017
For footnotes, see page 71.
(159)
(177)
NA
413
(590)
(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
NA
1,911
(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
NA
889
(697)
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
38
60
(75)
16
8
(100)
(69)
353
333
(1)
—
—
(4)
—
25
—
—
7
—
7
—
—
11
23
—
(12)
(1)
—
(1)
248
(231)
(23)
NA
63
(86)
5
9
(192)
(30)
285
257
(1)
—
—
(4)
—
34
(1)
—
—
—
—
—
—
67
66
—
1
—
—
—
$m
(4,112)
(4,205)
(133)
(719)
(3,353)
(101)
(5)
20
179
3,298
446
44
275
1
2,234
30
63
30
175
527
43
—
436
48
(822)
(962)
116
24
(162)
23
(185)
Total
$m
(815)
(1,396)
1,382
2,078
(4,856)
37
201
(77)
420
17,790
11,514
463
825
104
2,858
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)
NA
(1,224)
(2,925)
(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)
NA
2,052
(4,670)
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
70
HSBC Holdings plc Annual Report and Accounts 2019
5,823
6,623
5,435
121
(835)
17,167
Footnotes to global businesses and
geographical regions
1 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.
2 Fair value movements on financial instruments include non-qualifying
10 Risk-weighted assets are non-additive across geographical regions
due to market risk diversification effects within the Group.
11 Amounts are non-additive across geographical regions due to
intercompany transactions within the Group.
12 UK includes results from the ultimate holding company, HSBC
Holdings plc, and the separately incorporated group of service
companies (‘ServCo Group’).
hedges and debt valuation adjustments on derivatives.
13 Includes the impact of goodwill impairment. As per Group
accounting policy, HSBC’s cash-generating units are based on
geographical regions subdivided by global business, except for
Global Banking and Markets, for which goodwill is monitored on a
global basis.
14 Amounts are non-additive across geographical regions due to
goodwill impairment recognised on the Global Banking and Markets
cash-generating unit, which is monitored on a global basis.
3 Comprises costs associated with preparations for the UK’s exit from
the European Union, costs to establish the UK ring-fenced bank
(including the UK ServCo group) and costs associated with
establishing an intermediate holding company in Hong Kong.
4 Adjusted risk-weighted assets are calculated using reported risk-
weighted assets adjusted for the effects of currency translation
differences and significant items.
5 The results presented for insurance manufacturing operations are
shown before elimination of intercompany transactions with HSBC
non-insurance operations.
6 The effect on the Insurance manufacturing operations of applying
hyperinflation accounting in Argentina resulted in a reduction in
adjusted revenue in 2019 of $3m (2018: $29m) and a reduction in
PBT in 2019 of $3m (2018: $27m). These effects are recorded in ‘all
global businesses’ within Corporate Centre.
7 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.
8 Client assets related to our Middle East clients are booked across
various other regions, primarily in Europe.
9
‘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.
HSBC Holdings plc Annual Report and Accounts 2019
71
Financial review Report of the Directors | Other information
Other information
Taxes paid by region and country/territory
Carbon dioxide emissions
Carbon dioxide emissions
Page
72
72
We report our carbon emissions following the Greenhouse Gas
Protocol, which incorporates the scope 2 market-based emission
methodology. We report carbon dioxide emissions resulting from
energy use in our buildings and employees’ business travel.
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, the 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
– Turkey
– other
North America
– US
– Canada
– other
Latin America
– Mexico
– Argentina
– other
– of which: Brazil
Year ended 31 Dec
2019
$m
3,077
2,468
889
476
116
(7)
24
1,487
248
180
76
398
50
119
104
68
244
313
—
66
136
42
69
314
152
162
—
400
179
188
33
21
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
163
191
28
142
227
297
84
81
64
42
297
419
170
101
58
—
90
317
134
182
1
443
129
278
314
36
5,591
7,054
6,796
In 2019, we collected data on energy use and business travel for
our operations in 28 countries and territories, which accounted for
approximately 94% of our 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
94% to 100%.
We then apply emission uplift rates to reflect uncertainty
concerning the quality and coverage of emission measurement
and estimation. The rates are 4% for electricity, 10% for other
energy and 6% for business travel. This is consistent both with the
Intergovernmental Panel on Climate Change’s Good Practice
Guidance and Uncertainty Management in National Greenhouse
Gas Inventories and our internal analysis of data coverage and
quality.
Further details on our methodology can be found in our ‘CO2
Emissions Reporting Guidance 2019’ on our website at
www.hsbc.com/our-approach/esg-information/esg-reporting-and-
policies as relevant environmental key facts.
Carbon dioxide emissions in tonnes
Total
From energy1
Included energy UK
From travel1
2019
530,000
414,000
10,400
116,000
2018
559,000
437,000
9,700
122,000
1 Our carbon dioxide reporting year runs from October to September.
PwC provided limited assurance over our carbon dioxide emissions 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 at www.hsbc.com/our-approach/esg-information/esg-
reporting-and-policies.
Carbon dioxide emissions in tonnes per FTE
Total
From energy
From travel
2019
2.26
1.76
0.5
2018
2.39
1.87
0.52
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.
The tax we paid during 2019 was lower than in 2018 due to
differences in the timing of payments, particularly in Hong Kong.
Further details on our approach to tax are provided on page 25.
Energy consumption in GWh
Total Group
UK only
2019
1,050
281
2018
1,092
279
As energy takes 78% of our carbon emissions, we continue to
focus on energy reduction and efficiency projects. During 2019,
we implemented over 810 energy conservation measures that
amount to an estimated energy avoidance in excess of 22M kWh.
72
HSBC Holdings plc Annual Report and Accounts 2019
Risk
Our approach to risk
Our risk appetite
Risk management
Key developments in 2019
Top and emerging risks
Externally driven
Internally driven
Areas of special interest
UK withdrawal from the European Union
Ibor transition
Risks to our operations and portfolios in Asia-Pacific
Our material banking risks
Credit risk
Capital and liquidity risk
Market risk
Resilience risk
Regulatory compliance risk
Financial crime and fraud risk
Model risk
Insurance manufacturing operations risk
Our approach to risk
Our risk appetite
Page
73
73
73
76
76
76
80
81
81
81
82
83
84
130
135
143
144
145
146
146
We have maintained a consistent risk profile throughout our
history. This is central to our business and strategy. We recognise
the importance of a strong culture, which refers to our shared
attitudes, values and standards that shape behaviours related to
risk awareness, risk taking and risk management. All our people
are responsible for the management of risk, with the ultimate
accountability residing with the Board.
We seek to build our business for the long term by balancing
social, environmental and economic considerations in the
decisions we make. Our strategic priorities are underpinned by our
endeavour to operate in a sustainable way. This helps us to carry
out our social responsibility and manage the risk profile of the
business. We are committed to managing and mitigating climate-
related risks, both physical and transition, and continue to
incorporate consideration of these into how we manage and
oversee risks internally and with our customers.
The following principles guide the Group’s overarching appetite for
risk and determine how our businesses and risks are managed.
Financial position
• We aim to maintain a strong capital position, defined by
regulatory and internal capital ratios.
• We carry out liquidity and funding management for each
operating entity, on a stand-alone basis.
Operating model
• We seek to generate returns in line with a conservative risk
appetite and strong risk management capability.
• We aim to deliver sustainable earnings and consistent returns
for shareholders.
Business practice
• We have zero tolerance for any of our people knowingly
engaging in any business, activity or association where
foreseeable reputational risk or damage has not been
considered and/or mitigated.
• We have no appetite for deliberately or knowingly causing
detriment to consumers, or incurring a breach of the letter or
spirit of regulatory requirements.
• We have no appetite for inappropriate market conduct by any
member of staff or by any Group business.
Enterprise-wide application
Our risk appetite encapsulates the consideration of financial and
non-financial risks. We define financial risk as the risk of a
financial loss as a result of business activities. We actively take
these types of risks to maximise shareholder value and profits.
Non-financial risk is defined as the risk to achieving our strategy or
objectives as a result of inadequate or failed internal processes,
people and systems, or from external events.
Our risk appetite is expressed in both quantitative and qualitative
terms and applied at the global business level, at the regional level
and to material operating entities. Every three years, the Global
Risk function commissions an external independent firm to review
the Group’s approach to risk appetite and to help ensure that it
remains in line with market best practice and regulatory
expectations. The exercise carried out in 2019 confirmed the
Group’s risk appetite statement (‘RAS’) remains aligned to best
practices, regulatory expectations and strategic goals. The review
highlighted strengths across our governance and risk appetite
reporting, and noted that our risk appetite continues to evolve and
expand its scope as part of our regular review process.
The Board reviews and approves the Group’s risk appetite twice a
year to make sure it remains fit for purpose. The Group’s risk
appetite is considered, developed and enhanced through:
• an alignment with our strategy, purpose, values and customer
needs;
• trends highlighted in other Group risk reports, such as the ‘Risk
map’ and ‘Top and emerging risks’;
• communication with risk stewards on the developing risk
landscape;
• strength of our capital, liquidity and balance sheet;
• compliance with applicable laws and regulations;
• effectiveness of the applicable control environment to mitigate
risk, informed by risk ratings from risk control assessments;
• functionality, capacity and resilience of available systems to
manage risk; and
• the level of available staff with the required competencies to
manage risks.
We formally articulate our risk appetite through our RAS, which is
approved by the Board on the recommendation of the Group Risk
Committee (‘GRC’). Setting out our risk appetite ensures that
planned business activities provide an appropriate balance of
return for the risk we are taking, and that we agree a suitable level
of risk for our strategy. In this way, risk appetite informs our
financial planning process and helps senior management to
allocate capital to business activities, services and products.
The RAS consists of qualitative statements and quantitative
metrics, covering financial and non-financial risks. 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 Risk Management Meeting of the Group
Management Board (‘RMM’) 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.
Each global business, region and strategically important country
and territory is required to have its own RAS, which is monitored
to help ensure it remains aligned with the Group’s. Each RAS and
business activity is guided and underpinned by qualitative
principles and/or quantitative metrics.
Risk management
We recognise that the primary role of risk management is to
protect our customers, business, colleagues, shareholders and the
communities that we serve, while ensuring we are able to support
our strategy and provide sustainable growth. This is supported
through our three lines of defence model described on page 75. As
we move into a revised business focus and carry out a major
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change programme, it will be critical for us to ensure we use
active risk management to manage the execution risks.
We will also perform periodic risk assessments, including against
strategies, to help ensure retention of key personnel for our
continued safe operation.
We use a comprehensive risk management framework across the
organisation and across all risk types, underpinned by the Group’s
culture and values. This outlines the key principles, policies and
practices that we employ in managing material risks, both
financial and non-financial.
The framework fosters continual monitoring, promotes risk
awareness and encourages sound operational and strategic
decision making. It also ensures a consistent approach to
identifying, assessing, managing and reporting the risks we accept
and incur in our activities.
Our risk management framework
The following diagram and descriptions summarise key aspects of
the risk management framework, including governance and
structure, our risk management tools and our culture, which
together help align employee behaviour with our risk appetite.
Key components of our risk management framework
HSBC Values and risk culture
Risk governance
Non-executive risk governance
The Board approves the Group’s risk appetite, plans and performance
targets. It sets the ‘tone from the top’ and is advised by the Group Risk
Committee (see page 166).
Executive risk governance
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 83).
Roles and
responsibilities
Three lines of defence model
Our ‘three lines of defence’ model defines roles and responsibilities for
risk management. An independent Global Risk function helps ensure the
necessary balance in risk/return decisions (see page 75).
Risk appetite
Processes and tools
Enterprise-wide risk management tools
Active risk management: identification/assessment,
monitoring, management and reporting
The Group has processes in place to identify/assess, monitor, manage
and report risks to help ensure we remain within our risk appetite.
Policies and procedures
Policies and procedures define the minimum requirements for the
controls required to manage our risks.
Internal controls
Control activities
Operational risk management defines minimum standards and
processes for managing operational risks and internal controls.
Systems and infrastructure
The Group has systems and/or processes that support the identification,
capture and exchange of information to support risk management
activities.
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 145.
Day-to-day responsibility for risk management is delegated
to senior managers with individual accountability for decision
making. All our people have a role to play in risk management.
These roles are defined using the three lines of defence model,
which takes into account our business and functional structures as
described in the following commentary, 'Our responsibilities’.
We use a defined executive risk governance structure to help
ensure there is appropriate oversight and accountability of risk,
which facilitates reporting and escalation to the RMM. This
structure is summarised in the following table.
Risk governance
The Board has ultimate responsibility for the effective
management of risk and approves our risk appetite. In 2019, it was
advised on risk-related matters by the GRC and the Financial
System Vulnerabilities Committee (‘FSVC’). The final meeting of
the FSVC was held on 15 January 2020, with responsibility for
oversight of financial crime risk transferred to the GRC, which will
continue to advise the Board on risk-related matters.
The Group Chief Risk Officer, supported by the RMM, holds
executive accountability for the ongoing monitoring, assessment
and management of the risk environment and the effectiveness of
the risk management framework.
The Group Chief Risk Officer is also responsible for oversight of
reputational risk, with the support of the Group Reputational Risk
Committee. The Group Reputational Risk Committee considers
matters arising from customers, transactions and third parties 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. Our reputational risk policy sets out our risk
appetite and the principles for managing reputational risk. Further
details can be found under the ‘Reputational risk’ section of
www.hsbc.com/our-approach/risk-and-responsibility.
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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
Global Risk Management
Board
Global business/regional
risk management meetings
Group Chief Risk Officer
Chief risk officers of HSBC’s
global businesses and regions
Heads of Global Risk sub-functions
Global business/regional chief
risk officer
Global business/regional chief
executive officer
Global business/regional chief financial
officer
Global business/regional heads
of global functions
• Supporting the Group Chief Risk Officer in exercising Board-delegated risk
management authority
• Overseeing the implementation of risk appetite and the enterprise risk
management framework
• Forward-looking assessment of the risk environment, analysing possible risk
impacts and taking appropriate action
• Monitoring all categories of risk and determining appropriate mitigating action
• Promoting a supportive Group culture in relation to risk management and
conduct
• Supporting the Group Chief Risk Officer in providing strategic direction for the
Global Risk function, setting priorities and providing oversight
• Overseeing a consistent approach to accountability for, and mitigation of, risk
across the Global Risk function
• Supporting the Chief Risk Officer in exercising Board-delegated risk management
authority
• Forward-looking assessment of the risk environment, analysing the possible risk
impact and taking appropriate action
Implementation of risk appetite and the enterprise risk management framework
•
• Monitoring all categories of risk and determining appropriate mitigating actions
• Embedding a supportive culture in relation to risk management and controls
The Board committees with responsibility for oversight of risk-related matters are set out on page 171.
Our responsibilities
All our people are responsible for identifying and managing
risk within the scope of their roles 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 and encouraging collaboration, as well as
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 in line
with risk appetite, and ensuring that the right controls and
assessments are in place to mitigate them.
• The second line of defence challenges the first line of defence
on effective risk management, and provides advice and
guidance in relation to the risk.
• The third line of defence is our Global Internal Audit function,
which provides independent assurance that our risk
management approach and processes are designed and
operating effectively.
Global Risk function
Our Global Risk function, headed by the Group Chief Risk Officer,
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
business. 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.
Responsibility for minimising both financial and non-financial risk
lies with our people. They are required to manage the risks of the
business and operational activities for which they are responsible.
We maintain adequate oversight of our risks through our various
specialist risk stewards and the collective accountability held by
our chief risk officers.
Non-financial risk includes some of the most material risks we
face, such as cyber-attacks, the loss of data and poor conduct
outcomes. Actively managing non-financial risk is crucial to
serving our customers effectively and having a positive impact on
society. During 2019, we continued to strengthen the control
environment and our approach to the management of non-
financial risk, as set out in our operational risk management
framework. The approach outlines non-financial risk governance
and risk appetite, and provides a single view of the non-financial
risks that matter the most, and associated controls. It incorporates
a risk management system designed to enable the active
management of non-financial risk. Our ongoing focus is on
simplifying our approach to non-financial risk management, while
driving more effective oversight and better end-to-end
identification and management of non-financial risks. This is
overseen by the Operational Risk function, headed by the Group
Head of Operational Risk.
Stress testing and recovery planning
We operate a wide-ranging stress testing programme that is a key
part of our risk management and capital planning. Stress testing
provides management with key insights into the impact of severely
adverse events on the Group, and provides confidence to
regulators on the Group’s financial stability.
Our stress testing programme assesses our capital strength
through a rigorous examination of our resilience to external
shocks. As well as undertaking regulatory-driven stress tests, we
conduct our own internal stress tests in order to understand the
nature and level of all material risks, quantify the impact of such
risks and develop plausible business-as-usual mitigating actions.
Many of our regulators – including the Bank of England (‘BoE’),
the US 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.
Regulatory stress test: 2019 Bank of England stress test
results
In 2019, the Group participated in the concurrent annual cyclical
scenario and the biennial exploratory scenario stress tests, run by
the BoE.
The annual cyclical scenario, as published by the BoE, featured a
synchronised economic downturn that impacted a number of key
regions including Hong Kong. The Group’s stress results 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.
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From a common equity tier 1 (‘CET1’) position of 14.0% at 31
December 2018, the Group stress CET1 ratio reached a low point
of 8.9% (after management actions), which was above the hurdle
rates of 7.7%. The tier 1 leverage ratio remained above the
minimum requirement throughout the stress testing period.
The 2019 biennial exploratory stress scenario is underway and
explores the implications of a severe and broad-based liquidity
shock affecting major UK banks simultaneously over a 12-month
horizon.
Internal stress tests
Our internal capital assessment uses a range of stress scenarios
that explore risks identified by management. They include
potential adverse macroeconomic, geopolitical and operational
risk events, as well as other potential events that are specific to
HSBC.
The selection of stress scenarios is based upon the output of our
identified top and emerging risks 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, be absorbed through capital. This in turn informs
decisions about preferred capital levels and allocations.
In addition to the Group-wide stress testing scenarios, each major
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 Testing
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 to potential scenarios.
The Group stress testing programme is overseen by the GRC and
results are reported, where appropriate, to the RMM and GRC.
We also conduct reverse stress tests each year at Group level and,
where required, at subsidiary entity level to understand potential
extreme conditions that 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.
Recovery and resolution plans
Recovery and resolution plans form part of the integral framework
safeguarding the Group’s financial stability. The Group recovery
plan together with stress testing help us understand the likely
outcomes of adverse business or economic conditions and in the
identification of appropriate risk mitigating actions. The Group is
committed to further developing its recovery and resolution
capabilities in line with the BoE resolvability assessment
framework requirements.
Key developments in 2019
In 2019, it was announced that Marc Moses was stepping down
from his role of Group Chief Risk Officer on 31 December 2019.
Pam Kaur, who was Head of Wholesale Market and Credit Risk,
was appointed as Group Chief Risk Officer with effect from
1 January 2020. Marc assisted with a handover of his executive
responsibilities as Group Chief Risk Officer and will continue to
provide support in advising the Group Chief Executive in a non-
executive capacity until he formally retires from the Group on 9
December 2020.
During the year, we also undertook a number of initiatives to
enhance our approach to the management of risk. We continued
efforts to simplify and enhance how we manage risk. We
simplified the Group risk taxonomy by consolidating certain
existing risks into broader categories. These changes streamlined
risk reporting and promoted common language in our risk
management approach. These changes included:
• We formed a Resilience Risk sub-function to reflect the
growing regulatory importance of being able to ensure our
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HSBC Holdings plc Annual Report and Accounts 2019
operations continue to function when an operational
disturbance occurs. Resilience Risk was formed to simplify the
way we interact with our stakeholders and to deliver clear,
consistent and credible responses globally. The leadership of
the Resilience Risk function is the responsibility of the Global
Head of Resilience Risk. For further details on resilience risk,
see page 143.
• We created a combined Reputational and Sustainability Risk
team to further improve the way we manage these risks. For
further information on sustainability risk, see ‘Our approach to
sustainability risk management’ on page 40 of our ESG Update.
• The approach to capital risk management is evolving with the
creation of a dedicated second line of defence function, which
will provide independent oversight of capital management
activities. This will operate across the Group focusing on both
adequacy of capital and sufficiency of returns.
• We have placed greater focus on our model risk activities. To
reflect this, we created the role of Chief Model Risk Officer. This
has been filled on an interim basis while we seek a permanent
role holder.
Further simplification is expected to continue during 2020,
including the combining of our two key risk management
frameworks.
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 within one year, and which has the potential to
materially affect the Group’s financial results, reputation or
business model. It may arise across any combination of risk types,
regions or global businesses. The impact may be well understood
by senior management and some mitigating actions may already
be in place. Stress tests of varying granularity may also have been
carried out to assess the impact.
An ‘emerging risk’ is a thematic issue with large unknown
components that may form and crystallise beyond a one-year time
horizon. If it were to materialise, it could have a material effect on
our 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 as follows.
Externally driven
Economic outlook and capital flows
Global manufacturing was in recession in 2019 as the Chinese
economy slowed, trade and geopolitical tensions continued, and
key sectors like automotive and information technology suffered
from idiosyncratic issues. This had an impact on trade-reliant
regions including the European Union (‘EU’), while the US
benefited from a resilient consumer. Early in 2019, global central
banks abandoned their previous intentions to tighten monetary
policy gradually in order to underpin economic activity.
These and other factors contributed to an increase in market
optimism towards the end of 2019 that global economic activity
may be bottoming out.
However, a significant degree of caution is warranted. US-China
relations are likely to remain tense as negotiations move to a
second phase, covering aspects like intellectual property.
Changing global consumption patterns and the introduction of
stricter environmental standards may continue to hamper the
automotive and other traditional industries. The net impact on
trade flows could be negative, and may damage HSBC’s
traditional lines of business.
The coronavirus outbreak is a new emerging risk. In a baseline
scenario, the outbreak should be contained but may lead to a
slowdown in China’s economic activity during the first quarter of
2020, followed by a rebound in the remainder of the year, helped
by an increased policy stimulus in response to the outbreak.
However, there is a risk that containment proves more
challenging, and the resulting socio-economic disruption is more
extensive and prolonged, extending beyond China. Since the
beginning of January, the coronavirus outbreak has caused
disruption to our staff, suppliers and customers, particularly in
mainland China and Hong Kong. Should the coronavirus continue
to cause disruption to economic activity in Hong Kong and
mainland China through 2020, there could be adverse impacts on
income due to lower lending and transaction volumes, and
insurance manufacturing revenue, which may impact our RWAs
and capital position. We have invoked our business continuity
plans to help ensure the safety and well-being of our staff, as well
as our capability to support our customers and maintain our
business operations.
Elsewhere, there could also be other downside idiosyncratic risks
in emerging markets, which could include a disorderly sovereign
debt restructuring in Argentina.
It is anticipated that oil prices are likely to remain range-bound in
2020, with occasional spikes in volatility.
The run-up to the US Presidential Election in November may be a
key factor in causing market volatility. Persistent social tensions in
Hong Kong may disrupt local economy and business sentiment
further. In Europe, political uncertainty around the ultimate shape
of UK-EU relations may lead to occasional periods of market
volatility and economic uncertainty. We believe our businesses are
well placed to weather risks, but would nevertheless be affected
by severe shocks.
traditional political structures. This level of geopolitical risk is
expected to remain heightened throughout 2020.
The UK formally left the EU on 31 January 2020 and entered a
transition period until 31 December 2020. The top risk is that the
UK fails to agree a trade deal with the EU and commits to its
pledge to not extend the 11-month transition period. This scenario
would likely renew economic and financial uncertainty.
In 2019, Hong Kong experienced heightened levels of domestic
social unrest and, if prolonged, there could be broader economic
ramifications, affecting several of the Group’s portfolios.
In the US, there will be political uncertainty and increased
partisanship, as the US Presidential election campaign was
preceded by a presidential impeachment trial.
More broadly, intensified US-China competition and occasional
confrontation are expected to feature prominently in 2020, despite
the ‘phase one’ trade deal, as negotiations move to phase two,
which covers aspects such as intellectual property.
The impact of US-China competition may also be felt in our other
markets, particularly in Europe. New regulations from both the US
and China will likely increase scrutiny of companies involved in
cross-border data transfers and limit the use of foreign technology
in private and national infrastructure. Combined, these regulations
could drive the bifurcation of US and Chinese technology sectors,
standards and supply chain ecosystems, which may limit
innovation and drive up production and compliance costs for firms
operating in both markets.
In the Middle East, Iran is expected to remain central to regional
security in 2020. The risk of escalation remains high, and any
mismanaged incidents would have significant regional security
and global market repercussions. Continued geopolitical risks have
negative implications for economic growth. Central banks in key
markets are likely to see little need to raise their policy interest
rates above current levels and may even resort to lowering rates to
accommodate the risks to growth.
Mitigating actions
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 75.
• 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 manage and mitigate this risk
proactively.
•
In Hong Kong we are actively monitoring our credit and trading
portfolios. We have also performed internal stress tests and
scenario analysis. We continue to support our customers and
manage risk and exposures as appropriate.
Geopolitical risk
Our operations and portfolios are exposed to risks associated with
political instability, civil unrest and military conflict, which could
lead to disruption of our operations, physical risk to our staff and/
or physical damage to our assets.
Global tensions over trade, technology and ideology can manifest
themselves in divergent regulatory, standards and compliance
regimes, presenting long-term strategic challenges for
multinational businesses.
In 2019, societies in nearly all the markets in which we operate
were affected by a series of common issues, which are likely to
continue in 2020. Migration, income inequality, corruption, climate
change and terrorism are examples of those issues, which have
led to discontent in the markets in which we operate. This
discontent is reflected in increased protest activity and challenging
• 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 following 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 without a comprehensive trade
agreement.
• We have taken steps to enhance physical security in those
geographical areas deemed to be at high risk from terrorism
and military conflicts.
•
In Hong Kong, we are actively monitoring our credit portfolio.
We have performed internal stress tests and scenario analysis.
We continue to support our customers and manage risk and
exposures as appropriate.
The credit cycle
Dovish global monetary policies remained accommodative
through much of 2019, and share indices hit record highs. The US
FRB, European Central Bank (‘ECB’) and the Bank of Japan (’BoJ’)
are expected to keep global liquidity abundant in 2020. However,
there are signs of stress in parts of the credit market, as shown by
the FRB’s interventions in the repo market. There has been a surge
in borrowing by entities in the lowest investment grade segment,
which now makes up 55% of the total universe of rated corporate
bonds. Profit margins at US non-financial corporations are falling,
as are job openings, both of which could foreshadow a turn in the
credit cycle. Corporate credit quality in Europe is also
HSBC Holdings plc Annual Report and Accounts 2019
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Financial review Report of the Directors | Risk
deteriorating, leading to some analysts to predict a credit bear
market largely centred on industrial sectors. However, sterling
borrowers may suffer less than their euro counterparts, given UK
policymakers’ somewhat greater room for policy stimulus, and
also the UK economy’s lesser concentration in manufacturing, as
opposed to services.
Chinese authorities are more concerned than in the past about
increasing debt, but they are still expected to step up stimulus
measures, particularly as a result of the coronavirus outbreak.
Chinese economic stimulus could act to limit broader
macroeconomic downside risks to a degree. Debt is high in some
emerging markets, with specific events like an Argentine debt
restructuring possibly having wider implications.
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
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.
include the loss of passporting rights and free movement of
services, depending on the final terms of the future relationship
between the UK and the EU. Changes to business models and
structures will be necessary to accommodate any such
restrictions.
As described in Note 34 on the financial statements, we continue
to be subject to a number of material legal proceedings, regulatory
actions and investigations, including our January 2018 deferred
prosecution agreement with the US Department of Justice (‘DoJ’)
arising from its investigation into HSBC’s historical foreign
exchange activities (the ‘FX DPA’).
Mitigating actions
• We continue to enhance our horizon scanning capabilities to
identify new developments and regulatory publications. We are
investing in – and rolling out – a new system that collects
regulatory change information from multiple sources, to drive
clear accountability and responsibility for the implementation
and oversight of regulatory development.
• Relevant governance forums within the Group oversee change
programmes. Significant regulatory programmes are overseen
by the Group Change Committee.
• We are fully engaged, wherever appropriate, with governments
and regulators in the countries in which we operate, to help
ensure that new proposals achieve their policy objectives and
can be implemented effectively. We hold regular meetings with
all relevant authorities to discuss strategic contingency plans
across the range of regulatory priorities.
Cyber threat and unauthorised access to systems
• We have invested in significant resources and have taken, and
We and other organisations continue to operate in a challenging
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 attacks.
Mitigating actions
• We continually evaluate threat levels for the most prevalent
attack types and their potential outcomes. To further protect
our business and our customers, we strengthened our controls
to reduce the likelihood and impact of advanced malware, data
leakage, infiltration of payment systems and denial of service
attacks. We continued to enhance our cybersecurity
capabilities, including threat detection and access control as
well as back-up and recovery. An important part of our defence
strategy is ensuring our people remain aware of cybersecurity
issues and know how to report incidents.
• Cyber risk is a priority area for the Board. We report and review
cyber risk and control effectiveness quarterly at executive and
non-executive Board level. We also report it across the global
businesses, functions and regions to help ensure appropriate
visibility and governance of the risk and mitigating actions.
• We participate globally in several industry bodies and working
groups to share information about tactics employed by cyber-
crime groups and to collaborate in fighting, detecting and
preventing cyber-attacks on financial organisations.
Regulatory developments including conduct, with
adverse impact on business model and profitability
Financial service providers continue to face demanding 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, digital, cyber,
sustainability and the integrity of financial services delivery. HSBC
is particularly affected by regulatory change, given the geographic
scope of the Group’s operations.
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 could
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HSBC Holdings plc Annual Report and Accounts 2019
will continue to take, a number of steps to improve our
compliance systems and controls relating to our activities in
global markets. These include enhancements to pricing and
disclosure, order management and trade execution; trade, voice
and audio surveillance; front office supervision; and
improvements to our enforcement and discipline framework for
employee misconduct. For further details, see ‘Regulatory
compliance risk management’ on page 144.
Financial crime risk environment
Financial institutions remain under considerable regulatory
scrutiny regarding their ability to prevent and detect financial
crime. There is an increased regulatory focus on fraud and anti-
bribery and corruption controls, with expectations that banks
should do more to protect customers from fraud and identify and
manage bribery and corruption risks within our businesses.
Financial crime threats continue to evolve, often in tandem with
geopolitical developments. The highly speculative, volatile and
opaque nature of virtual currencies, including the pace of
development in this area, create challenges in effectively
managing financial crime risks. The evolving regulatory
environment continues to present execution challenges. We
continue to see increasing challenges presented by national data
privacy requirements in a global organisation, which may affect
our ability to effectively manage financial crime risks.
In December 2012, among other agreements, HSBC Holdings plc
(‘HSBC Holdings’) agreed to an undertaking with the UK Financial
Services Authority, which was replaced by a Direction issued by
the UK Financial Conduct Authority (‘FCA’) in 2013, and consented
to a cease-and-desist order with the US Federal Reserve Board
(‘FRB’), both of which contained certain forward-looking anti-
money laundering (‘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.
Reflective of HSBC’s significant progress in strengthening its
financial crime risk management capabilities, HSBC’s engagement
with the current Skilled Person will be terminated and a new
Skilled Person with a narrower mandate will be appointed to
assess the remaining areas that require further work in order for
HSBC to transition fully to business-as-usual financial crime risk
management. The Independent Consultant will continue to carry
out an annual OFAC compliance review at the FRB’s discretion.
The role of the Skilled Person/Independent Consultant is discussed
on page 145.
Mitigating actions
• We continue to enhance our financial crime risk management
capabilities. We are investing in next generation capabilities to
fight financial crime through the application of advanced
analytics and artificial intelligence.
• We are strengthening and investing in our fraud controls, to
introduce next generation anti-fraud capabilities to protect both
customers and the Group.
• We continue to embed our improved anti-bribery and
corruption policies and controls, focusing on conduct.
• We continue to educate our staff on emerging digital
landscapes and associated risks.
• We have developed procedures and controls to help manage
the risks associated with direct and indirect exposure to virtual
currencies, and we continue to monitor external developments.
• We continue to work with jurisdictions and relevant
international bodies to address data privacy challenges through
international standards, guidance, and legislation to help
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.
Ibor transition
Interbank offered rates (‘Ibors’) are used to set interest rates on
hundreds of trillions of US dollars of different types of financial
transactions and are used extensively for valuation purposes, risk
measurement and performance benchmarking.
Following the announcement by the UK’s FCA in July 2017 that it
will no longer persuade or require banks to submit rates for the
London interbank offered rate (‘Libor’) after 2021, the national
working groups for the affected currencies were tasked with
facilitating an orderly transition of the relevant Libors to their
chosen replacement rates. The euro national working group is also
responsible for facilitating an orderly transition of the Euro
Overnight Index Average (‘Eonia’) to the euro short-term rate
(‘€STER’) as a result of Eonia not being made compliant with the
EU Benchmark Regulation.
The process of developing products that reference the
replacement rates and transitioning legacy Ibor contracts exposes
HSBC to material execution, conduct, contractual and financial
risks.
Mitigating actions
• We have a global programme to facilitate an orderly transition
from Libor and Eonia for our business and our clients. The
execution of this programme is overseen by the Group Chief
Risk Officer.
• Our programme is focused on developing alternative rate
products that reference the proposed replacement rates and
making them available to customers. It is also focused on the
supporting processes and systems to developing these
products. At the same time, we are developing the capability to
transition, through repapering, outstanding Libor and Eonia
contracts.
• We have identified a number of execution, conduct, litigation
and financial risks and are in the process of addressing these.
We continue to analyse these risks and their evolution over the
course of the transition.
• We will continue to engage with industry participants and the
official sector to support an orderly transition.
Climate-related risks
Climate change can have an impact across HSBC’s risk taxonomy
through both transition and physical channels. Transition risk can
arise from the move to a low-carbon economy, such as through
policy, regulatory and technological changes. Physical risk can
arise through increasing severity and/or frequency of severe
weather or other climatic events, such as rising sea levels and
flooding.
These have the potential to cause both idiosyncratic and systemic
risks, resulting in potential financial impacts for HSBC. Impacts
could materialise through higher risk-weighted assets over the
longer term, greater transactional losses and/or increased capital
requirements.
The awareness of climate risk, regulatory expectations and
reputational risk have all heightened through 2019. The exposure
we have to the risk and materialisation of the risk have not
materially heightened.
Mitigating actions
• We have an established governance framework to help ensure
that risks associated with climate change are escalated to and
discussed at the Board, as appropriate, in a timely manner. At
each meeting, the Board is presented with a risk profile report,
which includes key issues and common themes identified
across the enterprise risk reports. In 2019, the Group Chief Risk
Officer raised concerns directly by providing verbal or written
updates on a regular basis to the Board and Group
Management Board.
• We are in the process of incorporating climate-related risk,
both physical and transition, into how we manage and oversee
risks. We have a Board-approved risk appetite statement that
contains a qualitative statement on our approach to climate
risk, which we intend to further enhance in 2020.
• We continue to enhance our approach to climate-related risks,
and develop and embed how we measure, monitor and
manage it. An internal climate risk working group provides
oversight by seeking to develop policy and limit frameworks to
achieve desired portfolios over time, and protect the Group
from climate-related risks that are outside of risk appetite.
• We have assigned responsibility to relevant senior management
function holders, in line with the Prudential Regulation
Authority (‘PRA’) and regulatory requirements. Climate risk has
been brought under Reputational and Sustainability Risk to
promote alignment. Risk stewards are expected to consider
physical and transition risks from climate change relevant to
their specific risk function.
• We are considering transition risk from three perspectives:
understanding our exposure to transition risk; understanding
how our clients are managing transition risk; and measuring
our client’s progress in reducing carbon emissions. We are
carrying out sector-specific scenario analysis and continue to
source data. For wholesale credit portfolios, we are using
questionnaires to assess transition risk across six sectors and
11 countries (for further information, see our TCFD disclosure
on page 22). For our retail credit portfolio, we review mortgage
exposures on a geographical basis in respect of natural hazard
risk and mitigants. For operational risk, we are working with
our property insurers to understand geographical exposure of
the property portfolio and assess effectiveness of controls for
design resilience, operations and business continuity.
• We have public and internal policies for certain sectors that
pose sustainability risk to our business. These include policies
on energy, agricultural commodities, chemicals, forestry,
mining and metals, and UNESCO World Heritage Sites and
Ramsar-designated wetlands. We are working with the PRA,
FCA and the wider industry through the Climate Financial Risk
Forum to help ensure we remain aware of and drive emerging
best practice.
• We continue to proactively engage our customers, investors
and regulators in compiling and disclosing the data and
HSBC Holdings plc Annual Report and Accounts 2019
79
Financial review Report of the Directors | Risk
information needed to manage the risks in transition to a low-
carbon economy. This will be a key area of focus during 2020.
Internally driven
IT systems infrastructure and resilience
We are committed to investing in the reliability and resilience of
our IT systems and critical services. We do so to protect our
customers and ensure they do not receive disruption to 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. We
are 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 have upgraded many of our IT systems, simplified our
service provision and replaced older IT infrastructure and
applications. These enhancements led to continued global
improvements in service availability during 2019 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 and proactively
managing the regulatory environment depends on the
development and retention of our leadership and high-performing
employees. The ability to continue to attract, develop and retain
competent individuals in alignment with our strategy 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,
internal and environmental factors, such as the UK’s exit from the
EU, changes to immigration policies and regulations,
organisational restructuring and tax reforms in key markets that
require active responses.
Mitigating actions
• HSBC University is focused on developing opportunities and
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 closely monitored to minimise the impact on the
attraction and retention of talent and key performers.
• We promote a diverse and inclusive workforce and provide
active support across a wide range of health and well-being
activities.
• We have robust plans in place, driven by senior management,
to mitigate the effect of external factors that may impact our
employment practices. We will also be monitoring the impact
on people linked to organisational changes announced in 2020.
Risks arising from the receipt of services from
third parties
We use 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
risks arising from the use of third parties could affect our ability to
meet strategic, regulatory or customer expectations.
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HSBC Holdings plc Annual Report and Accounts 2019
Mitigating actions
• We continued to embed our delivery model in the first line of
defence through a dedicated team. We have deployed
processes, controls and technology to assess third-party
service providers against key criteria and associated control
monitoring, testing and assurance.
• A dedicated oversight forum in the second line of defence
monitors the embedding of policy requirements and
performance against risk appetite.
Enhanced model risk management expectations
Model risk arises whenever business decision making includes
reliance on models. We use models in both financial and non-
financial contexts and in a range of business applications such as
customer selection, product pricing, financial crime transaction
monitoring, creditworthiness evaluation and financial reporting.
Mitigating actions
We strengthened the Model Risk Management sub-function,
including:
• We created a new Chief Model Risk Officer role, reporting
directly to the Group Chief Risk Officer, which was filled on an
interim basis.
• We appointed regional heads of Model Risk Management in all
of our key geographies, and a Global Head of Model Risk
Governance.
• We refined the model risk policy to enable a more risk-based
approach to model risk management.
• We conducted a full review and enhancement of model
governance arrangements overseeing model risk across the
Group, resulting in a range of enhancements to the underlying
structure to improve effectiveness and increase business
engagement.
• We designed a new target operating model for Model Risk
Management, informed by internal and industry best practice.
• We are refreshing the existing model risk controls to enable a
better understanding of control objectives and to provide the
modelling areas with implementation guidance to enhance
effectiveness.
Data management
We use 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. Along with other organisations, we also
need to meet external/regulatory obligations such as the General
Data Protection Regulation (‘GDPR’), the Basel Committee for
Banking Supervision (BCBS 239) principles and Basel III.
Mitigating actions
• We are improving data quality across a large number of
systems globally. Our data management, aggregation and
oversight continue 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 achieved a
‘largely compliant’ rating in support of the Basel Committee for
Banking Supervision (BCBS 239) principles and have embedded
them across the key markets and regions.
• We are expanding and enhancing our data governance
processes to monitor proactively the quality of critical
customer, product, reference and transaction data and
resolving associated data issues in a timely manner. We have
implemented data controls to improve the reliability of data
used by our customers and staff.
• We are modernising our data and analytics infrastructure
through investments in advanced capabilities in Cloud,
visualisation, machine learning and artificial intelligence
platforms.
• We have implemented a global data privacy framework that
establishes data privacy practices, design principles and
guidelines that demonstrate compliance with data privacy laws
and regulations in the jurisdictions in which we operate, such
as the GDPR in the UK and the EU, and the California
Consumer Protection Act in the US state of California.
• We continue to hold annual data symposiums and data privacy
awareness training to help our employees keep abreast of data
management and data privacy laws and regulations. These
highlight our commitment to protect personal data for our
customers, employees and stakeholders.
Areas of special interest
During 2019, a number of areas were identified and considered as
part of our top and emerging risks because of the effect they may
have on the Group. While considered under the themes captured
under top and emerging risks, in this section we have placed a
particular focus on the UK withdrawal from the EU, Ibor transition
and the risks to our operations and portfolios in Asia-Pacific.
UK withdrawal from the European Union
The UK left the EU on 31 January 2020 and entered a transition
period until 31 December 2020, during which negotiations will
take place on the future relationship between the UK and the EU.
At this stage it remains unclear what that relationship will look
like, potentially leaving firms with little time to adapt to changes,
which may enter into force on 1 January 2021. Our programme to
manage the impact of the UK leaving the EU has now been largely
completed. It is based on the assumption of a scenario whereby
the UK exits the transition period without the existing passporting
or regulatory equivalence framework that supports cross-border
business. Our focus has been on four main components: legal
entity restructuring; product offering; customer migrations; and
employees.
Legal entity restructuring
Our branches in seven European Economic Area (‘EEA’) countries
(Belgium, the Netherlands, Luxembourg, Spain, Italy, Ireland and
Czech Republic) relied on passporting out of the UK. We had
worked on the assumption that passporting will no longer be
possible following the UK’s departure from the EU and therefore
transferred our branch business to newly established branches of
HSBC France, our primary banking entity authorised in the EU.
This was completed in the first quarter of 2019.
Product offering
To accommodate for customer migrations and new business after
the UK’s departure from the EU, we expanded and enhanced our
existing product offering in France, the Netherlands and Ireland.
We also opened a new branch in Stockholm to service our
customers in the Nordic region.
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 are required to migrate some EEA-
incorporated clients from the UK to HSBC France, or another EEA
entity. We have now migrated most clients who we expect can no
longer be serviced out of the UK. We are working in close
collaboration with any remaining clients to make the transition as
smooth as possible.
Employees
The migration of EEA-incorporated clients will require us to
strengthen our local teams in the EU, and France in particular.
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 employees who are UK citizens resident
in EEA countries, and employees who are citizens of an EU
member state resident in the UK (e.g. on settlement applications).
At December 2019, HSBC employed approximately 40,000 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 under the
terms described above. However, there remain execution risks,
many of them linked to the uncertain outcome of negotiations.
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, see ‘Impact of
alternative/additional scenarios’ on page 95.
Ibor transition
The Financial Stability Board has observed that the decline in
interbank short-term unsecured funding poses structural risks for
interest rate benchmarks that reference these markets. In
response, regulators and central banks in various jurisdictions
have convened national working groups to identify replacement
rates (risk-free rates or RFRs) for these Ibors and, where
appropriate, to facilitate an orderly transition to these rates.
Following the announcement by the UK’s FCA in July 2017 that it
will no longer persuade or require banks to submit rates for Libor
after 2021, the national working groups for the affected currencies
were tasked with facilitating an orderly transition of the relevant
Libors to their chosen replacement rates. The euro working group
is also responsible for facilitating an orderly transition of the Euro
Overnight Index Average (‘Eonia’) to the euro short-term rate
(‘€STER’) as a result of Eonia not being made compliant with the
EU Benchmark Regulation.
Although national working groups in other jurisdictions have
identified replacements for their respective Ibors, there is no
intention for these benchmark rates to be discontinued.
Given the current lack of alternatives, HSBC has an increasing
portfolio of contracts referencing Libor and Eonia with maturities
beyond 2021. HSBC established the Ibor transition programme
with the objective of facilitating an orderly transition from Libor
and Eonia for HSBC and its clients. This global programme
oversees the transition effected by each of the global businesses
and is led by the Group Chief Risk Officer.
The programme’s strategic objectives can be broadly grouped into
two streams of work: develop RFR product capabilities; and
transition legacy contracts.
Develop RFR product capabilities
Our global businesses are currently developing their capabilities to
offer RFR-based products and the supporting processes and
systems. We already have several capabilities live – including
SOFR bonds and Sonia bonds, SOFR futures and Sonia swaps –
and we are planning further launches in 2020, with the initial focus
being on the UK, the US, Hong Kong and France.
The sale of Libor and Eonia contracts with maturities beyond 2021
is likely to continue until RFR-based products become widely
available and accepted by customers.
Transition legacy contracts
In addition to enabling the offering of new RFR-based products,
the new RFR product capabilities will also help enable the
transition of outstanding Libor and Eonia products onto the RFR
equivalents. To help enable the repapering of a significant number
of Libor and Eonia contracts, the programme is also developing
the capability to transition outstanding Libor and Eonia contracts
at scale. Critical to the successful transition of Libor-linked
contracts is the active engagement of other market participants
and HSBC’s clients.
Although we have notional amounts of around $5tn of Libor and
Eonia derivative contracts outstanding that mature beyond 2021,
we expect that ISDA’s efforts in guiding the transition of derivative
contracts to reduce the risk of a non-orderly transition of the
derivative market with an estimated notional size in excess of
$200tn. The process of implementing ISDA’s proposed protocol
HSBC Holdings plc Annual Report and Accounts 2019
81
Financial review pages 95 to 97. In addition, should the virus continue to cause
disruption to economic activity in Hong Kong and mainland China
through 2020, there could be adverse impacts on income due to
lower lending and transaction volumes, and insurance
manufacturing revenue. Further expected credit losses could arise
from other parts of our business impacted by the disruption to
supply chains. In Hong Kong, we have initiated a number of
measures to support customers during the coronavirus outbreak.
The uptake of these measures to date was immaterial.
We have invoked our business continuity plans to help ensure the
safety and well-being of our staff while enhancing our ability to
support our customers and maintain our business operations.
We regularly conduct stress tests to assess the resilience of our
balance sheet and our capital adequacy. We conduct this across
the Group and in key sites such as Hong Kong. The stress tests are
used to consider our risk appetite and to provide insights into our
financial stability. In the case of Hong Kong, our balance sheet and
capital adequacy remain resilient based on regulatory and internal
stress test outcomes.
Our central scenario for Hong Kong, used as a key input for
calculating expected credit losses in Hong Kong, has kept pace
with expectations of economic growth. The economy entered a
technical recession in the second half of 2019 and is expected to
record negative annual GDP growth for the first time since 2009.
This is a result of both tensions over trade and tariffs between the
US and China and domestic social unrest. The economy is
expected to gradually recover in 2020. We have also developed a
number of additional scenarios to capture more extreme downside
risks, and have used these in impairment testing and measuring
and to assess our capital resilience. While our economic scenarios
used to calculate credit loss capture a range of outcomes, the
potential economic impact of the coronavirus was not explicitly
considered at the year end due to the limited information and
emergent nature of the outbreak in December 2019.
For further details of all scenarios used in impairment measurements, see
‘Measurement uncertainty and sensitivity analysis of ECL estimates’ on page
92.
Report of the Directors | Risk
and transitioning outstanding contracts is nonetheless a material
undertaking for the industry as a whole and may expose HSBC to
the risk of financial losses.
The Group intends to engage actively in the process to achieve an
orderly transition of HSBC’s Libor and Eonia bond issuance,
HSBC’s holdings of Libor and Eonia bonds, and of those bonds
where HSBC is the payment agent. We continue to formulate
detailed plans to enable us to transition these exposures, although
the execution of these transition plans will, to a certain extent, also
depend on the participation and engagement of third-party market
participants in the transition process.
Although we have plans to transition approximately $100bn drawn
amounts of post-2021 contractually Ibor-referenced commercial
loans onto replacement rates, our ability to transition this portfolio
by the end of 2021 is materially dependent on the availability of
products that reference the replacement rates and on our
customers being ready and able to adapt their own processes and
systems to accommodate the replacement products. This gives
rise to an elevated level of conduct-related risk. HSBC is engaging
with impacted clients to help ensure that customers are aware of
the risks associated with the ongoing purchase of Libor- and
Eonia-referencing contracts as well as the need to transition
legacy contracts prior to the end of 2021.
In addition to the conduct and execution risk previously
highlighted, the process of adopting new reference rates may
expose the Group to an increased level of operational and financial
risks, such as potential earnings volatility resulting from contract
modifications and a large volume of product and associated
process changes. Furthermore, the transition to alternative
reference rates could have a range of adverse impacts on our
business, including legal proceedings or other actions regarding
the interpretation and enforceability of provisions in Ibor-based
contracts and regulatory investigations or reviews in respect of our
preparation and readiness for the replacement of Ibor with
alternative reference rates. We continue to engage with industry
participants, the official sector and our clients to support an
orderly transition and the mitigation of the risks resulting from the
transition. The FCA’s and PRA’s recent letter to senior managers of
institutions, including HSBC, that fall within their remit, should
increase the level and depth of engagement as well as
accelerating transition in the sterling Libor markets.
Risks to our operations and portfolios in Asia-
Pacific
In 2019, the Chinese economy grew at the slowest pace in nearly
three decades in the context of rising domestic leverage. The
authorities are expected to enact modest stimulus measures to
boost growth. Along with the ’phase one’ US-China trade deal and
plentiful global liquidity, these measures should help emerging-
market growth to make a partial recovery. Nevertheless, downside
idiosyncratic risks will abound.
Intensified US-China competition and occasional confrontation
continued to feature prominently in 2019. The two countries now
compete across multiple dimensions: economic power; diplomatic
influence; innovation and advanced technology leadership; and
military dominance in Asia. In 2019, we saw heightened levels of
risk in Hong Kong.
The downside risk is further increased given the coronavirus
outbreak, which could further impact the local economy and
dampen investor and business sentiment in many sectors where
the Group has a material presence. The increasing headwinds will
be challenging and we will continue to monitor our portfolios to
thoughtfully manage our risk exposures. We have reviewed and
enhanced our business continuity plans to help ensure minimal
disruption to our clients and continued safe operation of our
branches and employees. The new coronavirus outbreak is being
actively monitored. It will have an immediate impact on the
economic scenarios used for ECL, as key inputs for calculating
ECL such as GDP for Hong Kong and mainland China are
weakening, and the probability of a particularly adverse economic
scenario for the short term is higher. The economic scenarios for
Hong Kong used for ECL at 31 December 2019 are set out on
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Our material banking 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 84)
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
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.
Capital and liquidity risk (see page 130)
Capital and liquidity risk is the
risk of having insufficient
capital, liquidity or funding
resources to meet financial
obligations and satisfy
regulatory requirements,
including pension risk.
Capital and liquidity risk arises
from changes to the respective
resources and risk profiles
driven by customer behaviour,
management decisions or the
external environment.
Market risk (see page 135)
Market risk is the risk that
movements in market factors,
such as foreign exchange rates,
interest rates, credit spreads,
equity prices and commodity
prices, will reduce our income
or the value of our portfolios.
Exposure to market risk is
separated into two portfolios:
trading portfolios and non-
trading portfolios.
Market risk exposures arising
from our insurance operations
are discussed on page 149.
Capital and liquidity risk is:
• measured through appetites set as target and minimum ratios;
• monitored and projected against appetites and by using stress and scenario testing;
and
• managed through control of capital and liquidity resources in conjunction with risk
profiles and cash flows.
Market risk is:
• measured using sensitivities, value at risk 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 value at risk, 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.
Resilience risk (see page 143)
Resilience risk is the risk that
we are unable to provide
critical services to our
customers, affiliates and
counterparties as a result of
sustained and significant
operational disruption.
Resilience risk arises from
failures or inadequacies in
processes, people, systems or
external events.
Resilience risk is:
• measured using a range of metrics with defined maximum acceptable impact
tolerances, and against our agreed risk appetite;
• monitored through oversight of enterprise processes, risks, controls and strategic
change programmes; and
• managed by continual monitoring and thematic reviews.
Regulatory compliance risk (see page 144)
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, which as
a consequence incur fines and
penalties and suffer damage to
our business.
Regulatory compliance risk
arises from the risks associated
with breaching our duty to our
customers and other
counterparties, inappropriate
market conduct and breaching
other regulatory requirements.
Financial crime and fraud risk (see page 145)
Financial crime and fraud risk is
the risk that we knowingly or
unknowingly help parties
to commit or to further
potentially illegal activity,
including both internal and
external fraud.
Financial crime and fraud risk
arises from day-to-day banking
operations.
Model risk (see page 146)
Model risk is the potential for
adverse consequences from
business decisions informed by
models, which can be
exacerbated by errors in
methodology, design or the
way they are used.
Model risk arises in both
financial and non-financial
contexts whenever business
decision making includes
reliance on models.
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 and fraud 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.
Model risk is:
• measured by reference to model performance tracking and the output of detailed
technical reviews, with key metrics including model review statuses and findings;
• monitored against model risk appetite statements, insight from the independent
review function, feedback from internal and external audits, and regulatory reviews;
and
• managed by creating and communicating appropriate policies, procedures and
guidance, training colleagues in their application, and supervising their adoption to
ensure operational effectiveness.
HSBC Holdings plc Annual Report and Accounts 2019
83
Financial review Report of the Directors | Risk
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 149)
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 151)
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.
Credit risk sub-function
Page
(Audited)
Credit risk
Overview
Credit risk management
Credit risk in 2019
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
Overview
84
84
86
86
91
92
98
100
104
119
125
129
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.
Credit risk management
Key developments in 2019
There were no material changes to the policies and practices
for the management of credit risk in 2019. We continued to apply
the requirements of IFRS 9 ‘Financial Instruments’ within Credit
Risk.
Governance and structure
We have established Group-wide credit risk management and
related IFRS 9 processes. We continue to assess actively the
impact of economic developments in key markets on specific
customers, customer segments or portfolios. As credit conditions
change, 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.
84
HSBC Holdings plc Annual Report and Accounts 2019
Credit approval authorities are delegated by the Board to the
Group Chief Executive together with the authority to sub-delegate
them. The Credit Risk sub-function in Global Risk is responsible for
the key policies and processes for managing credit risk, which
include formulating Group credit policies and risk rating
frameworks, guiding the Group’s appetite for credit risk exposures,
undertaking independent reviews and objective assessment of
credit risk, and monitoring performance and management of
portfolios.
The principal objectives of our credit risk management are:
• to maintain across HSBC a strong culture of responsible
lending, and robust risk policies and control frameworks;
• to both partner and challenge our businesses in defining,
implementing and continually re-evaluating our risk appetite
under actual and scenario conditions; and
• to ensure there is independent, expert scrutiny of credit risks,
their costs and their mitigation.
Key risk management processes
IFRS 9 ‘Financial Instruments’ process
The IFRS 9 process comprises three main areas: modelling and
data; implementation; and governance.
Modelling and data
We have established IFRS 9 modelling and data processes in
various geographies, which are subject to internal model risk
governance including independent review of significant model
developments.
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
Regional management review forums are 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 Risk, as well as
the global business chief financial officers and the Group Chief
Accounting Officer.
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
Credit quality classification
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
Retail lending credit quality is based on a 12-month point-in-time
probability-weighted PD.
Quality classification
Footnotes
1, 2
Strong
Good
Satisfactory
Sub-standard
Credit impaired
Sovereign debt
securities
and bills
Other debt
securities
and bills
Wholesale lending
and derivatives
Retail lending
External credit
rating
External credit
rating
Internal credit
rating
12-month Basel
probability of
default %
Internal credit
rating
12 month
probability-
weighted PD %
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
1 Customer risk rating (‘CRR’).
2 12-month point-in-time probability-weighted probability of default (‘PD’).
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(i) on the financial statements.
Renegotiated loans and forbearance
Credit quality of renegotiated loans
(Audited)
‘Forbearance’ describes concessions made on the contractual
terms of a loan in response to an obligor’s financial difficulties.
A loan is classed as ‘renegotiated’ when we modify the
contractual payment terms on concessionary terms because we
have significant concerns about the borrowers’ ability to meet
contractual payments when due. Non-payment-related
concessions (e.g. covenant waivers), while potential indicators of
impairment, do not trigger identification as renegotiated loans.
Loans that have been identified as renegotiated retain this
designation until maturity or derecognition.
For details of our policy on derecognised renegotiated loans, see
Note 1.2(i) on the financial statements.
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.
Wholesale renegotiated loans are classified as credit impaired 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 generally remain credit
impaired until repayment, write-off or derecognition.
HSBC Holdings plc Annual Report and Accounts 2019
85
Financial review Report of the Directors | Risk
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.
Impairment assessment
(Audited)
For details of our impairment policies on loans and advances and
financial investments, see Note 1.2(i) on the financial statements.
Write-off of loans and advances
(Audited)
For details of our policy on the write-off of loans and advances,
see Note 1.2(i) 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 and territories where local
regulation or legislation constrains 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.
Credit risk in 2019
Gross loans and advances to customers of $1,045bn at 31
December 2019 increased from $990bn at 31 December 2018.
This increase included favourable foreign exchange movements of
$13bn. Loans and advances to banks of $69bn at 31 December
2019 decreased from $72bn at 31 December 2018. This included
adverse foreign exchange movements of $0.1bn. Wholesale and
personal lending movements are disclosed on pages 104 to 124.
The change in expected credit losses and other credit impairment
charges, as it appears in the income statement, for the period was
$2.8bn compared with $1.8bn in 2018.
Income statement movements are analysed further on page 49.
Our maximum exposure to credit risk is presented on page 91 and
credit quality on page 100. While credit risk arises across most of
our balance sheet, ECL have typically been recognised on loans
and advances to customers and banks and securitisation
exposures and other structured products. As a result, our
disclosures focus primarily on these two areas.
Re-presentation of UK gross carrying/nominal amounts
staging
The wholesale lending gross carrying/nominal amounts in stages 1
and 2, which were disclosed at 31 December 2018, have been re-
presented to reflect the UK economic uncertainty adjustment,
which was not previously reflected in the stage allocation. The 31
December 2018 amounts reflected the probability-weighted view
of stage allocation for the consensus scenarios only. In
comparison, the allowance for ECL did reflect the UK economic
uncertainty adjustment. As a result of the re-presentation, there
has been an increase in stage 2 amounts, with a corresponding
decrease in stage 1. The financial instruments and disclosures
impacted are as follows:
• Loans and advances to customers: A change of $6,795m
comprised $6,562m for corporate and commercial and $233m
for non-bank financial institutions, which can be seen on pages
89, 99, 103, 106, 108, 110 and 128.
• Loans and other credit-related commitments: A change of
$2,018m was attributable to $1,891m for corporate and
commercial and $127m for non-bank financial institutions,
which can be seen on pages 89, 99, 103, 106, 108, 110 and
128.
• Financial guarantees: A change of $50m comprised $48m for
corporate and commercial and $2m for non-bank financial
institutions, which can be seen on pages 89, 99, 103, 106, 108,
110 and 128.
• Commercial real estate lending: There was a change of $819m,
which can be seen on page 111.
• Wholesale lending – commercial real estate loans and
advances including loan commitments by level of collateral:
There was a change of $1,236m, which can be seen on page
114.
• Wholesale lending – other corporate, commercial and financial
(non-bank) loans and advances including loan commitments by
level of collateral: There was a change of $7,641m, which can
be seen on page 118.
The ‘Reconciliation of changes in gross carrying/nominal amount
and allowances for loans and advances to banks and customers,
including loan commitments and financial guarantees’ disclosure
for 31 December 2018 reflects this re-presentation in other
movements of $8,935m, and for foreign exchange there was a
$72m adverse movement. There is no impact upon total gross
carrying values/nominal amounts, personal lending amounts or
allowance for ECL.
Summary of credit risk
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.
The allowance for ECL increased from $9.2bn at 31 December
2018 to $9.4bn at 31 December 2019. This increase included
adverse foreign exchange movements of $0.1bn.
The allowance for ECL at 31 December 2019 comprised $8.9bn in
respect of assets held at amortised cost, $0.4bn in respect of loan
commitments and financial guarantees, and $0.2bn in respect of
debt instruments measured at fair value through other
comprehensive income (‘FVOCI’).
86
HSBC Holdings plc Annual Report and Accounts 2019
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied
(Audited)
31 Dec 2019
At 31 Dec 2018
Gross carrying/
nominal amount
Allowance for
ECL1
Gross carrying/
nominal amount Allowance for ECL1
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
Footnotes
$m
1,045,475
434,271
540,499
70,705
69,219
615,179
154,101
4,956
38,380
240,862
85,788
91,092
$m
(8,732)
(3,134)
(5,438)
(160)
(16)
(118)
(2)
—
—
—
(53)
(63)
$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
1,729,873
(8,866)
1,645,418
600,029
223,314
278,524
98,191
20,214
804
14,804
4,606
620,243
2,350,116
(329)
(15)
(307)
(7)
(48)
(1)
(44)
(3)
592,008
207,351
271,022
113,635
23,518
927
17,355
5,236
(377)
(9,243)
615,526
2,260,944
2
3
$m
(8,625)
(2,947)
(5,552)
(126)
(13)
(55)
(2)
—
—
—
(18)
(35)
(8,693)
(325)
(13)
(305)
(7)
(93)
(1)
(85)
(7)
(418)
(9,111)
Debt instruments measured at fair value through other comprehensive income
(‘FVOCI’)
Fair value
$m
Memorandum
allowance for
ECL4
$m
Fair value
$m
355,664
(166)
343,110
Memorandum
allowance for
ECL4
$m
(84)
1 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
2
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 231, includes both financial and non-financial assets.
3 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
4 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.
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 3: There is objective evidence of impairment and the
financial assets are therefore considered to be in default or
otherwise credit impaired on which a lifetime ECL is
recognised.
• Stage 1: These financial assets are unimpaired and without
significant increase in credit risk on which a 12-month
allowance for ECL is recognised.
• POCI: Financial assets that are purchased or originated at a
deep discount are seen to reflect the incurred credit losses on
which a lifetime ECL is recognised.
• Stage 2: A significant increase in credit risk has been
experienced on these financial assets since initial recognition
for which a lifetime ECL is recognised.
HSBC Holdings plc Annual Report and Accounts 2019
87
Financial review 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 2019
(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
Loan and
other credit-
related
commitments
– personal
– corporate
and
commercial
– financial
Financial
guarantees
– personal
– corporate
and
commercial
– financial
At 31 Dec
2019
Gross carrying/nominal amount1
Allowance for ECL
ECL coverage %
Stage 1
Stage 2 Stage 3
POCI2
Total Stage 1 Stage 2 Stage 3
POCI2
Total Stage 1 Stage 2 Stage 3
POCI2 Total
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
%
%
%
%
%
951,583
80,182 13,378
332 1,045,475
(1,297)
(2,284)
(5,052)
(99)
(8,732)
413,669
15,751
4,851
—
434,271
(583)
(1,336)
(1,215)
— (3,134)
0.1
0.1
2.8
8.5
37.8
25.0
29.8
0.8
— 0.7
472,253
59,599
8,315
332
540,499
(672)
(920)
(3,747)
(99)
(5,438)
0.1
1.5
45.1
29.8
1.0
65,661
4,832
212
—
70,705
(42)
(28)
(90)
—
(160)
0.1
0.6
42.5
— 0.2
67,769
1,450
—
—
69,219
(14)
(2)
—
—
(16)
—
0.1
—
—
—
613,200
1,827
151
1
615,179
(38)
(38)
(42)
—
(118)
—
2.1
27.8
—
—
577,631
21,618
221,490
1,630
771
194
259,138
18,804
573
97,003
1,184
4
17,684
2,340
186
802
1
1
12,540
2,076
184
4,342
263
1
9
—
9
—
4
—
4
—
600,029
(137)
(133)
223,314
(13)
(2)
278,524
(118)
(130)
98,191
(6)
(1)
20,214
804
14,804
4,606
(16)
(1)
(14)
(1)
(22)
—
(21)
(1)
(59)
—
(59)
—
(10)
—
(9)
(1)
—
—
—
—
—
—
—
—
(329)
(15)
(307)
(7)
(48)
(1)
(44)
(3)
2,227,867 107,417 14,486
346 2,350,116
(1,502)
(2,479)
(5,163)
(99)
(9,243)
—
—
—
—
0.1
0.1
0.1
—
0.1
0.6
0.1
0.7
0.1
0.9
—
1.0
0.4
7.7
—
10.3
—
5.4
—
— 0.1
—
—
— 0.1
—
—
— 0.2
— 0.1
4.9
— 0.3
100.0
— 0.1
2.3
35.6
28.6
0.4
1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
2 Purchased or originated credit-impaired (‘POCI’).
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 by those less than 30 days and greater than 30
DPD and therefore presents those financial assets classified as
stage 2 due to ageing (30 DPD) and those identified at an earlier
stage (less than 30 DPD).
Stage 2 days past due analysis at 31 December 2019
(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
Gross carrying amount
Allowance for ECL
ECL coverage %
Of which:
Of which:
Of which: Of which:
Of which:
Of which:
Stage 2
$m
80,182
15,751
59,599
4,832
1,450
1,827
1 to 29
DPD1
30 and >
DPD1
Stage 2
1 to 29
DPD1
30 and >
DPD1
Stage 2
1 to 29
DPD1
30 and >
DPD1
$m
2,471
1,804
657
10
—
14
$m
1,676
1,289
385
2
—
30
$m
(2,284)
(1,336)
(920)
(28)
(2)
(38)
$m
(208)
(178)
(30)
—
—
—
$m
(247)
(217)
(30)
—
—
—
%
2.8
8.5
1.5
0.6
0.1
2.1
%
8.4
9.9
4.6
—
—
—
%
14.7
16.8
7.8
—
—
—
1 Days past due (‘DPD’). Up to date accounts in stage 2 are not shown in amounts.
88
HSBC Holdings plc Annual Report and Accounts 2019
– 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
Summary of credit risk (excluding debt instruments measured at FVOCI) by stage distribution and ECL coverage by industry sector at
31 December 20183 (continued)
(Audited)
Gross carrying/nominal amount1
Allowance for ECL
ECL coverage %
Stage 1
Stage 2
Stage 3 POCI2
Total
Stage 1
Stage 2
Stage 3
$m
$m
$m
$m
$m
$m
$m
$m
POCI2
$m
Total
Stage 1
Stage 2
Stage 3
POCI2
Total
$m
%
%
%
%
%
Loans and
advances to
customers at
amortised cost
908,393
68,581
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)
474,700
51,341
8,212
324
534,577
(698)
(812)
(3,848)
(194)
(5,552)
0.1
0.1
0.1
3.1
8.4
1.6
38.8
25.1
59.9
—
0.9
0.7
46.9
59.9
1.0
59,012
2,165
230
—
61,407
(44)
(31)
(51)
—
(126)
0.1
1.4
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)
567,232
23,857
– personal
205,183
1,760
– corporate and
commercial
– financial
Financial
guarantees
– personal
– corporate and
commercial
249,587
20,925
112,462
1,172
20,834
2,384
920
3
14,963
2,101
– financial
4,951
280
912
408
503
1
297
4
288
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)
At 31 Dec 2018
2,149,450
96,802
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
0.4
17.5
—
—
0.6
0.1
0.6
0.2
1.2
—
1.2
1.4
2.4
4.7
—
8.5
—
15.2
—
15.3
20.0
35.9
—
—
—
—
—
—
—
—
58.1
0.1
—
0.1
—
0.4
0.1
0.5
0.1
0.4
1 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.
2 Purchased or originated credit-impaired (‘POCI’).
3 During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 86.
Stage 2 days past due analysis at 31 December 20182
(Audited)
Gross carrying amount
Allowance for ECL
ECL coverage %
Of which:
Of which:
Of which:
Of which:
Of which:
Of which:
Stage 2
$m
68,581
15,075
51,341
2,165
307
1,673
1 to 29
DPD1
$m
2,561
1,807
744
10
—
10
30 and >
DPD1
$m
1,914
1,383
485
46
—
26
Stage 2
$m
(2,108)
(1,265)
(812)
(31)
(2)
(6)
1 to 29
DPD1
$m
(204)
(165)
(39)
—
—
—
30 and >
DPD1
Stage 2
1 to 29
DPD1
30 and >
DPD1
$m
(254)
(220)
(34)
—
—
—
%
3.1
8.4
1.6
1.4
0.7
0.4
%
8.0
9.1
5.2
—
—
—
%
13.3
15.9
7.0
—
—
—
Loans and advances to customers
at amortised cost
– personal
– corporate and commercial
– non-bank financial institutions
Loans and advances to banks at
amortised cost
Other financial assets measured at
amortised cost
1 Days past due (‘DPD’). Up to date accounts in stage 2 are not shown in amounts.
2 During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 86.
HSBC Holdings plc Annual Report and Accounts 2019
89
Financial review
Report of the Directors | Risk
Personal gross loans to customers over five years ($bn)
Loans and advances change in ECL by geographical region in
2019 ($bn)
IAS 39
IFRS 9
Stage 1 and 2/Unimpaired
Stage 3 and POCI/Impaired loans
Wholesale gross loans to customers and banks over five years
($bn)
Loan and advances change in ECL by geographical region in
2018 ($bn)
IAS 39
IFRS 9
Stage 1 and 2/Unimpaired
Stage 3 and POCI/Impaired loans
Loans and advances change in ECL/loan impairment charge ($bn)
Loans and advances to customers change in ECL in 2019 ($bn)
IAS 39
IFRS 9
Personal
Wholesale
90
HSBC Holdings plc Annual Report and Accounts 2019
Loans and advances to customers loan impairment charges by
industry in 2018 ($bn)
Personal loans and advances allowance for ECL/loan impairment
allowance over five years ($bn)
IAS 39
IFRS 9
Allowance for ECL/loan impairment allowance ($bn)
Wholesale loans and advances allowance for ECL/loan
impairment allowance over five years ($bn)
IAS 39
IFRS 9
Credit exposure
Maximum exposure to credit risk
(Audited)
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 2019
is provided on page 53.
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 page 245 and Note 30 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 112.
Allowance for ECL/loan impairment allowance ($bn)
HSBC Holdings plc Annual Report and Accounts 2019
91
Financial review
Report of the Directors | Risk
Maximum exposure to credit risk
(Audited)
Maximum
exposure
$m
2019
Offset
$m
Net
$m
Loans and advances to customers held at amortised cost
1,036,743
(28,524)
1,008,219
– 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
431,137
535,061
70,545
69,203
616,648
154,099
4,956
38,380
(4,640)
(21,745)
(2,139)
—
(28,826)
—
—
—
426,497
513,316
68,406
69,203
587,822
154,099
4,956
38,380
Maximum
exposure
$m
981,696
391,390
529,025
61,281
72,167
585,600
162,843
5,787
35,859
2018
Offset
$m
(29,534)
(3,679)
(23,421)
(2,434)
—
(21,788)
—
—
—
Net
$m
952,162
387,711
505,604
58,847
72,167
563,812
162,843
5,787
35,859
– reverse repurchase agreements – non-trading
240,862
(28,826)
212,036
242,804
(21,788)
221,016
– financial investments
– prepayments, accrued income and other assets
Derivatives
85,735
92,616
—
—
242,995
(232,908)
85,735
92,616
10,087
62,666
75,641
—
—
207,825
(194,306)
62,666
75,641
13,519
Total on-balance sheet exposure to credit risk
1,965,589
(290,258)
1,675,331
1,847,288
(245,628)
1,601,660
Total off-balance sheet
– financial and other guarantees
– loan and other credit-related commitments
At 31 Dec
Concentration of exposure
We have a number of global businesses with a broad range of
products. We operate in a number of geographical markets with
the majority of our exposures in Asia and Europe.
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 119 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 119 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)
The recognition and measurement of ECL involves the use of
significant judgement and estimation. We form multiple economic
scenarios based on economic forecasts, apply these assumptions
to credit risk models to estimate future credit losses, and
probability-weight the results to determine an unbiased ECL
estimate.
Methodology
We use multiple economic scenarios to reflect assumptions about
future economic conditions, starting with three economic
scenarios based on consensus forecast distributions,
supplemented by alternative or additional economic scenarios
and/or management adjustments where, in management’s
judgement, the consensus forecast distribution does not
adequately capture the relevant risks.
The three economic scenarios represent the 'most likely' outcome
and two less likely outcomes referred to as the Upside and
Downside scenarios. Each outer scenario is consistent with a
92
HSBC Holdings plc Annual Report and Accounts 2019
893,246
95,967
797,279
—
—
—
893,246
95,967
797,279
874,751
94,810
779,941
—
—
—
874,751
94,810
779,941
2,858,835
(290,258)
2,568,577
2,722,039
(245,628)
2,476,411
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.
Economic assumptions in the Central consensus economic
scenario are set using the average of forecasts of external
economists. Reliance on external forecasts helps ensure that the
Central scenario is unbiased and maximises the use of
independent information. The Upside and Downside scenarios are
selected with reference to externally available forecast
distributions and 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 76. This ensures that scenarios
remain consistent with the more qualitative assessment of these
risks. We project additional variable paths using an external
provider’s global macro model.
The Upside and Downside scenarios are generated once a year,
reviewed at each reporting date to ensure that they are an
appropriate reflection of management’s view and updated if
economic conditions change significantly. The Central scenario is
generated every quarter. For quarters without updates to outer
scenarios, we use the updated Central scenario to approximate the
impact of the most recent outer scenarios on wholesale and retail
credit risk exposures.
Additional scenarios are created, as required, to address those
forward-looking risks that management considers are not
adequately captured by the consensus. At the reporting date, we
deployed additional scenarios to address economic uncertainty in
the UK, the impact of deteriorating trade relations between China
and the US on key Asian economies and to address the possibility
of a further weakening in economic growth in Hong Kong.
Description of consensus economic scenarios
The economic assumptions presented in this section have been
formed by HSBC with reference to external forecasts specifically
for the purpose of calculating ECL.
The consensus Central scenario
Our Central scenario is one of moderate growth over the forecast
2020–2024 period, which reflects an overall trend of deterioration
observed over the course of 2019. Global GDP growth is expected
to be 2.8% on average over the period, which is marginally lower
than the average growth rate over the 2014–2018 period. Across
the key markets, we note:
• Expected average rates of GDP growth over the 2020–2024
period are lower than average growth rates achieved over the
2014–2018 period in all of our key markets. 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. Short-term expectations of economic growth in
Hong Kong weakened in the second half of 2019.
• The unemployment rate is expected to rise over the forecast
horizon in most of our major markets.
Central scenario (average 2020–2024)
•
Inflation is expected to be stable and will remain close to
central bank targets in our core markets over the forecast
period.
• Major central banks lowered their main policy interest rates in
2019 and are expected to continue to maintain a low interest
rate environment over the projection horizon. The FRB has
resumed asset purchases to provide liquidity and the ECB has
restarted its asset purchase programmes.
• The West Texas Intermediate oil price is forecast to average
$59 per barrel over the projection period.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Central scenario.
GDP growth rate1
Inflation
Unemployment
Short-term interest rate
10-year Treasury bond yields
House price growth
Equity price growth
Probability
UK
%
1.6
2.0
4.4
0.6
1.7
3.0
2.8
55.0
France
Hong
Kong
Mainland
China
%
1.3
1.6
7.8
(0.6)
1.0
2.9
3.4
80.0
%
1.9
2.2
3.1
1.1
2.4
3.8
5.1
50.0
%
5.6
2.4
4.0
3.8
N/A
4.6
7.9
80.0
UAE
%
2.8
2.0
2.7
1.8
N/A
(2.4)
N/A
80.0
US
%
1.9
2.0
4.1
1.4
2.4
3.4
6.4
Canada
Mexico
%
1.8
2.0
6.0
1.6
2.2
2.6
3.8
%
2.1
3.5
3.6
6.7
7.4
5.4
5.6
80.0
80.0
80.0
Note: N/A – not required in credit models.
1 Comparative GDP growth rates for 2019–2023 period were: UK (1.7%), France (1.5%), Hong Kong (2.6%), mainland China (5.9%) and US (2.0%).
The consensus Upside scenario
The economic forecast distribution of risks (as captured by
consensus probability distributions of GDP growth) has shown a
decrease in upside risks across our main markets over the course
of 2019. In the first two years of the Upside scenario, global real
GDP growth rises before converging to the Central scenario.
Increased confidence, de-escalation of trade tensions, removal of
trade barriers, expansionary fiscal policy, positive resolution of
Upside scenario (average 2020–2024)
economic uncertainty in the UK, stronger oil prices and a calming
of geopolitical tensions are the risk themes that support the
Upside scenario.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Upside scenario.
GDP growth rate1
Inflation
Unemployment
Short-term interest rate
10-year Treasury bond yields
House price growth
Equity price growth
Probability
UK
%
2.1
2.4
4.0
0.6
1.7
4.4
4.4
10
France
Hong Kong
Mainland
China
%
1.7
2.0
7.4
(0.5)
1.0
3.7
7.3
10
%
2.2
2.5
2.9
1.2
2.5
5.0
6.9
10
%
5.9
2.7
3.9
3.9
N/A
5.8
10.7
10
UAE
%
3.5
2.3
2.5
1.9
N/A
0.6
N/A
10
US
%
2.6
2.4
3.7
1.5
2.5
4.5
10.0
10
Canada
Mexico
%
1.9
2.2
5.7
1.6
2.2
5.7
6.7
10
%
2.9
4.1
3.3
6.8
7.6
6.1
9.6
10
1 Comparative GDP growth rates for 2019–2023 period were: UK (2.2%), France (1.9%), Hong Kong (2.9%), mainland China (6.1%) and US (2.7%).
The consensus Downside scenario
The distribution of risks (as captured by consensus probability
distributions of GDP growth) has shown a marginal increase in
downside risks over the course of 2019 for the US, Hong Kong, the
eurozone and the UK. In the Downside scenario, global real GDP
growth declines for two years before recovering towards its long-
run trend. House price growth either stalls or contracts and equity
markets correct abruptly in our major markets in this scenario. The
potential slowdown in global demand would drive commodity
prices lower and result in an accompanying fall in inflation. Central
banks would be expected to enact loose monetary policy, which in
some markets would result in a reduction in the key policy interest
rate. The scenario is consistent with our top and emerging risks,
which include an intensification of global protectionism and trade
barriers, a worsening of economic uncertainty in the UK, a
slowdown in China, further risks to economic growth in Hong
Kong and weaker commodity prices.
The following table describes key macroeconomic variables and
the probabilities assigned in the consensus Downside scenario.
HSBC Holdings plc Annual Report and Accounts 2019
93
Financial review Report of the Directors | Risk
Downside scenario (average 2020–2024)
GDP growth rate1
Inflation
Unemployment
Short-term interest rate
10-year Treasury bond yields
House price growth
Equity price growth
Probability
UK
%
1.0
1.7
4.8
0.1
0.8
1.6
(1.1)
0
France
Hong Kong
Mainland
China
%
1.0
1.3
8.2
(0.9)
0.2
1.9
(2.3)
10
%
1.4
1.9
3.3
(0.1)
1.2
2.3
(0.7)
10
%
5.6
2.1
4.0
3.6
N/A
3.9
1.1
0
UAE
%
2.1
1.7
2.9
0.4
N/A
(5.2)
N/A
10
US
%
1.2
1.7
4.5
0.3
1.2
2.2
1.2
10
Canada
Mexico
%
1.5
1.8
6.4
0.8
1.4
(0.8)
0.6
10
%
1.5
3.1
4.0
5.7
6.6
4.9
(1.6)
10
1 Comparative GDP growth rates for 2019–2023 period were: UK (1.1%), France (1.1%), Hong Kong (2.2%), mainland China (5.8%) and US (1.2%).
Alternative Downside scenarios
Asia-Pacific alternative Downside scenario
Alternative Downside scenarios have been created to reflect
management’s view of risk in some of our key markets.
UK alternative Downside scenarios
Three alternative Downside scenarios were maintained in 2019 for
the UK, reflecting management’s view of the distribution of
economic risks. These scenarios reflect management’s judgement
that the consensus distribution does not adequately reflect the
risks that stem from the UK’s departure from the EU on 31
January 2020. Management evaluated events over the course of
2019 and assigned probabilities to these scenarios that take into
consideration all relevant economic and political events. The three
scenarios and associated probabilities are described below.
• UK alternative Downside scenario 1: 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 25% weighting.
• UK alternative Downside scenario 2: 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.
• UK alternative Downside scenario 3: 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.
The table below describes key macroeconomic variables and the
probabilities for each of the alternative Downside scenarios:
A continuation of trade- and tariff-related tensions throughout
2019 resulted in management modelling an alternative Downside
scenario for eight of our key Asia-Pacific markets. This 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 tariffs and
proposed tariffs and has been modelled as an addition to the three
consensus-driven scenarios for these economies. In
management’s judgement, the impact on the US and other
countries is largely captured by the consensus Downside scenario.
Key macroeconomic variables are shown in the table below:
Average 2020–2024
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
%
0.8
1.6
5.1
0.7
1.6
(3.7)
(3.3)
20
%
5.2
2.0
4.3
2.9
N/A
2.6
(1.6)
10
Hong Kong alternative Downside scenario
A deep cyclical recessionary scenario has been modelled to reflect
Hong Kong-specific risks and the possibility of a further
weakening in the economic environment. This scenario has been
applied to Hong Kong only and has been assigned a 10%
probability.
Average 2020–2024
Average 2020–2024
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
%
0.3
2.3
6.5
0.4
1.8
(1.7)
(3.3)
25
%
(0.3)
2.5
8.0
2.5
4.0
(3.7)
(4.6)
5
%
(0.8)
2.7
7.7
2.5
4.0
(4.8)
(9.6)
5
Asia-Pacific alternative Downside scenarios
Two alternative Downside scenarios have been created for key
Asia-Pacific markets to represent management’s view of economic
uncertainty arising from trade and tariff tensions between China
and the US and the current economic situation in Hong Kong.
These scenarios and their associated probabilities are described as
follows.
94
HSBC Holdings plc Annual Report and Accounts 2019
GDP growth rate
Inflation
Unemployment
Short-term interest rate
10-year Treasury bond yields
House price growth
Equity price growth
Probability
Hong Kong
%
(0.1)
1.3
5.1
0.4
1.4
(3.7)
(8.4)
10
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 previous tables 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 our four largest
markets.
US
UK
Hong Kong
Mainland China
How economic scenarios are reflected in the wholesale
calculation of ECL
We have 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, we incorporate 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
We have 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 using 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 using national level forecasts of the house
price index and applying the corresponding LGD expectation.
Impact of alternative/additional scenarios
At 31 December 2019, the impact of using additional scenarios to
the consensus distribution to address economic uncertainty in the
UK was $311m (2018: $410m), consisting of $166m (2018:
$160m) in the retail portfolio and $145m (2018: $250m) in the
wholesale portfolio. The impact of deteriorating trade relations
between China and the US on key Asian economies, and the
possibility of a further weakening in economic growth in Hong
Kong resulted in an additional ECL of $180m (2018: $40m),
consisting of $60m (2018: $10m) in the retail portfolio and $120m
(2018: $30m) in the wholesale portfolio, compared with consensus
forecasts. 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
2019.
HSBC Holdings plc Annual Report and Accounts 2019
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Financial review Report of the Directors | Risk
Economic scenarios sensitivity analysis of ECL
estimates
Management considered the sensitivity of the ECL outcome
against the economic forecasts as part of the ECL governance
process by recalculating the ECL under each scenario described
above for selected portfolios, applying a 100% weighting to each
scenario in turn. The weighting is reflected in both the
determination of a significant increase in credit risk and the
measurement of the resulting ECL.
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. The impact of defaults that might occur in
future under different economic scenarios is captured by
recalculating ECL for loans in stages 1 and 2 at the balance sheet
date. The population of stage 3 loans (in default) at the balance
sheet date is unchanged in these sensitivity calculations. Stage 3
ECL would only be sensitive to changes in forecasts of future
economic conditions if the LGD of a particular portfolio was
sensitive to these changes.
Wholesale analysis
IFRS 9 ECL sensitivity to future economic conditions1
There is a particularly 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.
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, and it is impracticable to separate the effect
of macroeconomic factors in individual assessments.
For retail credit risk exposures, the sensitivity analysis includes
ECL for loans and advances to customers related to defaulted
obligors. This is because the retail ECL for secured mortgage
portfolios including loans in all stages is sensitive to
macroeconomic variables.
ECL coverage of financial instruments subject
to significant measurement uncertainty at
31 December 20192
Reported ECL
Consensus scenarios
Central scenario
Upside scenario
Downside scenario
Alternative scenarios
UK
US Hong Kong
Mainland
China
Canada
Mexico
UAE
France
$m
725
536
480
635
$m
148
149
132
161
$m
328
243
241
244
$m
124
118
95
106
$m
80
79
63
108
$m
69
68
48
99
$m
97
97
89
108
$m
55
53
50
79
UK alternative Downside scenario 1
1,050
Tail risk scenarios (UK alternative Downside
scenarios 2 and 3)
Asia-Pacific alternative Downside scenario
Hong Kong alternative Downside scenario
Gross carrying amount/nominal amount3
1,900–2,100
550
700
150
346,035
203,610
418,102
104,004
74,620
32,632
42,304
124,618
IFRS 9 ECL sensitivity to future economic conditions1
UK
US
Hong Kong
Mainland
China
Canada
Mexico
UAE
France
ECL coverage of financial instruments subject to
significant measurement uncertainty at
31 December 20182
Reported ECL
Consensus scenarios
Central scenario
Upside scenario
Downside scenario
Alternative scenarios
UK alternative Downside scenario 1
Tail risk scenarios (UK alternative Downside
scenarios 2 and 3)
Trade Downside scenario
Gross carrying value/nominal amount3
$m
906
649
595
745
$m
163
156
142
177
1,000
1,700–1,900
$m
162
162
156
170
500
360,637
211,318
407,402
$m
83
82
78
88
150
99,379
$m
81
81
75
88
$m
76
74
58
93
$m
74
74
69
80
$m
46
44
43
58
72,759
31,798
37,546
105,416
1 Excludes ECL and financial instruments relating to defaulted obligors because the measurement of ECL is relatively more sensitive to credit factors
2
3
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 high carrying amounts but low ECL under all the
above scenarios.
96
HSBC Holdings plc Annual Report and Accounts 2019
At 31 December 2019, the UK and Hong Kong portfolios were
most sensitive to changes in macroeconomic forecasts. The
possible impact of Downside scenarios increased over 2019,
primarily due to downward revisions in consensus forecasts and
their resultant impact on the additional Downside scenarios.
The reported ECL in Hong Kong increased due to the impact of
worsening consensus forecasts and the use of additional
Downside scenarios. The sensitivity in Hong Kong was reflected in
the use of a deep cyclical recessionary scenario to consider the
possibility of a further weakening in the economic environment.
The underlying movement in the reported ECL in the UK was
driven by changes in the probability weights of the underlying
IFRS 9 ECL sensitivity to future economic conditions1
ECL of loans and advances to customers
at 31 December 20192
Reported ECL
Consensus scenarios
Central scenario
Upside scenario
Downside scenario
Alternative scenarios
UK Mexico
$m
936
773
686
918
$m
584
583
526
652
UK alternative Downside scenario 1
1,200
Tail risk scenarios (UK alternative Downside
scenarios 2 and 3)
1,500–1,700
Asia-Pacific alternative Downside scenario
Hong Kong alternative Downside scenario
Hong
Kong
$m
349
296
282
306
530
540
scenarios together with a shift in the portfolio mix of underlying
assets. Furthermore, the impact of the additional Downside
scenarios, particularly alternative Downside scenario 2 and
alternative Downside scenario 3, were relatively more severe than
2018 given marginally weaker than forecast economic
performance in 2019.
Retail analysis
The geographies below were selected based on an 85%
contribution to overall ECL within our retail lending business.
UAE
France
US Malaysia Singapore Australia
Canada
$m
174
173
158
193
$m
133
133
132
133
$m
90
90
84
98
$m
94
94
85
106
$m
60
58
57
58
$m
38
37
32
45
$m
39
39
36
41
110
80
50
Gross carrying amount
149,576
7,681 101,689
3,391
23,017
15,470
5,839
8,164
17,258
22,344
IFRS 9 ECL sensitivity to future economic conditions1
ECL of loans and advances to customers at
31 December 20182
Reported ECL
Consensus scenarios
Central scenario
Upside scenario
Downside scenario
Alternative scenarios
UK alternative Downside scenario 1
Tail risk scenarios (UK alternative Downside
scenarios 2 and 3)
Asia-Pacific alternative Downside scenario3
Gross carrying amount
UK
Mexico
$m
520
517
475
564
$m
705
540
480
641
900
1,100-1,300
Hong
Kong
$m
341
338
322
344
400
UAE
France
US Malaysia
Singapore
Australia
Canada
$m
204
204
195
209
$m
150
150
149
150
$m
102
101
94
115
$m
93
92
82
104
$m
68
66
61
67
$m
58
57
54
63
$m
29
29
28
31
138,026
6,098
92,356
3,453
21,622
15,262
110
5,906
70
70
7,378
14,156
19,992
1 ECL sensitivities exclude portfolios utilising less complex modelling approaches.
2 ECL sensitivity includes only on-balance sheet financial instruments to which IFRS 9 impairment requirements are applied.
3
In 2018, this scenario was previously described as the ‘trade Downside scenario’.
At 31 December 2019, the most significant level of ECL sensitivity
in the retail portfolio was observed in the UK, Mexico and Hong
Kong due to the interaction between economic forecasts, the
quantum of exposures and credit characteristics of the underlying
portfolios.
In France, following management’s review of the calculated ECL,
results were adjusted to more accurately reflect views of ECL
sensitivity under an Upside and Downside scenario by adjusting
for factors including the economic forecast skew and forecast
reversion approach, consistent with 2018. In Hong Kong, an
additional alternative Downside scenario was introduced during
2019.
The changes in sensitivity from 31 December 2018 was reflective
of changes in lending volumes, credit quality and movements in
foreign exchange with key countries discussed below:
• UK: An increase in stage 3 ECL was due to a pause in write-offs
and changes in credit quality.
• Mexico: An increase in sensitivity was due to changes in credit
quality.
• Hong Kong: An increase in severity of the Asia-Pacific
alternative Downside scenario was partly offset by changes in
credit quality.
For all the above sensitivity analyses, changes to ECL sensitivity
would occur should there be changes to the corresponding level of
uncertainty, economic forecasts, historical economic variable
correlations or credit quality.
Post-model adjustments
In the context of IFRS 9, post-model adjustments are short-term
increases or decreases to the ECL at either a customer or portfolio
level to account for late breaking events, model deficiencies and
expert credit judgement applied following management review
and challenge. We have internal governance in place to regularly
monitor post-model adjustments and where possible to reduce the
reliance on these through model recalibration or redevelopment,
as appropriate.
Post-model adjustments included an adjustment relating to
Argentina sovereign bonds given the uncertainty around the
sovereign debt repayment. However, the impact of the UK
HSBC Holdings plc Annual Report and Accounts 2019
97
Financial review Report of the Directors | Risk
economic uncertainty, global trade- and tariff-related tensions in
Asia-Pacific, and the economic situation around Hong Kong were
excluded as these were captured within the existing methodology
and governance process for the impact of multiple economic
scenarios on ECL.
Post-model adjustments at 31 December 2019 were $75m (2018:
$161m) for the wholesale business and $131m (2018: $117m) for
the retail business.
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. Movements are calculated
on a quarterly basis and therefore fully capture stage movements
between quarters. If movements were calculated on a year-to-date
basis they would only reflect the opening and closing position of
the financial instrument.
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 customer risk rating (‘CRR’)/probability of default (‘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.
Changes in ‘New financial assets originated or purchased’, ‘assets
derecognised (including final repayments)’ and ‘changes to risk
parameters – further lending/repayment’ represent the impact
from volume movements within the Group’s lending portfolio.
Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including
loan commitments and financial guarantees
(Audited)
Non-credit impaired
Credit impaired
Stage 1
Stage 2
Stage 3
POCI
Total
Gross
carrying/
nominal
amount
Gross
carrying/
nominal
amount
Allowance
for ECL
Gross
carrying/
nominal
amount
Allowance
for ECL
Allowance
for ECL
$m
$m
$m
$m
$m
$m
At 1 Jan 2019
1,502,976
(1,449)
95,104
(2,278)
14,232
(5,135)
Transfers of financial instruments:
(36,244)
(543)
31,063
– transfers from stage 1 to stage 2
(108,434)
487
108,434
1,134
(487)
5,181
(591)
73,086
(1,284)
388
(1,044)
(73,086)
1,044
59
(45)
(5,022)
737
—
669
504,064
(534)
—
—
—
—
6,306
(1,125)
—
—
665
(88)
(676)
—
—
—
(724)
133
(114)
Gross
carrying/
nominal
amount
$m
334
Allowance
for ECL
Gross
carrying/
nominal
amount
Allowance
for ECL
$m
$m
$m
(194) 1,612,646
(9,056)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(121)
—
135
(21)
504,199
(555)
(352,961)
112
(19,909)
553
(2,712)
656
(26)
8
(375,608)
1,329
(72,239)
291
(2,560)
67
402
(6)
—
—
—
—
16,838
(821)
2
(6)
—
—
(9)
3
—
—
—
—
1,201
652
(1,208)
4
—
—
(40)
3
—
—
(2,704)
14
(2,657)
2,657
(140)
(268)
125
160
(3)
(31)
8
—
1
13
28
—
—
12
(74,369)
364
(51)
—
140
—
1
6
—
—
(3,961)
12
(2,797)
2,797
(268)
125
18,200
(159)
(79)
20
1,561,613
(1,464) 105,551
(2,441)
14,335
(5,121)
345
(99) 1,681,844
(9,125)
534
(1,260)
(2,154)
(52)
(2,932)
361
(20)
(2,591)
– transfers from stage 2 to stage 1
– transfers to stage 3
– transfers from stage 3
Net remeasurement of ECL arising
from transfer of stage
New financial assets originated or
purchased
Assets derecognised (including
final repayments)
Changes to risk parameters –
further lending/repayment
Changes to risk parameters – credit
quality
Changes to models used for ECL
calculation
Assets written off
Credit-related modifications that
resulted in derecognition
Foreign exchange
Others
At 31 Dec 2019
ECL income statement change for
the period
Recoveries
Others
Total ECL income statement
change for the period
As above
Other financial assets measured at amortised cost
Non-trading reverse purchase agreement commitments
Performance and other guarantees not considered for IFRS 9
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 change for the period
98
HSBC Holdings plc Annual Report and Accounts 2019
At 31 Dec 2019
12 months ended
31 Dec 2019
Gross carrying/nominal
amount
$m
1,681,844
615,179
53,093
—
2,350,116
355,664
n/a
Allowance for ECL
ECL charge
$m
(9,125)
(118)
—
—
(9,243)
(166)
(9,409)
$m
(2,591)
(26)
—
(34)
(2,651)
(105)
(2,756)
As shown in the previous table, the allowance for ECL for loans
and advances to customers and banks and relevant loan
commitments and financial guarantees increased $69m during the
period from $9,056m at 31 December 2018 to $9,125m at 31
December 2019.
This increase was primarily driven by:
• $3,961m relating to underlying credit quality changes,
including the credit quality impact of financial instruments
transferring between stages;
• $121m relating to the net remeasurement impact of stage
transfers; and
• foreign exchange and other movements of $59m.
These decreases were partly offset by:
• $2,797m of assets written off;
• $1,138m relating to volume movements, which included the
ECL allowance associated with new originations, assets
derecognised and further lending/repayment;
• $125m credit-related modifications that resulted in
derecognitions; and
• $12m changes to models used for ECL calculation.
The ECL charge for the period of $2,932m presented in the
previous table consisted of $3,961m relating to underlying credit
quality changes, including the credit quality impact of financial
instruments transferring between stage and $121m relating to the
net remeasurement impact of stage transfers. This was partly
offset by $1,138m relating to underlying net book volume
movements and $12m in changes to models used for ECL
calculation.
Summary views of the movement in wholesale and personal
lending are presented on pages 107 and 120.
Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to banks and customers including
loan commitments and financial guarantees1,2
(Audited)
Non-credit impaired
Credit impaired
Stage 1
Stage 2
Stage 3
POCI
Total
At 1 Jan 2018
1,446,857
(1,469)
102,032
$m
$m
$m
Gross
exposure
Allowance/
provision
for ECL
Gross
exposure
Allowance/
provision
for ECL
Gross
exposure
$m
15,083
5,165
—
—
6,689
(1,524)
$m
(2,406)
1,185
(319)
999
607
(102)
(685)
319
3,582
84,181
(999)
(77,325)
35
(40)
(4,439)
1,165
(8,747)
(84,181)
77,325
(2,250)
359
—
620
—
(605)
—
Allowance/
provision for
ECL
Gross
exposure
Allowance/
provision
for ECL
Gross
exposure
Allowance/
provision for
ECL
$m
$m
$m
$m
(5,722)
1,042
(242)
1,565,014
$m
(9,839)
(500)
—
—
(642)
142
(103)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
126,868
(512)
(16,162)
564
(2,902)
733
(587)
42
107,217
—
—
—
(52,911)
(9,091)
423
—
—
76
98
—
—
—
(2,935)
8,587
(1,087)
—
—
99
(28)
—
—
(2,568)
(636)
90
(2,238)
—
2,552
232
(89)
1,502,976
(1,449)
95,104
(2,278)
14,232
(5,135)
—
—
(1)
(26)
(94)
334
(51)
—
1
6
50
—
—
(2,569)
(56,508)
(508)
(194)
1,612,646
(9,056)
—
—
—
—
—
(88)
827
(2,953)
—
2,553
413
31
531
(1,128)
(1,608)
(9)
(2,214)
408
(62)
(1,868)
Transfers of financial instruments:
– transfers from stage 1 to stage 2
– transfers from stage 2 to stage 1
– transfers to stage 3
– transfers from stage 3
Net remeasurement of ECL arising
from transfer of stage
Net new lending and further
lending/payments
Changes to risk parameters – credit
quality
Changes to models used for ECL
calculation
Assets written off
Foreign exchange
Other
At 31 Dec 2018
ECL income statement change for
the period
Recoveries
Others
Total ECL income statement change
for the period
At 31 Dec 2018
12 months ended 31 Dec 2018
Gross carrying/
nominal amount
Allowance for ECL
ECL charge
As above
Other financial assets measured at amortised cost
Non-trading reverse purchase agreement commitments
Performance and other guarantees not considered for IFRS 9
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 change for the period
$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
(1,868)
21
—
(25)
(1,872)
105
(1,767)
1 The 31 December 2018 comparative ‘Reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to
banks and customers‘ disclosure presents ‘New financial assets originated or purchased’, ‘Assets derecognised (including final repayments)’ and
‘Changes to risk parameters – further lending/repayments’ under ‘Net new lending and further lending/repayments’. To provide greater
granularity, these amounts have been separately presented in the 31 December 2019 disclosure.
2 During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount for 31 December 2018 only. For further
details, see page 86.
HSBC Holdings plc Annual Report and Accounts 2019
99
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Report of the Directors | Risk
Credit quality
Credit quality of financial instruments
(Audited)
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 PD, whereas 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 stages 1 and 2, although 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 85.
Distribution of financial instruments by credit quality at 31 December 2019
(Audited)
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
258,402
45,037
190,470
22,895
228,485
27,636
186,383
14,466
20,007
2,286
16,891
830
13,692
1,045,475
(8,732)
1,036,743
4,851
8,629
212
434,271
540,499
70,705
(3,134)
(5,438)
(160)
431,137
535,061
70,545
Strong
$m
524,889
354,461
138,126
32,302
60,636
5,329
1,859
1,395
151,788
1,398
915
4,935
38,380
193,157
78,318
70,675
1,133
69,542
18
—
37,947
6,503
8,638
4,651
3,987
3
—
9,621
906
11,321
4,196
7,125
333,158
10,966
7,222
—
—
—
137
61
306
230
76
544
Trading assets
135,059
15,240
22,964
2,181
Other financial assets designated
and otherwise mandatorily
measured at fair value through
profit or loss
Derivatives
Total gross carrying amount on
balance sheet
4,655
187,636
1,391
42,642
5,584
11,894
1,783,286
388,474
300,774
Percentage of total credit quality
70.9%
15.5%
12.0%
369,424
146,988
7,441
6,033
77,499
5,539
139
821
25,591
1.0%
5,338
1,011
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 income1
Out-of-scope for IFRS 9
Loan and other credit-related
commitments
Financial guarantees
In-scope: Irrevocable loan
commitments and financial
guarantees
Loan and other credit-related
commitments2
Performance and other guarantees
Out-of-scope: Revocable loan
commitments and non-
financial guarantees
—
—
—
—
—
—
152
4
148
1
—
—
2
69,219
(16)
69,203
154,101
(2)
154,099
4,956
38,380
240,862
85,788
91,092
10,214
80,878
—
—
—
(53)
(63)
(16)
(47)
4,956
38,380
240,862
85,735
91,029
10,198
80,831
351,891
(166)
351,725
175,444
—
175,444
11,769
242,995
—
—
11,769
242,995
13,847
2,511,972
(9,032)
2,502,940
0.6%
100%
780
190
600,029
20,214
(329)
(48)
599,700
20,166
376,865
153,021
83,038
6,349
970
620,243
(377)
619,866
66,148
30,099
69,890
23,335
58,754
20,062
2,605
2,057
182
380
197,579
75,933
—
197,579
(132)
75,801
96,247
93,225
78,816
4,662
562
273,512
(132)
273,380
100
HSBC Holdings plc Annual Report and Accounts 2019
Distribution of financial instruments by credit quality at 31 December 2018 (continued)
(Audited)
Trading assets
139,484
18,888
16,991
1,871
Gross carrying/notional amount
Good
Satisfactory
Sub-
standard
Credit impaired
$m
$m
$m
$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
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
Allowance for
ECL/other
credit
provisions
$m
(8,625)
(2,947)
(5,552)
(126)
Total
$m
990,321
394,337
534,577
61,407
Net
$m
981,696
391,390
529,025
61,281
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
—
—
—
—
—
—
126
3
123
12
—
—
41
6,079
169,121
1,694,864
71%
2,163
31,225
361,024
15.1%
373,302
137,076
9,716
7,400
6,683
6,813
295,622
12.4%
75,478
5,505
383,018
144,476
80,983
188,258
26,679
—
—
25,743
16,790
9
625
22,267
0.9%
5,233
597
5,830
—
1,869
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
1,219
615,526
(418)
615,108
—
403
188,258
71,484
—
(99)
188,258
71,385
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 income1
Out-of-scope for IFRS 9
Other financial assets designated
and otherwise mandatorily
measured at fair value through
profit or loss
Derivatives
Total gross carrying amount on
balance sheet
Percentage of total credit quality
Loan and other credit-related
commitments
Financial guarantees
In-scope: Irrevocable loan
commitments and financial
guarantees
Loan and other credit-related
commitments2
Performance and other guarantees
Out-of-scope: Revocable loan
commitments and non-financial
guarantees
214,937
25,743
16,790
1,869
403
259,742
(99)
259,643
1 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.
In 2018, revocable loan and other commitments, which are out of scope of IFRS 9, are presented within the ‘Strong’ classification.
2
HSBC Holdings plc Annual Report and Accounts 2019
101
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
– stage 1
– stage 2
– stage 3
– POCI
524,889
258,402
228,485
523,092
242,631
181,056
1,797
15,771
47,429
—
—
60,636
60,548
88
—
—
537,253
536,942
311
—
—
—
—
5,329
5,312
17
—
—
54,505
54,058
447
—
—
369,424
146,988
368,711
141,322
713
—
—
7,441
7,400
41
—
—
5,666
—
—
6,033
5,746
287
—
—
—
—
1,859
1,797
62
—
—
22,766
21,921
845
—
—
77,499
66,283
11,216
—
—
5,539
4,200
1,339
—
—
20,007
4,804
15,185
—
18
1,395
112
1,283
—
—
503
279
224
—
—
5,338
1,315
4,023
—
—
1,011
338
673
—
—
13,692
1,045,475
(8,732)
1,036,743
—
—
13,378
314
—
—
—
—
—
951,583
80,182
13,378
332
69,219
67,769
1,450
—
—
(1,297)
(2,284)
(5,052)
(99)
(16)
(14)
(2)
—
—
950,286
77,898
8,326
233
69,203
67,755
1,448
—
—
152
615,179
(118)
615,061
—
—
151
1
613,200
1,827
151
1
780
600,029
—
—
771
9
190
—
—
186
4
577,631
21,618
771
9
20,214
17,684
2,340
186
4
(38)
(38)
(42)
—
(329)
(137)
(133)
(59)
—
(48)
(16)
(22)
(10)
—
613,162
1,789
109
1
599,700
577,494
21,485
712
9
20,166
17,668
2,318
176
4
At 31 Dec 2019
1,499,643
471,257
336,148
28,254
14,814
2,350,116
(9,243)
2,340,873
Debt instruments at FVOCI
1
– stage 1
– stage 2
– stage 3
– POCI
333,072
10,941
86
—
—
25
—
—
6,902
320
—
—
At 31 Dec 2019
333,158
10,966
7,222
—
544
—
—
544
—
—
—
1
1
350,915
975
—
1
(39)
(127)
—
—
350,876
848
—
1
351,891
(166)
351,725
1 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.
102
HSBC Holdings plc Annual Report and Accounts 2019
Distribution of financial instruments to which the impairment requirements in IFRS 9 are applied, by credit quality and stage allocation2
(continued)
(Audited)
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
Gross carrying/notional amount
Good
Satisfactory Sub-standard
$m
$m
$m
244,199
232,004
12,195
230,357
187,773
42,584
16,993
5,446
11,521
—
—
7,371
7,250
121
—
—
44,724
44,339
385
—
—
137,076
131,278
5,798
—
—
7,400
6,863
537
—
—
—
—
4,549
4,413
136
—
—
23,019
22,184
835
—
—
75,478
62,452
13,026
—
—
5,505
4,231
1,274
—
—
—
26
11
11
—
—
—
200
70
130
—
—
5,233
973
4,260
—
—
597
158
439
—
—
Strong
$m
485,451
483,170
2,281
—
—
60,249
60,199
50
—
—
514,848
514,525
323
—
—
373,302
372,529
773
—
—
9,716
9,582
134
—
—
Credit
impaired
$m
13,321
—
—
13,023
298
—
—
—
—
—
126
—
—
126
—
919
—
—
912
7
300
—
—
297
3
Total
$m
990,321
908,393
68,581
13,023
324
72,180
71,873
307
—
—
582,917
581,118
1,673
126
—
592,008
567,232
23,857
912
7
23,518
20,834
2,384
297
3
Allowance for
ECL
$m
(8,625)
(1,276)
(2,108)
(5,047)
(194)
(13)
(11)
(2)
—
—
(55)
(27)
(6)
(22)
—
(325)
(143)
(139)
(43)
—
(93)
(19)
(29)
(45)
—
Net
$m
981,696
907,117
66,473
7,976
130
72,167
71,862
305
—
—
582,862
581,091
1,667
104
—
591,683
567,089
23,718
869
7
23,425
20,815
2,355
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
1
—
– 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
—
—
8
4
12
341,055
799
8
4
341,866
(33)
(50)
(1)
—
(84)
341,022
749
7
4
341,782
1 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.
2 During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 86.
Credit-impaired loans
(Audited)
We determine 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.
A summary of our current policies and practices for renegotiated loans and
forbearance is set out in ‘Credit risk management’ on page 84.
HSBC Holdings plc Annual Report and Accounts 2019
103
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 2019
Allowance for ECL
Personal
– first lien residential mortgages
– other personal lending
Wholesale
– corporate and commercial
– non-bank financial institutions
At 31 Dec 2019
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
—
—
—
1,168
1,168
—
1,168
—
—
—
(13)
(13)
—
(13)
—
—
—
1,532
1,517
15
1,532
—
—
—
(29)
(29)
—
(29)
—
—
—
1,179
1,179
—
1,179
—
—
—
(55)
(55)
—
(55)
—
—
—
1,193
1,193
—
1,193
—
—
—
(49)
(49)
—
(49)
2,207
1,558
649
3,353
3,290
63
5,560
(397)
(181)
(216)
(1,349)
(1,316)
(33)
(1,746)
2,248
1,641
607
3,845
3,789
56
6,093
(381)
(186)
(195)
(1,461)
(1,438)
(23)
(1,842)
POCI
$m
—
—
—
310
310
—
310
—
—
—
(86)
(86)
—
(86)
—
—
—
270
270
—
270
—
—
—
(146)
(146)
—
(146)
Renegotiated loans and advances to customers by geographical region
At 31 Dec 2019
At 31 Dec 2018
Europe
$m
4,182
4,533
Asia
$m
838
864
MENA
$m
1,805
1,973
North
America
Latin
America
$m
1,185
1,352
$m
207
366
Total
$m
8,217
9,088
UK
$m
3,438
3,609
Of which:
Total
$m
2,207
1,558
649
6,010
5,947
63
8,217
(397)
(181)
(216)
(1,503)
(1,470)
(33)
(1,900)
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
277
305
Wholesale lending
This section provides further details on the regions, countries,
territories and products comprising wholesale loans and advances
to customers and banks. 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 2019 to 31 December 2019
closing gross carrying/nominal amounts and the associated
allowance for ECL.
At 31 December 2019, wholesale lending for loans and advances
to banks and customers of $680bn increased by $12.3bn since
31 December 2018. This included favourable foreign exchange
movements of $6.1bn.
Excluding foreign exchange movements, the total wholesale
lending growth was driven by an $8.7bn increase in balances from
non-bank financial institutions and $0.3bn in corporate and
commercial balances. These were partly offset by a decrease in
loans and advances to banks of $2.8bn. The primary drivers of the
increase in balances from non-bank financial institutions were
$3.4bn in Europe, notably $2.8bn in France, and $4.9bn in Asia.
The allowance for ECL attributable to loans and advances to banks
and customers of $5.6bn at 31 December 2019 decreased from
$5.7bn at 31 December 2018.
104
HSBC Holdings plc Annual Report and Accounts 2019
Total wholesale lending for loans and advances to banks and customers by stage distribution
Gross carrying amount
Allowance for ECL
Corporate and commercial
472,253
59,599
8,315
332
540,499
Stage 1
Stage 2
Stage 3
$m
$m
$m
POCI
$m
$m
Total
Stage 1
Stage 2
Stage 3
POCI
$m
$m
(920)
(3,747)
– 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 2019
By geography
Europe
– of which: UK
Asia
– of which: Hong Kong
MENA
North America
Latin America
At 31 Dec 2019
5,416
9,923
1,000
4,189
278
311
2
12
6,696
14,435
88,138
14,525
1,581
136
104,380
13,479
1,386
2,963
508
10,520
3,883
83,151
22,604
20,109
18,103
122,972
21,085
21,370
1,889
1,700
3,543
2,537
13,143
725
2
8,159
722
65,661
67,769
9,897
2,359
4,284
1,706
6,450
2,687
3,817
488
184
811
257
941
66
—
147
14
4,832
1,450
175
30
852
1,625
588
262
141
1,329
350
438
—
16
111
30
191
—
—
7
—
212
—
—
15,040
—
32
8
29
1
21
3,501
15,287
94,681
25,580
24,656
19,971
1
130,752
—
89
—
—
—
—
1
—
—
—
—
—
—
24,122
25,714
2,377
1,900
4,465
2,824
14,276
791
2
8,313
736
70,705
69,219
605,683
65,881
8,527
332
680,423
190,528
131,007
308,305
182,501
25,470
64,501
16,879
20,276
16,253
32,287
23,735
3,314
7,495
2,509
4,671
3,343
1,419
673
1,686
458
293
129
215,604
79
150,682
148
342,159
48
18
—
37
206,957
30,488
72,454
19,718
(111)
(137)
$m
(672)
(13)
(22)
(143)
(14)
(6)
(16)
(42)
(37)
(30)
(108)
(31)
(33)
(1)
(7)
(9)
(6)
(35)
—
—
(6)
(2)
(42)
(14)
(728)
(318)
(252)
(228)
(118)
(55)
(45)
(82)
Total
$m
(5,438)
(182)
(226)
(1,210)
(80)
(28)
(564)
(1,184)
(237)
(146)
(87)
(680)
(209)
(270)
(8)
(18)
(57)
(25)
(199)
—
—
(14)
(14)
(160)
(16)
$m
(99)
(1)
(12)
(50)
—
—
(32)
(2)
—
(1)
(1)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(29)
(70)
(211)
(41)
(4)
(49)
(37)
(46)
(23)
(97)
(33)
(58)
(7)
(5)
(20)
(8)
(31)
—
—
(2)
(12)
(28)
(2)
(139)
(122)
(806)
(25)
(18)
(467)
(934)
(158)
(62)
(33)
(475)
(145)
(179)
—
(6)
(28)
(11)
(133)
—
—
(6)
—
(90)
—
(950)
(3,837)
(99)
(5,614)
(458)
(385)
(253)
(172)
(85)
(96)
(58)
(1,578)
(989)
(986)
(475)
(946)
(141)
(186)
(45)
(32)
(38)
(28)
(12)
—
(4)
(2,399)
(1,658)
(1,505)
(793)
(1,098)
(282)
(330)
605,683
65,881
8,527
332
680,423
(728)
(950)
(3,837)
(99)
(5,614)
Total wholesale lending for loans and other credit-related commitments and financial guarantees by stage distribution1
Corporate and commercial
Financial
At 31 Dec 2019
By geography
Europe
– of which: UK
Asia
– of which: Hong Kong
MENA
North America
Latin America
At 31 Dec 2019
Nominal amount
Allowance for ECL
Stage 1
Stage 2
Stage 3
POCI
Total
Stage 1
Stage 2
Stage 3
$m
271,678
101,345
373,023
190,604
76,013
60,759
27,047
5,690
112,812
3,158
$m
20,880
1,447
22,327
7,852
4,193
3,762
2,114
621
9,933
159
$m
757
5
762
645
494
8
5
31
77
1
373,023
22,327
762
$m
13
$m
293,328
— 102,797
13
396,125
13
199,114
9
—
—
—
80,709
64,529
29,166
6,342
— 122,822
—
13
3,318
396,125
$m
(132)
(7)
(139)
(60)
(48)
(43)
(14)
(12)
(22)
(2)
$m
(151)
(2)
(153)
(43)
(32)
(33)
(23)
(13)
(62)
(2)
$m
(68)
(1)
(69)
(56)
(31)
(4)
(2)
(4)
(5)
—
(139)
(153)
(69)
POCI
$m
—
—
—
—
—
—
—
—
—
—
—
Total
$m
(351)
(10)
(361)
(159)
(111)
(80)
(39)
(29)
(89)
(4)
(361)
1
Included in loans and other credit-related commitments and financial guarantees is $53bn relating to unsettled reverse repurchase agreements,
which once drawn are classified as ‘Reverse repurchase agreements – non-trading’.
HSBC Holdings plc Annual Report and Accounts 2019
105
Financial review Report of the Directors | Risk
Total wholesale lending for loans and advances to banks and customers by stage distribution1
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 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
Allowance for ECL
Stage 1
Stage 2
Stage 3
$m
$m
474,700
51,341
4,791
11,892
92,193
1,672
1,919
11,817
14,431
1,513
$m
8,212
236
359
1,569
40
24
1,168
287
1,458
12,784
1,652
1,957
2,904
1,453
6,502
2,656
2,110
30
230
609
758
436
59
3
168
16
2,165
307
351
270
189
1,115
350
437
8
14
141
39
242
1
7
—
—
230
—
3,212
12,577
83,192
23,195
18,370
19,529
115,615
19,567
22,553
1,425
1,585
3,558
4,244
13,234
770
49
7,905
813
59,012
71,873
POCI
$m
324
2
2
Total
$m
534,577
6,701
14,172
125
105,704
60
—
51
37
38
3
1
1
—
3
—
—
—
—
1
—
—
—
—
—
—
16,044
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)
$m
(812)
(34)
(51)
(156)
(60)
(2)
(41)
(115)
(128)
$m
POCI
$m
Total
$m
(3,848)
(194)
(5,552)
(117)
(94)
(791)
(15)
(17)
(524)
(968)
(82)
(83)
(84)
(594)
(113)
(166)
(5)
(6)
(33)
(15)
(140)
—
(1)
—
—
(51)
—
(1)
(2)
(83)
(54)
—
(44)
(7)
(1)
(1)
—
—
—
(1)
—
—
—
—
—
—
—
—
—
—
—
(167)
(176)
(1,162)
(147)
(24)
(636)
(1,218)
(166)
(168)
(142)
(771)
(171)
(256)
(9)
(24)
(59)
(33)
(202)
—
(1)
(7)
(13)
(126)
(13)
(46)
(41)
(16)
(80)
(29)
(48)
(3)
(7)
(16)
(9)
(31)
—
—
(1)
(13)
(31)
(2)
605,585
53,813
8,442
324
668,164
183,592
126,209
314,591
194,186
25,684
62,631
19,087
25,868
22,165
17,729
8,425
2,974
6,928
314
4,233
2,928
1,736
729
1,769
314
390
150
8
92
69
53
—
29
213,843
151,310
334,148
203,409
30,480
69,873
19,820
605,585
53,813
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)
(37)
(43)
(42)
(97)
(29)
(41)
(1)
(11)
(10)
(9)
(31)
—
—
(6)
—
(44)
(11)
(753)
(366)
(313)
(179)
(99)
(73)
(37)
(98)
1 During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 86.
Total wholesale lending for loans and other credit-related commitments and financial guarantees by stage distribution1,2
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
Nominal amount
Stage 1
Stage 2
Stage 3
$m
264,550
117,413
381,963
—
$m
23,026
1,452
24,478
—
201,024
11,794
80,504
61,206
27,022
5,304
111,494
2,935
8,446
3,076
1,115
732
8,850
26
$m
791
6
797
—
614
442
102
89
18
62
1
381,963
24,478
797
POCI
$m
10
—
10
—
10
—
—
—
—
—
—
10
Total
$m
288,377
118,871
407,248
—
213,442
89,392
64,384
28,226
6,054
120,406
2,962
407,248
Allowance for ECL
Stage 1
Stage 2
Stage 3
$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)
1
Included in loans and other credit-related commitments and financial guarantees is $65bn relating to unsettled reverse repurchase agreements,
which once drawn are classified as ‘Reverse repurchase agreements – non-trading’.
2 During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 86.
106
HSBC Holdings plc Annual Report and Accounts 2019
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 guarantees
(Audited)
At 1 Jan 2019
Transfers of financial instruments
(31,493)
Net remeasurement of ECL arising
from transfer of stage
Net new and further lending/
repayments
Change in risk parameters – credit
quality
Changes to models used for ECL
calculation
Assets written off
Credit-related modifications that
resulted in derecognition
—
—
—
—
Foreign exchange and other
At 31 Dec 2019
7,035
925,652
ECL income statement change for
the period
Recoveries
Others
Total ECL income statement
change for the period
Non-credit impaired
Credit impaired
Stage 1
Stage 2
Stage 3
POCI
Total
Gross
carrying/
nominal
amount
$m
922,192
Allowance
for ECL
$m
(902)
(169)
Gross
carrying/
nominal
amount
$m
78,266
28,418
Allowance
for ECL
$m
(1,012)
276
Gross
carrying/
nominal
amount
$m
9,239
3,075
Allowance
for ECL
$m
(3,987)
(107)
—
223
—
(268)
—
(38)
Gross
carrying/
nominal
amount
Allowance
for ECL
Gross
carrying/
nominal
amount
Allowance
for ECL
$m
334
—
—
$m
$m
$m
(194) 1,010,031
(6,095)
—
—
—
—
—
(83)
27,918
(134)
(20,121)
167
(1,552)
369
137
(1)
6,382
401
102
—
—
—
13
—
—
—
—
(193)
(56)
—
—
1,606
(17)
(867)
88,169
(1,103)
191
(350)
—
—
(1,514)
—
—
—
(1,312)
1,312
(140)
(268)
107
9,289
125
(66)
(3,906)
(1,183)
—
14
345
(51)
—
140
—
7
—
—
(1,656)
(56)
(1,452)
1,452
(268)
8,762
125
(63)
(99) 1,023,455
(5,975)
(52)
(1,394)
47
(24)
(1,371)
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 $120m during the period from
$6,095m at 31 December 2018 to $5,975m at 31 December 2019.
This decrease was primarily driven by:
• $1,452m of assets written off;
These decreases were partly offset by increases of:
• $1,656m relating to underlying credit quality changes,
including the credit quality impact of financial instruments
transferring between stages;
• $83m relating to the net remeasurement impact of stage
transfers;
• $401m relating to volume movements, which included the ECL
• $56m changes to models used for ECL calculation; and
allowance associated with new originations, assets
derecognised and further lending/repayments; and
• $125m of credit-related modifications that resulted in
derecognition.
• foreign exchange and other movements of $63m.
The ECL charge for the period of $1,394m presented in the above
table consisted of $1,656m relating to underlying credit quality
changes, including the credit quality impact of financial
instruments transferring between stage and $83m relating to the
net remeasurement impact of stage transfers. This was partly
offset by $401m relating to underlying net book volume
movements and $56m in changes to models used for ECL
calculation.
HSBC Holdings plc Annual Report and Accounts 2019
107
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 guarantees1
(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
ECL income statement change for the
period
Recoveries
Others
Total ECL income statement change
for the period
Gross
carrying/
nominal
amount
$m
897,529
(4,477)
Allowance
for ECL
$m
(873)
(274)
Gross
carrying/
nominal
amount
$m
84,354
1,535
Gross
carrying/
nominal
amount
Allowance
for ECL
$m
$m
(1,249)
10,209
386
2,942
Allowance
for ECL
$m
(4,410)
(112)
—
262
—
(231)
—
(92)
Gross
carrying/
nominal
amount
$m
1,042
—
—
74,107
(271)
(13,709)
342
(2,414)
406
(587)
—
—
(44,967)
922,192
157
—
97
—
—
6,086
(902)
78,266
(1,012)
148
(190)
(301)
—
(1,041)
—
41
(1,182)
(316)
9,239
1,172
90
(3,987)
(727)
—
(1)
(120)
334
Allowance
for ECL
Gross
carrying/
nominal
amount
Allowance
for ECL
$m
(242)
$m
$m
993,134
(6,774)
—
—
42
(51)
1
56
—
—
—
(61)
57,397
519
—
(1,236)
(1,183)
(39,317)
1,173
284
(194)
1,010,031
(6,095)
(9)
(778)
118
(69)
(729)
1 During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount for 31 December 2018 only. For further
details, see page 86.
Wholesale lending – distribution of financial instruments to which the impairment requirements of IFRS 9 are applied 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 2019
57,340
35,838
69,427
53,046
145,450
106,313
82,053
12,036
12,319
3,919
67,541
6,003
31,496
5,455
74,143
51,355
86,685
55,379
9,307
24,860
7,713
231,064
218,694
202,708
Percentage of total credit quality
34.0%
32.1%
29.8%
By geography
Europe
of which: UK
Asia
of which: Hong Kong
MENA
North America
Latin America
At 31 Dec 2018
Percentage of total credit quality
60,145
39,840
62,098
46,396
143,864
100,437
82,854
10,393
10,952
3,730
229,084
34.3%
63,564
7,905
31,278
6,088
207,806
31.1%
79,466
56,974
86,065
55,357
9,173
24,708
8,300
207,712
31.1%
9,895
7,023
2,158
1,263
1,439
3,320
2,304
19,116
2.8%
7,752
5,164
1,977
837
1,186
2,621
1,286
14,822
2.2%
4,799
3,420
1,553
721
1,703
459
327
8,841
1.3%
4,382
2,936
1,805
797
1,823
314
416
8,740
1.3%
215,604
150,682
342,159
206,957
30,488
72,454
19,718
680,423
100.0%
213,843
151,310
334,148
203,409
30,480
69,873
19,820
668,164
100.0%
Net
$m
213,205
149,024
340,654
206,164
29,390
72,172
19,388
(2,399)
(1,658)
(1,505)
(793)
(1,098)
(282)
(330)
(5,614)
674,809
(2,595)
(1,782)
(1,376)
(601)
(1,170)
(245)
(305)
211,248
149,528
332,772
202,808
29,310
69,628
19,515
(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 credit quality classifications can be found on page 85.
108
HSBC Holdings plc Annual Report and Accounts 2019
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
Total
ECL
coverage
Mapped
external rating
%
$m
$m
$m
$m
$m
$m
$m
$m
$m
$m
%
472,253 59,599
8,315
332 540,499
(672)
(920)
(3,747)
(99)
(5,438)
1.0
0.000 to 0.053
44,234
18
0.054 to 0.169
92,861
1,013
0.170 to 0.740
178,662 11,808
0.741 to 1.927
105,708 17,829
1.928 to 4.914
46,423 16,423
4.915 to 8.860
3,323
8.861 to 15.000
15.001 to 99.999
100.000
795
247
—
7,592
3,067
1,849
—
—
—
—
—
—
—
—
— 44,252
— 93,874
(7)
(20)
— 190,470
(164)
—
(10)
(91)
— 123,537
(244)
(151)
— 62,846
(190)
(218)
15
3
—
10,930
3,865
2,096
8,629
(33)
(11)
(3)
—
(141)
(172)
(137)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(7)
(30)
(255)
(395)
(408)
(174)
(183)
(140)
— 8,315
314
— (3,747)
(99)
(3,846)
44.6
— AA- and above
—
0.1
0.3
0.6
1.6
4.7
6.7
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
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 2019
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
65,661
4,832
212
— 70,705
(42)
(28)
(90)
16,616
15,630
21,562
7,535
4,024
280
12
2
—
—
56
1,333
1,169
1,738
517
7
12
—
67,769
1,450
49,858
10,689
5,312
1,725
71
113
1
21
68
17
31
32
2
1
— 1,278
—
—
—
—
—
—
—
—
—
—
212
—
—
—
—
—
—
—
—
—
—
— 16,616
— 15,686
— 22,895
—
—
—
—
—
—
8,704
5,762
797
19
14
212
(1)
(4)
(12)
(12)
(12)
(1)
—
—
—
— 69,219
(14)
— 49,879
— 10,757
—
—
—
—
—
—
—
5,329
1,756
103
115
2
1,278
—
(2)
(7)
(2)
(1)
—
(2)
—
—
—
—
—
(4)
(7)
(11)
(4)
—
(2)
—
(2)
—
—
—
(1)
—
—
—
(1)
—
—
—
—
—
—
—
—
—
(90)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(160)
0.2
(1)
(4)
(16)
(19)
(23)
(5)
—
(2)
(90)
(16)
(2)
(7)
(2)
(2)
—
(2)
—
(1)
—
— AA- and above
A+ to A-
BBB+ to BBB-
BB+ to BB-
BB- to B
B-
CCC+
CCC to C
D
—
0.1
0.2
0.4
0.6
—
14.3
42.5
—
— AA- and above
0.1
A+ to A-
— BBB+ to BBB-
0.1
—
1.7
—
0.1
—
0.8
BB+ to BB-
BB- to B
B-
CCC+
CCC to C
D
605,683 65,881
8,527
332 680,423
(728)
(950)
(3,837)
(99)
(5,614)
HSBC Holdings plc Annual Report and Accounts 2019
109
Financial review Report of the Directors | Risk
Wholesale lending – credit risk profile by obligor grade for loans and advances at amortised cost1 (continued)
Gross carrying amount
Allowance for ECL
Basel one-year PD
range
Stage
1
Stage
2
Stage
3
POCI
%
$m
$m
$m
$m
Total
$m
Stage
1
Stage
2
Stage
3
POCI
$m
$m
$m
$m
Total
$m
474,700
51,341
8,212
324 534,577
(698)
(812)
(3,848)
(194)
(5,552)
0.000 to 0.053
0.054 to 0.169
45,401
93,266
0.170 to 0.740 172,496
67
1,653
9,487
0.741 to 1.927 111,949
14,352
1.928 to 4.914
46,396
16,661
4.915 to 8.860
8.861 to 15.000
15.001 to 99.999
100.000
3,662
1,228
302
—
4,544
2,882
1,695
—
—
—
—
—
—
—
—
— 45,468
— 94,919
— 181,983
— 126,301
— 63,057
(4)
(17)
(162)
(231)
(209)
22
4
—
8,228
4,114
1,997
8,510
(2)
(4)
(85)
(114)
(252)
(103)
(147)
(105)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(6)
(21)
(247)
(345)
(461)
(144)
(169)
(117)
— 8,212
298
— (3,848)
(194)
(4,042)
47.5
59,012
2,165
230
— 61,407
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
13,256
15,172
17,950
7,521
4,882
61
169
1
—
71,873
47,680
12,519
7,250
4,032
381
8
1
2
—
—
20
501
798
606
133
23
84
—
307
32
18
121
118
18
—
—
—
—
—
—
—
—
—
—
—
—
230
—
—
—
—
—
—
—
—
—
—
— 13,256
— 15,192
— 18,451
—
—
—
—
—
—
8,319
5,488
194
192
85
230
— 72,180
— 47,712
— 12,537
—
—
—
—
—
—
—
7,371
4,150
399
8
1
2
—
(41)
(22)
(12)
—
(44)
(1)
(2)
(13)
(10)
(14)
—
(4)
—
—
(11)
(3)
(2)
(3)
(3)
—
—
—
—
—
(31)
(51)
—
—
(1)
(2)
(5)
(2)
(1)
(20)
—
(2)
—
—
(1)
(1)
—
—
—
—
—
—
—
—
—
—
—
—
—
(51)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(126)
(1)
(2)
(14)
(12)
(19)
(2)
(5)
(20)
(51)
(13)
(3)
(2)
(4)
(4)
—
—
—
—
—
ECL
coverage
Mapped external
rating
%
1.0
—
—
0.1
0.3
0.7
1.8
4.1
5.9
0.2
—
—
0.1
0.1
0.3
1.0
2.6
23.5
22.2
—
—
—
0.1
0.1
—
—
—
—
—
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 31 Dec 2018
605,585
53,813
8,442
324 668,164
(753)
(845)
(3,899)
(194)
(5,691)
1 During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 86.
110
HSBC Holdings plc Annual Report and Accounts 2019
Commercial real estate
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.
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
larger, better capitalised developers involved in residential
construction or assets supporting economic expansion.
Commercial real estate lending grew $7.2bn, including foreign
exchange movements, mainly in Hong Kong and, to a lesser
extent, within Canada.
Commercial real estate lending
Gross loans and advances
Stage 1
Stage 2
Stage 3
POCI
Europe
$m
25,017
3,988
1,115
1
Asia
$m
76,832
2,673
21
—
At 31 Dec 2019
30,121
79,526
– of which: renegotiated loans
Allowance for ECL
788
(372)
—
(78)
Commercial real estate lending1 (continued)
Gross loans and advances
Stage 1
Stage 2
Stage 3
POCI
At 31 Dec 2018
– of which: renegotiated loans
Allowance for ECL
Europe
$m
26,265
2,406
1,022
—
29,693
944
(364)
Asia
$m
70,769
3,176
16
—
73,961
1
(59)
18
208
—
1,733
195
(170)
MENA
$m
1,607
120
209
—
1,936
186
(171)
MENA
$m
North
America
$m
Latin
America
$m
Total
$m
UK
$m
Hong Kong
$m
Of which:
1,507
10,938
1,653
115,947
508
33
—
41
27
—
7,228
1,404
1
17,953
2,953
948
—
60,632
1,696
17
—
11,479
1,721
124,580
21,854
62,345
—
(17)
—
(7)
983
(644)
782
(305)
—
(40)
North
America
$m
Latin
America
$m
Total
$m
UK
$m
Hong Kong
$m
Of which:
9,129
677
43
—
1,796
109,566
13
118
14
6,392
1,408
14
19,624
1,809
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)
1 During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 86.
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 2019
On demand, overdrafts or revolving
< 1 year
1–2 years
2–5 years
> 5 years
At 31 Dec 2018
Europe
$m
13,808
6,197
7,797
2,319
30,121
13,790
5,850
7,257
2,796
29,693
Asia
$m
MENA
$m
North
America
Latin
America
$m
$m
21,625
17,638
35,557
4,706
79,526
22,100
13,174
32,894
5,793
73,961
816
142
509
266
5,905
1,548
3,511
515
1,733
11,479
896
305
417
318
1,936
4,942
1,949
2,152
806
9,849
135
107
1,332
147
1,721
427
117
1,053
344
1,941
Total
$m
42,289
25,632
48,706
7,953
11,775
5,274
4,347
458
124,580
21,854
42,155
21,395
43,773
10,057
11,305
5,153
5,232
416
117,380
22,106
16,937
13,776
27,860
3,772
62,345
18,094
9,120
26,061
4,641
57,916
Of which:
UK
$m
Hong Kong
$m
HSBC Holdings plc Annual Report and Accounts 2019
111
Financial review 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 244.
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.
Report of the Directors | Risk
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. Corporates would normally
provide guarantees as part of a parent/subsidiary relationship and
span a number of credit grades. The export credit agencies 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.
112
HSBC Holdings plc Annual Report and Accounts 2019
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
US
Gross carrying/
nominal amount
ECL
coverage
Gross carrying/
nominal amount
ECL
coverage
Gross carrying/
nominal amount
ECL
coverage
Gross carrying/
nominal amount
ECL
coverage
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 (D):
– collateral value on D
Total
At 31 Dec 2019
$m
61,820
89,319
46,318
32,583
5,018
5,400
6,563
3,602
157,702
3,040
5,184
2,167
1,986
333
698
500
203
8,724
315
557
87
90
89
291
773
380
%
0.1
0.1
0.1
0.1
0.1
0.2
0.2
0.1
1.2
1.1
1.1
0.9
2.1
1.1
0.6
1.1
57.8
14.9
16.1
7.8
15.7
16.5
41.5
1,645
35.6
—
1
1
—
—
—
—
—
1
168,072
—
—
—
—
—
—
—
—
0.5
$m
7,266
18,535
7,018
9,349
1,649
519
682
535
26,483
1,857
1,419
615
712
16
76
296
56
3,572
66
404
42
69
72
221
507
166
977
—
—
—
—
—
—
—
—
—
31,032
%
0.1
—
0.1
—
0.1
—
—
0.1
1.2
1.2
1.8
0.6
6.3
1.3
0.3
1.1
92.4
12.9
7.1
4.3
4.2
19.5
27.8
26.0
—
—
—
—
—
—
—
—
1.0
$m
32,478
41,798
28,776
10,815
1,436
771
1,627
1,142
75,903
440
1,501
955
497
29
20
42
25
1,983
—
17
6
10
—
1
—
—
17
—
—
—
—
—
—
—
—
—
77,903
%
—
—
—
0.1
0.1
—
0.1
—
0.2
0.6
0.3
1.0
—
—
—
0.5
—
11.8
16.7
—
—
—
—
11.8
—
—
—
—
—
—
—
—
0.1
$m
541
4,722
1,703
2,854
96
69
—
—
5,263
—
354
62
292
—
—
—
—
354
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,617
%
—
—
0.1
—
—
—
—
—
—
1.4
—
1.4
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.1
HSBC Holdings plc Annual Report and Accounts 2019
113
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)1 (continued)
Of which:
Hong Kong
Gross
carrying/
nominal
amount
$m
US
Gross
carrying/
nominal
amount
ECL
coverage
ECL
coverage
%
$m
%
Total
UK
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 (D):
– collateral value on D
Total
At 31 Dec 2018
Gross
carrying/
nominal
amount
$m
61,486
86,960
46,650
29,384
5,167
5,759
6,101
3,735
154,547
2,886
5,309
2,372
1,667
363
907
289
156
8,484
338
606
412
88
38
68
474
321
1,418
—
15
13
2
—
—
—
—
15
164,464
ECL
coverage
%
0.1
0.1
0.1
0.1
0.1
0.2
0.1
0.1
0.9
1.1
0.9
0.7
5.0
1.0
1.4
1.1
57.1
12.7
10.0
27.3
2.6
16.2
56.5
37.9
—
53.3
61.5
—
—
—
—
53.3
0.5
Gross
carrying/
nominal
amount
$m
9,920
17,196
7,673
7,937
1,038
548
487
285
27,603
1,083
1,352
727
567
34
24
52
20
ECL
coverage
%
0.2
0.1
0.1
0.1
—
0.2
0.2
0.1
1.0
2.6
1.9
0.7
44.1
8.3
5.8
31,224
39,174
25,870
10,452
1,168
1,684
2,130
1,401
72,528
1,140
1,576
795
505
29
247
15
5
2,487
2.0
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
—
—
—
0.1
0.1
0.1
—
—
0.2
0.4
0.4
0.4
—
—
—
0.3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,862
3,463
787
519
93
—
—
4,862
—
439
303
7
129
—
—
—
439
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,301
—
—
—
—
—
—
—
—
—
0.5
0.7
—
—
—
—
0.5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.1
1 During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 86.
114
HSBC Holdings plc Annual Report and Accounts 2019
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
%
Rated CRR/PD1 to 7
Not collateralised
Fully collateralised
Partially collateralised (A):
– collateral value on A
Total
Rated CRR/PD8
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 2019
Rated CRR/PD1 to 7
Not collateralised
Fully collateralised
Partially collateralised (A):
– collateral value on A
Total
Rated CRR/PD8
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
64,850
94,299
7,052
3,796
166,201
10
204
47
120
25
12
11
9
225
315
557
87
90
89
291
774
380
1,646
168,072
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
50.0
4.9
8.5
3.3
4.0
8.3
—
6.7
57.8
14.9
16.1
7.8
15.7
16.5
41.6
35.7
0.5
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
9,119
19,833
971
586
29,923
4
121
27
68
15
11
7
5
132
66
404
42
69
72
221
507
166
977
31,032
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
0.3
0.1
0.1
0.1
100.0
5.0
14.8
1.5
6.7
—
—
7.6
92.4
12.9
7.1
4.3
4.2
19.5
27.8
26.0
1.0
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
32,918
43,299
1,669
1,167
77,886
—
—
—
—
—
—
—
—
—
—
17
6
10
—
1
—
—
17
77,903
32,364
40,747
2,145
1,406
75,256
—
3
3
—
—
—
—
—
3
—
12
2
10
—
—
—
—
12
75,271
—
0.1
0.1
—
—
—
—
—
—
—
—
—
—
11.8
16.7
—
—
100.0
—
11.8
0.1
—
0.1
—
—
—
33.3
33.3
—
—
—
—
33.3
—
—
—
—
—
—
—
—
—
541
5,021
—
—
5,562
—
55
13
42
—
—
—
—
55
—
—
—
—
—
—
—
—
—
5,617
—
5,282
—
—
5,282
—
19
19
—
—
—
—
—
19
—
—
—
—
—
—
—
—
—
5,301
—
0.1
—
0.1
—
3.6
—
4.8
—
—
—
3.6
—
—
—
—
—
—
—
—
0.1
—
0.1
—
0.1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.1
HSBC Holdings plc Annual Report and Accounts 2019
115
Financial review Report of the Directors | Risk
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.
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)
Total
UK
Of which:
Hong Kong
Gross
carrying/
nominal
amount
$m
680,079
128,290
48,012
37,891
13,072
29,315
52,890
25,824
ECL
coverage
Gross
carrying/
nominal
amount
ECL
coverage
Gross
carrying/
nominal
amount
ECL
coverage
%
0.1
0.1
0.1
0.1
0.1
—
0.1
$m
%
$m
132,197
40,172
13,831
11,903
3,399
11,039
8,122
3,809
0.2
0.1
0.1
0.2
0.2
—
0.1
116,536
32,818
11,009
12,783
4,697
4,329
20,162
9,616
%
—
0.1
0.1
0.1
0.1
0.1
0.1
861,259
0.1
180,491
0.2
169,516
—
129,370
61,540
21,126
7,081
8,482
2,684
2,879
8,463
3,669
1.2
0.8
0.9
0.9
0.9
0.6
0.8
13,318
3,139
1,208
1,111
282
538
1,516
370
91,129
1.1
17,973
49.2
22.4
35.2
24.4
23.6
9.1
44.8
1,899
494
103
198
101
92
369
192
2.2
1.8
2.0
1.8
2.1
1.3
1.4
2.1
33.0
12.6
17.5
8.6
20.8
7.6
20.1
13,308
12,934
3,845
5,580
1,646
1,863
3,768
1,801
0.7
0.6
0.6
0.7
0.5
0.2
0.4
10,129
868
303
465
47
53
124
53
30,010
0.6
11,121
504
86
9
21
40
16
87
34
83.5
12.8
33.3
4.8
7.5
25.0
48.3
43.2
2,762
27.6
677
70.0
32.7
3.6
50.0
—
—
—
33.0
30.5
0.5
32
—
—
—
—
—
57
19
89
201,315
96.9
—
—
—
—
—
1.8
36.0
0.7
7
10
—
10
—
—
31
30
48
200,251
—
—
—
—
—
—
90.3
58.3
0.4
US
Gross
carrying/
nominal
amount
ECL
coverage
$m
%
112,911
14,830
5,326
3,717
130
5,657
1,629
1,337
2
214
2
—
—
212
92
65
308
—
—
—
—
—
—
—
—
—
140,799
—
—
—
0.1
—
—
—
—
0.9
0.8
0.3
1.1
2.1
—
1.6
0.9
50.0
—
—
—
—
—
44.6
13.6
—
—
—
—
—
—
—
—
0.1
4,768
1,479
335
352
373
419
1,367
693
7,614
223
28
2
26
—
—
97
57
348
960,350
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 (D):
– collateral value on D
Total
At 31 Dec 2019
116
HSBC Holdings plc Annual Report and Accounts 2019
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)1,2 (continued)
(Audited)
Total
UK
Of which:
Hong Kong
Gross
carrying/
nominal
amount ECL coverage
Gross
carrying/
nominal
amount ECL coverage
Gross
carrying/
nominal
amount ECL coverage
$m
%
$m
US
Gross
carrying/
nominal
amount ECL coverage
$m
%
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 (D):
– collateral value on D
Total
At 31 Dec 2018
$m
673,589
127,443
39,509
49,518
12,627
25,789
54,412
23,857
%
0.1
0.1
0.1
0.1
0.1
0.1
0.1
137,269
30,492
8,519
9,275
3,201
9,497
6,668
3,250
855,444
0.1
174,429
61,464
13,633
5,109
4,950
1,399
2,175
6,623
2,324
81,720
5,240
1,460
361
328
427
344
1,147
580
7,847
232
37
1
—
22
14
49
38
318
945,329
1.1
1.2
1.1
1.3
1.8
0.8
0.7
1.1
50.2
22.9
36.0
9.8
24.6
19.8
43.1
21,035
5,645
2,047
2,154
496
948
1,793
339
28,473
1,882
517
133
179
131
74
228
132
44.1
2,627
66.8
2.7
—
—
—
—
63.3
59.2
0.6
—
—
—
—
—
—
8
3
8
205,537
122,259
36,730
12,032
14,264
4,567
5,867
21,942
10,263
%
—
0.1
0.1
0.1
0.1
0.1
—
116,001
11,229
4,686
2,424
318
3,801
1,875
912
180,931
—
129,105
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
0.4
0.5
0.4
0.6
0.5
0.4
0.3
0.4
81.2
—
—
—
—
—
15.2
52.7
20.0
—
—
—
—
—
85.7
50.7
0.3
10,085
1,131
342
467
85
237
63
16
11,279
1
130
4
—
—
126
71
55
202
—
—
—
—
—
—
—
—
—
140,586
—
0.1
—
—
—
—
—
—
1.2
9.3
0.6
0.6
1.2
1.7
1.6
1.1
100.0
13.8
—
—
—
—
31.0
10.9
—
—
—
—
—
—
—
—
0.1
0.2
0.1
0.2
0.2
0.2
—
0.2
0.2
1.7
1.5
1.7
1.8
1.2
0.4
1.2
1.6
38.8
6.2
10.5
1.7
13.7
8.1
21.1
31.2
—
—
—
—
—
—
—
—
0.8
1 During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 86.
2 The 2018 comparative amounts have been re-presented to reclassify amounts from fully collateralised to not collateralised and to include not
collateralised amounts previously excluded. The impact of these re-presentations is to increase stage 1 not collateralised amounts by $130bn and
decrease fully collateralised amounts by $105bn; increase stage 2 not collateralised amounts by $14bn and decrease fully collateralised amounts
by $12bn; and to increase stage 3 not collateralised amounts by $0.3bn and decrease fully collateralised amounts by $0.1bn.
HSBC Holdings plc Annual Report and Accounts 2019
117
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
(Audited)
Total
UK
Of which:
Hong Kong
ECL
coverage
Gross
carrying/
nominal
amount
ECL
coverage
Gross
carrying/
nominal
amount
ECL
coverage
US
Gross
carrying/
nominal
amount
ECL
coverage
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 2019
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
Gross
carrying/
nominal
amount
$m
2,499
694
246
189
97
162
279
152
3,472
4,991
1,507
338
377
373
419
1,464
750
7,962
11,434
1,243
1,895
693
292
45
865
212
84
3,350
5,199
1,719
608
503
405
203
974
466
7,892
11,242
%
5.8
3.3
2.8
4.2
2.1
3.7
4.7
5.2
48.5
22.0
35.2
22.8
23.6
9.1
44.0
42.7
31.3
5.4
3.6
4.2
2.7
15.6
2.8
2.8
4.2
53.2
24.8
36.0
8.7
24.2
31.5
46.1
46.1
33.7
$m
285
382
120
93
42
127
53
34
720
1,930
494
103
198
101
92
427
211
2,851
3,571
565
74
21
49
2
2
23
14
662
1,775
513
181
172
86
74
187
116
2,475
3,137
%
$m
%
$m
13.0
2.6
1.7
3.2
2.4
3.9
5.7
6.9
34.1
12.6
17.5
8.6
20.8
7.6
17.6
27.9
23.7
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
10
—
—
—
—
—
73
6
83
510
96
10
30
40
16
119
64
725
808
94
11
—
11
—
—
153
49
258
503
155
11
62
32
50
193
73
851
1,109
70.0
—
—
—
—
—
2.7
1,645
166
85
18
45
18
66
39
12.0
1,877
82.5
11.5
—
3.3
7.5
—
58.8
69.2
63.4
7.4
9.1
—
9.1
—
—
1.3
3.9
78.1
—
—
—
—
—
28.0
52.6
41.3
2
214
2
—
—
212
92
65
308
2,185
191
1,621
594
169
20
838
—
—
1,812
6
188
77
103
—
8
5
2
199
2,011
%
3.3
1.2
1.2
—
2.2
—
3.0
3.0
50.0
—
—
—
—
—
44.6
13.6
4.5
5.2
3.1
4.2
2.4
—
—
—
3.4
16.7
9.6
22.1
1.0
—
—
60.0
11.1
4.2
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.
118
HSBC Holdings plc Annual Report and Accounts 2019
• 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 this 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 282 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.
reference to a market factor such as an interest rate, exchange
rate or asset price.
For further information on these arrangements, see Note 32 on the financial
statements.
Derivatives
We participate 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
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 valuation
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 or non-central counterparty.
Notional contract amounts and fair values of derivatives
Total OTC derivatives
2019
Notional
amount
$m
Fair value
Assets
Liabilities
$m
$m
Notional
amount
$m
26,244,531
282,778
279,101
31,982,343
– total OTC derivatives cleared by central counterparties
12,563,343
45,140
46,351
17,939,035
– total OTC derivatives not cleared by central counterparties
13,681,188
237,638
232,750
14,043,308
Total exchange traded derivatives
Gross
Offset
At 31 Dec
1,583,590
1,956
2,135
2,030,580
27,828,121
284,734
281,236
34,012,923
(41,739)
(41,739)
242,995
239,497
2018
Fair value
Assets
Liabilities
$m
255,190
52,424
202,766
2,346
257,536
(49,711)
207,825
$m
251,001
52,845
198,156
4,545
255,546
(49,711)
205,835
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 304 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
that 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 2019 to 31 December 2019 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.
At 31 December 2019, total personal lending for loans and
advances to customers of $434bn increased by $40bn compared
with 31 December 2018. This increase included favourable
exchange movements of $6bn. Excluding foreign exchange
movements, there was growth of $34bn, primarily driven by $18bn
in Asia and $14bn in Europe. The allowance for ECL attributable to
personal lending, excluding off-balance sheet loan commitments
and guarantees, and foreign exchange movements, increased
$0.2bn.
Excluding foreign exchange movements, total personal lending
was primarily driven by mortgage growth, which grew by $23bn.
Mortgages grew in Asia by $12bn, notably $7bn in Hong Kong and
$3bn in Australia. In Europe, mortgages grew by $10bn, notably
$9bn in the UK, 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 49%, compared with an estimated 41% for the
overall mortgage portfolio. The average LTV ratio on new lending
in the UK was 67%, compared with an estimated 51% for the
overall mortgage portfolio.
Excluding foreign exchange movements, other personal lending
balances at 31 December 2019 increased by $11bn compared
with 31 December 2018. The increase was attributable to loans
and overdrafts, which grew by $4bn in Hong Kong and $4bn in
Europe, notably $2bn in France and $1bn in the UK. Credit cards
increased by $1bn in the US, China and to a lesser extent from
Mexico.
HSBC Holdings plc Annual Report and Accounts 2019
119
Financial review Report of the Directors | Risk
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 2019
By geography
Europe
– of which: UK
Asia
– of which: Hong Kong
MENA
North America
Latin America
At 31 Dec 2019
Gross carrying amount
Stage 1
Stage 2
Stage 3
$m
$m
$m
Total
$m
312,031
31,201
14,222
101,638
77,031
22,285
750
1,572
7,077
1,602
796
8,674
4,575
3,959
84
56
3,070
376
514
1,781
1,193
524
55
9
322,178
33,179
15,532
112,093
82,799
26,768
889
1,637
Allowance for ECL
Stage 1
Stage 2
Stage 3
$m
(39)
(6)
(3)
(544)
(229)
(310)
(1)
(4)
$m
(68)
(15)
(3)
(1,268)
(451)
(801)
(6)
(10)
$m
(422)
(91)
(3)
(793)
(491)
(284)
(10)
(8)
Total
$m
(529)
(112)
(9)
(2,605)
(1,171)
(1,395)
(17)
(22)
413,669
15,751
4,851
434,271
(583)
(1,336)
(1,215)
(3,134)
186,561
153,313
173,523
117,013
5,671
41,148
6,766
6,854
5,455
5,855
2,751
247
1,930
865
413,669
15,751
2,335
1,612
717
189
299
1,238
262
4,851
195,750
160,380
180,095
119,953
6,217
44,316
7,893
434,271
(112)
(104)
(223)
(90)
(50)
(56)
(142)
(583)
(538)
(513)
(339)
(220)
(58)
(119)
(282)
(578)
(370)
(170)
(44)
(189)
(141)
(137)
(1,228)
(987)
(732)
(354)
(297)
(316)
(561)
(1,336)
(1,215)
(3,134)
Total personal lending for loans and other credit-related commitments and financial guarantees by stage distribution
Nominal amount
Allowance for ECL
Stage 1
Stage 2
Stage 3
Total
Europe
– of which: UK
Asia
– of which: Hong Kong
MENA
North America
Latin America
At 31 Dec 2019
Stage 1
Stage 2
Stage 3
$m
51,575
49,322
149,336
115,025
3,150
13,919
4,312
$m
604
493
682
27
46
256
43
$m
110
105
9
3
53
20
3
Total
$m
52,289
49,920
150,027
115,055
3,249
14,195
4,358
222,292
1,631
195
224,118
(14)
$m
(10)
(8)
—
—
—
(1)
(3)
$m
$m
(2)
(1)
—
—
—
—
—
(2)
—
—
—
—
—
—
—
—
Total personal lending for loans and advances to customers at amortised cost by stage distribution (continued)
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
Allowance for ECL
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
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)
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)
$m
(12)
(9)
—
—
—
(1)
(3)
(16)
Total
$m
(535)
(108)
(12)
(2,412)
(1,114)
(1,261)
(24)
(13)
120
HSBC Holdings plc Annual Report and Accounts 2019
Total personal lending for loans and other credit-related commitments and financial guarantees by stage distribution (continued)
Europe
– of which: UK
Asia
– of which: Hong Kong
MENA
North America
Latin America
At 31 Dec 2018
Stage 1
$m
52,719
50,195
131,333
102,156
3,264
14,469
4,318
Nominal amount
Stage 2
Stage 3
$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
206,103
1,763
412
208,278
Allowance for ECL
Stage 1
$m
Stage 2
$m
Stage 3
$m
(7)
(5)
—
—
—
(1)
(5)
(13)
—
—
—
—
—
(1)
—
(1)
—
—
—
—
—
—
—
—
Total
$m
(7)
(5)
—
—
—
(2)
(5)
(14)
Exposure to UK interest-only mortgage loans
The following information is presented for HSBC branded UK
interest-only mortgage loans with balances of $14.6bn. This
excludes offset mortgages in the first direct brand, Private Bank
mortgages, endowment mortgages and other products.
and 99% of mortgages had an LTV ratio of 75% or less.
Of the interest-only mortgages that expired in 2017, 86% were
repaid within 12 months of expiry with a total of 95% being repaid
within 24 months of expiry. For interest-only mortgages expiring
during 2018, 91% were fully repaid within 12 months of expiry.
At the end of 2019, the average LTV ratio in the portfolio was 42%
The profile of maturing UK interest-only loans is as follows:
UK interest-only mortgage loans
Expired interest-only mortgage loans
Interest-only mortgage loans by maturity
– 2020
– 2021
– 2022
– 2023
– 2024–2028
– Post 2028
At 31 Dec 2019
$m
158
306
435
430
556
3,101
9,587
14,573
Personal lending – reconciliation of changes in gross carrying/nominal amount and allowances for loans and advances to
customers including loan commitments and financial guarantees
(Audited)
Non-credit impaired
Credit impaired
Stage 1
Stage 2
Stage 3
Total
At 1 Jan 2019
Transfers of financial instruments
Net remeasurement of ECL arising from transfer of stage
Net new and further lending/repayments
Change in risk parameters – credit quality
Changes to models used for ECL calculation
Assets written off
Foreign exchange and other
At 31 Dec 2019
Gross
carrying/
nominal
amount
$m
580,784
(4,751)
—
50,946
—
—
—
8,982
635,961
Gross
carrying/
nominal
amount
$m
16,838
2,645
—
Allowance
for ECL
$m
(547)
(374)
446
3
(2,348)
(100)
(6)
—
(19)
—
—
—
247
Allowance
for ECL
Gross
carrying/
nominal
amount
Allowance
for ECL
Gross
carrying/
nominal
amount
Allowance
for ECL
$m
$m
$m
(1,148)
602,615
(2,961)
$m
(1,266)
858
(408)
453
(1,015)
60
—
(20)
$m
4,993
2,106
—
(758)
—
—
(1,345)
50
(484)
(76)
281
(1,190)
14
1,345
43
—
—
47,840
—
—
(1,345)
9,279
(597)
17,382
(1,338)
5,046
(1,215)
658,389
ECL income statement change for the period
343
(910)
(971)
Recoveries
Other
Total ECL income statement change for the period
—
(38)
737
(2,305)
68
1,345
4
(3,150)
(1,538)
314
4
(1,220)
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 increased $189m during the period from
$2,961m at 31 December 2018 to $3,150m at 31 December 2019.
This increase was primarily driven by:
These were offset by:
• $2,305m relating to underlying credit quality changes,
including the credit quality impact of financial instruments
transferring between stages; and
• $38m relating to the net remeasurement impact of stage
• $737m relating to volume movements, which included the ECL
transfers.
allowance associated with new originations, assets
derecognised and further lending/repayments;
• $68m due to changes to models used for ECL calculation;
• $1,345m of assets written off; and
• foreign exchange and other movements of $4m.
The ECL charge for the period of $1,538m presented in the above
table consisted of $2,305m relating to underlying credit quality
changes, including the credit quality impact of financial
instruments transferring between stage and $38m relating to the
net remeasurement impact of stage transfers. This was partly
offset by $737m relating to underlying net book volume
movements and $68m in changes to models used for ECL
calculation.
HSBC Holdings plc Annual Report and Accounts 2019
121
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 guarantees
(Audited)
Non-credit impaired
Stage 1
Stage 2
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
Allowance
for ECL
$m
(1,157)
799
(374)
222
(786)
—
30
(1,266)
(938)
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 income statement change for the period
Recoveries
Others
Total ECL income statement change for the period
Credit impaired
Stage 3
Gross
carrying/
nominal
amount
Allowance
for ECL
Total
Gross
carrying/
nominal
amount
Allowance
for ECL
$m
$m
$m
(1,312)
571,880
(3,065)
$m
4,874
2,223
—
(488)
—
(1,386)
(230)
4,993
(388)
(11)
327
(1,197)
1,380
53
—
—
49,820
—
(1,386)
(17,699)
(1,148)
602,615
(881)
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 range1
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
First lien residential
mortgages
%
$m
$m
$m
$m
312,031
7,077
3,070
322,178
$m
$m
(68)
(422)
(529)
—
(27)
308
(1,717)
1,380
160
(2,961)
(1,436)
290
(18)
(1,164)
ECL
coverage
%
0.2
—
—
0.1
0.2
1.5
4.2
2.3
0.3
0.4
0.5
3.3
9.8
31.7
44.5
0.7
$m
(39)
(16)
(4)
(13)
(5)
(1)
—
—
(544)
(120)
(38)
(110)
(144)
(132)
—
—
—
—
(3)
(7)
(23)
(35)
—
(1,268)
—
(26)
(13)
(329)
(440)
(460)
—
—
—
—
—
—
—
(422)
(793)
—
—
—
—
—
—
(793)
Total
$m
(16)
(4)
(16)
(12)
(24)
(35)
(2,605)
(120)
(64)
(123)
(473)
(572)
(460)
(793)
(422)
13.7
(41)
(15)
(4)
(14)
(7)
(1)
—
—
(493)
(95)
(34)
(122)
(131)
(111)
—
—
(62)
—
—
(2)
(6)
(19)
(35)
—
(1,203)
—
—
(26)
(285)
(465)
(427)
—
(432)
(535)
0.2
—
—
—
—
—
—
(15)
(4)
(16)
(13)
(20)
(35)
(432)
(716)
(432)
(2,412)
—
—
—
—
—
—
(716)
(1,148)
(95)
(34)
(148)
(416)
(576)
(427)
(716)
(2,947)
—
—
0.1
0.3
1.1
3.4
14.7
2.4
0.2
0.3
0.6
2.9
9.3
36.6
43.7
0.7
394,337
(534)
(1,265)
434,271
(583)
(1,336)
(1,215)
(3,134)
284,103
6,286
2,944
293,333
– Band 1
– Band 2
– Band 3
– Band 4
– Band 5
– Band 6
– Band 7
0.000 to 0.250
268,490
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
22,293
17,247
3,796
198
7
—
284
301
2,313
1,970
1,383
826
—
Other personal lending
101,638
8,674
– Band 1
– Band 2
– Band 3
– Band 4
– Band 5
– Band 6
– Band 7
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
46,533
16,435
25,160
10,951
2,421
138
—
60
65
317
3,483
3,434
1,315
—
At 31 Dec 2019
413,669
15,751
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
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
1 12-month point in time adjusted for multiple economic scenarios.
122
HSBC Holdings plc Annual Report and Accounts 2019
— 268,774
—
—
—
—
—
3,070
1,781
—
—
—
—
—
—
1,781
4,851
—
—
—
—
—
—
2,944
1,637
—
—
—
—
—
—
1,637
4,581
22,594
19,560
5,766
1,581
833
3,070
112,093
46,593
16,500
25,477
14,434
5,855
1,453
1,781
247,354
15,536
19,868
4,870
1,746
1,015
2,944
101,004
41,086
12,640
23,896
14,359
6,219
1,167
1,637
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
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.
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
%
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 2019
326,510
168,923
55,287
44,208
33,049
18,157
6,886
1,384
843
195
346
1,232
327,894
7,087
3,781
923
909
894
425
155
76
45
10
21
69
7,163
2,725
1,337
410
358
309
178
133
371
97
62
212
305
3,096
338,153
—
—
—
—
—
—
—
0.1
0.1
0.2
0.1
143,772
70,315
21,898
19,903
17,649
11,127
2,880
326
89
48
189
232
—
144,098
0.9
0.5
1.1
1.2
1.1
1.6
4.4
7.2
5.4
11.1
9.0
1.0
9.0
7.1
7.0
7.9
13.4
13.8
21.8
47.6
36.4
37.8
55.6
13.7
0.2
1,941
1,146
233
262
231
36
33
23
20
1
2
20
1,964
1,177
711
159
136
100
47
24
25
11
6
8
24
1,202
147,264
—
—
—
—
—
—
—
—
—
—
—
—
1.0
0.7
1.5
1.2
1.0
2.9
1.8
1.8
1.5
4.8
3.0
1.0
9.9
7.8
10.0
10.6
18.9
12.3
26.3
27.3
19.1
22.7
42.0
10.3
0.1
86,049
57,043
13,169
6,478
3,195
3,685
2,479
284
281
1
2
279
86,333
1,116
892
95
59
32
25
13
1
1
—
—
1
1,117
44
39
3
—
1
1
—
—
—
—
—
—
44
87,494
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.5
0.5
0.2
—
—
—
—
—
—
—
—
0.5
—
16,079
8,170
3,330
2,702
1,610
198
69
5
3
1
1
5
16,084
1,074
680
184
130
53
17
10
4
2
1
1
3
1,078
695
279
126
125
93
51
21
13
7
2
4
13
708
17,870
—
—
—
—
—
—
—
—
—
—
—
—
0.3
0.2
0.3
0.6
1.3
2.7
1.1
—
—
—
—
0.3
0.7
0.7
0.8
0.8
1.1
—
—
0.2
0.3
0.3
—
0.7
0.1
HSBC Holdings plc Annual Report and Accounts 2019
123
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
(continued)
(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
%
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
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
2,557
12.3
1,023
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
—
—
—
—
—
—
—
—
—
—
—
—
1.3
0.9
3.0
2.2
3.4
3.1
1.5
0.2
0.1
4.3
0.6
1.3
10.9
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
124
HSBC Holdings plc Annual Report and Accounts 2019
Supplementary information
Wholesale lending – loans and advances to customers at amortised cost by country/territory
Gross carrying amount
Allowance for ECL
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 2019
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
Corporate
and
commercial
Of which:
real estate1
Non-bank
financial
institutions
$m
175,215
126,760
27,885
9,771
1,535
9,264
267,709
168,380
11,428
6,657
4,346
26,594
6,914
19,986
6,384
17,020
23,447
1,889
13,697
7,861
59,680
34,477
24,427
776
14,448
12,352
2,096
$m
26,587
18,941
5,643
390
554
1,059
85,556
67,856
1,993
1,565
63
5,304
1,597
5,235
28
1,915
1,816
35
1,695
86
15,128
8,282
6,556
290
1,665
1,664
1
$m
26,497
18,545
4,899
1,743
406
904
32,157
19,776
1,743
2,622
353
5,911
230
618
82
822
288
16
122
150
10,078
8,975
979
124
1,685
1,625
60
Total
$m
201,712
145,305
32,784
11,514
1,941
10,168
299,866
188,156
13,171
9,279
4,699
32,505
7,144
20,604
6,466
17,842
23,735
1,905
13,819
8,011
69,758
43,452
25,406
900
16,133
13,977
2,156
Corporate
and
commercial
Of which:
real estate1
Non-bank
financial
institutions
$m
(2,304)
(1,629)
(423)
(60)
(1)
(191)
(1,449)
(750)
(70)
(49)
(222)
(198)
(40)
(60)
(2)
(58)
(1,087)
(132)
(683)
(272)
(274)
(116)
(136)
(22)
(324)
(221)
(103)
$m
(354)
(303)
(28)
—
—
(23)
(94)
(51)
(3)
(3)
(1)
(29)
(2)
(2)
—
(3)
(181)
—
(179)
(2)
(43)
(14)
(10)
(19)
(8)
(8)
—
$m
(81)
(26)
(52)
—
—
(3)
(52)
(40)
—
(1)
(2)
(8)
—
—
—
(1)
(13)
(3)
(7)
(3)
(11)
(2)
(4)
(5)
(3)
(3)
—
Total
$m
(2,385)
(1,655)
(475)
(60)
(1)
(194)
(1,501)
(790)
(70)
(50)
(224)
(206)
(40)
(60)
(2)
(59)
(1,100)
(135)
(690)
(275)
(285)
(118)
(140)
(27)
(327)
(224)
(103)
540,499
130,752
70,705
611,204
(5,438)
(680)
(160)
(5,598)
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
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
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
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
(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)
(481)
(410)
(36)
—
—
(35)
(67)
(40)
(3)
(4)
—
(15)
(2)
(2)
—
(1)
(178)
—
(176)
(2)
(37)
(8)
(5)
(24)
(8)
(8)
—
(82)
(78)
(1)
—
—
(3)
(31)
(20)
—
(1)
(2)
(6)
—
—
—
(2)
(1)
—
(1)
—
(8)
(2)
(2)
(4)
(4)
(4)
—
(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)
1 Real estate lending within this disclosure corresponds solely to the industry of the borrower. Commercial real estate on page 111 includes
borrowers in multiple industries investing in income-producing assets and to a lesser extent, their construction and development.
HSBC Holdings plc Annual Report and Accounts 2019
125
Financial review Report of the Directors | Risk
Personal lending – loans and advances to customers at amortised cost 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 2019
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
145,382
137,985
3,520
—
1,183
2,694
131,864
86,892
16,997
1,047
67
8,966
2,840
6,687
5,286
3,082
2,303
—
1,920
383
39,065
17,870
19,997
1,198
3,564
3,419
145
Gross carrying amount
Other
personal
Of which:
credit
cards
$m
50,368
22,395
21,120
325
6,165
363
48,231
33,061
693
528
329
1,190
3,200
7,033
1,004
1,193
3,914
346
1,462
2,106
5,251
2,551
2,495
205
4,329
3,780
549
$m
10,246
9,816
376
—
—
54
12,144
8,043
603
219
204
656
980
452
297
690
1,042
88
517
437
1,742
1,424
271
47
1,594
1,308
286
Total
$m
195,750
160,380
24,640
325
7,348
3,057
180,095
119,953
17,690
1,575
396
10,156
6,040
13,720
6,290
4,275
6,217
346
3,382
2,489
44,316
20,421
22,492
1,403
7,893
7,199
694
Allowance for ECL
First lien
residential
mortgages
Other
personal
Of which:
credit
cards
$m
(266)
(159)
(39)
—
(6)
(62)
(42)
(1)
(5)
(5)
—
(2)
(22)
(1)
0
(6)
(62)
—
(59)
(3)
(122)
(8)
(21)
(93)
(37)
(31)
(6)
$m
(962)
(828)
(101)
—
(17)
(16)
(690)
(353)
(34)
(21)
(24)
(74)
(73)
(60)
(14)
(37)
(235)
(3)
(121)
(111)
(194)
(160)
(25)
(9)
(524)
(488)
(36)
$m
(438)
(434)
(3)
—
—
(1)
(463)
(242)
(33)
(15)
(18)
(68)
(33)
(19)
(4)
(31)
(111)
(1)
(54)
(56)
(142)
(134)
(7)
(1)
(241)
(224)
(17)
Total
$m
(1,228)
(987)
(140)
—
(23)
(78)
(732)
(354)
(39)
(26)
(24)
(76)
(95)
(61)
(14)
(43)
(297)
(3)
(180)
(114)
(316)
(168)
(46)
(102)
(561)
(519)
(42)
322,178
112,093
26,768
434,271
(529)
(2,605)
(1,395)
(3,134)
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
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
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
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
(258)
(141)
(43)
—
(2)
(72)
(44)
(1)
(5)
(5)
—
(2)
(24)
—
(1)
(6)
(88)
—
(82)
(6)
(122)
(13)
(16)
(93)
(23)
(22)
(1)
(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)
(313)
(309)
(4)
—
—
—
(465)
(228)
(54)
(14)
(27)
(50)
(33)
(21)
(5)
(33)
(148)
(1)
(54)
(93)
(81)
(75)
(5)
(1)
(254)
(227)
(27)
(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)
126
HSBC Holdings plc Annual Report and Accounts 2019
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied – by global business
Gross carrying/nominal amount
Allowance for ECL
Loans and advances to customers at amortised cost
951,583
80,182
13,378
332
1,045,475
(1,297)
(2,284)
(5,052)
Stage 1
Stage 2
Stage 3
$m
$m
$m
POCI
$m
Total Stage 1 Stage 2 Stage 3
POCI
$m
$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
378,792
15,251
297,319
46,423
228,546
16,934
45,512
1,543
1,414
31
67,769
1,450
4,733
1,245
23,420
28
38,343
388
216
801
—
45
4,472
6,649
1,598
659
—
—
—
—
—
—
—
Other financial assets measured at amortised cost
613,200
1,827
151
55,915
13,698
280,621
1,406
261,560
535
900
372
9
11
32
47
34
4
34
—
212
120
—
—
—
—
—
—
—
—
1
—
1
—
—
—
398,515
350,603
247,198
47,714
1,445
69,219
5,121
1,461
24,221
28
38,388
615,179
56,482
14,646
281,027
1,419
261,605
(593)
(1,320)
(1,210)
(520)
(173)
(9)
(2)
(14)
—
(2)
(9)
—
(3)
(38)
(21)
(8)
(5)
—
(4)
(765)
(3,190)
(176)
(10)
(13)
(2)
(1)
—
(1)
—
—
(38)
(30)
(7)
(1)
—
—
(550)
(102)
—
—
—
—
—
—
—
(42)
(3)
(26)
(11)
(2)
—
Total
$m
(8,732)
(3,123)
(4,543)
(930)
(121)
(15)
(16)
(1)
(2)
(10)
—
(3)
(118)
(54)
(41)
(17)
(2)
(4)
$m
(99)
—
(68)
(31)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
– RBWM
– CMB
– GB&M
– GPB
– Corporate Centre
Total gross carrying amount on-balance sheet at
31 Dec 2019
Loans and other credit-related commitments
– RBWM
– CMB
– GB&M
– GPB
– Corporate Centre
Financial guarantees
– RBWM
– CMB
– GB&M
– GPB
– Corporate Centre
Total nominal amount off-balance sheet at
31 Dec 2019
RBWM
CMB
GB&M
GPB
Corporate Centre
Debt instruments measured at FVOCI at
31 Dec 2019
1,632,552
83,459
13,529
333
1,729,873
(1,349)
(2,324)
(5,094)
(99)
(8,866)
577,631
21,618
171,118
1,850
117,703
11,403
246,805
8,270
41,975
30
95
—
17,684
2,340
61
7,446
9,263
911
3
2
1,442
894
2
—
771
180
558
28
5
—
186
1
105
80
—
—
9
—
9
—
—
—
4
—
4
—
—
—
600,029
173,148
129,673
255,103
42,075
30
20,214
64
8,997
10,237
913
3
(137)
(133)
(14)
(69)
(53)
(1)
—
(16)
—
(9)
(7)
—
—
(1)
(65)
(67)
—
—
(22)
—
(12)
(10)
—
—
(59)
—
(56)
(3)
—
—
(10)
—
(6)
(4)
—
—
595,315
23,958
957
13
620,243
(153)
(155)
(69)
13,754
278
250
1,055
—
25
18
—
339,590
693
354,649
1,014
—
—
—
—
—
—
—
1
—
—
—
1
14,032
276
1,073
—
(5)
—
—
—
(58)
(12)
(8)
—
340,283
(34)
(49)
355,664
(39)
(127)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(329)
(15)
(190)
(123)
(1)
—
(48)
—
(27)
(21)
—
—
(377)
(63)
(12)
(8)
—
(83)
(166)
HSBC Holdings plc Annual Report and Accounts 2019
127
Financial review Report of the Directors | Risk
Summary of financial instruments to which the impairment requirements in IFRS 9 are applied – by global business1 (continued)
Loans and advances to customers at amortised cost
– RBWM
– CMB
– GB&M
– GPB
– Corporate Centre
Loans and advances to banks at amortised cost
– RBWM
– CMB
– GB&M
– GPB
– Corporate Centre
Other financial assets measured at amortised cost
– RBWM
– CMB
– GB&M
– GPB
– Corporate Centre
Total gross carrying amount on-balance sheet at
31 Dec 2018
Loans and other credit-related commitments
– RBWM
– CMB
– GB&M
– GPB
– Corporate Centre
Financial guarantees
– RBWM
– CMB
– GB&M
– GPB
– Corporate Centre
Total nominal amount off-balance sheet at
31 Dec 2018
RBWM
CMB
GB&M
GPB
Corporate Centre
Debt instruments measured at FVOCI at
31 Dec 2018
Gross carrying/nominal amount
Allowance for ECL
Stage 1
Stage 2
Stage 3
POCI
Total
Stage 1
Stage 2
Stage 3
$m
$m
$m
$m
$m
$m
$m
990,321
(1,276)
908,393
340,606
299,523
228,035
37,970
2,259
71,873
5,801
1,912
25,409
46
38,705
581,118
49,142
15,082
272,028
924
243,942
68,581
19,228
32,109
16,327
724
193
307
5
15
212
—
75
13,023
4,960
5,732
1,683
618
30
—
—
—
—
—
—
$m
324
— 364,794
298
25
337,662
246,070
1
—
—
—
—
—
—
—
39,313
2,482
72,180
5,806
1,927
25,621
46
38,780
1,673
126
— 582,917
184
774
703
1
11
32
60
20
2
12
—
—
49,358
15,916
— 272,751
—
927
— 243,965
(2,108)
(1,250)
(659)
(182)
(3)
(14)
(2)
—
—
(2)
—
—
(6)
(2)
(3)
(1)
—
—
(5,047)
(1,129)
(3,110)
(718)
(89)
(1)
—
—
—
—
—
—
(22)
(1)
(21)
—
—
—
(544)
(538)
(188)
(5)
(1)
(11)
(1)
(1)
(7)
—
(2)
(27)
(14)
(7)
(1)
—
(5)
POCI
$m
Total
$m
(194)
(8,625)
— (2,923)
(194)
(4,501)
— (1,088)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(97)
(16)
(13)
(1)
(1)
(9)
—
(2)
(55)
(17)
(31)
(2)
—
(5)
1,561,384
70,561
13,149
324 1,645,418
(1,314)
(2,116)
(5,069)
(194)
(8,693)
567,232
164,589
112,969
251,676
33,885
4,113
20,834
54
7,605
12,067
1,053
55
23,857
1,792
10,129
10,892
1,044
—
2,384
3
1,227
1,141
13
—
912
399
308
194
11
—
297
3
230
63
—
1
7
592,008
(143)
(139)
— 166,780
5
2
—
—
3
—
3
—
—
—
123,411
262,764
34,940
4,113
23,518
60
9,065
13,271
1,066
56
(6)
(72)
(58)
—
(7)
(19)
—
(10)
(8)
(1)
—
(1)
(52)
(86)
—
—
(29)
—
(11)
(18)
—
—
588,066
26,241
1,209
10
615,526
(162)
(168)
13,160
226
1,994
—
326,795
342,175
153
—
—
—
770
923
—
—
—
—
7
7
—
1
—
—
4
13,313
227
1,994
—
327,576
5
343,110
(5)
(2)
(5)
—
(21)
(33)
—
—
—
—
(50)
(50)
(43)
(1)
(40)
(2)
—
—
(45)
—
(39)
(5)
—
(1)
(88)
—
—
—
—
(1)
(1)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(325)
(8)
(164)
(146)
—
(7)
(93)
—
(60)
(31)
(1)
(1)
(418)
(5)
(2)
(5)
—
(72)
(84)
1 During the period, the Group has re-presented the UK wholesale lending stage 1 and stage 2 amount. For further details, see page 86.
128
HSBC Holdings plc Annual Report and Accounts 2019
Loans and advances to customers and banks metrics
First lien residential mortgages
Other personal lending
Personal lending
– 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
Corporate and commercial
Non-bank financial institutions
Wholesale lending
Loans and advances to customers
Loans and advances to banks
At 31 Dec 2019
HSBC Holdings
(Audited)
Gross
carrying
amount
Of which:
stage 3 and
POCI
Allowance
for ECL
Of which:
stage 3 and
POCI
Change in
ECL Write-offs
Recoveries
$m
322,178
112,093
434,271
6,696
14,435
$m
3,070
1,781
4,851
280
323
$m
(529)
(2,605)
(3,134)
(182)
(226)
104,380
1,717
(1,210)
15,040
3,501
15,287
94,681
25,580
24,656
19,971
175
30
884
(80)
(28)
(564)
1,633
(1,184)
617
263
162
130,752
1,330
24,122
25,714
2,377
1,900
4,465
2,824
14,276
791
2
8,313
736
540,499
70,705
611,204
350
527
—
16
111
30
192
—
—
7
—
8,647
212
8,859
1,045,475
13,710
69,219
—
$m
(422)
(793)
(1,215)
$m
(107)
(1,114)
(1,221)
$m
(139)
(1,206)
(1,345)
(140)
(134)
(856)
(25)
(18)
(499)
(936)
(158)
(63)
(34)
(475)
(145)
(179)
—
(6)
(28)
(11)
(15)
(31)
(392)
14
(4)
(171)
(330)
(93)
(49)
(17)
(34)
(47)
(80)
—
6
(6)
3
(6)
(4)
(332)
(54)
—
(191)
(389)
(37)
(81)
(31)
(168)
(10)
(22)
—
(3)
(13)
(4)
(237)
(146)
(87)
(680)
(209)
(270)
(8)
(18)
(57)
(25)
(199)
(133)
(79)
(102)
—
—
(14)
(14)
(5,438)
(160)
(5,598)
(8,732)
(16)
—
—
(6)
—
—
2
(8)
—
—
—
—
—
(3,846)
(1,331)
(1,447)
(90)
(3,936)
(5,151)
—
(71)
(1,402)
(2,623)
(6)
(5)
(1,452)
(2,797)
—
1,114,694
13,710
(8,748)
(5,151)
(2,629)
(2,797)
$m
54
260
314
—
—
8
2
—
12
13
—
—
—
6
1
—
—
—
1
—
2
—
1
—
—
46
1
47
361
—
361
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 its investments in those subsidiaries.
In HSBC Holdings, the maximum exposure to credit risk arises
from two components:
• financial instruments on the balance sheet (see page 237); and
• financial guarantees and similar contracts, where the maximum
exposure is the maximum that we would have to pay if the
guarantees were called upon (see Note 32).
In the case of our derivative balances, we have amounts with a
legally enforceable right of offset in the case of counterparty
default that are not included in the carrying value. These offsets
also include collateral received in cash and other financial assets.
The total offset relating to our derivative balances was $0.1bn at
31 December 2019 (2018: $1.5bn).
The credit quality of loans and advances and financial
investments, both of which consist of intra-Group lending and US
Treasury bills and bonds, is assessed as ‘strong’, with 100% of the
exposure being neither past due nor impaired (2018: 100%). For
further details of credit quality classification, see page 85.
HSBC Holdings plc Annual Report and Accounts 2019
129
Financial review Report of the Directors | Risk
Capital and liquidity risk
Capital risk management
Liquidity and funding risk management
Liquidity and funding risk in 2019
Sources of funding
Pension risk
Overview
Page
130
131
131
133
134
Capital and liquidity risk is the risk of having insufficient capital,
liquidity or funding resources to meet financial obligations and
satisfy regulatory requirements, including pension risk.
Capital and liquidity risk arises from changes to the respective
resources and risk profiles driven by customer behaviour,
management decisions or the external environment.
Governance and structure
Capital and liquidity are the responsibility of the Group
Management Board and directly addressed by the GRC. Capital
and liquidity risks are managed through the Holdings ALCO and
local Asset and Liability Management Committees (‘ALCOs’) and
overseen by the RMM. The Global Head of Wholesale and Market
Risk is the accountable risk steward.
Capital risk management
Overview
Capital risk is the risk that we fail to meet our regulatory capital
requirements either at Group, subsidiary or branch level.
Key developments in 2019
In 2019, we carried out a restructuring of our capital risk
management function, with the creation of a dedicated second
line of defence that will provide independent oversight of capital
management activities. The approach to capital risk management
is evolving. This will operate across the Group focusing on both
adequacy of capital and sufficiency of returns. Other
developments in 2019 included:
• The Risk function was actively involved in the calibration of the
capital risk appetite metrics, the review and challenge of the
capital adequacy expressed through stress testing, and the
internal capital adequacy assessment process (‘ICAAP’).
• The common equity tier 1 (‘CET1’) ratio was 14.7% at 31
December 2019 and the leverage ratio was 5.3%. Allocation of
the Group’s capital to business lines and legal entities is
informed by return metrics and the performance of key capital
ratios under plan and stress scenarios.
• We passed the PRA annual stress test exercise with sufficient
capital to operate through a severe macroeconomic scenario.
For quantitative disclosures on capital ratios, own funds and RWAs, refer to
pages 152 to 155 in the Capital section.
ICAAP and risk appetite
The objectives of our capital management policy are to maintain a
strong capital base to support the risks inherent in our business
and invest in accordance with our strategy, meeting both
consolidated and local regulatory capital requirements at all times.
Our capital management policy is underpinned by a capital
management framework and our ICAAP. The framework
incorporates key capital risk appetites for CET1, total capital,
minimum required eligible liabilities (‘MREL’), and double leverage.
The ICAAP is an assessment of the Group’s capital position,
outlining both regulatory and internal capital resources and
requirements resulting from HSBC’s business model, strategy, risk
profile and management, performance and planning, risks to
capital, and the implications of stress testing. Our assessment of
capital adequacy is driven by an assessment of risks. These risks
include credit, market, operational, pensions, insurance, structural
foreign exchange, residual risk and interest rate risk in the banking
book. An ICAAP supports the determination of the consolidated
and subsidiary capital risk appetite and target ratios as well as
130
HSBC Holdings plc Annual Report and Accounts 2019
enables the assessment and determination of capital requirements
by regulators.
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.
HSBC Holdings seeks to maintain a prudent balance between the
composition of its capital and its investment in subsidiaries,
including management of double leverage. Double leverage
reflects the extent to which equity investments in operating
entities are funded by holding company debt. Where Group capital
requirements are less than the aggregate of operating entity
capital requirements, double leverage can be used to improve
Group capital efficiency provided it is managed appropriately and
prudently in accordance with risk appetite. Double leverage is a
constraint on managing our capital position, given the complexity
of the Group’s subsidiary structure and the multiple regulatory
regimes under which we operate. As a matter of long-standing
policy, the holding company retains a substantial portfolio of high-
quality liquid assets (‘HQLA’), which at 31 December 2019 was in
excess of $14bn to mitigate holding company cash flow risk
arising from double leverage and to underpin the strength of
support the holding company can offer its subsidiaries in times of
stress. Further mitigation is provided by additional tier 1 (‘AT1’)
securities issued in excess of the regulatory requirements of our
subsidiaries.
Planning and performance
Capital and risk-weighted asset (‘RWA’) plans form part of the
annual operating plan that is approved by the Board. Capital and
RWA forecasts are submitted to the Group Management Board on
a monthly basis, and capital and RWAs are monitored and
managed against the plan. The responsibility for global capital
allocation principles rests with the Group Chief Financial Officer
supported by the Group Capital Management Meeting. This is a
specialist forum addressing capital management, reporting into
Holdings ALCO.
Through our internal governance processes, we seek to strengthen
discipline over our investment and capital allocation decisions, and
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
evaluate and manage business returns by using a return on
average tangible equity 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.
Downside and Upside scenarios are assessed against our capital
management objectives and mitigating actions are assigned as
necessary. We closely monitor and consider future regulatory
change. We continue to evaluate the impact upon our capital
requirements of regulatory developments, including the
amendments to the Capital Requirements Regulation, the Basel III
reforms package and the UK’s withdrawal from the EU.
We currently estimate our pre-mitigation RWAs could potentially
rise in the range of 5% to 10% as at 1 January 2022 as a result of
the regulatory changes. The primary drivers include changes in the
market risk, operational risk and credit valuation adjustment
methodologies, as well as the potential lack of equivalence for
certain investments in funds. We plan to take action to
substantially mitigate a significant proportion of the increase.
The Basel package introduces an output floor that will be
introduced in 2022 with a five-year transitional provision. This floor
ensures that at the end of the transitional period banks’ total
RWAs are no lower than 72.5% of those generated by the
standardised approaches. We estimate that there will be an
additional RWA impact as a result of the output floor from 2026.
There remains a significant degree of uncertainty in the impact
due to the number of national discretions within Basel’s reforms,
the need for further supporting technical standards to be
developed and the lack of clarity regarding their implementation
following the UK’s withdrawal from the EU. Furthermore, the
impact does not take into consideration the possibility of offsets
against Pillar 2, which may arise as the shortcomings within Pillar
1 are addressed.
Further details can be found in the ‘Regulatory developments’ section of the
Group’s Pillar 3 Disclosures at 31 December 2019.
Stress testing and recovery planning
The Group uses stress testing to evaluate the robustness of plans
and risk portfolios as well as to meet the requirements for stress
testing set by supervisors. Stress testing also informs the ICAAP
and supports recovery planning in many jurisdictions. It is a critical
methodology used to evaluate how much capital the Group
requires in setting risk appetite for capital risk and to re-evaluate
business plans where analysis shows returns and/or capital do not
meet target.
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 Bank of
England, the US Federal Reserve Board, the European Banking
Authority, the European Central Bank and the Hong Kong
Monetary Authority, and stress tests undertaken in other
jurisdictions. The results of regulatory stress testing and our
internal stress tests are used when assessing our internal capital
requirements through the ICAAP. The outcome of stress testing
exercises carried out by the PRA and other regulators feeds into
the setting of regulatory minimum ratios and buffers.
The Group and subsidiaries have established recovery plans
addressing the actions that management would consider taking in
a stress scenario if the capital position deteriorates through the
target ratio and threatens to breach risk appetite and regulatory
minimum levels. The recovery plans set out a range of appropriate
actions that could feasibly be executed in a stressed environment
to recover the capital position. These include cost management,
reducing dividends and raising additional capital.
Liquidity and funding risk management
Overview
Liquidity risk is the risk that we do not have sufficient financial
resources to meet our obligations as they fall due. Liquidity risk
arises from mismatches in the timing of cash flows.
Funding risk is the risk that we cannot raise funding or can only do
so at excessive cost.
Key developments in 2019
We have amended the Group risk appetite statement to remove
the depositor concentration and wholesale funding concentration
metrics. Both these risks will be monitored and controlled at the
operating entity level.
For the major operating entities, we have transferred second line
of defence activities to a newly created team in the Risk function.
This team provides independent review and challenge of first line
business activities and approves the liquidity and funding risk
management framework (‘LFRF’).
ILAAP and risk appetite
We maintain a comprehensive LFRF, which aims to enable us to
withstand very severe liquidity stresses. The LFRF comprises
policies, metrics and controls designed to ensure that Group and
entity management have oversight of our liquidity and funding
risks in order to manage them appropriately.
We manage liquidity and funding risk at an operating entity level
to ensure that obligations can be met in the jurisdiction where
they fall due, generally without reliance on other parts of the
Group. Operating entities are required to meet internal minimum
requirements and any applicable regulatory requirements at all
times. These requirements are assessed through the internal
liquidity adequacy assessment process (‘ILAAP’), which is used to
ensure that operating entities have robust strategies, policies,
processes and systems for the identification, measurement,
management and monitoring of liquidity risk over an appropriate
set of time horizons, including intra-day, so as to ensure they
maintain adequate levels of liquidity buffers. It informs the
validation of risk tolerance and the setting of risk appetite. It also
assesses the capability to manage liquidity and funding effectively
in each major entity. These metrics are set and managed locally
but are subject to robust global review and challenge to ensure
consistency of approach and application of the LFRF across the
Group.
Performance and measurement
Funding and liquidity plans form part of the annual operating plan
that is approved by the Board. The critical Board-level appetite
measures are the liquidity coverage ratio (‘LCR’) and net stable
funding ratio (‘NSFR’). An appropriate funding and liquidity profile
is managed through a wider set of measures:
• a minimum LCR requirement;
• a minimum NSFR requirement or other appropriate metric;
• a 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;
• a minimum LCR requirement by currency;
•
intra-day liquidity;
• the application of liquidity funds transfer pricing; and
• forward-looking funding assessments.
The LCR and NSFR metrics are to be supplemented by an internal
liquidity metric in 2020.
Risks to liquidity and funding
Risks to liquidity and funding are assessed through forecasting,
stress testing and scenario analysis, combined with ongoing
assessments of risks in the business and external environment.
Stress testing, recovery and contingency planning
The Group uses stress testing to evaluate the robustness of plans
and risk portfolios, inform the ILAAP and support recovery
planning, as well as meeting the requirements for stress testing
set by supervisors. It is a critical methodology used to evaluate
how much funding and liquidity the Group requires in setting risk
appetite.
All entities maintain contingency plans that can be enacted in the
event of internal or external triggers, which threaten the liquidity
or funding position. They also have established recovery plans
addressing the actions that management would consider taking in
a stress scenario if the position deteriorates and threatens to
breach risk appetite and regulatory minimum levels. The recovery
plans set out a range of appropriate actions, which could feasibly
be executed in a stressed environment to recover the position.
Details of HSBC’s liquidity and funding risk management framework (‘LFRF’)
can be found in the Group’s Pillar 3 Disclosures at 31 December 2019.
Liquidity and funding risk in 2019
Liquidity metrics
At 31 December 2019, all of the Group’s material operating
entities were above regulatory minimum levels.
Each entity maintains sufficient unencumbered liquid assets to
comply with local and regulatory requirements. The liquidity value
of these liquidity assets for each entity is shown in the following
table along with the individual LCR levels on a European
Commission (‘EC’) basis. This basis may differ from local LCR
measures due to differences in the way non-EU regulators have
implemented the Basel III standards.
Each entity maintains sufficient stable funding relative to the
required stable funding assessed using the NSFR or other
appropriate metric.
The Group liquidity and funding position at the end of 2019 is
analysed in the following sections.
HSBC Holdings plc Annual Report and Accounts 2019
131
Financial review Report of the Directors | Risk
Operating entities’ liquidity
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
Hang Seng Bank
HSBC Bank China
HSBC Bank USA
HSBC France
HSBC Middle East – UAE branch
HSBC Canada
HSBC Mexico
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
Hang Seng Bank
HSBC Bank China
HSBC Bank USA
HSBC France
HSBC Middle East – UAE branch
HSBC Canada
HSBC Mexico
Footnotes
1
2
3
3
4
4
1
2
3
3
4
4
LCR
%
165
142
163
147
185
180
125
152
202
124
208
143
147
161
149
202
153
121
128
182
115
153
At 31 December 2019
HQLA
Net outflows
NSFR
$bn
75
103
109
14
42
21
73
44
11
18
9
At 31 December 2018
59
117
125
12
38
24
70
20
7
16
6
$bn
45
72
67
10
23
11
59
29
5
14
4
41
80
78
8
19
15
58
16
4
14
4
%
150
106
128
120
148
151
122
117
159
124
136
144
113
132
123
152
153
131
113
132
126
123
1 HSBC UK Bank plc refers to the HSBC UK liquidity group, which 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 PRA.
2 HSBC Bank plc includes oversea branches and SPEs consolidated by HSBC for financial statements purposes.
3 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.
4 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.
At 31 December 2019, all of the Group’s principal operating
entities were well above regulatory minimum levels.
The most significant movements in 2019 are explained below:
• HSBC UK Bank plc improved its liquidity ratio to 165%, mainly
driven by increased customer surplus, wholesale funding and
MREL issuance.
• The Hongkong and Shanghai Banking Corporation – Hong Kong
branch remained highly liquid. The reduction in Hang Seng
Bank reflected changes in the maturity of both customer
lending and deposits.
• HSBC Bank China improved its LCR to 180%, mainly reflecting
increased customer deposits and wholesale funding issuance.
• HSBC France increased significantly the liquidity position,
reflecting management actions to address restructuring related
to the UK’s departure from the EU.
Liquid assets
At 31 December 2019, the Group had a total of $601bn of highly
liquid unencumbered LCR eligible liquid assets (31 December
2018: $567bn) held in a range of asset classes and currencies. Of
these, 90% were eligible as level 1 (31 December 2018: 89%).
The following tables reflect the composition of the liquidity pool by
asset type and currency at 31 December 2019:
Liquidity pool by asset type
Cash and balance at central
bank
Central and local government
bonds
Regional government PSE
International organisation and
MDBs
Covered bonds
Other
Total at 31 Dec 2019
Total at 31 Dec 2018
Liquidity
pool
Cash
Level 11
Level 21
$bn
$bn
$bn
$bn
158
158
—
375
17
15
12
24
601
567
—
—
—
—
—
158
165
334
15
15
3
16
383
338
—
41
2
—
9
8
60
64
1 As defined in EU regulation, level 1 assets means ‘assets of extremely
high liquidity and credit quality’, and level 2 assets means ‘assets of
high liquidity and credit quality’.
Liquidity pool by currency
$
£
€
HK$
Other
Total
$bn
$bn
$bn
$bn
$bn
$bn
Liquidity pool at 31 Dec
2019
Liquidity pool at 31 Dec
2018
179
117
164
105
93
81
47
165
601
57
160
567
132
HSBC Holdings plc Annual Report and Accounts 2019
Funding uses
(Audited)
Loans and advances to customers
Loans and advances to banks
Reverse repurchase agreements – non-
trading
Prepayments, accrued income and other
assets
– cash collateral, margin and settlement
accounts
Assets held for sale
Trading assets
– reverse repos
– stock borrowing
– other trading assets
Financial investments
Cash and balances with central banks
Other balance sheet assets
At 31 Dec
Footnotes
2019
$m
2018
$m
1,036,743
981,696
69,203
72,167
240,862
242,804
1
63,891
47,159
63,891
47,159
123
735
254,271
238,130
13,659
7,691
232,921
443,312
154,099
452,648
9,893
8,387
219,850
407,433
162,843
405,157
2,715,152
2,558,124
1
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 231 includes both financial and non-financial assets.
Wholesale term debt maturity profile
The maturity profile of our wholesale term debt obligations is set
out in the following table.
The balances in the table are not directly comparable with those in
the consolidated balance sheet because the table presents gross
cash flows relating to principal payments and not the balance
sheet carrying value, which include debt securities and
subordinated liabilities measured at fair value.
Consolidated liquidity metrics
The Group consolidated LCR reflects the LCR of the Group,
according to the guidelines under the EC Delegated Act. The
Group LCR was 150% at 31 December 2019. The Group LCR was
well above the regulatory minimum.
The methodology used to calculate the Group consolidated LCR is
currently under review given that the Group’s liquidity profile is set
and managed based on factors relevant to the operating entities
on a stand-alone basis.
31 Dec
2019
$bn
601
400
At
30 Jun
2019
$bn
533
391
31 Dec
2018
$bn
567
369
150%
136%
154%
High-quality liquid assets (liquidity value)
Net outflows
Liquidity coverage ratio
Sources of funding
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 ‘Funding uses’ tables provide
a consolidated view of how our balance sheet is funded, and
should be read in light of the LFRF, which generally requires
operating entities to manage liquidity and funding risk on a stand-
alone basis.
The tables analyse 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 at other balance sheet lines.
In 2019, the level of customer accounts continued to exceed the
level of loans and advances to customers.
Loans and advances to banks continued to exceed deposits by
banks, meaning the Group remained a net unsecured lender to the
banking sector.
Funding sources
(Audited)
Customer accounts
Deposits by banks
Repurchase agreements – non-trading
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
– other trading liabilities
Total equity
Other balance sheet liabilities
At 31 Dec
2019
$m
2018
$m
1,439,115
1,362,643
59,022
140,344
104,555
71,002
—
56,331
165,884
85,342
54,066
313
24,600
22,437
164,466
148,505
97,439
83,170
558
9,702
72,910
192,668
338,771
87,330
84,431
1,495
10,998
71,938
194,249
296,593
2,715,152
2,558,124
HSBC Holdings plc Annual Report and Accounts 2019
133
Financial review Report of the Directors | Risk
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
$m
19,758
12,280
2,462
1,386
—
—
—
3,630
—
—
—
$m
15,654
11,020
695
1,711
—
—
248
1,980
22
22
—
$m
16,284
8,745
4,595
1,003
—
—
161
1,780
2,000
2,000
—
$m
16,132
11,509
1,753
923
1,139
—
—
$m
35,836
1,156
25,121
3,579
749
—
205
808
5,026
—
—
—
754
754
—
$m
57,387
2,095
42,316
6,102
3,661
—
911
2,302
2,424
2,424
—
Due not
more than
1 month
$m
17,728
4,913
8,198
1,698
—
1,933
—
986
1,523
1,500
23
Due over
5 years
$m
Total
$m
53,768
232,547
1,578
53,296
38,812
123,952
9,596
1,159
—
741
1,882
26,809
24,587
2,222
25,998
6,708
1,933
2,266
18,394
33,532
31,287
2,245
19,251
19,758
15,676
18,284
16,132
36,590
59,811
80,577
266,079
8,091
4,378
467
817
—
2,094
—
335
—
—
—
13,362
7,640
1,233
821
—
—
—
3,668
95
95
—
15,808
10,696
3,107
1,452
205
—
—
348
2,007
2,007
—
10,241
6,546
2,263
1,029
—
—
—
403
—
—
—
5,447
818
2,172
2,394
—
—
—
63
—
—
—
21,811
529
11,252
3,005
1,190
—
—
5,835
2,021
2,021
—
70,462
764
55,307
7,021
3,469
—
—
3,901
1,383
1,383
—
8,091
13,457
17,815
10,241
5,447
23,832
71,845
63,914
1,031
54,256
4,473
1,137
—
327
2,690
31,131
28,934
2,197
95,045
209,136
32,402
130,057
21,012
6,001
2,094
327
17,243
36,637
34,440
2,197
245,773
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 2019
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
Pension risk
Overview
Pension risk is the risk of increased costs to HSBC from offering
post-employment benefit plans to its employees.
Pension risk arises from investments delivering an inadequate
return, adverse changes in interest rates or inflation, or members
living longer than expected. Pension risk also includes operational
and reputational risk of sponsoring pension plans.
Key developments in 2019
There were no material changes to our global policies and
practices for the management of pension risk in 2019.
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:
134
HSBC Holdings plc Annual Report and Accounts 2019
•
investments delivering a return below that required to provide
the projected plan benefits;
• the prevailing economic environment leading to corporate
failures, thus triggering write-downs in asset values (both
equity and debt);
• a change in either interest rates or inflation expectations,
causing an increase in the value of plan liabilities; and
• plan members living longer than expected (known as longevity
risk).
Pension risk is assessed using an economic capital model
that takes into account potential variations in these factors.
The impact of these variations on both pension assets and pension
liabilities is assessed using a one-in-200-year stress test. Scenario
analysis and other stress tests are also used to support pension
risk management. To fund the benefits associated with defined
benefit plans, sponsoring Group companies, and in some
instances employees, make regular contributions in accordance
with advice from actuaries and in consultation with the plan’s
trustees where relevant. These contributions are normally set
to ensure that there are sufficient funds to meet the cost of
the accruing benefits for the future service of active members.
However, higher contributions are required when plan assets are
considered insufficient to cover the existing pension liabilities.
Contribution rates are typically revised annually or once every
three years, depending on the plan.
The defined benefit plans invest contributions in a range of
investments designed to limit the risk of assets failing to meet
a plan’s liabilities. Any changes in expected returns from the
investments may also change future contribution requirements. In
pursuit of these long-term objectives, an overall target allocation
of the defined benefit plan assets between asset classes is
established. In addition, each permitted asset class has its own
benchmarks, such as stock-market or property valuation indices or
liability characteristics. 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.
In addition, during 2019, some of the Group’s pension plans
performed longevity swap transactions. These arrangements
provide long-term protection to the relevant plans against costs
resulting from pensioners or their dependants living longer than
initially expected. The most sizeable plan to do this was the HSBC
Bank (UK) Pension Scheme, which performed longevity swap
transactions with The Prudential Insurance Company of America, a
subsidiary of Prudential Financial, Inc., and with Swiss Re.
Together these cover approximately three-quarters of the plan’s
pensioner liabilities (50% with The Prudential Insurance Company
of America and 25% with Swiss Re).
trading VaR reside in GB&M. Each major operating entity has an
independent market risk management and control sub-function,
which is responsible for measuring, monitoring and reporting
market risk exposures against limits on a daily basis. Each
operating entity is required to assess the market risks arising in its
business and to transfer them either to its local GB&M unit for
management, or to separate books managed under the
supervision of the local ALCO. The Traded Risk function enforces
the controls around trading in permissible instruments approved
for each site as well as new product approval procedures. Traded
Risk also restricts trading in the more complex derivative products
to offices with appropriate levels of product expertise and robust
control systems.
Market risk
Market risk management
Market risk in 2019
Trading portfolios
Non-trading portfolios
Market risk balance sheet linkages
Structural foreign exchange exposures
Net interest income sensitivity
Sensitivity of capital and reserves
Third-party assets in Balance Sheet Management
Defined benefit pension schemes
Additional market risk measures applicable only to the parent company
Overview
Key risk management processes
Monitoring and limiting market risk exposures
Page
135
137
137
138
139
139
140
141
141
141
142
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. We use
sensitivity measures to monitor the market risk positions within
each risk type. Granular sensitivity limits are set for trading desks
with consideration of market liquidity, customer demand and
capital constraints, among other factors.
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 management
Key developments in 2019
There were no material changes to our policies and practices for
the management of market risk in 2019.
Governance and structure
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.
Risk types
Trading risk
Non-trading risk
• Foreign exchange and
commodities
• Interest rates
• Credit spreads
• Equities
• Structural foreign
exchange
• Interest rates1
• Credit spreads
Global business
GB&M and BSM2
GB&M, BSM2, GPB, CMB
and RBWM
Risk measure
Value at risk | Sensitivity |
Stress testing
Value at risk | Sensitivity |
Stress testing
1 The interest rate risk on the fixed-rate securities issued by HSBC
Holdings is not included in the Group value at risk. The management
of this risk is described on page 142.
2 Balance Sheet Management (‘BSM’), for external reporting purposes,
forms part of the Corporate Centre while daily operations and risk are
managed within GB&M.
Where appropriate, we apply similar risk management policies and
measurement techniques to both trading and non-trading
portfolios. Our objective is to manage and control market risk
exposures to optimise return on risk while maintaining a market
profile consistent with our established risk appetite.
Market risk is managed and controlled through limits approved by
the Group Chief Risk Officer for HSBC Holdings. These limits are
allocated across business lines and to the Group’s legal entities.
The majority of HSBC’s total value at risk (‘VaR’) and almost all
Value at risk
(Audited)
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. 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 that are calculated with reference
to data from the past two years; and
• calculations to a 99% confidence level and using a one-day
holding period.
The models also incorporate the effect of option features on the
underlying exposures. The nature of the VaR models means that
an increase in observed market volatility will lead to an increase in
VaR without any changes in the underlying positions.
VaR model limitations
Although a valuable guide to risk, VaR is used with awareness of
its limitations. For example:
• The use of historical data as a proxy for estimating future
market moves may not encompass all potential market events,
particularly those that are extreme in nature.
• The use of a one-day holding period for risk management
purposes of trading and non-trading books assumes that this
short period is sufficient to hedge or liquidate all positions.
• The use of a 99% confidence level by definition does not take
into account losses that might occur beyond this level of
confidence.
HSBC Holdings plc Annual Report and Accounts 2019
135
Financial review Report of the Directors | Risk
• VaR is calculated on the basis of exposures outstanding at the
close of business and therefore does not reflect intra-day
exposures.
Risk not in VaR framework
The risks not in VaR (‘RNIV’) framework captures and capitalises
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 either the VaR-based RNIV approach or a stress
test approach within the RNIV framework. While VaR-based RNIVs
are calculated by using historical scenarios, stress-type RNIVs are
estimated on the basis of stress scenarios whose severity is
calibrated to be in line with the capital adequacy requirements.
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, the stressed VaR measure
also includes risk factors considered in the VaR-based RNIV
approach.
Stress-type RNIVs include a gap risk exposure measure to capture
risk on non-recourse margin loans, and a de-peg risk measure to
capture risk to pegged and heavily managed currencies.
Stress testing
Stress testing is an important procedure that is integrated into our
market risk management framework to evaluate the potential
impact on portfolio values of more extreme, although plausible,
events or movements in a set of financial variables. In such
scenarios, losses can be much greater than those predicted by
VaR modelling.
Stress testing is implemented at legal entity, regional and overall
Group levels. A set of scenarios is used consistently across all
regions within the Group. The risk appetite around potential stress
losses for the Group is set and monitored against a referral limit.
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.
Stress testing and reverse stress testing provide senior
management with insights regarding the ‘tail risk’ beyond VaR, for
which our appetite is limited.
Trading portfolios
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,
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 Asset, Liability and Capital Management (‘ALCM’) function.
Interest rate risk in the banking book is transferred to and
managed by Balance Sheet Management (‘BSM’), and also
monitored by the 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.
Trading portfolios comprise positions held for client servicing and
market-making, with the intention of short-term resale and/or to
hedge risks resulting from such positions.
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:
Back-testing
We routinely validate the accuracy of our VaR models by back-
testing the VaR metric against both actual and hypothetical profit
and loss. Hypothetical profit and loss excludes non-modelled items
such as fees, commissions and revenue of intra-day transactions.
The number of back-testing exceptions is used to gauge how well
the models are performing. We consider enhanced internal
monitoring of a VaR model if more than five profit exceptions or
more than five loss exceptions occur in a 250-day period.
We back-test our VaR at set 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.
Therefore, our consolidated balance sheet is affected by exchange
136
HSBC Holdings plc Annual Report and Accounts 2019
• 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 NII sensitivities across
a range of interest rate scenarios.
Projected NII 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 NII 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 NII 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 NII sensitivity can be found on
page 140.
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
NII in this scenario. EVE can be used to assess the economic
capital required to support interest rate risk in the banking book.
An EVE sensitivity is the extent to which the EVE value will change
due to 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.
Market risk in 2019
The performance of financial markets through the year reflected
fluctuations in global trade tensions and changes in the policy
stance of key central banks. With persistently low inflation and
weak growth outlook, monetary policy turned accommodative in
several major economies and emerging markets. The FRB cut its
policy rate three times, reversing the tightening cycle started in
2018. At the same time, the ECB restarted its programme of
government bond purchases in September. Yield curves inverted
in a number of countries during the summer, while the stock of
fixed income securities with negative yields reached record highs.
During the last quarter of the year, easing of US-China trade
tensions and looser financial conditions contributed to a more
positive market sentiment. Global stock markets reached historical
record highs and volatility remained subdued. However, tensions
around the UK’s departure from the EU led to spikes in short-term
sterling volatility. Search for yield contributed to further tightening
of credit spreads on investment grade and high-yield debt,
although spreads on corporate debt with the lowest ratings tended
to widen.
The overall risk profile remained relatively stable in 2019, with the
fixed income business continuing to be the key driver of trading
VaR. The interest rates asset class was the major contributor to
trading VaR, while the exposure to credit spread risks provided
partial offsetting gains. The equity and foreign exchange
components provided more limited contributions to the overall
market risk in the trading book.
Trading portfolios
Value at risk of the trading portfolios
Trading VaR predominantly resides within Global Markets.
VaR for trading book activity at the end of 2019 was lower than at
the end of 2018. The decrease was attributable primarily to lower
contributions from:
• credit spread risks due to a reduction of exposures during the
year and lower baseline credit spread levels;
• reduced equity correlation and interest rate volatility risks
captured in the RNIV framework; and
• some offsetting gains provided by the flow rates activity.
The lower contribution of the above drivers of trading VaR was
partly offset by reduced diversification benefits across asset
classes.
The daily levels of total trading VaR during 2019 are set out in the graph below.
Daily VaR (trading portfolios), 99% 1 day ($m)
HSBC Holdings plc Annual Report and Accounts 2019
137
Financial review Report of the Directors | Risk
The Group trading VaR for the year is shown in the table below.
Trading VaR, 99% 1 day1
(Audited)
Balance at 31 Dec 2019
Average
Maximum
Minimum
Balance at 31 Dec 2018
Average
Maximum
Minimum
Foreign
exchange and
commodity
Interest
rate
$m
7.7
6.9
13.5
4.1
12.6
9.5
21.8
5.5
$m
28.2
29.9
36.5
22.9
33.9
36.4
49.9
27.0
Equity
$m
15.7
16.2
24.9
12.4
22.6
22.5
33.8
13.5
Credit
spread
Portfolio
diversification2
$m
15.2
23.7
33.2
11.7
25.9
20.7
35.2
12.2
$m
(26.4)
(29.0)
(37.9)
(34.3)
Total3
$m
40.3
47.8
59.3
33.3
57.1
54.8
71.2
43.9
1 Trading portfolios comprise positions arising from the market-making and warehousing of customer-derived positions.
2 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 – such as 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.
3 The total VaR is non-additive across risk types due to diversification effects.
Back-testing
Non-trading portfolios
In 2019, the Group experienced six profit back-testing exceptions
and one loss back-testing exception against actual profit and loss.
Some of these exceptions were driven by profits spread across a
large number of desks or arose from new trades, which are
outside trading VaR scope. The above exceptions comprised:
• a profit exception in early January, driven by gains across most
asset classes, as interest rates rose and equity markets
rebounded;
• a profit exception in late January, due mainly to gains from new
transactions in the Rates business and lower equity volatilities;
• a profit exception in March, driven by increased volatility in
some emerging markets currencies and interest rates;
• a loss exception in March, attributable to month-end valuation
adjustments driven by portfolio and spread changes;
• two profit exceptions in early May, arising from new
transactions and a number of relatively small gains spread
across all asset classes; and
• a profit exception in December, due to gains from multiple
desks and spread across all asset classes.
The Group also experienced one profit back-testing exception and
one loss back-testing exception against hypothetical profit and
loss:
• a loss exception in November driven primarily by the impact of
the widening of the credit spread on a high-yield bond holding;
and
• a profit exception in December, due to gains from multiple
desks and spread across all asset classes.
Non-trading portfolios comprise positions that primarily arise from
the interest rate management of our retail and commercial
banking assets and liabilities, financial investments measured at
fair value through other comprehensive income, debt instruments
measured at amortised cost, and exposures arising from our
insurance operations.
Value at risk of the non-trading portfolios
VaR for non-trading books at the end of 2019 was materially larger
than in 2018. The increase was driven by an uplift in contributions
from both interest rate and credit spread risks during the last
quarter of the year. The larger contribution from interest rate risks
was primarily due to increased inventories of highly-rated
government securities and the effect of rising long-term interest
rates on the duration of the agency mortgage-backed securities
(‘MBS’) portfolio. Increase in credit spread risk contribution was
also driven by the MBS portfolio, due mainly to US mortgage
spreads widening in the second half of the year owing to
geopolitical events, such as the US-China trade- and tariff-related
tensions, and related concerns around weaker economic growth.
Non-trading VaR includes the interest rate risk in the banking book
transferred to and managed by BSM and the non-trading financial
instruments held by BSM. The management of interest rate risk in
the banking book is described further in the ‘Net interest income
sensitivity’ section.
The daily levels of total non-trading VaR over the last year are set
out in the graph below.
138
HSBC Holdings plc Annual Report and Accounts 2019
Daily VaR (non-trading portfolios), 99% 1 day ($m)
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 2019
Average
Maximum
Minimum
Balance at 31 Dec 2018
Average
Maximum
Minimum
Interest
rate
Credit
spread
Portfolio
diversification1
$m
96.2
65.9
100.1
49.2
61.4
96.8
129.3
59.9
$m
62.5
44.2
81.2
26.6
37.2
48.3
96
27.6
$m
(28.2)
(25.6)
(30.6)
(29.1)
Total2
$m
130.5
84.5
132.8
60.9
68
116
154.1
68
1 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 – such as 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.
2 The total VaR is non-additive across risk types due to diversification effects.
Non-trading VaR excludes equity risk on securities held at fair
value, structural foreign exchange risk and interest rate risk on
fixed-rate securities issued by HSBC Holdings. The following
sections describe the scope of HSBC’s management of market
risks in non-trading books.
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. 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 are not measured by 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 136 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’.
HSBC Holdings plc Annual Report and Accounts 2019
139
Financial review Report of the Directors | Risk
Net structural foreign exchange exposures
Footnotes
1
Currency of structural exposure
Hong Kong dollars
Pound sterling
Chinese renminbi
Euros
Mexican pesos
Canadian dollars
Indian rupees
Saudi riyals
UAE dirhams
Malaysian ringgit
Singapore dollars
Taiwanese dollars
Australian dollars
Indonesian rupiah
Korean won
Swiss francs
Thai baht
Egyptian pound
Brazilian real
2019
$m
46,527
33,383
28,847
14,881
4,600
4,416
4,375
4,280
4,105
2,695
2,256
1,957
1,898
1,665
1,245
1,188
910
875
271
2018
$m
41,477
36,642
27,554
20,964
4,363
3,815
3,837
3,913
2,185
2,572
2,246
1,904
1,823
1,792
1,285
987
856
697
707
Others, each less than $700m
At 31 Dec
6,758
167,132
6,140
165,759
1 At 31 December 2019, we had forward foreign exchange contracts
of $10.5bn (2018: $5bn) in order to manage our sterling structural
foreign exchange exposure.
Shareholders’ equity would decrease by $2,298m (2018: $2,743m)
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 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 2020 (effects over one year and five years); and
NII sensitivity to an instantaneous change in yield curves (12 months)
• an immediate shock of 100bps to the current market-implied
path of interest rates across all currencies on 1 January 2020
(effects over one year and five years).
The sensitivities shown represent our assessment of the change to
a hypothetical base case NII, assuming a static balance sheet and
no management actions from BSM. They incorporate the effect of
interest rate behaviouralisation, managed rate product pricing
assumptions and customer behaviour, including prepayment of
mortgages or customer migration from non-interest-bearing to
interest-bearing deposit accounts under the specific interest rate
scenarios. Market uncertainty and our competitors’ behaviours
also need to be factored in when analysing these results. 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 NII for the 12 months to 31 December
2020 by $853m and $2,798m, respectively. Conversely, falls of
25bps and 100bps would decrease projected NII for the 12 months
to 31 December 2020 by $849m and $3,311m, respectively.
The sensitivity of NII for 12 months increased by $20m in the plus
100bps parallel shock and decreased by $143m in the minus
100bps parallel shock, comparing December 2020 with December
2019. These changes were driven by movements in the sterling
amounts primarily due to changes in balance sheet composition
given by liquidity management.
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 ‘Market
risk management’ section on page 135.
Change in Jan 2020 to Dec 2020 (based on balance sheet at 31 December 2019)
+25bps parallel
-25bps parallel
+100bps parallel
-100bps parallel
$
$m
59
(91)
(16)
HK$
$m
198
(255)
504
(490)
(1,023)
Change in Jan 2019 to Dec 2019 (based on balance sheet at 31 December 2018)
+25bps parallel
-25bps parallel
+100bps parallel
-100bps parallel
70
(160)
147
(523)
Currency
£
$m
278
(332)
1,123
(1,049)
198
(244)
777
232
(301)
773
(1,046)
(1,122)
€
$m
116
11
441
(23)
115
8
408
9
Other
$m
Total
$m
202
(182)
746
(726)
213
(187)
673
(772)
853
(849)
2,798
(3,311)
828
(884)
2,778
(3,454)
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.
140
HSBC Holdings plc Annual Report and Accounts 2019
NII sensitivity to an instantaneous change in yield curves (5 years)
Change in Jan 2020 to Dec 2020 (based on balance sheet at 31 December 2019)
+25bps parallel
-25bps parallel
+100bps parallel
-100bps parallel
Change in Jan 2019 to Dec 2019 (based on balance sheet at 31 December 2018)
+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 2019, the stressed VaR of the
portfolio was $3.2bn (2018: $2.9bn).
We monitor the sensitivity of reported cash flow hedging reserves
to interest rate movements on a yearly basis by assessing
Year 1
Year 2
Year 3
Year 4
Year 5
$m
$m
$m
$m
$m
Total
$m
853
(849)
2,798
(3,311)
828
(884)
2,778
(3,454)
1,158
(1,205)
4,255
(4,621)
1,155
(1,127)
3,863
(4,632)
1,348
(1,402)
4,915
(5,289)
1,416
(1,206)
4,542
(5,276)
1,449
(1,562)
5,155
(5,766)
1,529
(1,296)
4,968
(5,691)
1,523
(1,649)
5,454
6,331
(6,667)
22,577
(6,164)
(25,151)
1,428
(1,597)
5,096
(6,187)
6,356
(6,110)
21,247
(25,240)
the expected reduction in valuation of cash flow hedges due to
parallel movements of plus or minus 100bps in all yield curves.
These particular exposures form only a part of our overall interest
rate exposure.
The following table describes the sensitivity of our cash flow
hedge reported reserves to the stipulated movements in yield
curves at year end. The sensitivities are indicative and based on
simplified scenarios.
Sensitivity of cash flow hedging reported reserves to interest rate movements
At 31 Dec 2019
+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 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
$m
(702)
(0.38)%
732
0.4%
(492)
(0.26)%
550
0.3%
Third-party assets in Balance Sheet Management
For our BSM governance framework, see page 136.
Third-party assets in BSM increased by 1.6% during 2019.
‘Reverse repurchase agreements’ increased by $7bn, reflecting in
part the management of cash and commercial surplus in North
America and Asia respectively. ‘Financial Investments’ increased
by $18bn, driven by an increase in investments predominantly
across Europe and Middle East. ‘Cash and balances at central
banks’ comparatively decreased by $16bn.
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
2019
$m
129,114
268
24,466
310
29,868
351,842
7,655
543,523
2018
$m
144,802
601
25,257
964
22,899
333,622
6,880
535,025
Defined benefit pension schemes
Market risk arises within our defined benefit pension schemes to
the extent that the obligations of the schemes are not fully
matched by assets with determinable cash flows.
For details of our defined benefit schemes, including asset allocation, see
Note 5 on the financial statements, and for pension risk management,
see page 134.
HSBC Holdings plc Annual Report and Accounts 2019
141
Financial review Report of the Directors | Risk
Additional market risk measures applicable only to the
parent company
HSBC Holdings monitors and manages foreign exchange risk and
interest rate risk. In order to manage interest rate risk, HSBC
Holdings uses the projected sensitivity of its NII to future changes
in yield curves and the interest rate gap repricing tables.
Foreign exchange risk
HSBC Holdings’ foreign exchange exposures derive almost entirely
from the execution of structural foreign exchange hedges on
behalf of the Group as its business-as-usual foreign exchange
exposures are managed within tight risk limits. At 31 December
2019, HSBC Holdings had forward foreign exchange contracts of
$10.5bn (2018: $5bn) to manage the Group’s sterling structural
foreign exchange exposure.
Sensitivity of net interest income
HSBC Holdings monitors NII sensitivity over a five-year time
horizon, reflecting the longer-term perspective on interest rate risk
management appropriate to a financial services holding company.
These sensitivities assume that any issuance where HSBC
Holdings has an option to reimburse at a future call date is called
at this date. The table below sets out the effect on HSBC Holdings’
future NII over a five-year time horizon of incremental 25bps
parallel falls or rises in all yield curves at the beginning of each
quarter during the 12 months from 1 January 2020.
The NII sensitivities shown are indicative and based on simplified
scenarios. Immediate interest rate rises of 25bps and 100bps
would decrease projected NII for the 12 months to 31 December
2020 by $21m and $96m, respectively. Conversely, falls of 25bps
and 100bps would increase projected NII for the 12 months to 31
December 2020 by $23m and $99m, respectively.
NII sensitivity to an instantaneous change in yield curves (12 months)
Change in Jan 2020 to Dec 2020 (based on balance sheet at 31 December 2019)
+25bps
-25bps
+100bps
-100bps
Change in Jan 2019 to Dec 2019 (based on balance sheet at 31 December 2018)
+25bps
-25bps
+100bps
-100bps
NII sensitivity to an instantaneous change in yield curves (5 years)
Change in Jan 2020 to Dec 2020 (based on balance sheet at 31 December 2019)
+25bps
-25bps
+100bps
-100bps
Change in Jan 2019 to Dec 2019 (based on balance sheet at 31 December 2018)
+25bps
-25bps
+100bps
-100bps
Other
$m
Total
$m
$
$m
(30)
30
(120)
120
(10)
10
(38)
38
HK$
$m
—
—
—
—
—
—
—
—
£
$m
7
(7)
30
(21)
8
(8)
31
(28)
€
$m
2
—
(6)
—
(5)
8
(22)
33
—
—
—
—
—
—
—
—
Year 1
Year 2
Year 3
Year 4
Year 5
$m
$m
$m
$m
$m
(21)
23
(96)
99
(7)
10
(29)
43
(14)
12
(64)
61
(9)
12
(36)
47
(13)
8
(53)
41
(9)
11
(36)
47
(14)
9
(54)
38
(4)
11
(16)
29
(17)
13
(72)
43
—
(8)
11
(32)
42
(21)
23
(96)
99
(7)
10
(29)
43
Total
$m
(79)
65
(339)
282
(37)
55
(149)
208
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.
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HSBC Holdings plc Annual Report and Accounts 2019
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 sensitivity
Net interest rate risk gap at 31 Dec 2019
Cumulative interest rate gap
Cash at bank and in hand:
– balances with HSBC undertakings
Derivatives
Loans and advances to HSBC undertakings
Financial investments in HSBC undertakings
Investments in subsidiaries
Other assets
Total assets
Amounts owed to HSBC undertakings
Financial liabilities designated at fair values
Derivatives
Debt securities in issue
Other liabilities
Subordinated liabilities
Total equity
Total liabilities and equity
Off-balance sheet items attracting interest rate sensitivity
Net interest rate risk gap at 31 Dec 2018
1
Cumulative interest rate gap
Total
$m
2,382
2,002
72,182
16,106
163,948
1,095
257,715
(464)
(30,303)
(2,021)
(56,844)
(2,203)
(18,361)
(147,519)
(257,715)
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)
Up to
1 year
$m
2,382
—
19,976
13,054
5,035
102
40,549
(464)
—
—
From over
1 to 5 years
From over
5 to 10 years
More than
10 years
Non-interest
bearing
$m
—
—
$m
—
—
$m
—
—
21,084
24,739
2,000
3,006
5,118
—
—
3,924
—
—
—
—
$m
—
2,002
4,383
46
149,871
993
29,208
28,663
2,000
157,295
—
—
(14,628)
(14,698)
—
—
—
(750)
—
(15,446)
(22,336)
(15,154)
(2,000)
—
(227)
(2,021)
(1,908)
(2,203)
(2,534)
(123,887)
(132,780)
309
24,824
—
—
707
3,242
—
153,013
1,077
158,039
(949)
(1,208)
(2,159)
1,888
(1,156)
(1,277)
(123,893)
(128,754)
1,041
30,326
—
(2,543)
(9,975)
—
(11,284)
—
(42,370)
(14,034)
6,796
(6,911)
6,469
(5,565)
(19,259)
(24,824)
—
—
—
—
18,382
2,000
—
379
—
18,761
—
(9,299)
—
—
—
2,000
—
(750)
—
(2,900)
—
(10,317)
(1,372)
(15,339)
6,410
(6,929)
(30,326)
—
—
(2,950)
(18,860)
(30,363)
(8,674)
(8,674)
3,509
—
39,316
—
4,703
—
47,528
—
(1,920)
—
—
(2,000)
(10,707)
(49,671)
16,789
(3,674)
(12,348)
—
—
16,717
—
2,136
—
18,853
—
(11,871)
—
(14,879)
(16,753)
(18,156)
—
(1,646)
(1,450)
(19,895)
(30,713)
(3,080)
(3,080)
—
—
(9,861)
(38,485)
10,544
(9,088)
(12,168)
—
(4,476)
(10,777)
(42,708)
12,718
(11,229)
(23,397)
1
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.
Resilience risk
Overview
Resilience risk is the risk that we are unable to provide critical
services to our customers, affiliates and counterparties as a result
of sustained and significant operational disruption.
Resilience risk arises from failures or inadequacies in processes,
people, systems or external events.
Resilience risk management
Key developments in 2019
In May 2019, in line with the increasing threat landscape that we
face, we formed a new Resilience Risk sub-function. The function
seeks to take a holistic view of the increasing geopolitical,
environmental and technological risks to ensure the continued
provision of critical services to our customers. These threats
include those to our physical buildings, data centres and branches,
cyber-attacks impacting our critical systems and data as well as
threats posed by our reliance on third parties.
We have carried out a number of initiatives to develop and embed
the new sub-function:
• We recruited and consolidated the following previously
independent risk functions: Information and Cyber Security;
Protective Security; Business Continuity and Incident
Management; Building Availability and Workspace Safety;
Third Party; Systems and Data Integrity; and Transaction
Processing.
• We aligned with the operational risk management framework
and the agreed non-financial risk responsibilities.
• We developed a new risk taxonomy with control library
changes, simplifying and removing duplication that existed in
the previously independent risk functions, which helped to
strengthen our overall management of operational risks.
• We focused on the establishment of preventative measures,
which include deepening an understanding of resilience risk,
and creating clearly defined resilience risk oversight services
and end-to-end strategic change programme support.
• We focused on detailed responsive methods, which include
robust business continuity plans, back-up plans, alternative
delivery channels and tested recovery options.
• We invested in IT resilience by designing and implementing IT
systems that continue to be available to use in the face of
adverse conditions.
HSBC Holdings plc Annual Report and Accounts 2019
143
Financial review Report of the Directors | Risk
• We have sought to ensure we understand the root cause of IT
failures and learn lessons both from our own experiences and
those of others.
We prioritise our efforts on areas of material risk and strategic
growth by being present in higher risk profile countries. However,
we are also supporting chief risk officers and our colleagues in the
Operational Risk function in countries where we have no physical
presence, with assessing and understanding their risk profile.
We maintain 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 help
ensure business continuity plans remain accurate, relevant and fit
for purpose. Where possible, we ensured that our critical business
systems are not co-located with business systems users, thereby
reducing concentration risk.
Governance and structure
Regulatory compliance risk
Resilience Risk provides oversight, advice, guidance and challenge
to our global businesses and global functions to strengthen our
ability to prevent, adapt, and learn from resilience-related threats
when – and not if – something goes wrong.
The Resilience Risk target operating model was published in
November 2019. It is helping us to provide a globally consistent
view across resilience risks, strengthening our risk management
oversight while operating effectively as part of a simplified non-
financial risk structure. We view resilience risk through six risk
lenses: strategic change and emerging threats; third-party risk;
information and data resilience; payments and processing
resilience; systems and cyber resilience; and protective security
risk.
The Resilience Risk structure simplifies interactions with our key
stakeholders by providing a single channel of contact for all areas
across Resilience Risk. The Resilience Risk manager interfacing
with the stakeholders will be supported by experts in the wider
Resilience Risk organisation to deliver clear, consistent and
credible responses to the business.
A strategic change and emerging threat team within Resilience
Risk provides increased oversight and robust challenge around
high-priority programmes and change programmes. They consider
how emerging threats, requirements and opportunities arise from
the use of new technologies, and how they could impact our risk
profile.
The Resilience Risk Management Meeting oversees resilience risk
and has accountability to the RMM. The Resilience Risk
management meeting is supported by its sub-committees that
provide oversight over each of the respective Resilience Risk sub-
teams.
The Resilience Risk Global Governance Meeting aims to ensure
that resilience risk is managed within its defined risk appetite. It is
jointly chaired by the Global Head of Operational Resilience and
the Group Chief Information Officer. The Resilience Risk Global
Governance Meeting has accountability into the Non-Financial
Risk Management Board and escalates issues to the Group Risk
Committee.
Overview
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, which as a consequence incur
fines and penalties and suffer damage to our business.
Regulatory compliance risk arises from the risks associated with
breaching our duty to our customers and other counterparties,
inappropriate market conduct and breaching other regulatory
requirements.
Regulatory compliance risk management
Key developments in 2019
There were no material changes to the policies and practices for
the management of regulatory compliance risk in 2019, except for
the initiatives that we undertook to raise our standards in relation
to the conduct of our business, as described below under
‘Conduct of business’.
Governance and structure
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 our strategic objectives. Regulatory
Compliance is part of the Compliance function, which is headed
by the Group Chief Compliance Officer. Regulatory Compliance is
structured as a global sub-function with regional and country
Regulatory Compliance teams, which support and advise each
global business and global function.
Key risk management processes
We regularly review our policies and procedures. Global policies
and procedures require the prompt identification and escalation of
any actual or potential regulatory breach to Regulatory
Compliance. Reportable events are escalated to the RMM and the
GRC, as appropriate. Matters relating to the Group’s regulatory
conduct of business are reported to the GRC.
Key risk management processes
Conduct of business
Operational resilience is our ability to adapt operations to continue
functioning when an operational disturbance occurs. We measure
resilience in terms of the maximum disruption period or the impact
tolerance that we are willing to accept for a business service.
Resilience risk cannot be managed down to zero, so we
concentrate on material risk and critical business services and
strategic change programmes that have the highest potential to
threaten our ability to provide continued service to our customers.
The Resilience Risk team oversees the identification, management
and control of resilience risks. To support our oversight, a variety
of changes have been made to the risk taxonomy and control
library to simplify and strengthen the risk management of
Resilience Risk. The risk taxonomy and control library was
developed by looking at a number of frameworks and control
libraries, including National Institute for Standards and
Technology, Control Objectives for Information and related
Technology and Standard of Good Practice.
Continuity of business operations
Every department within the organisation undertakes business
continuity management. This incorporates the development of a
plan that includes a business impact analysis, which assesses risk
when business disruption occurs.
In 2019, we continued to promote and encourage good conduct
through our people’s behaviour and decision making in order to
deliver fair outcomes for our customers, and to maintain financial
market integrity. During 2019:
• We developed and implemented a set of principles to govern
the ethical management and use of data and artificial
intelligence (‘AI’), which includes support of digital products
and services. This was complemented with training of our
people to use data appropriately.
• We continued to focus on the needs of vulnerable customers in
our product and process design. In specific markets, we
provided awareness and training initiatives, and we also
deployed staff with specialist knowledge of conditions such as
dementia. Financial inclusion initiatives progressed in specific
markets, combating financial abuse and developing financial
education schemes for older customers.
• We further defined roles and responsibilities for our people as
part of the enterprise risk management framework across the
Group to consider the customer in decision making and action.
• We delivered our fifth annual global mandatory training course
on conduct, and reinforced the importance of conduct by
highlighting examples of good conduct.
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HSBC Holdings plc Annual Report and Accounts 2019
• We continued the expansion of recognition programmes across
business areas for our people when they deliver exceptional
service, when working directly with customers or in supporting
roles.
The Board continues to maintain oversight of conduct matters
through the GRC.
Further details can be found under the ‘Our conduct’ section of
www.hsbc.com/our-approach/risk-and-responsibility.
Financial crime and fraud risk
Overview
Financial crime and fraud risk is the risk that we knowingly or
unknowingly help parties to commit or to further potentially illegal
activity, including both internal and external fraud. Financial crime
and fraud risk arises from day-to-day banking operations.
Financial crime and fraud risk management
Key developments in 2019
In 2019, we continued to increase our efforts to strengthen our
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. We have begun several initiatives
to define the next phase of financial crime risk management,
including:
• We continued to strengthen our anti-fraud capabilities,
focusing upon threats posed by new and existing technologies,
and delivered a comprehensive fraud training programme to
our people.
• We continued to invest in the use of AI and advanced analytics
techniques to develop a financial crime risk management
framework for the future.
• We launched advanced anti-money laundering (‘AML’) and
sanctions automation systems to detect and disrupt financial
crime in international trade. These systems are designed to
strengthen our ability to fight financial crime through the
detection of suspicious activity and possible criminal networks.
Governance and structure
Since establishing a global framework of financial crime risk
management committees in the first quarter of 2018, we have
continued to strengthen and review the effectiveness of our
governance framework to manage financial crime risk. Formal
governance committees are held across all countries, territories,
regions and lines of business, and are chaired by the respective
CEOs. They help to enable compliance with the letter and the spirit
of all applicable financial crime compliance laws and regulations,
as well as our own standards, values and policies relating to
financial crime risks.
In 2019, at a Group level, the Financial System Vulnerabilities
Committee (‘FSVC’) reported to the Board on matters relating to
financial crime. The committee, which was attended by the Group
Chief Compliance Officer, received regular reports on actions
being taken to address issues and vulnerabilities, and updates on
the ongoing work to strengthen financial crime controls in relation
to money laundering and sanctions. In order to simplify our
governance framework and processes, and as a reflection of the
growing maturity of our financial crime and fraud risk
management, responsibility for the oversight of financial crime risk
transferred from the FSVC to the GRC, with the final meeting of
the FSVC taking place on 15 January 2020. For more details on
the work of the FSVC, see page 182.
Key risk management processes
We continued to deliver a programme to further enhance the
policies and controls around identifying and managing the risks of
bribery and corruption across our business. Our transformation
programme continued to focus on our anti-fraud and anti-tax
evasion capabilities. Further enhancements have been made to our
governance and policy frameworks, and to the management
information reporting process, which demonstrates the
effectiveness of our financial crime controls. We are investing in
the next generation of capabilities to fight financial crime by
applying advanced analytics and AI. We remain committed to
enhancing our risk assessment capabilities and to delivering more
proactive risk management.
Working in partnership with the public sector and other financial
institutions is vital to managing financial crime risk. We are a
strong proponent of public-private partnerships and participate in
information-sharing initiatives around the world to gain a better
understanding of these risks so that they can be mitigated more
effectively.
Skilled Person/Independent Consultant
Following expiration in December 2017 of the anti-money
laundering deferred prosecution agreement entered into with the
US Department of Justice (‘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 2013. He has also
continued to work in his capacity as an Independent Consultant
under a cease-and-desist order issued by the US Federal Reserve
Board (‘FRB’).
The Skilled Person has assessed HSBC’s progress towards being
able to effectively manage its financial crime risk on a business-as-
usual basis. The Skilled Person issued several reports in 2019. 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. Reflective of HSBC’s
significant progress in strengthening its financial crime risk
management capabilities, HSBC’s engagement with the current
Skilled Person will be terminated and a new Skilled Person with a
narrower mandate will be appointed to assess the remaining areas
that require further work in order for HSBC to transition fully to
business-as-usual financial crime risk management. The FCA also
intends to take steps to maintain global oversight of HSBC’s
management of financial crime risk.
The Independent Consultant completed his sixth annual
assessment, which was primarily focused on HSBC’s sanctions
programme. The Independent Consultant concluded that HSBC
continues to make significant strides toward establishing an
effective sanctions compliance programme, commending HSBC’s
material progress since the fifth annual assessment in 2018.
However, he has determined that certain areas within HSBC’s
sanctions compliance programme require further work. A seventh
annual assessment will take place in the first quarter of 2020. The
Independent Consultant will continue to carry out an annual Office
of Foreign Assets Control compliance review, at the FRB’s
discretion.
Throughout 2019, 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 received the Skilled
Person’s country and quarterly reports and the Independent
Consultant’s sixth annual assessment report. Given our general
progress in strengthening our financial crime systems and
controls, and in order to simplify our governance framework and
processes, responsibilities of the FSVC transferred recently to the
Group Risk Committee, and the final meeting of the FSVC was
held on 15 January 2020.
HSBC Holdings plc Annual Report and Accounts 2019
145
Financial review Report of the Directors | Risk
Model risk
Overview
Model risk is the potential for adverse consequences from
business decisions informed by models, which can be exacerbated
by errors in methodology, design or the way they are used. Model
risk arises in both financial and non-financial contexts whenever
business decision making includes reliance on models.
Key developments in 2019
In 2019, we carried out a number of initiatives to further develop
and embed the Model Risk Management sub-function, including:
• We appointed regional heads of Model Risk Management in all
of our key geographies, and a Global Head of Model Risk
Governance.
• We refined the model risk policy to enable a more risk-based
approach to model risk management.
• We conducted a full review of model governance arrangements
overseeing model risk across the Group, resulting in a range of
enhancements to the underlying structure to improve
effectiveness and increase business engagement.
• We designed a new target operating model for Model Risk
Management, referring to internal and industry best practice.
• We enhanced the calculation methodology within our Group
risk appetite for model risk.
Governance and structure
We placed greater focus on our model risk activities during 2019,
and to reflect this, we created the role of Chief Model Risk Officer,
reporting to the Group Chief Risk Officer. This has been filled on an
interim basis while we seek a permanent role holder. Model Risk
Management is structured as a sub-function within Global Risk
Strategy. Regional Model Risk Management teams support and
advise all areas of the Group.
Key risk management processes
We use a variety of modelling approaches, including regression,
simulation, sampling, machine learning and judgemental
scorecards for a range of business applications, in activities such
as customer selection, product pricing, financial crime transaction
monitoring, creditworthiness evaluation and financial reporting.
Global responsibility for managing model risk is delegated from
the RMM to the Global Model Risk Committee, which is chaired by
the Group Chief Risk Officer. This committee regularly reviews our
model risk management policies and procedures, and requires the
first line of defence to demonstrate comprehensive and effective
controls based on a library of model risk controls provided by
Model Risk Management.
Model Risk Management also reports on model risk to senior
management on a regular basis through the use of the risk map,
risk appetite metrics and top and emerging risks.
We regularly review the effectiveness of these processes,
including the model oversight committee structure, to help ensure
appropriate understanding and ownership of model risk is
embedded in the businesses and functions.
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HSBC Holdings plc Annual Report and Accounts 2019
Insurance manufacturing operations risk
Overview
Insurance manufacturing operations risk management
Insurance manufacturing operations risk in 2019
HSBC’s bancassurance model
Measurement
Key risk types
– Market risk
– Credit risk
– Capital and liquidity risk
– Insurance risk
Overview
Page
146
146
147
147
147
149
149
150
150
151
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. The
cost of claims and benefits can be influenced by many factors,
including mortality and morbidity experience, as well as lapse and
surrender rates.
Insurance manufacturing operations risk
management
Key developments in 2019
There were no material changes to our policies and practices for
the management of risks arising in our insurance manufacturing
operations in 2019.
Governance and structure
(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 74. 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,
Resilience 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.
Key risk management processes
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.
• 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 on new contracts 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.
Insurance manufacturing operations risk in 2019
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
HSBC, the issuer.
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.
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 eight
countries and territories, which are Hong Kong, France, Singapore,
the UK, mainland China, Malta, Mexico and Argentina. 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 through branches, direct
channels and third-party distributors.
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.
Each of the businesses operates to appetite limits of 135% or
higher. 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.
HSBC Holdings plc Annual Report and Accounts 2019
147
Financial review Report of the Directors | Risk
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 2019
Footnotes
2
3
4
With
DPF
$m
73,929
—
21,652
202
35,299
12,447
4,329
2,208
—
2,495
78,632
—
77,147
197
—
77,344
—
77,344
Balance sheet of insurance manufacturing subsidiaries by type of contract (continued)
Unit-linked
Other
contracts1
Shareholder
assets and
liabilities
$m
7,333
—
7,119
(6)
18
—
202
72
—
2
7,407
2,011
6,151
23
—
8,185
—
8,185
$m
17,514
—
3,081
9
13,436
445
543
1,563
—
211
19,288
3,881
14,141
6
—
18,028
—
18,028
$m
8,269
—
2,426
3
4,076
1,136
628
1
8,945
602
Total
$m
107,045
—
34,278
208
52,829
14,028
5,702
3,844
8,945
3,310
17,817
123,144
—
—
1,297
4,410
5,707
13,879
19,586
5,892
97,439
1,523
4,410
109,264
13,879
123,143
(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
Footnotes
2
3
4
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
contracts1
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
14,722
—
—
1,051
3,659
4,710
12,232
16,942
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
1
‘Other Contracts’ includes term insurance, credit life insurance, universal life insurance and investment contracts not included in the ‘Unit-linked’
or ‘With DPF’ columns.
2 Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.
3 Present value of in-force long-term insurance business.
4
‘Deferred tax’ includes the deferred tax liabilities arising on recognition of PVIF.
148
HSBC Holdings plc Annual Report and Accounts 2019
Balance sheet of insurance manufacturing subsidiaries by geographical region1
(Audited)
Financial assets
– trading assets
Footnotes
Europe
$m
Asia
$m
31,613
74,237
—
—
– 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 2019
2
3
4
15,490
84
100
13,071
2,868
237
945
1,085
33,880
1,139
28,437
229
2,212
32,017
1,862
33,879
Balance sheet of insurance manufacturing subsidiaries by geographical region1 (continued)
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
Footnotes
2
3
4
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
18,562
124
52,186
582
2,783
3,604
7,841
2,176
87,858
4,753
67,884
1,275
2,172
76,084
11,774
87,858
Asia
$m
66,793
—
15,744
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
Latin
America
$m
1,195
—
226
—
543
375
51
3
159
49
Total
$m
107,045
—
34,278
208
52,829
14,028
5,702
3,844
8,945
3,310
1,406
123,144
—
1,118
19
26
1,163
243
1,406
Latin
America
$m
1,320
—
326
—
522
441
31
5
122
27
1,474
—
1,126
7
58
1,191
283
1,474
5,892
97,439
1,523
4,410
109,264
13,879
123,143
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
1 HSBC has no insurance manufacturing subsidiaries in Middle East and North Africa or North America.
2 Comprise mainly loans and advances to banks, cash and inter-company balances with other non-insurance legal entities.
3 Present value of in-force long-term insurance business.
4
‘Deferred tax’ includes the deferred tax liabilities arising on recognition of PVIF.
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.
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. Amounts 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
HSBC Holdings plc Annual Report and Accounts 2019
149
Financial review Report of the Directors | Risk
following table shows the total reserve held for the cost of
guarantees, the range of investment returns on assets supporting
these products and the implied investment return that would
enable the business to meet the guarantees.
The cost of guarantees increased to $693m (2018: $669m)
primarily due to the reduction in swap rates in France and Hong
Kong, partly offset by the impact of modelling changes in Hong
Kong.
For unit-linked contracts, market risk is substantially borne by the
policyholder, but some market risk exposure typically remains, as
fees earned are related to the market value of the linked assets.
Financial return guarantees
(Audited)
Capital
Nominal annual return
Nominal annual return
Nominal annual return
At 31 Dec
Investment
returns implied
by guarantee
%
0.0
0.1 - 2.0
2.0 - 4.0
4.1 - 5.0
Footnotes
1
2019
Long-term
investment
returns on
relevant
portfolios
%
1.3 - 3.9
3.0-4.5
2.4 - 4.5
2.3 - 4.1
Cost of
guarantees
Investment
returns implied
by guarantee
$m
110
118
355
110
693
%
0.0
0.1-2.0
2.1-4.0
4.1-5.0
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
$m
100
78
420
71
669
1 A block of contracts in France with guaranteed nominal annual returns in the range 1.25%–3.72% is reported entirely in the 2.0%–4.0% category
in line with the average guaranteed return of 2.6% offered to policyholders by these contracts.
Sensitivities
Changes in financial market factors, from the economic
assumptions in place at the start of the year, had a positive impact
on reported profit before tax of $450m (2018: $326m negative).
The following table illustrates the effects of selected interest rate,
equity price and foreign exchange rate scenarios on our profit for
the year and the total equity of our insurance manufacturing
subsidiaries.
Where appropriate, the effects of the sensitivity tests on profit
after tax and equity incorporate the impact of the stress on the
PVIF. 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. The differences between
the impacts on profit after tax and equity are driven by the
changes in value of the bonds measured at fair value through
other comprehensive income, which are only accounted for in
equity.
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
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 148.
The credit quality of the reinsurers’ share of liabilities under
insurance contracts is assessed as ‘satisfactory’ or higher (as
defined on page 85), with 100% of the exposure being neither past
due nor impaired (2018: 100%).
150
HSBC Holdings plc Annual Report and Accounts 2019
2019
2018
Effect on
profit after tax
Effect on
total equity
Effect on
profit after tax
Effect on
total equity
$m
43
(221)
270
(276)
41
(41)
$m
(37)
(138)
270
(276)
41
(41)
$m
9
(28)
213
(202)
36
(36)
$m
(61)
46
213
(202)
36
(36)
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
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.
Capital and 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 2019. 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 remaining contractual maturity of investment contract
liabilities is included in Note 29 on page 298.
The profile of the expected maturity of insurance contracts at
31 December 2019 remained comparable with 2018.
Expected maturity of insurance contract liabilities
(Audited)
Unit-linked
With DPF and Other contracts
At 31 Dec 2019
Unit-linked
With DPF and Other contracts
At 31 Dec 2018
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 148 and 149 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 2018.
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.
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
Within 1 year
1-5 years
5-15 years
Over 15 years
Expected cash flows (undiscounted)
$m
1,296
7,907
9,203
1,119
7,459
8,578
$m
3,153
26,906
30,059
2,932
27,497
30,429
$m
2,654
50,576
53,230
2,684
46,217
48,901
$m
1,955
71,731
73,686
1,962
55,989
57,951
Total
$m
9,058
157,120
166,178
8,697
137,162
145,859
Mortality and morbidity risk is typically associated with life
insurance contracts. The effect on profit of an increase in mortality
or morbidity depends on the type of business being written. Our
largest exposures to mortality and morbidity risk exist in Hong
Kong and Singapore.
Sensitivity to lapse rates depends on the type of contracts
being written. For a portfolio of term assurance, an increase in
lapse rates typically has a negative effect on profit due to the loss
of future income on the lapsed policies. However, some contract
lapses have a positive effect on profit due to the existence of
policy surrender charges. We are most sensitive to a change in
lapse rates on unit-linked and universal life contracts in Hong Kong
and Singapore, and DPF contracts in France.
Expense rate risk is the exposure to a change in the cost
of administering insurance contracts. To the extent that increased
expenses cannot be passed on to policyholders, an increase in
expense rates will have a negative effect on our profits.
2019
$m
(88)
88
(99)
114
(106)
105
2018
$m
(77)
82
(95)
107
(92)
93
HSBC Holdings plc Annual Report and Accounts 2019
151
Financial review Report of the Directors | Capital
Capital
Capital overview
Own funds
Risk-weighted assets
Leverage ratio
Capital overview
Capital ratios1
Transitional basis
Common equity tier 1 ratio
Tier 1 ratio
Total capital ratio
End point basis
Common equity tier 1 ratio
Tier 1 ratio
Total capital ratio
Total regulatory capital and risk-weighted assets1
Page
152
153
153
155
RWAs by risk types
Credit risk
Counterparty credit risk
Market risk
Operational risk
At 31 Dec 2019
RWAs
$bn
676.6
44.1
29.9
92.8
Capital
required2
$bn
54.2
3.5
2.4
7.4
843.4
67.5
At
31 Dec
31 Dec
2019
%
14.7
17.6
20.4
14.7
17.2
18.9
2018
%
14.0
17.0
20.0
14.0
16.6
19.4
1 Capital figures and ratios at 31 December 2019 are calculated in
accordance with the revised Capital Requirements Regulation, as
implemented (‘CRR II’). Prior period capital figures are reported
under the Capital Requirements Regulation and Directive (‘CRD IV’).
Unless otherwise stated, all figures are calculated using the EU's
regulatory transitional arrangements for IFRS 9 ‘Financial
Instruments’ in article 473a of the Capital Requirements Regulation.
‘Capital required’ represents the minimum total capital charge set at
8% of risk-weighted assets by article 92 of the Capital Requirements
Regulation.
2
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.
At
Approach and policy
Transitional basis
Common equity tier 1 capital
Additional tier 1 capital
Tier 2 capital
Total regulatory capital
Risk-weighted assets
End point basis
Common equity tier 1 capital
Additional tier 1 capital
Tier 2 capital
Total regulatory capital
Risk-weighted assets
31 Dec
31 Dec
2019
$m
2018
$m
123,966
121,022
24,393
23,791
172,150
843,395
26,120
26,096
173,238
865,318
123,966
121,022
20,870
14,473
159,309
843,395
22,525
24,511
168,058
865,318
Our approach to capital management is driven by our strategic
and organisational requirements, taking into account the
regulatory, economic and commercial environment. We aim to
maintain a strong capital base to support the risks inherent in our
business and invest in accordance with our strategy, meeting both
consolidated and local regulatory capital requirements at all times.
Our policy on capital management is underpinned by a capital
management framework and our internal capital adequacy
assessment process (‘ICAAP’), which 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.
For further details, please refer to our Pillar 3 Disclosures at 31
December 2019.
152
HSBC Holdings plc Annual Report and Accounts 2019
Own funds
Own funds disclosure
(Audited)
Ref*
1
2
3
5
5a
6
28
29
36
43
44
45
51
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
Total regulatory adjustments to common equity tier 1
Common equity tier 1 capital
Additional tier 1 capital before regulatory adjustments
Total regulatory adjustments to additional tier 1 capital
Additional tier 1 capital
Tier 1 capital
Tier 2 capital before regulatory adjustments
Total regulatory adjustments to tier 2 capital
Tier 2 capital
Total capital
At
31 Dec
31 Dec
2019
$m
2018
$m
22,873
22,873
127,188
1,735
4,865
(3,381)
153,280
(29,314)
123,966
24,453
(60)
24,393
148,359
25,192
(1,401)
23,791
172,150
22,384
22,384
121,180
3,368
4,854
3,697
155,483
(34,461)
121,022
26,180
(60)
26,120
147,142
26,729
(633)
26,096
173,238
* The references identify the lines prescribed in the European Banking Authority (‘EBA’) template, which are applicable and where there is a value.
Throughout 2019, we complied with the PRA’s regulatory capital
adequacy requirements, including those relating to stress testing.
At 31 December 2019, our common equity tier 1 (‘CET1’) ratio
increased to 14.7% from 14.0% at 31 December 2018.
CET1 capital increased during the year by $2.9bn, mainly as a
result of:
• capital generation of $6.0bn through profits;
• a fall in the deduction for goodwill and other intangible assets
of $4.9bn. This was primarily due to $7.3bn of goodwill
impairment, partly offset by an increase in internally generated
software;
• a $1.5bn increase in FVOCI reserve; and
• favourable foreign currency translation differences of $1.0bn.
These increases were partly offset by:
• dividends and scrip of $9.0bn;
• share buy-backs of $1.0bn; and
• an increase in the deduction for excess expected loss $0.7bn.
Our Pillar 2A requirement at 31 December 2019, as per the PRA’s
Individual Capital Requirement based on a point-in-time
assessment, was 3.0% of RWAs, of which 1.7% was met by CET1.
Risk-weighted assets
Risk-weighted assets (‘RWAs’) decreased by $21.9bn during the
year. The $26.9bn decrease (excluding foreign currency translation
differences) comprised the movements described by the following
comments.
Asset size
The $9.0bn rise in RWAs due to asset size movements was the
result of lending growth largely in CMB, RBWM and GB&M, partly
offset by reductions due to active portfolio management in GB&M
and CMB. In CMB, a $9.5bn RWA increase arose from growth of
$14.4bn principally in Asia and Europe, which was partly offset by
active portfolio management measures totalling $4.9bn, largely in
Europe. In RBWM, the $7.5bn RWA increase was the result of
lending growth, whereas the fall of $1.6bn in GB&M resulted from
management actions of $12.3bn, mainly in Europe, Asia and North
America, which offset growth of $10.7bn. A $4.0bn decrease in
Corporate Centre was primarily due to disposals from the legacy
portfolio, and a $2.4bn fall in market risk levels mainly resulted
from reduced exposures.
Asset quality
The $3.7bn growth as a result of changes in asset quality included
a $3.3bn increase in CMB RWAs, most notably in Asia, and a
$0.6bn increase in GB&M RWAs, predominantly in Europe. These
movements were primarily due to changes in portfolio mix.
Model updates
The $7.7bn reduction in RWAs from model updates included a
$4.8bn fall in GB&M and CMB RWAs, largely due to global
corporate model updates, and a $2.3bn decrease in GPB RWAs,
reflecting changes to Private Banking models in Asia and North
America. The $0.6bn decrease in RBWM RWAs was mainly due to
updates to UK retail models.
Methodology and policy
The $32.2bn fall in RWAs due to methodology and policy changes
was primarily due to management initiatives of $25.9bn, largely in
CMB and GB&M. These included risk parameter refinements and
securitisation transactions.
A change to our best estimate of expected loss on corporate
exposures further reduced RWAs by $6.3bn, primarily in CMB’s
UK portfolio. The $3.7bn decrease in market risk RWAs derived
mainly from increased diversification benefits following regulatory
approval to expand the scope of consolidation. In addition, an
approved change to operational risk methodology caused a $0.9bn
fall in RWAs across all global businesses.
These decreases were partly offset by a $4.5bn increase in
tangible fixed assets within Corporate Centre as a result of
implementing IFRS 16 ‘Leases’, recognising right-of-use assets in
relation to leases previously classified as ’operating leases’.
HSBC Holdings plc Annual Report and Accounts 2019
153
Financial review Report of the Directors | Capital
RWAs by global business
Credit risk
Counterparty credit risk
Market risk
Operational risk
At 31 Dec 2019
Credit risk
Counterparty credit risk
Market risk
Operational risk
At 31 Dec 2018
RWAs by geographical region
Credit risk
Counterparty credit risk
Market risk
Operational risk
At 31 Dec 2019
Credit risk
Counterparty credit risk
Market risk
Operational risk
At 31 Dec 2018
RBWM
$bn
103.8
—
—
30.2
134.0
99.6
—
—
27.3
126.9
Europe
$bn
208.3
25.1
23.1
24.5
281.0
219.5
27.3
24.0
27.3
298.1
CMB
$bn
290.8
—
—
25.9
316.7
296.9
—
—
24.3
321.2
Asia
$bn
292.0
8.7
20.5
45.2
366.4
291.9
9.2
23.3
39.5
363.9
GB&M
$bn
161.1
42.7
23.6
30.8
258.2
172.0
45.1
32.4
31.5
281.0
GPB
$bn
11.0
0.2
—
2.8
14.0
13.8
0.2
—
2.8
16.8
Corporate
Centre
$bn
109.9
1.2
6.3
3.1
120.5
108.8
2.0
3.4
5.2
119.4
MENA
North
America
Latin
America
$bn
48.0
1.3
2.0
6.2
57.5
47.0
1.0
1.9
6.8
56.7
$bn
98.4
7.3
4.4
11.9
122.0
103.1
8.3
8.5
11.7
131.6
$bn
29.9
1.7
1.8
5.0
38.4
29.6
1.5
1.4
5.8
38.3
Footnotes
1
1
1 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.
RWA movement by global business by key driver
RWAs at 1 Jan 2019
Asset size
Asset quality
Model updates
Methodology and policy
Acquisitions and disposals
Foreign exchange movements
Total RWA movement
RWAs at 31 Dec 2019
Credit risk, counterparty credit risk and operational risk
RBWM
$bn
126.9
7.5
—
(0.6)
(0.6)
—
0.8
7.1
CMB
$bn
321.2
9.5
3.3
(1.9)
(18.3)
—
2.9
(4.5)
134.0
316.7
GB&M
$bn
248.6
(1.6)
0.6
(2.9)
(11.0)
—
0.9
(14.0)
234.6
GPB
$bn
16.8
—
(0.3)
(2.3)
(0.3)
—
0.1
(2.8)
14.0
Corporate
Centre
Market
risk
$bn
116.0
(4.0)
(0.1)
—
1.7
0.3
0.3
(1.8)
114.2
$bn
35.8
(2.4)
0.2
—
(3.7)
—
—
(5.9)
29.9
RWA movement by geographical region by key driver
Credit risk, counterparty credit risk and operational risk
RWAs at 1 Jan 2019
Asset size
Asset quality
Model updates
Methodology and policy
Acquisitions and disposals
Foreign exchange movements
Total RWA movement
RWAs at 31 Dec 2019
Europe
$bn
274.1
(2.0)
1.9
(2.9)
(17.3)
—
4.1
(16.2)
257.9
154
HSBC Holdings plc Annual Report and Accounts 2019
Asia
$bn
340.6
14.9
1.6
(2.4)
(9.6)
—
0.8
5.3
MENA
North
America
Latin
America
Market
risk
$bn
54.8
1.4
—
(0.1)
(1.0)
0.3
0.1
0.7
$bn
123.1
(3.8)
(0.5)
(2.3)
(0.2)
—
1.3
(5.5)
$bn
36.9
0.9
0.5
—
(0.4)
—
(1.3)
(0.3)
36.6
$bn
35.8
(2.4)
0.2
—
(3.7)
—
—
(5.9)
29.9
345.9
55.5
117.6
Total
$bn
676.6
44.1
29.9
92.8
843.4
691.1
47.3
35.8
91.1
865.3
Total
$bn
676.6
44.1
29.9
92.8
843.4
691.1
47.3
35.8
91.1
865.3
Total
RWAs
$bn
865.3
9.0
3.7
(7.7)
(32.2)
0.3
5.0
(21.9)
843.4
Total
RWAs
$bn
865.3
9.0
3.7
(7.7)
(32.2)
0.3
5.0
(21.9)
843.4
Leverage ratio
Ref*
20
21
Tier 1 capital
Total leverage ratio exposure
22
Leverage ratio
EU-23 Choice of transitional arrangements for the definition of the capital measure
UK leverage ratio exposure – quarterly average
UK leverage ratio – quarterly average
UK leverage ratio – quarter end
Footnotes
At
31 Dec
2019
$bn
144.8
2,726.5
%
5.3
31 Dec
2018
$bn
143.5
2,614.9
%
5.5
Fully phased-in
Fully phased-in
2,535.4
2,464.4
%
5.8
5.7
%
5.8
6.0
1
1
1
* The references identify the lines prescribed in the EBA template.
1 UK leverage ratio denotes the Group’s leverage ratio calculated under the PRA’s UK leverage framework and excludes qualifying central bank
balances from the calculation of exposure.
Our leverage ratio calculated in accordance with the Capital
Requirements Regulation was 5.3% at 31 December 2019, down
from 5.5% at 31 December 2018. The increase in exposure was
primarily due to growth in customer lending and financial
investments.
At 31 December 2019, our UK minimum leverage ratio
requirement of 3.25% under the PRA’s UK leverage framework
was supplemented by an additional leverage ratio buffer of 0.7%
and a countercyclical leverage ratio buffer of 0.2%. These
additional buffers translated into capital values of $17.7bn, and
$5.4bn respectively. We exceeded these leverage requirements.
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 of wide-ranging information
on their risks, capital and management. Our Pillar 3 Disclosures at
31 December 2019 is published on our website, www.hsbc.com/
investors.
HSBC Holdings plc Annual Report and Accounts 2019
155
Financial review Corporate
governance report
157
158
162
164
Chairman’s governance statement
The Board
Group Management Board
Board roles and responsibilities
165 How we are governed
166
167
168
170
171
Board activities during 2019
Board governance
Board development
Board effectiveness
Board committees
184 Directors’ remuneration report
211
214
215
218
219
Share capital and other disclosures
Internal control
Employees
Statement of compliance
Directors’ responsibility statement
HSBC is committed to high standards
of corporate governance. We have a
comprehensive range of policies and
systems in place to ensure that the
Group is well managed, with effective
oversight and control.
156
HSBC Holdings plc Annual Report and Accounts 2019 Chairman’s governance statement
“ The Board sets the tone to achieve
our results in a way that treats our
customers fairly and helps to strengthen
communities and ensure a properly
functioning financial system.”
Mark E Tucker
Group Chairman
Dear Shareholder
On behalf of the Board, I am pleased to present the corporate
governance report for 2019.
Corporate governance provides the framework within which we form
our decisions and build our business. The entire Board is focused on
creating long-term sustainable growth for our shareholders. We also
aim to deliver long-term value to all stakeholders. Our corporate
governance framework helps us achieve these goals.
We continued our efforts to strengthen and simplify our governance
arrangements during the year, with the aim of achieving more effective
decision making at Board and management levels. A key achievement
in this respect was the demise of our Financial System Vulnerabilities
Committee at the end of January 2020, which followed regulatory
approval. More information on the transition of the committee’s
responsibilities to the Group Risk Committee can be found on page 182.
There have been a number of Board changes throughout the year. As a
result of these changes, the Board reviewed its current and future skills
needs and began a search for additional non-executive Directors, with
complementary skills and experience to help the Board through the
next stage of the Group’s strategy.
Setting our culture
We believe how we do business is as important as what we do.
The Board sets the tone to achieve our results in a way that treats
our customers fairly and helps to strengthen communities and ensure
a properly functioning financial system. Our culture determines how
we behave, how we make decisions and our attitude towards risk.
It is also aligned with the Group’s purpose, values and strategy.
Corporate governance reform and engagement
With main share listings on the London Stock Exchange and The Stock
Exchange of Hong Kong Limited, the Group is required to comply with
both corporate governance codes.
Corporate governance reform
A number of new requirements were introduced by the new UK
Corporate Governance Code 2018. The new UK Code and new reporting
regulations place greater emphasis on company purpose, culture and
the need for boards to consider views of their stakeholders when
making decisions. Information on how the Board discharged its duties
can be found on pages 42 to 43.
mechanisms through which it receives views from the workforce and
determined that these were working effectively and, therefore, did not
adopt one of the three workforce engagement options proposed under
the UK Code. Further details can be found on page 172.
The Board commissioned an external effectiveness review during the
year. The review confirmed that the Board and its committees were
operating effectively and that each individual Director has sufficient
time to meet their Board responsibilities. However, the review identified
a number of enhancements to improve the Board’s practices. Details
of the findings and the actions can be found on page 170.
Subsidiary relationships
The Board oversaw the implementation of initiatives to strengthen,
simplify and enhance corporate governance arrangements at all levels of
the Group during 2019. We also took action to formalise our interactions
with our principal subsidiaries by holding regular forums with the chairs
of these subsidiaries and their material subsidiaries, which provided an
opportunity to share best practice and discuss common challenges.
In order to improve Board effectiveness, programmes such as ‘Ways of
Working’ were introduced to make management and Board meetings
shorter, more focused and decisive. A total of 200,000 hours of
management time were saved and the initiative won ‘Governance
Project of the Year’ at the ICSA Chartered Governance Institute Awards.
We also introduced our subsidiary accountability framework to embed
improved governance procedures across the Group.
Focus for 2020
Strong and effective corporate governance will be of critical importance
as the Board and management progress the implementation of the new
business update.
We will continue to seek opportunities to improve our corporate
governance arrangements and adapt our governance processes so
that these align with the Group’s strategic and operational ambitions,
and support the Board in its objective of providing long-term
sustainable value for all stakeholders.
We are committed to engaging meaningfully with the workforce
regardless of geographical location to help ensure that the Board
considers the views of employees. The Board considered the existing
Mark E Tucker
Group Chairman
18 February 2020
157
Corporate governanceHSBC Holdings plc Annual Report and Accounts 2019
Report of the Directors | Corporate governance report
The Board
The Board aims to promote the Group’s long-term
success, deliver sustainable value to shareholders
and promote a culture of openness and debate.
Chairman and executive Directors
Mark E Tucker (62)
Group Chairman
Appointed to the Board: September 2017
Group Chairman since: October 2017
Skills and experience: With over 30 years of
experience in financial services in Asia and the
UK, Mark has a deep understanding of the industry
and the markets in which we operate.
Career: Mark was previously Group Chief Executive
and President of AIA Group Limited (‘AIA’). Prior to
joining AIA, he held various senior management
roles with Prudential plc, including as Group Chief
Executive for four years. He served on Prudential’s
Board for 10 years.
Mark previously served as non-executive Director of
the Court of The Bank of England, as an independent
non-executive Director of Goldman Sachs Group and
as Group Finance Director of HBOS plc.
External appointments:
– Chair of the CityUK
– Non-executive Chairman of Discovery Limited
Noel Quinn (58)
Group Chief Executive
Appointed to the Board: August 2019
Ewen Stevenson (53)
Group Chief Financial Officer
Appointed to the Board: January 2019
Skills and experience: Noel has more than 30
years of banking and financial services experience,
both in the UK and Asia, with over 27 years at HSBC.
Career: Noel has held various management
roles across HSBC since joining in 1992. He was
most recently Chief Executive Officer of Global
Commercial Banking, having been appointed to
the role in December 2015 and as a Group Managing
Director in September 2016. Noel joined Forward
Trust Group, a subsidiary of Midland Bank, in 1987
and joined HSBC in 1992 when the Group acquired
Midland Bank. He is also a Director of HSBC
Bank Canada.
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 of a
large financial institution.
Career: Ewen was Chief Financial Officer of
Royal Bank of Scotland Group plc from 2014
to 2018. Prior to this, Ewen spent 25 years with
Credit Suisse, where his last role was co-Head
of the EMEA Investment Banking Division
and co-Head of the Global Financial
Institutions Group.
External appointments: None
External appointments: None
Board committee membership key
Committee Chair
Group Audit Committee
Group Risk Committee
Group Remuneration Committee
Nomination & Corporate Governance Committee
158
HSBC Holdings plc Annual Report and Accounts 2019 Independent non-executive Directors
Kathleen Casey (53)
Independent non-executive Director
Appointed to the Board: March 2014
Laura Cha, GBM (70)
Independent non-executive Director
Appointed to the Board: March 2011
Henri de Castries (65)
Independent non-executive Director
Appointed to the Board: March 2016
Irene Lee (66)
Independent non-executive Director
Appointed to the Board: July 2015
Skills and experience: Kathleen
has extensive financial regulatory
policy experience, including in
the US Government and in
cross-governmental bodies.
Skills and experience: Laura
has extensive regulatory and
policymaking experience in the
finance and securities sector in
Hong Kong and mainland China.
Skills and experience: Henri has
more than 25 years of international
experience in the financial services
industry, working in global insurance
and asset management.
Career: Kathleen served as a
Commissioner of the US Securities
and Exchange Commission (‘SEC’)
between 2006 and 2011, acting
as its principal representative in
dialogues between the G-20
Financial Stability Board and the
International Organization of
Securities Commissions.
Kathleen previously spent 13 years
working for the US Government,
where she held positions including
Staff Director and Counsel of the
US Senate Committee on Banking,
Housing and Urban Affairs, as well
as Legislative Director and Chief of
Staff for a US Senator.
External appointments:
– Chair of the Board of the
Career: Laura was formerly Vice
Chairman of the China Securities
Regulatory Commission, becoming
the first person outside mainland
China to join the Central Government
of the People’s Republic of China
at Vice-Ministerial level. The Hong
Kong Government awarded her
Gold and Silver Bauhinia Stars for
public service.
She has previously served
as non-executive Director of China
Telecom Corporation Limited, Bank
of Communications Co., Ltd, and
Tata Consultancy Services Limited.
External appointments:
– Chair of Hong Kong Exchanges
and Clearing Limited
– Non-executive Chair of The
Career: Henri joined AXA S.A. in
1989 and held a number of senior
roles, including Chief Executive Officer
from 2000. In 2010, he was appointed
Chairman and Chief Executive, before
stepping down in 2016.
He has previously worked for the
French Finance Ministry Inspection
Office and the French Treasury
Department.
External appointments:
– Special Adviser to General Atlantic
– Chairman of Institut Montaigne
– Vice Chairman of Nestlé S.A.
– Non-executive Director of the French
National Foundation for Political
Science
– Member of the Global Advisory
Council at LeapFrog Investments
Financial Accounting Foundation
– Senior Adviser to Patomak
Hongkong and Shanghai Banking
Corporation Limited
Global Partners
– Non-executive Director of the
Federal Home Loan Mortgage
Corporation
– Non-executive Director of
The London Metal Exchange
– Non-executive Director of
Unilever PLC and Unilever N.V.
Skills and experience: Irene has
more than 40 years of experience
in the finance industry, having held
senior investment banking and fund
management roles in the UK, the
US and Australia.
Career: Irene held senior positions at
Citibank, the Commonwealth Bank of
Australia and SealCorp Holdings
Limited.
Other past appointments include
being a member of the Advisory
Council for J.P. Morgan Australia,
a member of the Australian
Government Takeovers Panel and a
non-executive Director of Cathay
Pacific Airways Limited.
External appointments:
– Executive Chair of Hysan
Development Company Limited
– Non-executive Director of The
Hongkong and Shanghai Banking
Corporation Limited
– Non-executive Director of Hang
Seng Bank Limited
– Member of the Exchange Fund
Advisory Committee of the Hong
Kong Monetary Authority
159
Corporate governanceHSBC Holdings plc Annual Report and Accounts 2019
Report of the Directors | Corporate governance report
Independent non-executive Directors
Dr José Antonio Meade Kuribreña
(50)
Independent non-executive Director
Appointed to the Board: March 2019
Heidi Miller (66)
Independent non-executive Director
Appointed to the Board:
September 2014
Skills and experience: José has
extensive experience across a number
of industries, including in public
administration, banking, financial
policy and foreign affairs.
Skills and experience: Heidi
has more than 30 years of senior
management experience in
international banking and finance.
David Nish (59)
Independent non-executive Director
Appointed to the Board: May 2016
Skills and experience: David has
substantial international experience
of financial services, corporate
governance, financial accounting
and operational transformation.
Career: Between 2011 and 2017,
José held Cabinet-level positions
in the federal government of Mexico,
including as Secretary of Finance
and Public Credit, Secretary of Social
Development, Secretary of Foreign
Affairs and Secretary of Energy. Prior
to his appointment to the Cabinet, he
served as Undersecretary and as
Chief of Staff in the Ministry of
Finance and Public Credit.
José is also a former Director General
of Banking and Savings at the Ministry
of Finance and Public Credit and
served as Chief Executive Officer of
the National Bank for Rural Credit.
External appointments:
– Commissioner and Board Member
of the Global Commission on
Adaptation
– Non-executive Director of Alfa
S.A.B. de C.V.
Career: Heidi was President of
International at J.P. Morgan Chase
& Co. between 2010 and 2012 where
she led the bank’s global expansion
and international business strategy
across the investment bank, asset
management, and treasury and
securities services divisions.
Career: David served as Group Chief
Executive Officer of Standard Life plc
between 2010 and 2015, having joined
the company in 2006 as Group
Finance Director. He is also a former
Group Finance Director of Scottish
Power plc and was a partner at Price
Waterhouse.
David has also previously served as a
non-executive Director of HDFC Life
(India), Northern Foods plc, London
Stock Exchange Group plc, the UK
Green Investment Bank plc and Zurich
Insurance Group.
External appointments:
– Non-executive Director of Vodafone
Group plc
Previously, she ran the treasury
and securities services division for
six years. Other past roles included
Chief Financial Officer of Bank One
Corporation and Senior Executive
Vice President of Priceline.com Inc.
She is currently Chair of HSBC
North America Holdings Inc.
She has previously served in
non-executive Director roles for
General Mills Inc., Merck & Co Inc.
and Progressive Corp. She was also a
trustee of the International Financial
Reporting Standards Foundation.
External appointments:
– Non-executive Director of Fiserv Inc.
Sir Jonathan Symonds,
CBE (60)
Independent non-executive Director
Appointed to the Board: April 2014
Senior Independent Director since
April 2017
Deputy Group Chairman since
August 2018
Skills and experience: Jonathan
has a wide range of international
finance and governance experience,
including senior management and
non-executive roles in a variety
of industries.
Career: Jonathan was formerly
Chairman of HSBC Bank plc,
HSBC’s European subsidiary. He was
previously Chief Financial Officer of
Novartis AG from 2009 to 2013. Before
joining Novartis, he was a partner and
managing director of Goldman Sachs,
Chief Financial Officer of AstraZeneca
plc and a partner at KPMG. He also
held the roles of non-executive
Director and Chair of the audit
committees of Diageo plc and
QinetiQ plc.
External appointments:
– Chairman of Geonomics England
Limited
– Chairman of GlaxoSmithKline plc
– Chairman of Proteus Digital Health
– Non-executive Director of Rubius
Therapeutics, Inc.
Board attendance in 2019
Number of meetings held
Group Chairman
Mark Tucker
Executive Directors
Marc Moses
Noel Quinn2
Ewen Stevenson3
John Flint4
AGM Board1
AGM Board1
AGM Board1
1
1
1
1
1
1
8
Number of meetings held
Non-executive Directors
8/8
Kathleen Casey
Laura Cha5
Henri de Castries5
Lord Evans of Weardale6
Irene Lee
José Antonio Meade Kuribreña7
8/8
2/2
8/8
5/6
1
1
1
1
1
1
8
Number of meetings held
Heidi Miller
David Nish
Sir Jonathan Symonds
Jackson Tai5
Pauline van der Meer Mohr
8/8
7/8
6/8
3/3
8/8
6/6
1
1
1
1
1
1
8
8/8
8/8
8/8
7/8
8/8
1 Board meetings in 2019 were held in the UK, France, Hong Kong, Mexico and
the US. In addition to the Board meetings listed, 10 Chairman’s Committee
meetings were also held in 2019, both in the UK and overseas.
2 Appointed to the Board on 5 August 2019.
3 Appointed to the Board on 1 January 2019.
4 Stepped down from the Board on 5 August 2019.
5 Laura Cha, Henri de Castries and Jackson Tai were unable to attend Board
meetings due to prior arranged commitments.
6 Retired from the Board on 12 April 2019.
7 Appointed to the Board on 1 March 2019.
160
HSBC Holdings plc Annual Report and Accounts 2019
Former Directors who served
for part of the year
Lord Evans of Weardale
Lord Evans retired from the Board on
12 April 2019.
John Flint
John Flint stepped down from the
Board on 5 August 2019.
Marc Moses
Marc Moses retired from the Board on
31 December 2019.
Aileen Taylor (47)
Group Company Secretary and
Chief Governance Officer
Appointed: November 2019
Skills and experience: Aileen has
significant governance experience
across various roles in the banking
industry.
Career: Aileen spent 19 years at
the Royal Bank of Scotland Group,
having held various legal, risk
and compliance roles. She was
appointed Group Secretary in
2010 and was most recently
Chief Governance Officer and
Board Counsel.
Jackson Tai (69)
Independent non-executive Director
Appointed to the Board: September 2016
Skills and experience: Jackson
has significant experience as a
non-executive Director, having held
senior operating and governance
roles across Asia, North America
and Europe.
Pauline van der Meer Mohr (59)
Independent non-executive Director
Appointed to the Board:
September 2015
Skills and experience: Pauline has
extensive legal and human resources
experience across a number of
different sectors.
Career: Jackson was Vice Chairman
and Chief Executive Officer of DBS
Group and DBS Bank Ltd. between
2002 and 2007, having served as Chief
Financial Officer and then as President
and Chief Operating Officer. He was
previously an investment banker at J.P.
Morgan & Co. Incorporated, where he
worked for 25 years.
Other former appointments include
non-executive Director of Canada
Pension Plan Investment Board, Royal
Philips N.V., Bank of China Limited,
Singapore Airlines, NYSE Euronext,
ING Groep N.V., CapitaLand Ltd,
SingTel Ltd. and Jones Lang LaSalle
Inc. He also served as Vice Chairman
of Islamic Bank of Asia.
External appointments:
– Non-executive Director of Eli Lilly
and Company
– Non-executive Director of
MasterCard Incorporated
Career: Pauline served on the
Supervisory Board of ASML Holding
N.V. between 2009 and 2018. She
was formerly President of Erasmus
University Rotterdam, a member of
the Dutch Banking Code Monitoring
Committee and a Senior Vice
President and Head of Group Human
Resources Director at TNT N.V. She
also held various executive roles at the
Royal Dutch Shell Group.
External appointments:
– 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
– Member of the Capital Markets
Committee of the Dutch Authority
for Financial Markets
For full biographical details of our Board members,
see www.hsbc.com/who-we-are/leadership.
161
Corporate governanceHSBC Holdings plc Annual Report and Accounts 2019
Report of the Directors | Corporate governance report
Group Management Board
The Group Management Board comprises senior executives
who support the Group Chief Executive in the day-to-day
management of the business and the implementation of strategy.
Elaine Arden (51)
Group Chief Human
Resources Officer
Samir Assaf (59)
Chief Executive Officer,
Global Banking and Markets
Elaine joined HSBC as a Group
Managing Director and Group Chief
Human Resources Officer in June
2017. She was previously at the Royal
Bank of Scotland Group, where she
was Group Human Resources
Director. She has held senior human
resources and employee relations
roles in a number of other financial
institutions, including Clydesdale Bank
and Direct Line Group. Elaine is a
member of the Chartered Institute
of Personnel and Development.
Samir joined HSBC in 1994 and
became a Group Managing Director
in 2011. He is Chairman and a
non-executive Director of HSBC
France; 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.
Colin Bell (52)
Group Chief Compliance Officer
Jonathan Calvert-Davies (51)
Group Head of Internal Audit
Colin joined HSBC in July 2016 and
was appointed a Group Managing
Director in March 2017. He previously
worked at UBS, where he was the
Global Head of Compliance and
Operational Risk Control. Colin joined
the British Army in 1990 and he served
for 16 years in a variety of command
and staff roles and completed the
Joint Services Command and Staff
College in 2001. He joined UBS
Investment Bank in 2007, working
in the Risk function prior to moving
into Compliance and integrating
the Compliance and Operational
Risk functions.
Jonathan joined HSBC as a Group
Managing Director and Group Head
of Internal Audit in October 2019.
He has 30 years of experience
providing assurance, audit and
advisory services to the banking and
securities industries in the UK, the US
and Europe. Prior to joining HSBC, he
led KPMG’s financial services internal
audit services practice. His previous
roles include leading PwC’s UK
internal audit services practice. He
also served as interim Group Head of
Internal Audit at the Royal Bank of
Scotland Group.
John Hinshaw (49)
Group Chief Operating Officer
Pam Kaur (56)
Group Chief Risk Officer
Stuart Levey (56)
Chief Legal Officer
John joined HSBC in December 2019
and became a Group Managing
Director and Group Chief Operating
Officer in February 2020. John has an
extensive background in transforming
organisations across a range of
industries. Most recently, he served as
Executive Vice President of Hewlett
Packard and Hewlett Packard
Enterprise, where he managed
technology and operations and was
Chief Customer Officer. Between 2012
and 2019, he served on the Board of
Directors of BNY Mellon and chaired
its Technology Committee.
Pam was appointed Group Chief Risk
Officer in January 2020, having been
a Group Managing Director since
joining HSBC in 2013. In April 2019,
she was appointed Head of Wholesale
Market and Credit Risk and Chair of
the enterprise-wide non-financial risk
forum. Pam was previously Group
Head of Internal Audit and has held a
variety of audit and compliance roles
at banks, including Deutsche Bank,
RBS, Lloyds TSB and Citigroup. She
serves as a non-executive Director of
Centrica plc.
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.
Paulo Maia (61)
Chief Executive Officer,
Latin America
Paulo joined HSBC in 1993 and
became a Group Managing Director in
February 2016. He has been CEO,
Latin America since July 2015 and also
holds the roles of Chairman of Grupo
Financiero HSBC Mexico S.A. de C.V.,
Chairman of HSBC Argentina Holdings
S.A. and Director of HSBC North
America Holdings Inc. Former
appointments include: Chief Executive
Officer of HSBC Bank Canada and
HSBC Bank Australia Limited.
162
HSBC Holdings plc Annual Report and Accounts 2019 Stephen Moss (53)
Group Chief of Staff
Stephen, who joined HSBC in 1992,
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.
Charlie Nunn (48)
Chief Executive Officer, Retail
Banking and Wealth Management
Barry O’Byrne (44)
Chief Executive Officer,
Global Commercial Banking
Michael Roberts (59)
President and Chief Executive
Officer, HSBC USA
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.
Barry joined HSBC in April 2017
and became interim CEO, Global
Commercial Banking in August 2019.
He was previously Chief Operating
Officer for Global Commercial
Banking and prior to joining HSBC,
Barry worked at GE Capital for 19
years in a number of senior leadership
roles, including as CEO, GE Capital
International and in CEO positions
in Italy, France and the UK.
Michael joined HSBC and became a
Group Managing Director in October
2019. He is an executive Director,
President and CEO of HSBC North
America Holdings Inc. He also serves
as Chairman of HSBC Bank USA, N.A.
and HSBC USA Inc. Previously, he
spent 33 years at Citigroup in a
number of senior leadership roles,
most recently as Global Head of
Corporate Banking and Capital
Management and Chief Lending
Officer.
António Simões (44)
Chief Executive Officer,
Global Private Banking
Ian Stuart (56)
Chief Executive Officer,
HSBC UK Bank plc
António joined HSBC in 2007 and
became a Group Managing Director
in February 2016. He became CEO,
Global Private Banking in 2019, having
previously served as CEO of UK and
Europe (HSBC Bank plc), and before
that as Chief of Staff to the Group
Chief Executive and Group Head
of Strategy and Planning. António
was formerly the Chairman of the
Practitioner Panel of the FCA, a
partner of McKinsey & Company,
and an associate at Goldman Sachs.
Ian has been a Group Managing
Director and Chief Executive Officer
of HSBC UK Bank plc since April 2017.
Ian has worked in financial services
for almost four decades. He joined
HSBC as Group General Manager
and Head of Commercial Banking
Europe in 2014, having previously
led the corporate and business
banking businesses at Barclays and
NatWest. He started his career at
Bank of Scotland. Ian is a business
ambassador for Meningitis Now and
a Board member for UK Finance.
Peter Wong (68)
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. 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.
Additional members of the
Group Management Board
Noel Quinn
Ewen Stevenson
Aileen Taylor
Biographies are provided on pages
158 and 161.
163
Corporate governanceHSBC Holdings plc Annual Report and Accounts 2019
Report of the Directors | Corporate governance report
Board roles and responsibilities
At 31 December 2019, the Board comprised the Group Chairman,
10 non-executive Directors and three executive Directors. Further
details of the Board’s career background, skills, experience and
external appointments can be found on pages 158 to 161.
Group Chairman
The Group Chairman provides effective leadership of the Board
and is not responsible for executive matters regarding the Group’s
business.
His principal duties and responsibilities include leading the Board
in providing strong strategic oversight, setting the Board’s agenda,
challenging management’s thinking and proposals and ensuring
open and constructive debate among Directors. The Group
Chairman’s role is to promote the highest standards of corporate
governance practices, as well as providing ethical leadership of the
Group, setting clear expectations of integrity, culture, values,
principles and sustainability. The role involves maintaining external
relationships with key stakeholders and communicating investors’
views to the Board. He also develops and evaluates the Board,
committees and Directors, including on succession planning.
The Group Chairman meets with the independent non-executive
Directors without the executive Directors in attendance after each
Board meeting and otherwise, as necessary.
Group Chief Executive
The Group Chief Executive’s principal duties and responsibilities
include leading the Group Management Board, under delegated
authority from the Board, with responsibility for the day-to-day
operations of the Group. He leads and directs the implementation
of the Group’s business strategies, embedding the organisation’s
culture and values.
His role is to protect the Group’s reputation, while reviewing and
developing its strategy. He is also expected to build, protect and
enhance the Group's overall brand value. The Group Chief
Executive maintains relationships with key stakeholders, including
the Group Chairman and the Board.
Group Chief Financial Officer
The Group Chief Financial Officer’s principal duties and
responsibilities include supporting the Group Chief Executive in
developing and implementing the Group strategy, while leading
the Global Finance function, fostering key finance talent and
planning for succession. Responsible for effective financial
reporting, he is expected to ensure that processes and controls are
in place and that the systems of financial controls are robust and
fit for purpose.
Other responsibilities include supporting a robust risk
management environment and facilitating strong controls in
collaboration with the Risk, Compliance and Global Internal Audit
functions. The Group Chief Financial Officer recommends the
annual budget and long-term strategic and financial plan. He also
maintains relationships with key stakeholders, including
shareholders.
Group Chief Risk Officer
The Group Chief Risk Officer’s principal duties and responsibilities
involve leading the Global Risk function, assessing the risk profile
and controls, and monitoring and mitigating the risks arising from
the Group's businesses.
The Group Chief Risk Officer advises the Board and committees on
risk appetite and risk tolerance matters, as well as supports the
Group Risk Committee in discharging its responsibilities. With
effect from 1 January 2020, the role ceased to be an executive
Director but the Group Chief Risk Officer will still attend Board
meetings.
Deputy Group Chairman and Senior Independent
Director
The principal roles of the Deputy Group Chairman are to deputise
formally for the Group Chairman and focus on external leadership
of key stakeholders.
As Senior Independent Director, his responsibilities include
supporting the Group Chairman in his role, acting as intermediary
for other non-executive Directors when necessary, leading the
non-executive Directors in the oversight of the Group Chairman
and ensuring there is a clear division of responsibility between the
Group Chairman and the Group Chief Executive.
The Senior Independent Director is available to shareholders to
listen to their views if they have concerns that cannot be resolved
through the normal channels.
Independent non-executive Directors
Independent non-executive Directors make up the majority of the
Board. 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.
Group Company Secretary and Chief Governance
Officer
The Group Company Secretary and Chief Governance Officer
ensures there is good governance practices at Board level and
throughout the Group.
Under the direction of the Group Chairman, she ensures effective
functioning of the Board and good information flows within the
Board and its committees as well as between senior management
and the non-executive Directors. The Group Company Secretary
and Chief Governance Officer also facilitates induction and assists
with professional development of non-executive Directors, as
required.
As Chief Governance Officer, her role is to advise and support the
Board and management in ensuring effective governance and
good decision making across the Group.
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HSBC Holdings plc Annual Report and Accounts 2019
How we are governed
Corporate governance
We are committed to high standards of corporate governance. The
Group has a comprehensive range of policies and systems in place
to ensure that it is well managed, with effective oversight and
controls. We comply with the applicable provisions of the UK
Corporate Governance Code and the requirements of the Hong
Kong Corporate Governance Code.
The Board and its role
The Board aims to promote the Group’s long-term success and
deliver sustainable value to investors and other stakeholders, as
well as encouraging a culture of risk awareness, 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. The independent non-executive Directors hold
management accountable and ensure the executive Directors are
discharging their responsibilities properly.
The majority of Board members are independent non-executive
Directors. Both the Group Chief Executive and the Group Chief
Financial Officer are required to be members of the Board. In
2019, the Group Chief Risk Officer was also a member of the
Board. With effect from 1 January 2020, this role ceased to be a
Board member but the Group Chief Risk Officer will still attend
Board meetings. The role of the independent non-executive
Directors is to challenge and scrutinise the performance of
management, including executive Directors, and to help develop
proposals on strategy. They also review the performance of
management in meeting agreed goals and objectives as well as
monitor the Group’s risk profile.
Powers of the Board
In exercising its duty to promote the success of the Group, the
Board is responsible for overseeing the management of HSBC
globally and, in so doing, may exercise its powers, subject to any
relevant laws, regulations and HSBC’s articles of association.
The Board is committed to effective engagement and fostering its
relationship with all of its stakeholders. The Board receives reports
from management on issues concerning customers, the
environment, communities, suppliers, employees, regulators,
governments and investors, which it takes into account in
discussions and in the decision-making process under section 172
of the Companies Act 2006. Further information on how the
Directors have had regard to the matters set out in section 172
when discharging their duties is disclosed on pages 42 and 43.
Additional non-financial disclosures detailing the policies pursued
by HSBC in relation to the workforce, environment, social matters,
human rights, and anti-corruption and anti-bribery matters are
included in other sections of this Annual Report and Accounts
2019 and the ESG Update 2019.
Certain matters, including the review and approval of annual
operating plans, risk appetite, performance targets, credit or
market risk limits and any substantial change in balance sheet
management policy, require Board approval before
implementation. Acquisitions, disposals, investments, capital
expenditure or realisation or creation of a new venture, which are
above certain limits, also require prior Board approval.
Operation of the Board
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 stakeholders. It also considers presentations
on strategy and performance by each of the global businesses and
across the principal geographical areas.
All of HSBC’s activities involve the measurement, evaluation,
acceptance and management of risk or combinations of risks. The
Board, advised by the Group Risk Committee, promotes a strong
risk governance culture that shapes the Group’s attitude to risk
and supports the maintenance of a strong risk management
framework.
The Group Chairman meets with the independent non-executive
Directors without the executive Directors in attendance after each
Board meeting and otherwise, as necessary. The Directors are
encouraged to have free and open contact with management at all
levels and full access to all relevant information. When attending
off-site Board meetings and when travelling for other reasons,
non-executive Directors are encouraged to visit local business
operations and meet local management. Directors may take
independent professional advice, if necessary, at HSBC’s expense.
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.
Role of the Board committees
Committees are smaller groups delegated by the full Board to
provide advice on and oversight of HSBC's different activities.
Each standing committee is chaired by a non-executive Board
member and has a remit to cover specific topics. Only
independent non-executive Directors are able to be members of
Board committees.
Details of the work carried out by each of the Board committees
can be found in the respective committee reports in this Annual
Report and Accounts 2019.
Board
Group Audit Committee
Group Risk Committee
Financial System
Vulnerabilities Committee
Group Remuneration
Committee
Nomination & Corporate
Governance Committee
Board performance and accountability
The Board and its committees are subject to regular, independent
evaluation of their effectiveness. All Board members also undergo
regular performance reviews. In the case of executive Directors,
this helps determine the level of variable pay they receive each
year.
In addition, the Board is directly accountable to HSBC’s
shareholders. Shareholders vote at each Annual General Meeting
('AGM') on whether to re-elect individual Directors.
HSBC Holdings plc Annual Report and Accounts 2019
165
Corporate governance Report of the Directors | Corporate governance report
Board, committees and subsidiary interaction
In addition to the regular Board and committee meetings, there is
extensive contact across the Group that complements the formal
meeting and approval processes. We have defined how we
escalate and cascade information and procedures between the
HSBC Holdings Board, the principal subsidiary boards and their
respective board committees.
Our Group Chairman interacts regularly with the chairs of the
principal subsidiaries, including through the Chairs' Forum, which
takes place at various times throughout the year to discuss a wide
array of relevant issues impacting the principal subsidiaries.
The Chairs of each of the Group Audit Committee, Group Risk
Committee and Group Remuneration Committee also have regular
dialogues with the respective committees of the principal
subsidiaries to ensure an awareness and coordinated approach to
key issues. These interactions are reinforced through Audit and
Risk Committee Chairs' Forums and the Remuneration Committee
Chairs' Forum. The chairs of the principal subsidiaries committees
globally are invited to attend the relevant forums, which are held
several times a year, to raise and discuss current and future global
issues.
Board members are encouraged to, and do, make regional visits
and attend principal subsidiary meetings as guests. Similarly,
regional Directors are invited regularly to attend committee
meetings at a Group level.
Relationship between the Board and the senior
executive team
The roles of Group Chairman and Group Chief Executive are
separate, with a clear division of responsibilities between the
running of the Board by the Group Chairman and executive
responsibility for running HSBC’s business, which is undertaken
by the Group Chief Executive.
The Board delegates day-to-day management of the business and
implementation of strategy to the Group Chief Executive. The
Group Chief Executive is supported in his day-to-day management
of the Group by recommendations and advice from the Group
Management Board, an executive forum that he chairs comprising
senior management.
There are special meetings of the Group Management Board that
provide specialist oversight. The Risk Management Meeting,
chaired by the Group Chief Risk Officer, provides oversight of risk
matters, while the Financial Crime Risk Management Meeting,
chaired by the Group Chief Compliance Officer, oversees the
management of financial crime risk.
Principal subsidiaries
A company will typically be considered a Group subsidiary if more
than 50% of its voting share capital is held by another HSBC
company. Subsidiaries are formally designated as principal
subsidiaries by approval of the Board. These principal subsidiaries
generally conduct commercial activities in markets that carry
significant reputational risks and are typically regulated. Other
characteristics include having risk, audit, remuneration
committees or other board committees as well as independent
non-HSBC non-executive Directors.
The designated principal subsidiaries are:
Principal subsidiary
Oversight responsibility
The Hongkong and Shanghai Banking
Corporation Limited
HSBC Bank plc
HSBC UK Bank plc
HSBC Bank Middle East Limited
HSBC North America Holdings Inc.
HSBC Latin America Holdings (UK)
Limited
Asia-Pacific
Europe, Bermuda (excluding
Switzerland and UK ring-fenced
activities)
UK ring-fenced bank and its
subsidiaries
Middle East
US
Mexico and Latin America
HSBC Bank Canada
Canada
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HSBC Holdings plc Annual Report and Accounts 2019
To strengthen accountability and flows of information, these
principal subsidiaries each take responsibility for the oversight of
Group companies in their region through the subsidiary
accountability framework.
There is close interaction between the Board and the principal
subsidiary boards and their respective committees, including the
sharing of minutes and a requirement for certain appointments to
subsidiary boards to be approved by the Group’s Nomination &
Corporate Governance Committee.
Board activities during 2019
The activities of the Board were structured to support the
development of the Group’s strategy and to enable the Board to
support executive management on its delivery within a transparent
governance framework.
Business performance and strategy
The Board is responsible for the monitoring and delivery of the
Group’s strategy. In 2019, the Board reviewed the progress against
the strategic priorities set in June 2018 and will oversee the
implementation of the new business update approved in 2020.
As a matter of course, the Board considered and approved key
standing items such as the long-term viability statement and
certain acquisitions, mergers and disposals. Additional sessions
requested by the Group Chairman ensured that the Board
considered non-standing items, which included sustainable
finance and climate change. A deep dive session on climate
change was completed by the Board in July 2019. This session
considered the potential impacts of climate change on the
business and the climate-related risk initiatives progressing within
the Group. It was confirmed that climate-related risk would remain
a thematic issue within the Group's 'Top and emerging risk' report.
Further details can be found on page 79 and in the ESG Update.
The Board managed the process involving the departure of the
Group Chief Executive and the appointment of an interim Group
Chief Executive on 5 August 2019. Further details can be found on
page 171.
Financial decisions
The Board has an ongoing responsibility for approving key
financial decisions throughout the year. Having monitored the
Group's performance against the approved 2019 annual operating
plan – as well as each of the global businesses – the Board
approved the Interim Report 2019, the Annual Report and Accounts
2019 and associated dividends. The Board also approved the
renewal of debt programme authorities.
Governance, risk and regulatory
The Board remained focused on its governance, regulatory
obligations and risks to the Group's business throughout the year.
A number of key frameworks, control documents and core
processes were reviewed and approved. These included:
•
•
•
•
the Group's risk appetite framework and risk appetite
statement;
the individual liquidity adequacy assessment process;
the internal capital adequacy assessment process;
the revised terms of reference for the Board and the Board
committees;
• our corporate governance framework describing HSBC’s
corporate governance structure and processes in consultation
with the UK's Prudential Regulation Authority ('PRA') and
Financial Conduct Authority ('FCA');
•
•
the Group recovery plan and delegation of authority; and
the Group’s payment protection insurance ('PPI') provisions.
Certain operational changes were considered and approved,
including the change of HSBC Private Banking Holdings (Suisse)
SA from a principal subsidiary to a material subsidiary, and the
recognition change of HSBC Global Asset Management Limited as
a material subsidiary. These changes of definitions altered how
these companies operate under the Group’s subsidiary
accountability framework in terms of the delegation of matters
and the escalation of issues. The Board is continually working to
assess the smooth operation and oversight of its principal and
material subsidiaries.
A revised UK Corporate Governance Code meant that the Board
considered and approved its approach to workforce engagement
and organisational culture. The Group’s obligations under the
Modern Slavery Act were also considered and its statement for the
Group website was approved.
In order to ensure that the Board is operating in the most effective
way possible, an external evaluation of the Board was conducted.
Actions from the review were approved and are being
implemented by various key stakeholders. Further information is
provided on page 170. In addition, Group-wide initiatives such as
‘Ways of Working’ were implemented during the year to promote
efficiency at a Board level and throughout the Group as a whole.
Ways of Working aims to improve the efficiency and effectiveness
of how we run meetings.
The Board is conscious of the implications of geopolitical
developments during the year and actively monitored and
reviewed them, including US-China trade relations, the UK's
General Election and departure from the EU, and the Argentinian
and Hong Kong political situations.
People and culture
The Board is committed to its diversity and inclusion agenda,
which forms a key part of its focus on Group culture. The Board
has set targets against a number of diversity and inclusion criteria.
In 2019, the Board considered executive appointments, focusing
on succession planning for the Group Chief Executive, the Group
Chief Risk Officer and the Group Company Secretary and Chief
Governance Officer.
As part of succession planning of the Board, Sir Jonathan
Symonds is stepping down as Deputy Group Chairman, Senior
Independent Director and the Chair of the Group Audit Committee
in February 2020. The Board has appointed David Nish in the role
of Senior Independent Director and Chair of the Group Audit
Committee. The role of Deputy Chairman will be considered as
part of Board succession planning in 2020. In 2019, the Board
appointed Dr José Antonio Meade Kuribreña as an independent
non-executive Director. It will continue to review the skills and
experience of the Board as a whole to ensure the correct
composition.
Technology
The Board reviewed opportunities for the Group from investments
in technology, including the Cloud, data and artificial intelligence
solutions. It also considered the role of the technology advisory
board and its interaction with the Board.
Board governance
Appointment
Appointments to the Board are made on merit and candidates are
considered against objective criteria, having regard to the benefits
of a diverse Board. A rigorous selection process is followed for the
appointment of Directors and senior employees. As per the
Group’s Articles of Association, the number of Directors (other
than any alternate 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.
Re-election
In accordance with the UK Corporate Governance Code and the
requirements of the Hong Kong Corporate Governance Code, all
Directors are nominated for annual re-election at the AGM by
shareholders, subject to continued satisfactory performance based
upon an assessment by the Group Chairman and the Nomination
& Corporate Governance Committee. All Directors that stood for
re-election at the 2019 AGM were re-elected by shareholders.
Period of appointment
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 but any term beyond
six years is subject to a particularly rigorous review with an
explanation to be provided in the Annual Report and Accounts. No
Directors are involved in deciding their own remuneration.
Time commitment
The terms and conditions of the appointments 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. Letters of appointment of each non-executive Director
are available for inspection at the registered office of HSBC
Holdings plc. 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 Chair of the Group Risk
Committee 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.
Outside Directorships
During their term of appointment, non-executive Directors are
expected to consult the Group Chairman or the Group Company
Secretary and Chief Governance Officer if they are considering
whether to accept or vary any commitments outside the Group, for
which Board approval is required.
Conflicts of interest
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
register of conflicts is maintained by the Group Company
Secretary and Chief Governance Officer's office. On appointment,
new Directors are advised of the process for dealing with conflicts
and the process for reviewing those conflicts when they have been
authorised. The terms of those authorisations of conflicts are
routinely undertaken by the Board. During the year no conflicts of
interest arose.
Indemnity
The Articles of Association of HSBC Holdings plc 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.
HSBC Holdings plc has granted deeds of indemnity by deed poll to
the Directors of the Group and associates, including the former
Directors who retired during the year. The deed poll indemnity
constituted 'qualifying third-party indemnity provisions' for the
purposes of the Companies Act 2006 and continues to be in force.
The deed poll indemnifies the Directors to the maximum extent
permitted by law and was in force during the whole of the
financial year or from the date of appointment in respect of the
Directors appointed in 2019. Additionally, all Directors have the
benefit of Directors’ and officers’ liability insurance. The deed poll
is available for inspection at HSBC Holdings' registered office.
Qualifying pension scheme indemnities have also been granted to
the Trustees of the Group's pension schemes, which were in force
for the whole of the financial year and remain in force as at the
date of this report.
HSBC Holdings plc Annual Report and Accounts 2019
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Corporate governance Report of the Directors | Corporate governance report
Contracts of significance
During 2019, none of the Directors had 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 securities and
following specific enquiry all Directors have confirmed that they
have complied with their obligations.
Shareholder engagement
The Board gives a high priority to communicating with
shareholders. Extensive information about HSBC and its activities
is provided to shareholders in the Annual Report and Accounts and
the Interim Report as well as on www.hsbc.com. To complement
the regular publications provided on HSBC’s website, there is
regular dialogue with institutional investors.
Directors are encouraged to develop an understanding of the
views of shareholders. Enquiries from individuals on matters
relating to their shareholdings and HSBC’s business are
welcomed.
Any individual or institutional investor can make an enquiry by
contacting the investor relations team, Group Chairman, Group
Chief Executive, Group Chief Financial Officer and Group Company
Secretary and Chief Governance Officer. Our Senior Independent
Director is also available to shareholders if they have concerns that
cannot be resolved or for which the normal channels would not be
appropriate. He can be contacted via the Group Company
Secretary and Chief Governance Officer at 8 Canada Square,
London E14 5HQ.
Annual General Meeting
The AGM in 2020 will be held at the Queen Elizabeth Hall,
Southbank Centre, Belvedere Road, London SE1 8XX at 11.00am
on Friday, 24 April 2020 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.
Notice of the 2020 AGM will shortly be available on
www.hsbc.com/investors/shareholder-information/annual-general-
meeting.
Shareholders are encouraged to attend the meeting. Shareholders
may send enquiries to the Board in writing via the Group Company
Secretary and Chief Governance Officer, HSBC Holdings plc, 8
Canada Square, London E14 5HQ or by sending an email to
shareholderquestions@hsbc.com.
General meetings
Shareholders may require the Directors to call a general meeting
other than an AGM, as provided by the UK Companies Act 2006.
Requests to call a general meeting may be made by members
representing at least 5% of the paid-up capital of HSBC Holdings
or by at least 100 shareholders holding at least £100 of nominal
capital that carry 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.
Board development
Board induction
We provide new members of the Board with a comprehensive and
bespoke induction programme that extends beyond the
boardroom and considers their past experience and individual
needs. Induction programmes are delivered over a number of
months and normally completed prior to the commencement of
the appointment. They involve site visits, technical briefings and
meetings with Board members, senior management, treasury
executives, auditors, tax advisers and, where relevant, regulators.
This is to ensure that the Board member can contribute and add
value from their appointment date. This supports good information
flows within the Board and its committees and between senior
management and non-executive Directors, giving a better
understanding of our culture and the way things are done in
practice. It also provides a sense of the experience and concerns
of our people and other stakeholders. Typical induction topics
include those that focus on HSBC values, culture and leadership;
governance arrangements; Directors’ duties; and anti-money
laundering and anti-bribery training.
During 2019, we provided induction programmes to the two new
Board members as well as to the new Group Company Secretary
and Chief Governance Officer. The induction programme for Ewen
Stevenson was conducted in 2018. The induction programmes
supply the necessary knowledge and insight of the business to
support them with strategic Group discussions.
Board training
To supplement the robust Director induction programme, we
provide continual training and development for each Director, with
the support of the Group Company Secretary and Chief
Governance Officer. Non-executive Directors develop and refresh
their skills and knowledge through a range of activities. This
ensures Directors understand the key activities and risks involved
in the business and enhance their ability to provide effective
challenge to the Group’s business strategy. Needs are assessed as
part of regular, independent evaluation of the Board’s own
effectiveness and that of its committees. The training and
development activities undertaken by each Director during the
year are set out below.
Mandatory training
In 2019, each Director carried out mandatory training modules
that mirrored the training undertaken by all employees. Training
was delivered through a specially designed mobile application so
Directors could access it easily. Modules included the following
topics:
• the management of risk under the enterprise risk management
framework, with a focus on operational risk;
• the importance of health, safety and well-being;
• data privacy and the protection of data of our customers and
colleagues;
• combating financial crime, which involves understanding how
we deal with money laundering, sanctions, and bribery and
corruption risks; and
• the importance of our values and conduct.
Board-wide training
Directors undertook various Board and committee training during
the year.
They attended deep dive sessions to develop an understanding of
the Group’s strategic priorities and to monitor their progress.
Other reviews covered topics such as selected risk, business and
governance areas, including financial crime, climate change,
Cloud technology and shareholder activism.
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HSBC Holdings plc Annual Report and Accounts 2019
In addition, Directors attended several meetings and forums:
• The Group Chairman hosted two Chairs Forums for the chairs
of the Group's principal subsidiaries, which were attended by
Directors. The awareness and discussion sessions covered
strategy, the economy, regulatory matters, cyber risk and
resilience, implementation of the subsidiary accountability
framework and corporate governance.
• The Chairs of the Group Audit Committee and the Group Risk
Committee hosted three Audit and Risk Committee Chairs
Forums for the chairs of the Group’s principal subsidiary audit
and risk committees. These forum sessions, which took place
in Hong Kong, New York and London, promoted connectivity
between committees, share governance best practices and a
holistic review of focus areas, including regulator priorities in
the region.
• The Chair of the Group Remuneration Committee hosted a
Remuneration Committee Forum for the chairs of the principal
subsidiary boards and committees responsible for
remuneration matters. The forum sessions promoted
connectivity and encouraged consistency of approach on
remuneration matters across the Group.
External consultants provided specific training to all the Group’s
boards and executive committees who were in scope for the
Directors’ induction and ongoing development in 2019
Senior Manager and Certification Regime. The training comprised
a refresher of the Senior Manager and Certification Regime, with
practical examples of ‘reasonable steps’ and discussion of relevant
case studies where regulatory breaches had occurred.
In 2019, a refreshed Directors’ handbook was issued, which
included material on Director's duties, Board and Group policies
and procedures and regulatory and statutory requirements of
which the Directors must be aware and follow.
Bespoke training
Non-executive Directors discuss individual development areas with
the Group Chairman during performance reviews and during
conversations with Group and subsidiary company secretaries. If a
non-executive Director makes a request for a specific area of
knowledge or understanding, the Group Company Secretary and
Chief Governance Officer would make appropriate arrangements
using internal resources, or otherwise, at HSBC’s expense.
Subsidiaries
Laura Cha, Irene Lee and Heidi Miller – Board Directors who serve
on principal subsidiary company Boards – participated in
additional training and development activities specifically related
to those entities.
Director
Mark Tucker
Noel Quinn
Ewen Stevenson
Marc Moses
Sir Jonathan Symonds
David Nish
Irene Lee
José Antonio Meade Kuribreña
Kathleen Casey
Laura Cha
Henri de Castries
Heidi Miller
Jackson Tai
Pauline van der Meer Mohr
Induction1
Strategy and
business
briefings2
Risk and
control3
Corporate
governance4
ARCC, Chairs
and Remco
Forum5
Subsidiary6
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
1 Noel Quinn and José Antonio Meade Kuribreña joined the Board and followed an induction plan during 2019.
2 All Directors, except Noel Quinn, participated in business strategy, market development and business briefings, which are global, regional and/or
market-specific. Examples of specific sessions held in 2019 included 'Asia growth: build and strengthen in Hong Kong' and 'Strategic priority:
growth of UK ring-fenced bank.'
3 All Directors received risk and control training. Examples of specific sessions held in 2019 included 'Governance of climate-related risk',
'Wholesale and retail credit risk management' and 'Forward-looking financial crime risk issues.'
4 All Directors received corporate governance training. Examples of specific sessions held in 2019 included 'Sustainable control environment:
outcomes and learnings from the pilot of critical processes' and 'ESG Update.'
5 All Directors except Henri de Castries attended at least one of the following: the Principal Subsidiary Chairs Forum, the Audit and Risk Committee
Chairs Forum and the Remuneration Committee Chairs Forum.
6 Marc Moses, Laura Cha, Irene Lee and Heidi Miller were Directors of a subsidiary company and undertook the required training for the respective
entities.
HSBC Holdings plc Annual Report and Accounts 2019
169
Corporate governance Report of the Directors | Corporate governance report
Board effectiveness
The Board is committed to regular, independent evaluation of its
own effectiveness and that of its committees. At least once every
three years, to ensure objectivity and fresh insights, the Board
commissions an external evaluation to review the Board’s
performance and to identify areas for improvement. The last
external evaluation was carried out in 2016.
During 2019, the Nomination & Corporate Governance Committee
oversaw the process to appoint an independent service provider to
evaluate the Board’s performance. After the Committee invited
three independent firms to participate in a tender process to
conduct the Board review in 2019, it appointed Dr Tracy Long of
Boardroom Review Limited. Dr Tracy Long is an independent
external service provider with no connection to the Group or any
individual Directors.
The methodology was customised to HSBC and included a review
of corporate information, preparatory briefings and interviews with
Directors, including chairs of some of the principal subsidiaries,
selected executives, regulators and the external auditor. Between
January and April 2019, Dr Tracy Long observed various Board
meetings, committee meetings, private sessions and strategy
discussions.
The review covered all aspects of the Board’s modus operandi with
a specific focus on the Board’s leadership, the individual and
collective contribution of Directors, the work of the Board and
governance.
Findings were presented in the form of a discussion document
that analysed the Board’s strengths and challenges alongside
specific recommendations designed to support the Board in
preparing for future challenges and to help Directors optimise their
contribution to the success of the Group. Findings in relation to
individual performance were fed back to the Group Chairman and
individual Directors.
On receipt of the report, the Group Chairman led a Board
discussion on the findings. Following a constructive debate, the
Board agreed the actions and priorities to be implemented.
• effective communication channels and meaningful dialogue
with stakeholders;
• an open and collegiate culture, which values individual
contributions and lessons learned through deep dive sessions;
• a healthy diversity of perspectives and an increasing sense of
team;
• a shared strategic perspective;
• a sophisticated risk management framework supported by
strong and rigorous audit and risk committees;
•
increased transparency in relation to issue escalation; and
• a balanced approach to remuneration and close attention to
talent development.
The review explored potential longer-term challenges and
suggested ways that the Board might build on its current
strengths to ensure it remained effective as it progressed through
a period of change. Key themes included:
Leadership
• Continue to provide strong leadership through a culture of
collaboration, transparency, open communication and
cooperation.
Shared perspective
• Build on the shared strategic perspective by ensuring that the
Board agenda allows sufficient time and visibility of longer term
strategic perspectives aligned to its appetite for business risk.
Culture
• Reflecting the improvement in corporate culture, keep culture
on the agenda to ensure ongoing transparency and escalation
of issues. Maintain visibility and insight into cultural initiatives
and differences across global businesses.
End-to-end governance
• Maintain focus on improving the quality of information and
increased communication channels with subsidiaries and other
stakeholders, including the voice of the employee.
The findings
Future thinking
The review identified a number of key strengths of the Board
including:
• a strong focus on Board composition that provides effective
leadership with a common purpose and independent mindset.
Following the appointment of the Group Chairman, steps had
already been taken to reduce the size of the Board, restructure
the Committees and encourage better connections between
Subsidiaries and the Group;
• Continue to develop the Board agenda to provide focus on
emerging issues.
The Board has approved actions designed to implement the above,
which will be monitored and addressed on an ongoing basis. In
addition, a number of one-off and administrative changes
designed to improve the effectiveness of Board meetings, such as
the layout of the Boardroom, have already been implemented.
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HSBC Holdings plc Annual Report and Accounts 2019
Board Committees
Membership
Nomination & Corporate Governance Committee
"Ensuring the Board is of the right size, structure and
composition is critical to creating an effective Board that
delivers for HSBC and its shareholders."
Dear Shareholder
I am pleased to present our report on the Nomination & Corporate
Governance Committee’s activities for 2019. This report provides
an overview of the work of the Committee and its activities during
the year.
The primary responsibilities of the Committee include reviewing
the composition of the Board and its committees, overseeing
succession planning of executive Directors, non-executive
Directors and other senior appointments and monitoring the
Group’s corporate governance framework. The Committee also
makes recommendations to the Board on governance matters and
best practice.
Board composition
The Committee takes the lead on all Board and Board committee
appointments, including leading the process for identifying and
nominating candidates for approval. It ensures orderly succession
plans are in place for both Board and senior management
positions. The Committee also oversees the development of a
diverse pipeline of candidates. During 2019, a number of Director
changes took place:
• On 1 January, Ewen Stevenson was appointed Group Chief
Financial Officer and executive Director, succeeding Iain
Mackay who stepped down on 31 December 2018. The process
leading to Ewen’s appointment was explained in the Annual
Report and Accounts 2018.
• On 1 March, Dr José Antonio Meade Kuribreña joined the
Board as an independent non-executive Director. José has
extensive experience in public administration, banking and
financial policy and is currently a Commissioner of the Global
Commission on Adaptation, which seeks to enhance political
visibility of climate resilience.
• On 12 April, Lord Evans of Weardale retired from the Board.
• On 5 August, John Flint stepped down as Group Chief
Executive and as a Director by mutual agreement with the
Board. Noel Quinn was appointed as interim Group Chief
Executive and executive Director, pending the appointment of a
permanent successor.
• On 31 December, Marc Moses retired from the Board and his
position as Group Chief Risk Officer. On 1 January 2020, Pam
Kaur was appointed as the new Group Chief Risk Officer.
The Committee also has oversight of the composition of the
boards of the Group’s regional principal subsidiaries and approves
the appointment of Directors and senior management in those
subsidiaries.
Member since
Meeting attendance
in 2019
Mark Tucker (Chair)
Kathleen Casey
Laura Cha
Henri de Castries1
Lord Evans of Weardale2
Irene Lee
José Antonio Meade
Kuribreña
Heidi Miller
David Nish
Sir Jonathan Symonds
Jackson Tai
Pauline van der Meer Mohr
Oct 2017
April 2018
May 2014
April 2018
April 2018
April 2018
April 2019
April 2018
April 2018
April 2017
April 2018
April 2016
7/7
7/7
7/7
5/7
3/3
7/7
5/5
7/7
7/7
7/7
7/7
7/7
1 Henri de Castries was unable to attend two Committee meetings due
to prior engagements.
2 Lord Evans of Weardale retired from the Board and Committee on 12
April 2019.
Board succession
Succession planning was central to the Committee’s agenda in
2019. It was discussed at each Committee meeting throughout the
year and the discussions covered succession planning for the
Group Chief Executive, executive Directors, non-executive
Directors and senior management, which includes the 90 most
senior roles across the Group.
The Committee’s process for identifying – or planning for – new
members to the Board considers the tenures, time commitments,
skills and experience of the existing non-executive Directors. The
Committee remains committed to ensuring the Board and its
committees have the right balance of skills and experience to help
achieve our strategic objectives.
The Committee’s approach when considering the recruitment of
new Board members involves the adoption of a formal and
transparent procedure with due regard to the skills, knowledge
and level of experience required, as well as diversity and soft skills.
Soft skills include good judgement and critical assessment,
openness and the ability to develop trust and forge relationships.
In July, it was announced that Sir Jonathan Symonds would retire
as Deputy Group Chairman and Senior Independent Director on
18 February 2020. Jonathan will be replaced in the role of Senior
Independent Director and Chair of the Group Audit Committee by
David Nish. The role of Deputy Group Chairman will be considered
during 2020 as part of Board succession planning. Kathleen Casey
has indicated her intention to step down from the Board in April
2020 and will not stand for re-election at the AGM. I would like to
thank Jonathan and Kathleen for their valued contribution.
As part of its succession planning, the Committee engaged Russell
Reynolds Associates to support the search for new non-executive
Directors. A sub-committee comprising five members of the
Committee, supported by the Company Secretary and Chief
Governance Officer, met regularly between Committee meetings
to lead and progress the search.
In November, Aileen Taylor joined the Group as Group Company
Secretary and Chief Governance Officer, replacing Richard Gray
who served as interim Group Company Secretary from April to
November 2019.
Group Chief Executive succession
In August 2019, the Committee initiated the process to identify a
new Group Chief Executive to consider both internal and external
candidates. The search is focused on candidates who have the
relevant skills and experience required for an organisation of the
scale, complexity and global nature of HSBC. The key actions
undertaken by the Committee during 2019 were to: agree the
profile and requirements of the role; identify the appropriate
executive search firm, which after presentations from and
consideration of three firms, resulted in the appointment of Egon
HSBC Holdings plc Annual Report and Accounts 2019
171
Corporate governance Report of the Directors | Corporate governance report
Zehnder; review the long list of candidates provided; discuss
diversity and inclusion as part of the review process; and assess
the characteristics of each candidate and provide feedback to
Egon Zehnder on the proposed shortlist. Russell Reynolds and
Egon Zehnder assist with senior recruitment at HSBC. They have
no other connection with HSBC Holdings or any of its Directors.
Diversity
Building a more diverse and inclusive workforce is a critical
component to developing a sustainable and successful business.
This is informed by our deep roots in many geographical regions
and our international focus. We apply these principles with regard
to the composition of our Board, with consideration of a wide
range of backgrounds, including the gender, ethnicity, age,
geographical provenance and educational and professional
backgrounds of candidates. How the Group performs against
diversity targets can be found on page 19.
The Committee remains committed to delivering on the Board
diversity and inclusion policy, which was approved in July 2018.
The policy is a framework for ensuring, among other
considerations, that the Board attracts, motivates and retains the
best talent, while also setting out how to eliminate bias, prejudice
or discrimination whether intentional or not.
Independence of non-executive Directors
The UK Corporate Governance Code requires the Board to identify
in the Annual Report and Accounts each non-executive Director it
considers to be independent after consideration of all relevant
circumstances that are likely to impair, or could appear to impair,
independence. This should include independence of character and
judgement. Similarly, the Hong Kong Corporate Governance Code
requires the Committee to assess the independence of the non-
executive Directors.
All non-executive Directors who have submitted themselves for re-
election at the AGM are considered by the Board to be
independent in accordance with UK and Hong Kong requirements
and they continue to make effective contributions and effectively
challenge and hold management to account.
The Committee is responsible for renewal of the terms of office of
independent non-executive Directors. Non-executive Directors are
appointed for an initial three-year term and, subject to re-election
by shareholders, on an annual basis at the Group’s AGM. Non-
executive Directors are typically expected to serve two three-year
terms, although they may serve additional periods at the invitation
of the Board. After a non-executive Director has served more than
nine years on the Board, the term of appointment moves to an
annual basis to ensure appropriate review and challenge.
On 1 March 2020, Laura Cha will have served on the Board for
nine years from the date of her first appointment as a Director. In
view of her strong contribution and constructive guidance and
challenge when holding management to account, the Board has
requested Laura Cha to stand for re-election at the 2020 AGM. In
making its recommendation to the Board, the Committee also
considered the valuable perspectives from Laura Cha’s extensive
regulatory and policymaking experience in Hong Kong and
mainland China.
The continued service of Laura Cha beyond nine years reflects
current circumstances and is in the context of the length of service
of the other non-executive Directors as a whole, each of whom
have served on the Board for fewer than six years. After taking into
account all relevant factors, including her length of service, the
Board determined that Laura Cha will continue to be
independent. In making this determination, her previous role as
Chair of The Hongkong and Shanghai Banking Corporation
Limited, where she was a corporate relations adviser until 2011,
was considered not to be material.
Governance
The Committee has continued to focus on strengthening the
Group’s corporate governance arrangements, including the
operation of the subsidiary accountability framework and
corporate governance framework.
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HSBC Holdings plc Annual Report and Accounts 2019
The Financial Reporting Council's revised UK Corporate
Governance Code took effect on 1 January 2019. The Committee
took this opportunity to reflect on the Code’s governance
requirements, including on workforce engagement, to develop our
governance arrangements in a manner considered most
appropriate and effective. For further information on our
employees, including employee development and diversity and
inclusion, see pages 18 to 19 and pages 215 to 217.
Board evaluation
An independent evaluation of the Board and its committees was
carried out during the year by Dr Tracy Long of Boardroom Review
Limited. The Committee was involved in the appointment and
overseeing certain actions arising from the evaluation. Full details
can be found on page 170.
Workforce engagement
HSBC is committed to engaging meaningfully with the workforce,
regardless of geographical location, to impart information and to
ensure the employee voice is considered when developing its
business. The Committee received updates on corporate
governance developments during the year and considered how it
could appropriately and effectively apply the requirements of the
UK Corporate Governance Code that relate to workforce
engagement within HSBC.
The Board agreed to a recommendation from the Committee that
the Group would apply the ‘alternative arrangements’ approach to
workplace engagement in the Code, as opposed to one of the
three prescribed methods. The ‘alternative arrangements’
approach to how we engage with our employees was considered
the most effective in large part due to our geographical reach.
During 2019, in response to the Code, the Board put a focus on
ensuring the employee voice is heard in the boardroom while
continuing the many existing procedures already in place. This
enabled an increased understanding of employee concerns and
issues as part of the Board’s decision-making process.
Outside the normal activities of the Board, other new procedures
were implemented, as follows:
• The Group Chief Executive and the Group Chief Human
Resources Officer provided twice-yearly formal updates to the
Board on the employee voice, including results of employee
engagement surveys using benchmarked data.
• The chairs forums of the principal subsidiaries held discussions
to consider feedback from the employee voice of those
subsidiaries. Key issues or observations were reported to the
Board at its following meeting.
• Directors attended ‘open door’ events and met with our
employees. Directors could choose which events to attend and
when. The events included town halls, employee resource
group meetings, graduate intake feedback sessions,
experienced hire onboarding sessions and leadership
conferences for global businesses and functions. In addition,
Directors are given the opportunity to set up Director-led
Exchange and focus groups to engage with employees.
• Paper templates for Board meetings were altered in order to
support the Board’s consideration of employee and other
stakeholder views when making principal decisions.
Focus for 2020
During the course of 2020, the Committee will continue to focus
on succession planning and to monitor HSBC’s compliance with
new regulations and developments arising under best practice and
from the UK Corporate Governance Code. The Committee has also
commissioned a subsidiary governance review of the Group's
principal and key material subsidiaries.
Mark E Tucker
Chair
Nomination & Corporate Governance Committee
18 February 2020
Group Audit Committee
Membership
Sir Jonathan Symonds (Chair)
Kathleen Casey
David Nish
Jackson Tai1
Member since
Meeting attendance
in 2019
Sep 2014
Mar 2014
May 2016
Dec 2018
10/10
10/10
10/10
9/10
1 Jackson Tai was unable to attend the meeting in December 2019 due
to a prior engagement.
Our external auditor, PricewaterhouseCoopers LLP ('PwC'), has
now completed its fifth audit. PwC continues to provide robust
challenge to management and has been a significant force in the
drive to deliver a more effective control environment. PwC has
given sound independent advice to the Committee on specific
financial reporting and judgements.
Further details of PwC’s work are contained on pages 174 to 177.
Key responsibilities
The Committee’s key responsibilities are as follows:
• The Committee monitors and assesses the integrity of the
financial statements, formal announcements and regulatory
information in relation to the Group's financial performance as
well as significant accounting judgements.
•
It reviews the effectiveness of, and ensures that management
has appropriate internal controls over, financial reporting.
• The Committee reviews and monitors the relationship with the
external auditor and oversees its appointment, tenure, rotation,
remuneration, independence and engagement for non-audit
services.
•
It oversees the work of Global Internal Audit and monitors and
assesses the effectiveness, performance, resourcing,
independence and standing of the function.
Activities in the year
In 2019, the GAC carried out the following activities:
• The Committee monitored a Group-wide programme to
strengthen the control environment in a more sustainable way
through improving the understanding of end-to-end processes
and ownership of controls. The Committee also continued to
monitor ongoing control remediation.
•
It conducted a review of the enhancements to the
whistleblowing arrangements to improve its effectiveness and
employee confidence in the process and to encourage an
improved ‘speak up’ culture across HSBC.
• The Committee reviewed management plans in response to
regulatory changes, including the transition of interbank offered
rates (‘Ibors’), IFRS 17 ‘Insurance Contracts’ and Basel III
reforms.
• The Committee carried out a review of the environmental,
social and governance (‘ESG’) disclosures and continued to
monitor developments to enhance and embed controls for
these disclosures.
• The Committee challenged and assessed the effectiveness of
the external audit process.
•
It continued to engage with Global Internal Audit’s annual plan,
received regular updates and invited management to discuss
remediation plans on areas rated as not effective by Global
Internal Audit.
Focus of future activities
The Committee will focus on the ongoing priorities that will
continue into 2020. However, in light of the business update
announced with the results, the GAC will provide additional
scrutiny over management’s assurance and execution of strategic
plans, sequencing of events and the impact of these actions on
financial reporting and the sustainable control environment.
HSBC Holdings plc Annual Report and Accounts 2019
173
"The Committee continued in 2019 to focus on an effective
end-to-end control environment, the foundation of sound
financial reporting and consistent customer service."
Dear Shareholder
I am pleased to introduce the Group Audit Committee
('GAC') report. The Committee had another busy year,
holding 10 meetings in 2019.
There were two important additions to management relevant
to the GAC. Ewen Stevenson joined as Group Chief Financial
Officer on 1 January 2019 and Jonathan Calvert-Davies
joined as Group Head of Internal Audit on 1 October 2019.
Both bring with them significant financial services
experience.
The Committee members as a whole have strong, but
diverse, financial backgrounds relevant to the sector in
which we operate. This was a real benefit in the
understanding of the financial, operational and
macroeconomic challenges facing the Group, all of which
require careful thought on recognition and presentation.
After serving as Chair of the GAC for almost six years, I will
be stepping down from the Board on the publication of these
results. David Nish will take over as Chair of this Committee
with effect from 19 February 2020. Kathleen Casey will be
leaving the Board at the AGM and I would like to thank her
for her tremendous support to the work of the Committee. I
would also like to thank all the GAC members for their
support while serving as Chair of the GAC.
Even though much work still needs to be done, an
exceptional amount has been achieved. The Group’s financial
reporting processes, control processes and ability to forecast
and react to geopolitical and macroeconomic turbulence are
immeasurably better. Still more can be done to improve the
robustness of end-to-end processes for the benefit of
improved financial control, simpler operating processes and
more consistent customer outcomes.
We continued to strengthen our relationships with the principal
subsidiary audit committees through regular communication, with
the escalation and cascading of information of key activities and
through active participation in the Audit and Risk Committee
Chairs Forum. This has been a major advance in the last few years
and has brought the work of the subsidiary audit committees and
the risk committees into much tighter alignment.
The Committee is also encouraged by management's efforts
to enhance the Group’s whistleblowing arrangements,
focusing on key culture and conduct-related themes
emerging from the analysis of whistleblowing cases. Critical
to sustained improvement is the needed establishment of a
stronger ‘speak up’ culture throughout the Group.
Corporate governance Report of the Directors | Corporate governance report
Committee governance
Financial reporting
The Committee is responsible for communicating and advising the
Board on matters concerning the Group’s financial reporting
requirements to ensure that the Board has exercised oversight of
the work carried out by management, Global Internal Audit and
the external auditor.
The Group Chief Financial Officer, Head of Finance, Group Chief
Accounting Officer, Group Head of Internal Audit and other
members of senior management routinely attended meetings of
the GAC. The external auditor attended all meetings.
The Chair held regular meetings with management to discuss
agenda planning and specific issues as they arose during the year.
Most meetings included in camera sessions with the Chief Legal
Officer and the internal and external auditors.
The Committee, led by the Chair, who is also the Deputy Group
Chairman and Senior Independent Director, oversaw the
succession process and selection of the Group Head of Internal
Audit.
The Committee Secretary regularly met with the Chair to consider
input from stakeholders, including senior management, internal
auditors and external auditors to finalise meeting agendas and to
track progress on actions and Committee priorities.
To ensure that the Committee reports its findings and
recommendations to the Board in a timely and orderly manner, it
usually meets a couple of days before Board meetings.
Compliance with regulatory requirements
The Board has confirmed that each member of the Committee is
independent according to the criteria from the US Securities and
Exchange Commission and may be regarded as audit committee
financial experts for the purposes of section 407 of the Sarbanes-
Oxley Act. All Committee members have recent and relevant
financial experience for the purposes of the UK and Hong Kong
corporate governance codes.
The Committee assessed the adequacy of resources of the
accounting and financial reporting function. It also monitored the
legal and regulatory environment relevant to its responsibilities.
The GAC Chair had regular meetings with the regulators, including
the UK’s PRA, the FCA and the US Federal Reserve Board. These
included trilateral meetings involving the Group’s external auditor
PwC.
Committee evaluation and effectiveness
During the year, the Committee carried out an internal review of its
own effectiveness and was also subject to an externally facilitated
Board effectiveness review. Further details of this can be found on
page 170.
Both reviews concluded that the Committee continued to operate
effectively and in line with regulatory requirements. During 2019,
recommendations from the external review, including joint
recommendations with the Group Risk Committee ('GRC'), were
tracked and implemented.
How the Committee discharged its
responsibilities
Connectivity with principal subsidiary audit committees
During the year, GAC members had regular formal and informal
communication with the members of the audit committees of the
Group’s principal subsidiaries. Appointments to the audit
committees of the principal subsidiaries were reviewed by the
GAC. The GAC Chair met with the proposed new chairs of the
principal subsidiaries’ audit committees, as appropriate.
On a half-yearly basis, principal subsidiary audit committees
provided certifications to the GAC regarding the preparation of
their financial statements, adherence to Group policies and
escalation of any issues that required the attention of the GAC.
Where necessary, the GAC Chair attended meetings of the
principal subsidiaries’ audit committees to enable closer links and
deeper understanding on judgements around key issues.
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HSBC Holdings plc Annual Report and Accounts 2019
The Committee’s review of financial reporting during the year
included the Annual Report and Accounts, Interim Report, quarterly
earnings releases, ESG Update, analyst presentations and Pillar 3
disclosures.
As part of its review, the GAC evaluated management’s
application of key accounting policies, significant accounting
judgements and compliance with disclosure requirements to
ensure these were consistent, appropriate and acceptable under
the relevant financial reporting requirements. In particular, the
Committee gave careful consideration to the key performance
metrics relating to the strategic priorities to ensure transparency
and consistency throughout the financial reporting disclosures.
In conjunction with the GRC, the GAC considered the current
position of the Group, along with the emerging and principal risks,
and carried out a robust assessment of the Group’s prospects,
before making a recommendation to the Board on the Group’s
long-term viability statement. The GAC also undertook a detailed
review before recommending to the Board that the Group continue
to adopt the going concern basis in preparing the annual and
interim financial statements.
Following challenge of the disclosures, the Committee
recommended to the Board that the financial statements, taken as
a whole, were fair, balanced and understandable. The financial
statements provided the shareholders with the necessary
information to assess the Group’s position and performance,
business model, strategy and risks facing the business.
Internal controls
The GAC assessed the effectiveness of the internal control system
for financial reporting and any developments affecting it. This was
in support of the Board’s assessment of internal control over
financial reporting, in accordance with section 404 of the
Sarbanes-Oxley Act.
The Committee received regular updates and confirmations that
management had taken, or was taking, the necessary actions to
remediate any failings or weaknesses identified through the
operation of the Group’s framework of controls. Further details of
how the Board reviewed the effectiveness of key aspects of
internal control can be found on page 214.
External auditor
The Group’s external auditor is PwC, which has held the role for
five years. The senior audit partner was rotated to Scott Berryman
in 2019 and the GAC oversaw the transition. The Committee
reviewed the external auditor’s approach, strategy for the annual
audit and its findings. In 2019, the Committee reviewed auditor
independence and audit quality, and GAC members routinely met
audit partners in various locations of the business. Principal
matters discussed with PwC are set out in its report on page 220.
The GAC is involved in audit partner rotation and succession for
the Group and its principal subsidiaries. The GAC monitors the
policy on hiring employees or former employees of the external
auditor, including in relation to any breaches of the policy. The
external auditor attended all Committee meetings and the GAC
Chair maintains regular contact with the audit partner throughout
the year. The GAC Chair and the senior audit partner also met
jointly with the regulators during the year.
During the year, the GAC assessed the effectiveness of PwC as the
Group’s external auditor, using a questionnaire that focused on the
overall audit process, its effectiveness and the quality of output.
The Committee 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 2019.
The Committee confirms it has complied with the provisions of the
Competition and Markets Authority Order for the financial
statements. The Committee acknowledges the provisions
contained in the UK Corporate Governance Code in respect of
audit tendering, along with European rules on mandatory audit
rotation and audit tendering. In conformance with these
requirements, HSBC will be required to tender for the audit for the
2025 financial year end and beyond, having appointed PwC from 1
January 2015.
The Committee believed it would not be appropriate to re-tender
for the external audit after PwC has finished its first five-year
rotation. As one of the largest international financial services
companies in the world, it would take time for any new external
auditor to develop an understanding of the business. HSBC is
undergoing a period of significant strategic change and the
Committee currently believes that frequent changes of auditor
would be inefficient and lead to increased risk. A change in auditor
has a significant impact on the organisation, including on the
Finance function, and any change in auditor should be scheduled
to limit operational disruption.
The Committee will consider its strategy on audit tendering in
preparation for the 2025 financial year end in due course.
Therefore, the Committee has recommended to the Board that
PwC should be reappointed as auditor. Resolutions concerning the
reappointment of PwC and its audit fee for 2020 will be proposed
to shareholders at the 2020 AGM.
Non-audit services
The Committee is responsible for setting, reviewing and
monitoring the appropriateness of the provision of non-audit
services to the external auditor. It also applies the Group’s policy
on the award of non-audit services to the external auditor. The
non-audit services are carried out in accordance with the external
auditor independence policy to ensure that services do not create
a conflict of interest. All non-audit services are approved by the
GAC.
The non-audit services carried out by PwC included 34
engagements approved during the year where the fees were over
$100,000 but less than $1m. Group Finance, as a delegate of GAC,
considered that it was in the best interests of the Group to use
PwC for these services because they were:
• audit-related engagements that were largely carried out by
members of the audit engagement team, with the work closely
related to the work performed in the audit;
• engagements covered under other assurance services that
require obtaining appropriate audit evidence to express a
conclusion designed to enhance the degree of confidence of
the intended users other than the responsible party about the
subject matter information;
•
tax compliance services; or
• other permitted services to advisory attestation reports on
internal controls of a service organisation primarily prepared
for and used by third-party end users.
Similar non-audit services to the ones outlined above included
three engagements that were approved by the Committee where
the fee exceeded $1m, and a further three engagements outside
the scope of the pre-approved services list were approved during
the year. They were extensions of work started in the previous year
and consistency of methodology of these reviews was critical for
the success of these engagements.
Auditors‘ remuneration
Total fees payable
Fees for non-audit services
Internal audit
2019
$m
110.7
25.50
2018
$m
119.50
32.90
The primary role of the Global Internal Audit function is to help the
Board and management protect the assets, reputation and
sustainability of the Group. Global Internal Audit does this by
providing independent and objective assurance on the design and
operating effectiveness of the Group’s governance, risk
management and control framework and processes, prioritising
the greatest areas of risk.
The independence of Global Internal Audit from day-to-day line
management responsibility is critical to its ability to deliver
objective audit coverage by maintaining an independent and
objective stance. Global Internal Audit is free from interference by
any element in the organisation, including on matters of audit
selection, scope, procedures, frequency, timing, or internal audit
report content. Global Internal Audit adheres to The Institute of
Internal Auditors' mandatory guidance.
The Group Head of Internal Audit reports to the Chair of the GAC
and there are frequent meetings held between them. Results of
audit work, together with an assessment of the Group’s overall
governance, risk management and control framework and
processes are reported regularly to the GAC, GRC and local audit
and risk committees, as appropriate. This reporting highlights key
themes identified through audit activity, business and regulatory
developments, and provides an independent view of emerging and
horizon risk, together with details of audit coverage.
Audit coverage is achieved using a combination of business and
functional audits of processes and controls, risk management
frameworks and major change initiatives as well as regulatory
audits, investigations and special reviews. Key areas of focus for
2019 audit coverage were prudential soundness, operational
resilience, conduct and culture, financial crime and regulatory
compliance, and data management and governance. 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, which validates closure on a risk basis.
Consistent with previous years, the 2020 audit planning process
will include assessing the inherent risks and strength of the
control environment across the audit entities representing the
Group. Results of this assessment are combined with a top-down
analysis of risk themes by risk category to ensure that themes
identified are addressed in the plan. Risk theme categories for
2020 audit work include strategy, governance and culture;
financial crime, conduct and compliance; financial resilience; and
operational resilience. During 2020, a quarterly assessment of key
risk themes will form the basis of thematic reporting and plan
updates and will ultimately drive the 2021 planning process. The
annual audit plan and material plan updates are approved by the
GAC. The GAC is satisfied with the effectiveness of the Global
Internal Audit function. On the appointment of Jonathan Calvert-
Davies as Head of Group Internal Audit, the GAC considered and
approved him joining the Group, and his independence with him
being a former partner of PwC.
Global Internal Audit maintains a close working relationship with
HSBC’s external auditor, PwC. The external auditor is kept
informed of Global Internal Audit’s activities and results, and is
afforded free access to all internal audit reports and supporting
records.
Principal activities and significant issues
considered during 2019
Collaborative oversight by GAC and GRC
The GAC and GRC worked closely to ensure there were
procedures to manage risk and oversee the internal control
framework. They also worked together to ensure any areas of
significant overlap were appropriately addressed with inter-
committee communication or joint meetings.
The Chairs are members of both committees and engage on the
agendas of each other’s committees to further enhance
connectivity, coordination and flow of information.
In 2019, three Audit and Risk Committee Chair Forums were held
in Hong Kong, New York and London with the chairs of principal
and regional subsidiaries’ audit and risk committees, together with
senior management from these subsidiaries. The purpose of these
Audit and Risk Committee Chair Forums was to discuss mutual
priorities, improvement and remediation programmes and
forward-looking issues in relation to the management of risk and
the internal control framework.
HSBC Holdings plc Annual Report and Accounts 2019
175
Corporate governance Committee was kept informed of progress of the whistleblowing
enhancement programme, which included the strengthening of
entity level controls, the roll-out of a third-party technology
solution and additional training for line managers.
Environmental, social and governance
The GAC received updates on future developments of the Group’s
ESG approach. The Committee monitored stakeholder feedback
and reviewed management’s gap analysis of Sustainalytics rating
reports. The GAC considered best methods of assurance,
presentation and alignment with the Annual Report and Accounts
to allow stakeholders to gauge holistically HSBC’s performance.
During the year, the Committee received reports from Global
Internal Audit on the internal controls for sustainability risk.
Long-term viability statement
In accordance with the UK Corporate Governance Code, the
Directors carried out a robust assessment of the principal risks of
the Group and parent company. The GAC considered the
statement to be made by the Directors and concluded 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 long-term viability statement covers a period of three years.
Engagement with regulatory reform and review
The Committee held additional sessions to review and engage
actively with the Competition and Markets Authority study into the
statutory audit market, the Kingman review of the Financial
Reporting Council and the Brydon review on the quality and
effectiveness of audit. The Committee notes the importance of
such reviews and proposals for reform to the work of the
Committee in improving the quality of financial reporting and
audit.
The Committee will continue to engage and monitor the proposals
by the government to implement recommendations from these
reviews.
Sir Jonathan Symonds, CBE
Chair
Group Audit Committee
18 February 2020
Report of the Directors | Corporate governance report
Three areas of joint focus for the GAC and GRC during 2019 were:
Sustainable control environment
With oversight from the GAC, the Group Management Board
initiated a programme to change and enhance the control
environment in a way that can be sustained. The purpose of this
programme is to ensure there is clear understanding,
accountability and ownership for internal controls and end-to-end
processes to deliver operational quality and consistent outcomes
for customers and simpler operation of controls for colleagues.
The GAC provided constructive challenge to management
proposals and received regular progress updates on the work
streams. Improvements were measured and tracked through a
new enterprise-wide non-financial risk forum with escalation paths
into the GAC and GRC. During 2020, the GAC will focus on the
new business update and restructuring, and how they impact the
control environment.
Financial reporting
The GAC reviewed and provided feedback on the assurance work
and management’s opinion on internal controls over financial
reporting, as required by the Sarbanes-Oxley Act. In conjunction
with the GRC, the GAC monitored the remediation of significant
deficiencies and weaknesses in entity level controls raised by
management and the external auditor. The GAC will continue to
monitor the progress of remediation as well as efforts to integrate
requirements of the Sarbanes-Oxley Act with the operational risk
framework as part of the sustainable control environment
programme.
For expected credit losses under IFRS 9, the GAC works with the
GRC in reviewing and challenging the underlying economic
scenarios, additional scenarios added by management and the
reasonableness of the weightings applied to each scenario in order
to understand the impact on the financial statements.
Monitoring changes to regulatory requirements
The GAC approved an annual priorities plan to review
management’s response to current and future changes in
regulatory requirements affecting financial reporting. In 2019, this
included changes in the UK and Hong Kong corporate governance
codes, interpretation of new accounting standards, industry-wide
regulatory reform programmes and their impact on accounting
judgements. The GAC will continue to monitor specific accounting
issues identified during the year and future regulatory items that
will impact the integrity of financial reporting, the Group and its
relationships with regulators.
Key financial metrics and strategic priorities
In exercising its oversight, the Committee assessed management’s
assurance and preparation of external financial reporting
disclosures. In particular, the Committee provided feedback and
challenge on the disclosures related to the monitoring and
tracking of key financial metrics and strategic priorities.
In the third quarter of 2019, the Committee was involved at all
stages in overseeing the disclosures that updated the market on
the challenging revenue environment and the decision to update
plans and set new financial targets.
Whistleblowing and ‘speak up’ culture
The GAC received regular updates on the status of the Group’s
whistleblowing arrangements, how they operated and how they
were enhanced during the year. The Committee focused on the
key culture- and conduct-related themes emerging from
whistleblowing cases and the end-to-end control processes that
deliver reliable, timely conclusions. This included feedback to
management to drive a stronger ‘speak up’ culture as part of the
Group’s commitment to develop and maintain a culture where
employees can raise issues and concerns without fear of
punishment, embarrassment or rejection.
During the year, concerted efforts were made in many areas of the
Group to build greater trust between employees and leaders and
to normalise the act of airing concerns openly and directly. The
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HSBC Holdings plc Annual Report and Accounts 2019
Significant accounting judgements considered during 2019 included:
Key area
Goodwill
Expected credit loss
('ECL') impairment
Bank of
Communications Co.,
Limited (‘BoCom’)
impairment testing
Appropriateness of
provisioning for legal
proceedings and
regulatory matters
Valuation of defined
benefit pension
obligations
Interest rate benchmark
replacement
Action taken
The GAC received reports on management's approach to goodwill impairment testing and challenged the approach and model
used. The GAC also challenged management's key judgements on inputs to the calculations such as long-term growth rates and
discount factors and the sensitivities of such judgements. A further key judgement was what cash flows were included or
excluded within the goodwill tests for each cash generating unit (‘CGU’), both in terms of compliance with accounting standards
and also the reasonableness of the assumptions in the annual operating plan. The GAC also considered the reasonableness of
the outcomes as a sense check against the annual operating plan and strategic objectives of HSBC. The GAC considered the
outcomes in cases where the goodwill for a CGU was impaired and subsequently written off, and where sensitivities were tested
and the CGU's goodwill was unimpaired and remained on the balance sheet.
The GAC considered loan impairment allowances for personal and wholesale lending. Particular judgements included the effect
of UK economic uncertainty, Hong Kong political uncertainty and the risk of escalation of trade tensions 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 of HSBC’s Swiss Private Bank by a number of tax
administration, regulatory and law enforcement authorities; and (b) an FCA investigation into HSBC Bank’s and HSBC UK Bank’s
compliance with the UK money laundering regulations and financial crime systems and controls requirements.
The valuation of defined benefit pension obligations involves highly judgemental inputs and assumptions, of which the most
sensitive are the discount rate, pension payments and deferred pensions, inflation rate and changes in mortality. Different
assumptions could significantly alter the defined benefit obligation and the amounts recognised in profit or loss or other
comprehensive income. The GAC has considered the effect of changes in key assumptions on the HSBC UK Bank plc section of
the HSBC Bank (UK) Pensions Scheme, which is the principal plan of HSBC Group.
The GAC considered the accounting implications of benchmark interest rate replacement for hedge accounting relationships as
at 31 December 2019, and management’s decision to early-adopt amendments to accounting standards issued by the IASB
during the year. These amendments introduced temporary exceptions from applying specific hedge accounting requirements
under which interbank offered rates ('Ibors') are assumed to continue for the purposes of hedge accounting until such time as
the transition uncertainty is resolved. At 31 December 2019, the uncertainty existed and therefore the temporary exceptions
apply to all of the Group’s hedge accounting relationships affected by the transition. The GAC also considered the expected
accounting implications of the forthcoming transition to new risk free-rate benchmarks for financial instruments and noted that
further amendments to accounting standards will be made dealing with transition and the resolution of uncertainty.
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
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.
Tax-related judgements
The GAC considered the recoverability of deferred tax assets, in particular in the US and the UK. The GAC also considered
management’s judgements relating to tax positions in respect of which the appropriate tax treatment is uncertain, open to
interpretation or has been challenged by the tax authority.
UK customer
remediation
Adjusted profit
measures
The GAC considered the provisions for redress for mis-selling of 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.
Throughout the year, the GAC considered management’s non-GAAP measures for adjusted profits.
HSBC Holdings plc Annual Report and Accounts 2019
177
Corporate governance Report of the Directors | Corporate governance report
Group Risk Committee
Membership
Jackson Tai (Chair)
José Antonio Meade
Kuribreña1
Heidi Miller
Sir Jonathan Symonds
Pauline van der Meer Mohr
Member since
Sept 2016
May 2019
Sept 2014
April 2018
April 2018
Meeting attendance
in 2019
11/11
4/6
11/11
11/11
11/11
1 José Antonio Meade Kuribreña was unable to attend the meetings in
July and November due to prior engagements that predated his
appointment.
The GRC continued to place high priority in engaging first line
business owners in our review and challenge sessions to deepen
our insight into the opportunity and attendant risks, to reaffirm
ownership and accountability, and to seek resolution or close-out
of issues. The participation of our senior business leaders,
including the current and the former Group Chief Executive who
between them attended four GRC meetings in 2019, reaffirmed
the ownership and accountability of risks in the first line of
defence and strengthened our holistic three lines of defence
review of our most pressing risks.
The GRC also reviewed and challenged key regulatory processes,
including the Group internal capital adequacy assessment process
(‘ICAAP’), individual liquidity adequacy assessment process
(‘ILAAP’), the Group recovery plan and both of the Bank of
England’s regulatory stress tests – the annual cyclical scenario and
the biennial exploratory scenario. As a priority, the GRC engaged
the Group’s principal subsidiary risk committees and their chairs
to form a holistic understanding of the Group’s progress in these
regulatory processes and concluded that they were of a
satisfactory standard.
Throughout the year, we continued to advocate and support the
Group’s subsidiary accountability framework.
The connectivity between the GRC and the principal subsidiary risk
committees continues to be strengthened through cross-
attendance of meetings by the Chair and principal subsidiary risk
committee chairs, a practice launched in 2017. During the year,
the Chair attended principal subsidiary risk committee meetings in
Hong Kong, Dubai, New York and Mexico City. We also actively
encouraged the chairs of principal subsidiary risk committees to
attend GRC meetings and governance events in person or
electronically, and found their active participation facilitated the
sharing of Committee materials, findings and best practices and
enhanced the GRC’s holistic oversight of risk management across
the Group. (See ‘Connectivity with principal subsidiary risk
committees’ below.)
In addition, the Chairs of the GRC and of the Group Audit
Committee ('GAC') actively promoted the timely sharing of subject
matter expertise and insight among principal subsidiary audit and
risk committee chairs, non-executive Directors, and senior
management through our three regional Audit and Risk
Committee Chairs forums held in Asia, the Americas and EMEA.
Besides advancing our oversight over enterprise risk management,
these Audit and Risk Committee Chairs Forums also ensured
stronger alignment of the priorities of the Group and of our
principal subsidiaries. (See ‘Audit and Risk Committee Chairs
Forum' below.)
The GRC also took steps in 2019 to foster transparency and a
better understanding of our risk governance progress by
welcoming our principal regulator to one of our deep dive and
challenge sessions and by inviting our regional regulators to
address our regional Audit and Risk Committee Chairs Forums.
"The Group Risk Committee embraced proactive risk
governance – through informed review and appropriate
challenge – to reinforce effective risk management."
Dear Shareholder
I am pleased to present the Group Risk Committee (‘GRC’) report.
The Committee has responsibility for the oversight of enterprise
risk management. Throughout 2019, the GRC embraced proactive
risk governance – through informed review and appropriate
challenge – to reinforce effective risk management.
During the year, the Committee strengthened its composition and
skills and experience to ensure that it is well positioned to promote
proactive risk governance. Dr José Antonio Meade Kuribreña
joined the GRC with effect from 1 June 2019 and has brought a
fresh perspective in multilateral governmental affairs and
geopolitical developments from his base in Latin America. We also
welcomed Kathleen Casey, who became a member of the GRC on
16 January 2020 after the Board approved the transition of
financial crime risk management from the Financial System
Vulnerabilities Committee (‘FSVC’) to the GRC. Kathy has had a
long tenure as a FSVC member and brings insight into financial
crime remediation as well as her regulatory and government
service background to the GRC.
The Committee shaped its meeting agenda to focus on forward-
looking and pressing risk issues, including credit risk; non-financial
risk management; forward-looking capital and liquidity strategies;
model risk management; climate-related risks; people risk and
conduct; information and cybersecurity risks; and operational
resilience. For each meeting, we organised ‘deep dive and
challenge’ sessions to address one or more of the Group’s top and
emerging risks through active engagement from all three lines of
defence: first line business owners, second line risk stewards and
third line audit and assurance. Where possible, the GRC worked
with senior management and subject matter experts to organise
training, remedial and ‘walk-through’ sessions to raise the
Committee’s understanding of the underlying domain issues,
ensuring the GRC was better prepared in its informed review and
constructive challenge. Indeed, many of our ‘deep dive’ sessions
start with the Committee’s advance submission of forward-looking
and strategic questions to first and second line presenters,
addressing HSBC-specific challenges and cross-organisational
dependencies.
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HSBC Holdings plc Annual Report and Accounts 2019
Key responsibilities
The GRC has non-executive responsibility for the oversight of
enterprise risk management, risk governance and internal control
systems. In its holistic view of risk in 2019, the Committee was
supported by the FSVC, the Board sub-committee responsible for
overseeing risks relating to financial crime and financial system
abuse. In January 2020, the GRC assumed direct responsibility
for financial crime risk oversight from the FSVC.
The Committee’s key responsibilities are:
• The Committee oversees and advises the Board on all risk-
related matters, including financial risks, non-financial risks and
the effectiveness of the Group’s conduct framework.
•
It advises the Board on risk appetite-related matters, including
the ICAAP and ILAAP, as well as recovery and resolution
planning.
• The Committee reviews the effectiveness of the Group’s
enterprise risk management framework and internal controls
systems (other than internal financial controls overseen by the
GAC).
•
It undertakes a review and challenge of the Group’s stress
testing exercises.
Activities in the year
In 2019, the GRC carried out the following activities:
• The Committee conducted an in-depth review and challenge
on non-financial risk management and the Group’s internal
control environment, with deep dives into people risk and
conduct, model risk management, IT resilience and
governance, Cloud strategy, operational resilience, data
management, end-to-end process and risk and control
mapping. For the review of non-financial risks, internal
controls and data management, the GRC and GAC worked
closely to convene joint and coordinated review and challenge
sessions. (See ‘Collaborative oversight by GRC and GAC’
below.)
•
•
It reviewed the major financial risks affecting the Group,
including retail and wholesale credit risk management,
counterparty credit risk exposures to central clearing
counterparties and climate change-related risks faced by the
Group, as well as challenged management to be rigorous and
forward looking in their strategies and approach, particularly in
addressing horizontal dependencies for these financial risks,
such as talent, data, analytics and modelling.
It reviewed and challenged the assessment of the Group
ICAAP and ILAAP programmes and engaged with Group
management and principal subsidiary risk committee chairs in
overseeing and evaluating the Group’s forward-looking capital
and liquidity strategies and capabilities, including Group
liquidity risk management.
• The Committee conducted comprehensive reviews of the
Group’s participation in the Bank of England’s annual cyclical
scenario stress test and biennial exploratory scenario stress
test, and provided challenges over the stress results, strategic
management actions and lessons learned from the stress
scenarios.
• The Committee conducted informed review and challenge of
the alignment of risk and reward, satisfying itself that risk and
compliance objectives and outcomes impacted the Group
variable pay pool.
•
It undertook its biannual risk appetite review and
recommended the Group’s 2020 risk appetite statement to the
Board with enhancements to both financial and non-financial
risk metrics.
• The Committee reviewed and challenged the 2019 Group
recovery plan and satisfied itself with regards to the
completeness of the plan and its consistency with the
principles of the Group’s risk appetite.
•
It reviewed the Group’s readiness to address major geopolitical
developments, including the short and longer-term impact of
trade tensions between the US and China on our Asia-Pacific
franchise, and the contingency planning and our forward-
looking business model following the UK’s departure from the
EU, including the migration of key client relationships and
product capabilities to continental Europe. In the latter case,
the Chair met with HSBC Bank plc and HSBC France
leadership in Paris to understand our programme planning and
risk mitigation.
• The Committee maintained throughout the year a deliberate
focus on people risk, including diversity, conduct and culture
issues. The GRC regularly monitored the Group’s progress in
remediating the market conduct issues underlying the 2018
deferred prosecution agreement with the US Department of
Justice and the related 2017 Federal Reserve Bank Consent
Order. The GRC also organised a Group Human Resources
training session on workplace harassment.
Focus of future activities
The GRC’s focus for 2020 will include the following activities:
• The Committee plans to provide robust oversight and scrutiny
over the execution risk of the strategic actions and business
re-profiling announced with the 2019 financial results, and the
impact of these actions on the Group’s risk exposure, financial
resources and sustainable control environment.
•
It will monitor and appropriately challenge management’s
plans to manage and mitigate the impacts of geopolitical risks
on our operations and portfolios in Asia-Pacific, the Middle
East and the rest of the world.
• The Committee will ensure the continuity in financial crime risk
oversight after assuming the responsibility from the FSVC,
with a focus on sanctions and transaction monitoring.
•
•
It will continue to monitor developments and enhancements in
the Group’s management of conduct and culture, as well as
people risk management. As a matter of priority, the GRC will
oversee progress in remediating the market conduct issues
underlying the 2018 deferred prosecution agreement with the
US Department of Justice and the related 2017 Federal
Reserve Board Consent Order.
It will continue reviewing and challenging management’s
progress in developing and implementing our operational
resilience strategy, the key elements of which include third-
party risk management, data management, IT governance,
Cloud strategy and cybersecurity risk.
• The Committee will also focus on the Group’s forward-looking
strategy and management actions to quantify and mitigate
climate change-related risks.
Committee governance
In carrying out its responsibilities, the GRC is supported by the
Group Chief Risk Officer, Group Chief Financial Officer, Group
Head of Internal Audit, Group Chief Compliance Officer and
Global Head of Risk Strategy, all of whom regularly attend GRC
meetings to contribute their subject matter expertise and insight.
They facilitate Committee members' review and challenge of
current and forward-looking risk issues, working together with
business, functional and regional leaders across all three lines of
defence. The Chair and members of the GRC also regularly meet
with the Group Chief Risk Officer, the Group Head of Internal
Audit and external auditors PwC without management present.
HSBC Holdings plc Annual Report and Accounts 2019
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Committee evaluation and effectiveness
Collaborative oversight by GRC and GAC
The Committee is committed to regular, independent evaluation of
its own effectiveness. During 2019, the GRC undertook an internal
committee effectiveness exercise, which concluded that the GRC
continued to operate effectively and in line with regulatory
requirements.
The Committee was also subject to a wider externally facilitated
Board effectiveness review during 2019. Recommendations from
the review, including joint recommendations with the GAC, were
tracked and implemented. Further details on this can be found on
page 170.
How the Committee discharges its responsibilities
Since 2017, more than half of each Committee meeting has been
dedicated to deep dives and challenge of the most pressing risks
facing the Group. These sessions deepened the GRC members’
understanding of the priority risks and issues and strengthened
the GRC’s oversight and challenge through active engagement
with all three lines of defence.
As well as deep dive sessions, the GRC reviewed regular risk and
independent audit reports, which provided an overview of the
Group’s risk profile and highlighted the material current and
forward-looking risks and issues, such that the Committee could
effectively identify any areas that required more of the GRC's
attention.
After assuming the oversight responsibility for people risk and
employee conduct in 2018, the GRC continued to exercise its
governance in this area, supported by the Group Chief Human
Resources Officer and Group business heads, including overseeing
the effective delivery of the Global Markets conduct enhancement
programme as well as the remediation plan addressing the issues
set out in the 2018 FX deferred prosecution agreement with the
US Department of Justice and the 2017 Consent Order with the
Federal Reserve Board.
Following the assumption of the responsibility for information
security and cyber risk in 2018, the Committee continued to make
headway in the improvement of the Group’s cybersecurity and
management of cyber risks. The GRC received periodic reports
from management throughout 2019 on the cyber risks facing the
Group and the mitigating actions in place. Additionally, the
Committee’s independent cybersecurity adviser, Andrew France,
was invited to attend every GRC meeting to provide his advice and
insight with particular regard to cyber issues.
Activities outside formal meetings
The GRC had a number of activities outside its regular meeting
cycle to facilitate more effective oversight of the risks impacting
the Group. The chairs of principal subsidiary risk committees were
also invited. Activities included, among others:
• a stress test tutorial focusing on material models and their
limitations;
• a financial crime awareness session led by Group Chief
Compliance Officer Colin Bell and the Financial Crime
Compliance leadership team;
• a workplace harassment training session led by senior leaders
in Human Resources; and
• quarterly cybersecurity consultation sessions and monthly
written updates on cyber developments such as cyber crime,
legislation and technology provided by the GRC’s
cybersecurity adviser, Andrew France.
The GRC worked closely with the GAC to ensure that there are no
gaps in risk oversight, and that any areas of significant overlap are
appropriately addressed by inter-committee communication or
joint meetings where appropriate. The GRC and GAC Chairs are
members of both committees and engage on the agendas of each
other’s committees to further enhance connectivity, coordination
and flow of information.
Three areas of collaborative oversight by the GRC and the GAC
during 2019 were:
Sustainable control environment
During 2019, the GRC undertook in-depth reviews of a number of
topics relating to the Group’s internal controls and the necessary
culture change needed to improve the control environment.
Management’s progress and forward-looking plan to embed non-
financial risk management were reviewed and challenged by the
GRC, with a focus on first line ownership and customer outcomes.
The Committee also carried out an extensive review of the Group’s
operational resilience strategy and progress in end-to-end
process, and risk and control mapping, which highlighted the
importance of ensuring the resilience of our critical business
services and setting impact tolerance for inevitable service
disruption.
Financial risk
The GRC provided informed review and constructive challenge to
the Group’s regulatory submissions of ICAAP and ILAAP
processes. It also 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 key
assumptions, strategic management actions and outcomes of the
principal tests conducted. Through these reviews, the Committee
assessed each risk facing the Group to determine the principal
risks to its long-term viability, including those that would threaten
its solvency and liquidity.
Monitoring changes to regulatory requirements
During 2019, the GRC undertook review and challenge of a
number of risk areas for which the Group has regulatory
obligations or is facing regulatory change. These included model
risk, climate change-related risk and operational resilience. In
particular, the GRC convened a models limitation tutorial session
and conducted an extensive review on model risk management,
which was a high priority area under regulatory scrutiny. The
Committee also received periodic updates on the progress against
the GRC-approved annual Compliance function strategic plan,
including analysis of emerging compliance risks, compliance-
related policy updates and the Group’s relationship with the
regulator.
Connectivity with principal subsidiary risk committees
The risk committees of principal subsidiaries provided half-yearly
confirmations to the GRC. These certifications confirmed that the
principal subsidiary risk committees had 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 were operating effectively.
In 2019, the GRC proactively encouraged principal subsidiary risk
committee chairs’ participation in regular GRC meetings and
special review or learning sessions throughout the year. As a
result, there has been an improvement in the connectivity between
the Group and principal subsidiary risk committees as well as
within the risk committees themselves. Since 2017, the GRC
Chair’s attendance at principal subsidiary risk committees’
meetings in Asia, UK, Europe, US, Latin America, Canada and the
Middle East also furthered this information sharing and
connectivity.
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HSBC Holdings plc Annual Report and Accounts 2019
Audit and Risk Committee Chairs Forum
• top risks and significant issues that were reviewed and
The Audit and Risk Committee Chairs Forum was held for each of
the three key regions where the Group operates, of Asia, EMEA
and the Americas. In 2019, it continued to be the collaborative
event that shared risk and audit subject matter expertise, aligned
Group and subsidiary priorities, supported the subsidiary
accountability framework and promoted two-way connectivity
between the Group and principal subsidiary risk and audit
committees. The Audit and Risk Committee Chairs Forums were
jointly hosted by the GAC and GRC Chairs and attended by
members of the GAC and GRC, Group Management Board
members, the chairs of principal and regional subsidiary audit
and risk committees, together with non-executive Directors and
senior management from these subsidiaries.
At these events, subject matter expertise was shared through
interactive discussions and presentations by Group senior
management. The aim was to focus on best practices among
subsidiaries, promote connectivity and consistency, and reinforce
a holistic view across the Group’s high priority audit and risk
issues. The topics covered at these forums included:
• the Group’s business update from the Group Chief Executive
and implications for the subsidiaries;
• the regulator’s perspective on progress and challenges for the
HSBC franchise;
challenged at the GRC and GAC, such as sustainable control
environment, accelerating the embedding of non-financial risk
management, credit risk management, capital and liquidity
constraints, model risk management and operational resilience;
• regional leadership’s views on improving a ‘speak up culture’
and on HSBC’s core values, behaviour, conduct and culture;
and
• the GRC’s and GAC’s progress in 2019 and key priorities in
2020.
The Audit and Risk Committee Chairs Forums provided an
opportunity for the GRC to understand locally specific issues with
potential read-across to other areas and regions of the Group. It
also served to help the GRC learn from the experience and
different perspectives provided by the chairs of subsidiaries' risk
committees in addressing top and emerging areas of risk and
agree and endorse a consistent approach to risk management
across the Group.
Looking forward to 2020, the GRC will continue its progress in
subsidiary risk committee connectivity and three lines of defence
engagement. The GRC will further consider Libor, operational
resilience, conduct issues and execution risk connected to
strategic change over the course of 2020.
Jackson Tai
Chair
Group Risk Committee
18 February 2020
HSBC Holdings plc Annual Report and Accounts 2019
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Financial System Vulnerabilities Committee
Membership
Member since
Meeting attendance
in 2019
Non-executive Directors
Jackson Tai (Chair)1
Kathleen Casey2
Laura Cha
Lord Evans of Weardale3
Co-opted non-Director
members4
Nick Fishwick CMG
Dave Hartnett CB5
Lord Hogan-Howe5
David Irvine AO5
John Raine5
The Honourable Juan Zarate6
Sept 2016
April 2019
April 2018
May 2014
Jan 2013
Feb 2013
Sept 2017
Nov 2016
Sept 2017
Jan 2013
5/5
4/4
5/5
2/2
5/5
2/2
2/2
2/2
2/2
4/5
1 Jackson Tai was appointed as Chair of the FSVC on 12 April 2019.
2 Kathleen Casey also served on the FSVC from 1 March 2014 to
20 April 2018.
3 Lord Evans of Weardale stepped down as Chair of the FSVC on
12 April 2019.
4 The co-opted 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.
5 Dave Hartnett CB, Lord Hogan-Howe, David Irvine AO and John
Raine CMG OBE all stepped down from the FSVC on 10 April 2019.
6 The Honourable Juan Zarate did not attend the Committee meeting
in September due to a prior engagement.
Transition of financial crime oversight
On 18 December 2019, the UK’s FCA gave formal approval for the
oversight of financial crime to transition from the FSVC to the
GRC. On 15 January 2020, the final FSVC meeting was held,
during which the Committee discussed the handover of financial
crime oversight to the GRC. Following this, a joint meeting of the
FSVC and GRC was held to discuss the assumption of
responsibility by the GRC.
Board approval for the transition of financial crime oversight was
given on 16 January 2020 and the FSVC was formally demised. To
ensure continuity in the responsibilities of financial crime
oversight, Kathleen Casey became a member of the GRC on
16 January 2020. The non-Director members of the FSVC were
assigned as advisers to the GRC, attending relevant financial crime
remediation items on the GRC’s agenda.
Financial crime will now be managed in line with other risk types
managed by the GRC and appropriate coverage of financial crime
will be included in its agenda.
Meetings
The Committee had five scheduled meetings during 2019. The
Committee’s meetings are aligned to the Board meeting cycle and
occur in advance so that any updates can be made at Board
meetings. The Chair of the FSVC provides updates as a standing
agenda item at Board meetings.
"Regulatory approval to demise the Committee reflected
significant effort by the Committee and Group to bring about
a cultural change in the awareness and remediation of
financial crime risk."
Dear Shareholder
I am pleased to present the Financial System Vulnerabilities
Committee (‘FSVC’) report.
The Committee provides oversight of matters relating to financial
crime and financial system abuse, including anti-money
laundering, sanctions, terrorist financing, proliferation financing
and anti-bribery and corruption. It also provides advice to the
Board on the Group’s framework of controls and procedures that
are designed to identify areas where HSBC and the financial
system more broadly may become exposed to financial crime or
system abuse.
Committee chair transition
On 12 April 2019, Lord Evans of Weardale resigned as a Director
and I was appointed as Chair of the FSVC to ensure continuity,
having been a member of the Committee since September 2016.
In preparation for the transition, the Committee received reports
on its achievements and areas of potential focus. The change of
Chair and non-Director membership, detailed below, supported a
programmed transition of financial crime oversight to the Group
Risk Committee ('GRC').
Committee membership
There were several changes to the Committee’s membership
during 2019. Firstly, we welcomed Kathleen Casey back to the
Committee’s membership.
In line with the maturity of the financial crime risk agenda and the
governance simplification process, we took the decision to reduce
the number of advisers. Lord Hogan-Howe, John Raine, David
Irvine and Dave Hartnett all stood down as non-Director members
of the Committee following its meeting on 10 April 2019. They
continued to work with the wider Group and maintained focus on
regional financial crime risk throughout 2019.
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HSBC Holdings plc Annual Report and Accounts 2019
Activities during the year
Activities outside formal meetings
In 2019, the Committee received regular reports from
management on areas within its scope, including financial crime,
internal audit findings, legal matters and operational effectiveness.
The Committee held, or facilitated, a number of activities outside
its regular meeting cycle to provide further oversight of matters
relating to financial crime and financial system abuse.
Alongside these regular reports, the Committee's activities
focused on other areas during the year. The Committee held
'Spotlight' sessions with relevant executives to explore these
additional areas. Some of these sessions included discussion
regarding:
• how governance and escalation procedures are used to
mitigate financial crime risk within the Group;
• cross-border trade, finance flows and growth in digital financial
services in the market and how this applies to the Group;
• how the Group manages financial crime risk and what the
associated controls are in relation to multinational corporations.
Where the Group has a relationship with a multinational
corporation, what financial crime risk controls are in place to
govern these relationships;
•
financial crime risk management and supporting governance
structures within HSBC UK, HSBC Bank plc, the Latin America
region and the Asia-Pacific region;
• how the Group kept up to date on developments of Office of
Foreign Assets Control sanctions, the broader sanctions arena
and on sanctions controls across the Group’s global business;
• reports from Committee advisers following their visits to
various jurisdictions;
•
the development of HSBC’s principles, and associated
governance, on the ethical use of 'Big Data' and machine
learning models;
• developments related to the UK’s exit from the EU, including
the potential financial crime risks associated with it, and the
evolving challenges around fraud;
• updates from the Skilled Person, as approved by the UK's FCA
and PRA, in February and July, as part of which private
sessions were held with the Committee members;
• progress regarding HSBC’s transaction monitoring programme;
• updates on the governance and escalation principles in place
across the Group from the Group Company Secretary;
• a review of enterprise-wide risk assessment reports on anti-
money laundering, anti-bribery and corruption and sanctions;
and
• a review of its own terms of reference and agreeing that no
changes were required.
The FSVC Chair, alongside senior executives, met with an FCA
supervision team to discuss industry-wide topics, including
financial crime remediation.
In May 2019, the Committee held joint training sessions with the
GRC in preparation for the transition of financial crime oversight to
the GRC. The Group Company Secretary and the Group Chief
Compliance Officer respectively held workshops with country
CEOs and the chairs of subsidiary risk and audit committees to
discuss financial crime, conduct, behaviour and issues relating to
culture.
In September 2019, the FSVC members undertook on-site visits to
HSBC’s Mexican operations, which included a branch visit. The
purpose of these on-site visits was to review the progress and
learnings of our financial crime remediation programme since
2012, and to share regional forward-looking initiatives on insider
risks and fraud.
The FSVC Chair visited a number of jurisdictions, including Hong
Kong and the UAE, to discuss emerging financial crime topics with
country senior managers. The co-opted non-Director members and
the Group’s financial crime advisers met in November to discuss
current trends and topics within the financial crime arena.
On 22 January 2020, the GRC Chair (following the formal demise
of the FSVC on 17 January 2020) joined the Global Head of
Financial Crime Compliance and Group Money Laundering
Reporting Officer Ralph Nash, Global Head of Sanctions Allison
Mackenzie, and advisers to the Group GRC on financial crime Juan
Zarate and Nick Fishwick, in launching a full-day sanctions
training event in Hong Kong for Asia-Pacific non-executive
Directors, senior managers, client relationship officers and support
officers.
Jackson Tai
Chair
Financial System Vulnerabilities Committee
18 February 2020
HSBC Holdings plc Annual Report and Accounts 2019
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Directors’ remuneration report
set out in our annual operating plan. This represents a 3.8%
decrease on the 2018 variable pay pool.
Group Remuneration Committee
Our approach to Directors' remuneration
Annual report on remuneration
Workforce remuneration
Additional remuneration disclosures
Page
186
187
191
204
208
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.
In setting the pool, the Committee applied:
• a reduction of $206m for the fines, penalties and cost of
customer redress faced by the Group; and
• a discretionary reduction of $999m taking into consideration
financial performance being lower than the targets we had set
at the start of the year and certain non-financial risk metrics,
where performance was outside our risk appetite.
We expect all our people to reflect our values in how they behave
and conduct business. We are committed to delivering fair
outcomes for our customers, and to ensuring we act with integrity.
The personal conduct of our people is critical to our ability to live
up to these commitments. We recognise and reward exceptional
conduct demonstrated by our employees. We also discourage
poor conduct and inappropriate behaviour that is not in keeping
with our values, or which exposes us to financial, regulatory and
reputational risk. We do this through:
• the use of behaviour and performance ratings for all employees,
which directly influence pay outcomes;
• positive adjustments to variable pay for individuals who have
exhibited exemplary conduct and who went the extra mile to
courageously do the right thing (totalling $9.2m in 2019);
• our global recognition programme, where our employees can
recognise peers and reward positive behaviours in a real-time,
visible way; and
• reductions in variable pay where there are cases of
inappropriate individual conduct and behaviours (totalling
$2.3m in 2019).
Membership
Pauline van der Meer Mohr (Chair)
Henri de Castries1
David Nish
Irene Lee
Member since
1 January 2016
26 May 2017
26 May 2017
20 April 2018
Meeting attendance
in 2019
Executive Director changes
7/7
6/7
7/7
7/7
On 5 August 2019, Noel Quinn was appointed as interim Group
Chief Executive after John Flint stepped down. Marc Moses
stepped down as an executive Director and Group Chief Risk
Officer on 31 December 2019.
1 Henri de Castries was unable to attend the April meeting due to prior
commitments.
Dear Shareholder
I am pleased to present our 2019 Directors’ remuneration report
on behalf of the members of the Group Remuneration Committee.
Our new remuneration policy received strong support at the 2019
AGM, with more than 97% of the votes cast in favour of the
policy. The first year of implementation of this policy was in 2019.
I have set out below a summary of our 2019 performance, key
decisions made by the Committee and how the Committee has
applied the new policy.
Performance and pay for 2019
In 2019, we faced a challenging business environment, with
revenue growth softer than we anticipated at the start of the year.
Our reported profit before tax of $13.3bn was down 33%, which
included a $7.3bn goodwill impairment. Adjusted profit before tax
of $22.2bn increased by 5%. Reported revenue of $56.1bn
increased by 4%, while adjusted revenue of $55.4bn was 6%
higher, with strong performances in our RBWM and CMB
businesses, partly offset by lower revenue in GB&M. Adjusted
operating expenses increased by 3%, reflecting ongoing cost
discipline while continuing to invest, resulting in positive adjusted
jaws of 3.1%. We delivered a return on tangible equity ('RoTE') of
8.4%, a reduction of 20 basis points compared with 2018.
The Group announced a dividend of $0.51 per ordinary share, and
in 2019 returned a total of $1bn to shareholders through share
buy-backs.
The Group Remuneration Committee reviewed and agreed the
Group variable pay pool of $3,341m, taking into account
performance against financial and non-financial metrics set out in
the Group risk appetite statement, including conduct, and targets
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HSBC Holdings plc Annual Report and Accounts 2019
All remuneration decisions made in respect of these changes were
in accordance with the policy approved by the shareholders.
Noel Quinn’s base salary, fixed pay allowance and cash in lieu of
pension were set at the amounts approved by shareholders for
the Group Chief Executive role at the 2019 AGM. He was also
eligible to be considered for variable pay consisting of an annual
incentive and a long-term incentive ('LTI') award.
In accordance with our approved remuneration policy and
contractual terms agreed, both John Flint and Marc Moses have
been designated as good leavers taking into consideration John
Flint’s and Marc Moses’ 30 and 14 years of service with HSBC,
respectively. John Flint's and Marc Moses' good leaver statuses
are conditional upon satisfaction of our non-compete provisions
under which they cannot take up roles with a defined list of
competitor financial services firms for two years after they cease
employment with HSBC. As good leavers, they were eligible to be
considered for 2019 annual incentive awards based on the 2019
scorecard outcome. Their unvested awards will continue to vest
on their scheduled vesting dates and the vesting of any LTI
awards granted to them will be pro-rated for time spent in
employment with the Group during the performance period,
following the performance assessment. Neither John Flint nor
Marc Moses has been granted LTI awards for 2019. Further
details are set out on page 198.
Key remuneration decisions for executive
Directors
In March 2019, the Committee decided to reduce the cash in lieu
of pension allowance for new executive Directors from 30% of
base salary to 10% of base salary. The change was made to
ensure this allowance for new executive Directors, as a percentage
of salary, is not more than the maximum contribution rate, as a
percentage of salary, that HSBC could make for a majority of
employees who are defined contribution members of the HSBC
Bank (UK) Pension Scheme. The current executive Directors also
voluntarily agreed to have their allowance reduced to 10% of
salary with effect from 1 April 2019. This change has been
positively received by our shareholders.
The annual scorecards of our executive Directors were aligned to
the delivery of our strategic priorities, as set out on page 192. As
we did not achieve all of our 2019 financial and strategic targets,
the 2019 annual incentive scorecard outcomes for our Group Chief
Executive and Group Chief Risk Officer were lower than the 2018
scorecard outcomes. The 2019 annual incentive scorecard
outcome was 66.4% for Noel Quinn (2018 Group Chief Executive
scorecard outcome: 75.7%), and 66.3% for Marc Moses (2018
outcome: 89.0%). For Ewen Stevenson, the scorecard outcome
was 77.5% taking into account performance against the financial
targets and management of the Global Finance function. The
annual incentive scorecard outcome for John Flint was 61.4%,
reflecting the lower outcomes on non-financial objectives in the
first half of 2019. The annual incentive awards for Noel Quinn and
John Flint were determined based on the outcome of the 2019
scorecard measures set for the Group Chief Executive and then
pro-rated for time spent by them as Group Chief Executive during
2019. Further details are provided on page 192.
The three-year performance period for the 2016 LTI award ended
on 31 December 2019. The scorecard outcome for this award was
assessed at 72.7%, which included assessment of performance
against return on equity, adjusted jaws and relative total
shareholder returns ('TSR') targets that were set at the start of the
performance period. The awards after adjustment of the
performance outcome, and time spent in employment during the
performance period by former executive Directors, will vest in five
equal annual instalments and will be subject to a six-month post-
vesting retention period.
In determining the 2019 annual incentive and the 2016 LTI
outcome, the Committee also took into consideration the overall
performance of the Group using a number of internal and external
measures, including profit before tax, RoTE, share price and TSR,
to consider if any adjustments should be made to the formulaic
scorecard outcomes. The Committee determined that the
scorecard outcomes appropriately reflected the financial results
and determined no discretionary adjustments were required.
The Committee also granted Ewen Stevenson an LTI award for
2019, taking into consideration his 2019 performance. This award
will also be subject to a three-year forward-looking performance
period ending on 31 December 2022. Taking into account
feedback received on our 2018 LTI scorecard and discussions with
investors, we have included a relative TSR measure. The 2019 LTI
scorecard will consist of RoTE, relative TSR and customer
measures with each given equal weighting. We believe these
measures align the reward of our executives with our financial
performance and the interest of our shareholders. Details of the
LTI award are set out on page 195. The Committee has not
granted an LTI award to Noel Quinn given he has been in an
interim capacity in the Group Chief Executive role. To meet
regulatory requirements, 60% of his variable pay will be deferred
and vest in equal annual instalments between the third and
seventh anniversary of the grant. At least 50% of his total variable
pay will be in shares, which will be subject to a one-year retention
period after vesting.
We have increased the base salary of our executive Directors by
2.5%, in line with the average increase for our Group employees.
Investor consultation
Regular dialogue with our shareholders, even outside of policy
vote years, is important to ensure our remuneration policy
operates as intended. In 2019, we met with a number of our
significant shareholders and proxy voting agencies to hear their
views on the implementation of our new policy. We found this
engagement useful. There was a preference towards the use of a
relative measure in the LTI scorecard and the use of firm-specific
environmental targets in executive Directors’ scorecards. Based on
this feedback, the 2019 LTI includes a TSR measure and the 2020
annual incentive scorecards of executive Directors include an
environment measure linked to our commitment to reducing
carbon emissions.
Review of workforce remuneration matters
Under the PRA’s Senior Managers Regime, as the Chair of the
Committee I have prescribed responsibilities for overseeing the
development and implementation of the Group’s remuneration
framework. In line with these prescribed responsibilities and the
provisions of the UK Corporate Governance Code in 2019, the
Committee continued to review the effectiveness of the
remuneration framework for our overall workforce, including
through feedback received from the employee pay review survey.
The survey showed that there has been an improvement in
employees’ understanding of how their pay is determined, both in
terms of their own performance and behaviour as well as business
performance. A majority of the employees who responded to the
survey thought that their managers recognised positive
performance and behaviour and that there is recognition for acting
appropriately with regards to risk and compliance. The survey
results were also used to determine the 2019 priorities, which
included simplifying decision making for managers to enable them
to make informed pay decisions and enhancing the frequency and
quality of performance and development conversations.
As part of the year-end pay review, the Committee reviewed
results of remuneration outcomes across the Group to ensure they
were in line with our pay principles. These included details of
outcomes by performance, behaviour ratings and a focus on
diversity and outcomes for our junior employees. The Committee
also reviewed variable pay adjustments. This informs the
Committee on the effectiveness of our remuneration framework
and whether our framework aligns rewards with our values.
An overview of our remuneration principles and the wider
employee remuneration policy is set out on page 204.
Diversity and inclusion
Diversity is a critical enabler of our business strategy and all Group
employees have a role to play in shaping an inclusive culture. Our
approach to pay 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.
In June, we published our 2019 UK Gender Pay Gap report and it
is clear from our aggregate UK-wide median gender pay gap of
47.8% that we have more work to do. The biggest driver of our UK
gender pay gap is the shape of our workforce. We have a
predominance of women at the more junior levels with fewer
women in senior leadership roles.
Our commitment to improving the gender balance of our
workforce has resulted in the implementation of a three-part plan,
which includes the following actions:
•
incorporating aspirational gender diversity targets in the
performance scorecards of our Group Management Board;
• requiring gender-diverse shortlists for all external senior
leadership hires to support balanced hiring; and
•
introducing a new framework setting out our vision and
principles for flexible working.
We have updated our reward practices to increase transparency
and consistency. We remain confident our approach to pay
produces fair outcomes and will continue to conduct robust
reviews and monitor pay data to reduce the risk of any bias
impacting our processes. If pay differences are identified that are
not due to an objective, tangible reason such as performance or
skills and experience, we make adjustments.
Our annual report on remuneration
As Chair of the Committee, I hope you will support the 2019
Directors' remuneration report.
Pauline van der Meer Mohr
Chair
Group Remuneration Committee
18 February 2020
HSBC Holdings plc Annual Report and Accounts 2019
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Corporate governance Report of the Directors | Corporate governance report
Group Remuneration Committee
The Group Remuneration Committee is responsible for setting the
overarching principles, parameters and governance of the Group's
remuneration framework for all employees, and the remuneration
of executive Directors and other senior Group employees. The
Committee regularly reviews the framework in the context of
consistent and effective risk management, and the regulatory
requirements of multiple jurisdictions.
No Directors are involved in deciding their own remuneration. All
members of the Committee are independent non-executive
Directors of HSBC Holdings. A copy of the Committee’s terms of
reference can be found on our website at www.hsbc.com/our-
approach/corporate-governance/board-committees.
Activities
The Committee met seven times during 2019. The following is a
summary of the Committee’s key activities during 2019.
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
alternatives and structure
• Consulted with key shareholders and proxy advisory bodies on executive
Director remuneration matters, including policy and structure
• Reviewed and approved executive Director remuneration matters,
including departure and appointment terms
• Reviewed and approved scorecards and pay proposals
• Approved 2018/2019 performance year pay review matters
• Reviewed remuneration policy effectiveness
• Received updates on notable events, regulatory and corporate
governance matters
• Reviewed and approved 2019 Material Risk Taker ('MRT') identification
approach and outcomes of MRT review
• Approved 2019 regulatory submissions
• Reviewed attrition data and plans to address areas of concerns
• Reviewed UK Gender Pay Report
Advisers
The Committee received input and advice from different advisers
on specific topics during 2019. Deloitte LLP (‘Deloitte’) was re-
appointed by the Committee in 2019 as an objective, independent
adviser to support the Committee on specific remuneration
matters for executive Directors. The Committee made the re-
appointment after considering invited proposals from Deloitte and
two other consultancy firms. Deloitte provided benchmarking data
on remuneration policy matters and independent advice to the
Committee. The Committee may request ad hoc assistance from
Deloitte. Deloitte also provided tax compliance and other advisory
services to the Group.
The Committee also received advice from Willis Towers Watson on
market data and remuneration trends for senior management.
Willis Towers Watson was appointed as remuneration advisers by
management after considering invited proposals from similar
consultancy firms. It provides actuarial support to Group Finance
and benchmarking data and services related to benefits
administration for our Group 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 2019. 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 2019, total fees of £194,650 and £89,251 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.
Attendees and interaction with other Board
committees
During the year, Noel Quinn as the interim Group Chief Executive
and John Flint as the former Group Chief Executive provided
regular briefings to the Committee. In addition, the Committee
engaged with and received updates from the following:
• Pam Kaur, Group Chief Risk Officer since 1 January 2020 and
former Group Head of Internal Audit;
• Ruth Horgan, Global Head of Regulatory Compliance;
• Aileen Taylor, Group Company Secretary and Chief Governance
Officer;
• Richard Gray, interim Group Company Secretary; and
• Ben Mathews, former Group Company Secretary.
The Committee also received feedback and input from the Group
Risk Committee, the Financial System Vulnerabilities Committee
and Group Audit Committee on risk, conduct and compliance-
related matters relevant to remuneration.
Implementation of remuneration policy for
executive Directors
The Committee reviewed and considered whether the 2019
remuneration outcomes appropriately reflected the performance
achieved during 2019 and whether it should exercise any
discretion to the formulaic scorecard outcomes. Taking into
consideration the overall performance of the Group using a
number of internal and external measures, including profit before
tax, RoTE, share price and total shareholder returns, the
Committee considered that our remuneration policy has operated
as intended and the scorecard outcomes reflected the
performance achieved. For further information of the annual
incentive and LTI scorecard outcomes, see page 192.
Review of workforce remuneration and related
policies
The Committee reviews the effectiveness of the remuneration
framework for our overall workforce and the results of
remuneration outcomes across the Group to ensure they are in line
with our pay principles (as set out on page 204). These included
details of variable remuneration adjustments made as well as
information on reward outcomes by performance and behaviour
ratings. The Committee uses this information to assess the
effectiveness of our remuneration framework and whether our
framework aligns employee rewards with our values.
• Mark Tucker, Group Chairman;
Engagement with shareholders
• Ewen Stevenson, Group Chief Financial Officer;
• Marc Moses, Group Chief Risk Officer until 31 December 2019;
• Stuart Levey, Chief Legal Officer;
• Charlie Nunn, Chief Executive Officer, RBWM;
• Elaine Arden, Group Chief Human Resources Officer;
• Alexander Lowen, Group Head of Performance and Reward;
• Colin Bell, Group Chief Compliance Officer;
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During 2019, the Committee engaged with key shareholders to
hear their views on implementation of our new policy. For further
information, see the Chair's letter on page 184.
Our approach to Directors' remuneration
This section summarises our remuneration policy for executive and
non-executive Directors. The policy was approved at the AGM on
12 April 2019 and is intended to apply for three performance years
until the AGM in 2022. The full remuneration policy, including the
Remuneration policy summary – executive Directors
Elements and objectives
Operation
policy on payment for loss of office, can be found on pages 175 to
184 of our Annual Report and Accounts 2018 and the Directors'
Remuneration Policy Supplement, which is available under Group
Results and Reporting in the Investor Relations section of
www.hsbc.com.
Base salary
To attract and retain key talent by being
market competitive and rewarding
ongoing contribution to role.
• Base salary is paid in cash on a monthly basis.
• 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 in total for the duration of the 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.
• The FPA is granted in instalments of immediately vested shares.
• On vesting, shares equivalent to the net number of shares delivered (after
those sold to cover any income tax and social security) are 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
for which the shares are granted.
• Dividends are paid on the vested shares held during the retention period.
Implementation in 2020
Base salary for Noel Quinn and
Ewen Stevenson will increase by
2.5%, in line with the increase for
Group employees. With the
increase, the base salary from 1
March 2020 will be as follows:
• Noel Quinn: £1,271,000
• Ewen Stevenson: £741,000
No change from 2019. FPA for
2020 will be as follows:
• Noel Quinn: £1,700,000
• Ewen Stevenson: £950,000
Cash in lieu of pension
• Cash in lieu of pension is paid on a monthly basis as 10% of base salary.
• No change to percentage of
To attract and retain key talent by being
market competitive.
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.
Long-term incentive ('LTI')
To incentivise sustainable long-term
performance and alignment with
shareholder interests.
• The maximum opportunity is up to 215% of base salary.
• Annual incentive performance is measured against an individual scorecard.
• At least 50% of any award is delivered in shares, which are normally
• See page 191 for details of
performance measures.
base salary.
immediately vested.
• On vesting, shares equivalent to the net number of shares that have vested
(after those sold to cover any income tax and security payable) will be held
for a retention period of up to one year, or such period as required by
regulators.
• Awards will be subject to clawback (i.e. repayment or recoupment of paid
vested awards) for a period of seven years from the date of award,
extending to 10 years in the event of an ongoing internal/regulatory
investigation at the end of the seven-year period. Any unvested awards will
be subject to malus (i.e. reduction and/or cancellation) during any
applicable deferral period.
• The Committee retains the discretion to:
– apply a longer retention period;
–
– defer the vesting of a portion of the award.
increase the proportion of the award to be delivered in shares; and
• The maximum opportunity is up to 320% of base salary.
• The LTI is granted if the Committee considers that there has been
satisfactory performance over the prior year.
• The LTI is 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, awards will 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.
• On vesting, shares equivalent to the net number of shares that have vested
(after those sold to cover any income tax and security payable) will be held
for a retention period of up to one year, or such period as required by
regulators.
• Awards are subject to malus provisions prior to vesting. Vested shares are
subject to clawback for a period of seven years from the date of award,
extending to 10 years in the event of an ongoing internal/regulatory
investigation at the end of the seven-year period.
• Awards may be entitled to dividend equivalents during the vesting period,
paid on vesting. Where awards do not receive dividend equivalents, the
number of shares awarded can be determined using the share price
discounted for the expected dividend yield.
• Details of performance
measures and targets for
awards to be made in 2020 (in
respect of 2019) are set out on
page 195.
HSBC Holdings plc Annual Report and Accounts 2019
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Elements and objectives
Operation
Implementation in 2020
Benefits
To provide benefits in accordance with
local market practice.
• Benefits include the 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).
• Benefits to be provided as per
policy. Details will be
disclosed in the Annual Report
and Accounts 2020 single
figure of remuneration table.
Shareholding guidelines
To ensure appropriate alignment with
the interest of our shareholders.
All employee share plans
To promote share ownership by all
employees.
Illustration of release profile
• 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.
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%
Executive Directors are eligible to participate in all employee share plans,
such as HSBC Sharesave, on the same basis as all other employees.
• No change to percentage of
base salary.
• Participation in any such plans
will be disclosed in the Annual
Report and Accounts 2020, as
required.
The following chart provides an illustrative release profile of remuneration for executive Directors.
Illustration of release profile
Fixed pay
allowance
• Released in five equal annual instalments
starting from March 2020.
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
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
Retained
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 granted taking into consideration
performance over the prior year and also
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 date1.
• 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
Vesting period
Retention period
Malus
Clawback
1 The seven-year vesting period and the one-year post-vesting retention period applied to shares granted under the LTI aligns with the minimum
five-year holding period expected by shareholders and under the UK Corporate Governance Code 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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HSBC Holdings plc Annual Report and Accounts 2019
The table below details how the Group Remuneration Committee addresses the principles set out in the UK Corporate Governance Code
in respect of the Directors' remuneration policy.
Provision
Approach
Clarity
Remuneration arrangements should be transparent and
promote effective engagement with shareholders and the
workforce.
Simplicity
Remuneration structures should avoid complexity and their
rationale and operation should be easy to understand.
Risk
Remuneration structures should identify and mitigate
against reputational and other risks from excessive
rewards, as well as behavioural risks that can arise from
target-based incentive plans.
• The Committee regularly engages and consults with key shareholders to take into account
shareholder feedback and to ensure there is transparency on our policy and its
implementation.
• Our employees were informed about the Directors' remuneration policy approved by our
shareholders at our 2019 AGM. Details of our remuneration practices and our
remuneration policy for Directors are published and available to all our employees.
• Our Directors' remuneration policy has been designed to achieve simplicity while
complying with the provisions set out in the UK Corporate Governance Code and the
remuneration rules of the UK's Prudential Regulation Authority and Financial Conduct
Authority, as well as meeting the expectations of our shareholders. The objective of each
remuneration element is explained and the amount paid in respect of each element of pay
is clearly set out.
• In line with regulatory requirements, our remuneration practices promote sound and
effective risk management while supporting our business objectives (see page 207).
• Risk and conduct considerations are taken into account in setting the variable pay pool,
from which any executive Director variable pay is funded.
• Executive Directors' annual and LTI scorecards include a mix of financial and non-financial
measures. Financial measures in the scorecards are subject to a CET1 underpin to ensure
CET1 remains within risk tolerance levels while achieving financial targets. In addition, the
overall scorecard outcome is subject to a risk and compliance underpin.
• The deferred portion of any awards granted to executive Directors is subject to a seven-
year deferral period during which our malus policy can be applied. All variable pay awards
that have vested are subject to our clawback policy for a period of up to seven years from
the award date (extending to 10 years where an investigation is ongoing).
Predictability
The range of possible values of rewards to individual
Directors and any other limits or discretions should be
identified and explained at the time of approving the policy.
• The charts set out on page 7 of our Directors’ remuneration policy show how the total
value of remuneration and its composition vary under different performance scenarios for
executive Directors. The Directors' remuneration policy can be found at www.hsbc.com/
our-approach/corporate-governance/remuneration.
Proportionality
The link between individual awards, the delivery of strategy
and the long-term performance of the Group should be
clear and outcomes should not reward poor performance.
Alignment with culture
Incentive schemes should drive behaviours consistent with
the Group's purpose, values and strategy.
• The annual incentive scorecard rewards achievement of our annual operating targets and
the LTI scorecard rewards achievement of long-term financial and shareholder value
creation targets.
• The Committee retains the discretion to reduce (to zero if appropriate) the annual incentive
and LTI payout based on the outcome of the relevant scorecards, if it considers that the
payout determined does not appropriately reflect the overall position and performance of
the Group during the performance period.
• 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.
• Annual incentive and LTI scorecards contain non-financial measures linked to our wider
social obligations. This includes measures related to reducing the environmental impact of
our operations, improving customer satisfaction, diversity and employee engagement.
Remuneration policy – non-executive Directors
Non-executive Directors are not employees. They receive base fees
for their service and 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.
Non-executive Directors also receive a travel allowance of £4,000
towards the additional time commitment required for travel.
Any other taxable or other expenses incurred in performing their
role are reimbursed, as well as any related tax cost on such
reimbursement.
All non-executive Directors are expected to satisfy a shareholding
guideline of 15,000 shares within five years of their appointment.
There have been no changes to the non-executive Directors' fees
from the remuneration policy approved at the AGM in 2019,
except for the Senior Independent Director. Following Sir Jonathan
Symond's decision to retire from the Board, David Nish has been
appointed as Senior Independent Director. The Committee
considered the fee for the role of Senior Independent Director in
the context of the demands and expectations of the role, including
responsibilities related to the ongoing strategic review. Given the
increased time commitment for this role, the Remuneration
Committee approved a fee of £200,000 per annum. This compares
with the amount of £375,000, which was previously payable in
respect of the combined role of Deputy Group Chairman and
Senior Independent Director. The following table sets out the fees
for 2020.
Position
Non-executive Group Chairman1
Non-executive Director (base fee)
Senior Independent Director2
Group Risk Committee
Group Audit Committee, Group Remuneration Committee and Financial System Vulnerabilities Committee
Nomination & Corporate Governance Committee
2020 fees
£
1,500,000
127,000
200,000
150,000
40,000
75,000
40,000
––
33,000
Chair
Member
Chair
Member
Chair
Member
1 Group Chairman does not receive a base fee or any other fee in respect of chairing of any other committee.
2 For the period to 18 February 2020, a fee of £375,000 was paid in respect of the combined role of Deputy Group Chairman and Senior
Independent Director.
HSBC Holdings plc Annual Report and Accounts 2019
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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.
Noel Quinn
John Flint1
Ewen Stevenson
Marc Moses2
Contract date (rolling)
5 August 2019
21 February 2018
1 December 2018
27 November 2014
Notice period
(Director and HSBC)
12 months
12 months
12 months
12 months
1 John Flint stepped down from the Board on 5 August 2019.
2 Marc Moses stepped down from the Board on 31 December 2019.
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 158 to 163, and include those directorships
provided for under the Capital Requirements Regulation II.
Non-executive Directors
Non-executive Directors are appointed for fixed terms not
exceeding three years, which may be renewed subject to their re-
election by shareholders at AGMs. Non-executive Directors do not
have service contracts, but are bound by letters of appointment
issued for and on behalf of HSBC Holdings, 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:
2020 AGM
Kathleen Casey
Laura Cha
David Nish
Jackson Tai
2021 AGM
Mark Tucker
Heidi Miller
2022 AGM
Henri de Castries
Irene Lee
José Antonio Meade Kuribreña
Pauline van der Meer Mohr
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HSBC Holdings plc Annual Report and Accounts 2019
Annual report on remuneration
This section sets out how our approved Directors’ remuneration policy was implemented during 2019.
Single figure of remuneration
(Audited)
The following table shows the single figure of total remuneration of each executive Director for 2019, together with comparative figures
for 2018.
Single figure of remuneration
(£000)
Base salary
Fixed pay allowance
Cash in lieu of pension
Taxable benefits4
Non-taxable benefits4
Total fixed
Annual incentive5
AML DPA award6
LTI7
Replacement award8
Notional returns9
Total variable
Total fixed and variable
Noel Quinn1
John Flint2
Ewen Stevenson
Marc Moses3
2019
503
695
50
41
23
1,312
665
—
—
—
—
665
1,977
2018
—
—
—
—
—
—
—
—
—
—
—
—
—
2019
730
1,005
134
91
31
1,991
891
—
—
—
40
931
2,922
2018
1,028
1,459
308
40
28
2,863
1,665
—
—
—
54
1,719
4,582
2019
719
950
107
16
28
1,820
1,082
—
—
1,974
—
3,056
4,876
2018
2019
—
—
—
—
—
—
—
—
—
—
—
—
—
719
950
107
40
33
1,849
926
—
1,709
—
17
2,652
4,501
2018
700
950
210
13
38
1,911
1,324
695
—
—
33
2,052
3,963
1 Noel Quinn succeeded John Flint as interim Group Chief Executive with effect from 5 August 2019 and the remuneration included in the single
figure table above is in respect of services provided as an executive Director.
2 John Flint stepped down as an executive Director and Group Chief Executive on 5 August 2019. His remuneration details for 2019 are in respect
of services provided as an executive Director. Details of John Flint's departure terms are provided on page 198.
3 Marc Moses stepped down as an executive Director and Group Chief Risk Officer on 31 December 2019. Details of Marc Moses' departure terms
are provided on page 198.
4 Taxable benefits include the provision of medical insurance, car and tax return assistance (including any associated tax due, where applicable).
Non-taxable benefits include the provision of life assurance and other insurance cover.
5 To meet regulatory deferral requirements for 2019, 60% of the annual incentive award for John Flint and Marc Moses 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 shares
will be subject to a one-year retention period. The deferred awards are subject to the executive Director maintaining good leaver status during the
deferral period. Noel Quinn will have 60% of his annual incentive award deferred, and in line with regulatory requirements it will be split equally
between cash and shares subject to the same vesting and retention conditions.
6 The 2012 annual incentive for Marc Moses had a 60% deferral. The vesting of this deferred award was subject to a service condition and
satisfactory completion of the five-year deferred prosecution agreement ('AML DPA') with the US Department of Justice. The AML DPA condition
was satisfied in March 2018 and the awards were released. The value of Marc Moses' award in the table above reflects his time as an executive
Director between 1 January 2014 and the vesting date.
7 An LTI award was made in February 2017 (in respect of 2016) at a share price of £6.503 for which the performance period ended on
31 December 2019. The value has been computed based on a share price of £5.896, the average share price during the three-month period to 31
December 2019. This includes dividend equivalents of £237,030, equivalent to 40,202 shares at a share price of £5.896. See the following section
for details of the assessment outcomes.
8 As set out in the 2018 Directors' remuneration report, in 2019 Ewen Stevenson was granted replacement awards to replace unvested awards,
which were forfeited as a result of him joining HSBC. The awards, 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. The values included in the
table relate to Ewen Stevenson's 2015 and 2016 LTI awards granted by The Royal Bank of Scotland Group plc ('RBS') for performance years 2014
and 2015, respectively, and replaced with HSBC shares when Ewen Stevenson joined HSBC. These awards are not subject to further performance
conditions and commenced vesting in March 2019. The total value is an aggregate of £1,121,308 for the 2015 LTI and £852,652 for the 2016 LTI.
The 2016 LTI award value has been determined by applying the performance assessment outcome of 27.5% as disclosed in RBS's Annual Report
and Accounts 2018 (page 70) to the maximum number of shares subject to performance conditions.
‘Notional returns’ refers to the notional return on deferred cash for awards made in prior years. The deferred cash portion of the annual incentive
granted in prior years 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 for their services as an executive Director since the 2016 financial year.
9
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Determining executive Directors’ performance
(Audited)
Awards made to executive Directors reflected the Committee’s
assessment of each of their performance against scorecard
objectives, and reflect the Group’s strategic priorities and risk
appetite. For the risk and compliance and personal objectives, this
involved making a qualitative assessment of the extent of progress
achieved, where applicable. This was then applied to the
weighting of each objective to determine the outcome percentage.
As part of this assessment, the Committee also consulted the
Group Risk Committee and Financial System Vulnerabilities
Committee, and took into consideration their feedback in
determining the scorecard outcomes for the executive Directors
against risk and compliance measures.
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 2019,
all executive Directors achieved the required behaviour rating.
The maximum 2019 annual incentive opportunity for Noel Quinn
and John Flint was set at 198% of salary and for Ewen Stevenson
and Marc Moses at 193% of salary. Noel Quinn’s and John Flint’s
2019 scorecard outcomes were assessed by taking into
consideration the Group’s performance against the 2019
scorecard measures for the Group Chief Executive, as set out in
the Annual Report and Accounts 2018. The outcomes for these
measures have been pro-rated for the time spent by Noel Quinn
and John Flint in the Group Chief Executive role during 2019 to
determine their annual incentive awards. Based on input received
from the Group Risk Committee, there was a difference in the
Group’s performance against the risk and compliance measure
during Noel Quinn’s and John Flint’s tenures, and this has been
reflected in their overall scorecard outcomes and annual incentive
awards as noted in the following tables.
Annual assessment
Profit before tax1
Positive jaws
Revenue growth
RoTE
Capital metrics
Strategic priorities
Risk and compliance
Personal objectives
Total
Maximum annual incentive opportunity (£000)
Annual incentive (£000)
– Noel Quinn2
– John Flint3
Financial performance
Annual assessment
Measure
Profit before tax ($bn)1
Positive jaws (%)
Deliver mid-single digit revenue growth (%)
Reported RoTE (%)
Capital metrics4
Strategic priorities5
Group Chief Executive
Group Chief Financial Officer
Group Chief Risk Officer
Weighting
(%)
Assessment
(%)
Outcome
(%)
Weighting
(%)
Assessment
(%)
Outcome
(%)
Weighting
(%)
Assessment
(%)
Outcome
(%)
10.0
5.0
10.0
5.0
5.0
30.0
25.0
10.0
100.0
92.5
100.0
79.4
48.7
62.5
39.3
77.5
75.0
9.3
5.0
7.9
2.4
3.1
11.8
19.4
7.5
66.4
£2,451
£665
£891
10.0
10.0
—
8.3
16.7
20.0
25.0
10.0
100.0
92.5
100.0
—
48.7
62.5
68.8
90.0
75.0
9.3
10.0
—
4.0
10.4
13.8
22.5
7.5
77.5
£1,396
£1,082
10.0
—
—
3.3
6.7
15.0
45.0
20.0
100.0
92.5
—
—
48.7
62.5
41.7
63.9
81.3
9.3
—
—
1.6
4.2
6.3
28.7
16.2
66.3
£1,396
£926
Minimum
(25% payout)
Maximum
(100% payout)
Performance
Assessment (%)
$21.3
Positive
3.0
7.8
$24.3
2.5
7.0
9.7
$24.0
3.0
5.9
8.4
92.5
100.0
79.4
48.7
Various (see following notes and performance assessment)
1 Profit before tax, as defined for Group annual bonus pool calculation. This definition excludes business disposal gains and losses, debt valuation
and goodwill adjustments and variable pay expense. However, it takes into account fines, penalties and costs of customer redress, including
provisions, which are excluded from the adjusted profit before tax. Other significant items are included or excluded in line with the principles
underpinning the definition. The adjusted profit before tax as per adjusted results is found on page 2.
2 Noel Quinn performed the Group Chief Executive role from 5 August 2019 to 31 December 2019. The performance assessment for Noel Quinn
against the risk and compliance measure was 77.5%, resulting in an outcome of 19.4% against this measure. This results in an overall scorecard
outcome of 66.4% for him. His annual incentive award has been determined based on 40.8% of the performance outcome to reflect the time
spent by him in the Group Chief Executive role during 2019.
3 John Flint performed the Group Chief Executive role from 1 January 2019 to 4 August 2019. The performance assessment for John Flint against
the risk and compliance measure was 57.5%, resulting in an outcome of 14.4% against this measure. This results in an overall scorecard outcome
of 61.4% for him. His annual incentive award has been determined based on 59.2% of this performance outcome to reflect the time spent by him
in the Group Chief Executive role during 2019.
4 Maintaining and improving Group capital measures, primarily equity measures, in line with our intent to maintain a CET1 ratio of more than 14%.
5 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 and employee engagement.
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HSBC Holdings plc Annual Report and Accounts 2019
Non-financial performance
Group Chief Executive (Noel Quinn and John Flint)
Objectives
Performance
Strategic priorities
• Accelerate revenue growth from
our Asia franchise
• Deliver revenue growth from our
international network
• Turn around the US business
• Improve customer satisfaction
Risk and compliance
• Achieve and deliver sustainable
global conduct outcomes and
effective financial crime risk
management
• Effectively manage material
operational risks
• The full-year revenue growth of 7.1% in Asia, 11.6% in Asia wealth management, 6.6% in Hong Kong and 5.4% in
the ASEAN region were all within their respective target ranges but below the maximum targets set for these
measures. Growth of 9.8% in the Pearl River Delta was below the target range. This measure carried a 15%
weighting, with a performance assessment of 54%, resulting in an overall scorecard outcome of 8.05%.
• Revenue growth from international clients of 2.0% was below the full-year target range of 3.5 to 7.5%. This
measure carried a 5% weighting and has not resulted in any payout.
• The lower interest rate environment and challenging conditions, particularly in capital markets, impacted the US
RoTE target, with the full-year RoTE of 1.8%, below the 2% to 4% target range for 2019. This measure carried a 5%
weighting and has not resulted in any payout.
• Customer service in RBWM in six out of eight scale markets was ranked in the top three, or improved from 2018. In
CMB, four out of eight scale markets were within the top-three rankings. The GB&M customer engagement score
was ahead of the competition, despite having decreased by 2 points since 2018. In GPB, the overall satisfaction
score increased from a mean score of 7.6 out of 10 in 2018 to 8.0 in 2019. Initiatives for continual improvement of
customer satisfaction remain a high priority. This measure carried a 5% weighting, with a performance assessment
of 75% and a scorecard outcome of 3.75%.
The assessment has been based on the management of financial crime risk, delivery of conduct outcomes and
management of the Group’s operational risk profile.
There was a firm commitment to the compliance agenda and a strong tone from the top that contributed towards:
• improvement in the management of financial crime risks through increased effectiveness of the financial crime risk
management committees, proactive management of data quality, a more robust financial crime risk control
environment and conduct outcomes across the Group;
• the encouragement of a ‘speak up’ culture; and
• the acceleration of the full adoption of the operational risk management framework across the first and second
lines of defence to manage non-financial risk more effectively.
There was a slower pace of progress on operational risk matters in the first half of 2019 and this was reflected in the
lower outcome assessed for John Flint.
Personal objectives
• Strengthen the Group’s external
• Interactions with investors and regulators received positive feedback. They were described as professional,
competent and embodying trust, respect and transparency.
relationships
• Employer advocacy, as a measure of employee engagement, remained stable at 66%, although below the target of
• Improve employee engagement
• Improve diversity in senior
management
69%. Efforts to improve engagement continue.
• Female representation in senior leadership roles at 29.4% exceeded the target of 29%, and is on track towards the
aspirational target of 30% female leaders in senior positions by 2020.
Group Chief Financial Officer (Ewen Stevenson)
Objectives
Performance
Strategic priorities
• Turn around the US business
• Improve Finance function
support to global businesses
through investment in digital
capabilities
• Simplify the organisation and
deliver cost savings
• The lower interest rate environment and challenging conditions, particularly in capital markets, impacted the US
RoTE target, with the full-year RoTE of 1.8%, below the 2% to 4% 2019 target range. This measure carried a 5%
weighting and has not resulted in any payout.
• The deployment of Cloud technologies for regulatory liquidity reporting was executed to plan, with migration to
Cloud infrastructure by the year-end. Full migration to Cloud technology for the Finance function has focused on
three key areas: Finance operating model, people skills and regulatory engagement. This measure carried a 5%
weighting and 75% performance outcome.
• Simplification of the Finance function’s structure led to more effective management of the function. Finance
launched a ‘Stop and Simplify’ campaign to implement initiatives, leading to greater efficiencies. Other initiatives
continue to target enhanced employee engagement, skills development and advocacy. This measure carried a 10%
weighting and was assessed as fully met.
Risk and compliance
• Achieve and deliver sustainable
global conduct outcomes and
effective financial crime risk
management
• Effectively manage material
• The assessment has been based on the management of financial crime risk, delivery of conduct outcomes,
management of the Group’s operational risk profile, delivery of stress tests and other commitments to the
regulators.
• Processes for monitoring and reporting conduct outcomes were enhanced and overseen by senior governance
structures. No significant conduct issues, breaches or reportable events were identified. Internal review of conduct
and controls, including governance, were rated as effective.
operational risks
• Progress is underway to embed the risk management framework to manage non-financial risks more effectively.
• Deliver commitments to
regulators, including the
successful delivery of the Bank
of England and other stress tests
Personal objectives
• Strengthen the Group’s external
relationships
• Improve employee engagement
• Improve diversity in senior
management
There is robust stewardship of financial reporting risk across the Group with a strong tone from the top supported
by senior governance forums.
• Regulatory stress test updates were delivered on time and to the required standard, with regulator queries
addressed in a timely manner.
• The investor relations strategy was fulfilled, covering all key regions and strengthening the Group’s relationships
with key stakeholders. Effective interactions helped to gain considerable traction with key regulators in core
markets.
• Employer advocacy, as a measure of employee engagement, remained stable at 66%, although below the target of
69%. Efforts to improve engagement continue.
• Female representation in senior leadership roles in the Global Finance function at 29.6% exceeded the target of
29.2%, primarily due to the recruitment of women in key senior leadership roles. Sponsorship of the Global
Disability Confidence Programme, female development programmes, parental transition coaching, and PRIDE
(LBGTQ) sensitisation training all supported diversity and inclusion in the function.
HSBC Holdings plc Annual Report and Accounts 2019
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Group Chief Risk Officer (Marc Moses)
Objectives
Performance
Strategic priorities
• Turn around the US business
• Improve customer satisfaction
• Simplify the organisation and
deliver cost savings
Risk and compliance
• Achieve and deliver sustainable
global conduct outcomes and
effective financial crime risk
management
• Effectively manage material
operational risks
• Deliver commitments to
regulators, including the
successful delivery of the Bank
of England and other stress tests
• Successfully enhance model risk
management
Personal objectives
• Support innovation
• Strengthen the Group’s external
relationships
• Improve employee engagement
• Improve diversity in senior
management
• The lower interest rate environment and challenging conditions, particularly in capital markets has impacted the US
RoTE target, with the full-year RoTE of 1.8%, below the 2% to 4% 2019 target range. This measure carried a 5%
weighting and has not resulted in any payout.
• The focus on customer satisfaction continued across markets, with improvements identified for action.
• Targeted cost savings in the function were achieved through consolidation of work, simplification of structures and
centres of excellence.
• The assessment has been based on the management of financial crime risk, delivery of conduct outcomes,
management of the Group’s operational risk profile, delivery of stress tests and other commitments to the
regulators and model risk management.
• The 2019 conduct agenda continued to drive forward by maintaining a strong tone from the top, fostering a ‘speak
up’ culture and targeting ongoing monitoring.
• The Group’s top non-financial risks remained broadly unchanged in 2019, with a focus on model risk and resilience
risk stewardship. There was an increased focus to fully adopt the operational risk management framework and to
manage non-financial risks more effectively.
• Progress is underway to embed the operational risk management framework to manage non-financial risks more
effectively, with robust stewardship of financial reporting risk across the Group and a strong tone from the top.
• The 2019 annual cyclical scenario was successfully delivered to the PRA and the CCAR submission was delivered
to the US Federal Reserve Board.
• The enhancement of model risk management is underway through staff appointments, training and the delivery of
the model ownership framework.
• The education of Global Risk employees in innovation continues, with increasing deployment of Cloud technologies
and Agile methodologies.
• There were successful and regular interactions with stakeholders. Regulators repeatedly highlighted the excellence
of financial risk management. The improvement of non-financial risk management remains a continued focus.
• Employer advocacy, as a measure of employee engagement, remained stable at 66%, although below the target of
69%. Initiatives to improve engagement continue.
• Female representation in senior leadership roles at 25.6% exceeded the target of 24%.
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HSBC Holdings plc Annual Report and Accounts 2019
2016 long-term incentive performance
The 2016 LTI award was granted to Marc Moses, Stuart Gulliver
(former Group Chief Executive) and Iain Mackay (former Group
Finance Director). The awards that will vest for Stuart Gulliver and
Iain Mackay will be determined after applying the performance
Assessment of the LTI award in respect of 2016 (granted in 2017)
outcome below to their 2016 LTI award and pro-rating for time in
employment during the performance period of 1 January 2017 to
31 December 2019 (as disclosed in the Annual Report and
Accounts 2018).
Measures (with weighting)
Average return on equity1 (20.00%)
Cost efficiency
(adjusted jaws) (20.00%)
Relative total shareholder return2
(20.00%)
Global Standards including risk and
compliance
• Status of AML DPA (10.00%)
Minimum
(25% payout)
7.00%
Positive
Target
(50% payout)
Maximum
(100% payout)
8.50%
1.50%
10.00%
3.00%
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.
Actual
8.33%
3.10%
Assessment
Outcome
47.17%
9.43%
100.00%
20.00%
Rank 5th
68.00%
13.60%
Met
100.00%
10.00%
• Achieve and sustain compliance with
Global Financial Crime Compliance
policies and procedures3 (15.00%)
Performance 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.
75.00%
75.00%
11.25%
Strategy
•
International client revenues
(Share of revenue supported by
international network) (3.75%)
50.00%
51.00%
52.00%
53.00%
100.00%
3.75%
• Revenue synergies
22.00%
23.00%
24.00%
31.00%
100.00%
3.75%
(Share of revenues supported by
universal banking model) (3.75%)
• Employee4
(Results of employee survey) (3.75%)
• Customer
(Based on customer recommendation
in home country markets) (3.75%)
Total5
65.00%
67.00%
70.00%
58.00%
0.00%
0.00%
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.
Ranked
within
top three
in two
customer
segments
25.00%
0.94%
72.72%
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, J.P. Morgan Chase & Co., Lloyds Banking Group, Standard Chartered and UBS Group.
3 The performance outcome was reviewed and approved by the Group Risk Committee and the Financial System Vulnerabilities Committee. The
performance assessment was based on qualitative and quantitative factors, which evidenced an improvement in financial crime risk-related audit
outcomes, an overall reduction of residual risk for anti-money laundering and sanctions as assessed by our enterprise-wide risk assessment,
improvement of financial crime risk control effectiveness during the performance period and strong financial crime governance.
4 Assessed based on results of the latest employee Snapshot survey question: ‘I am seeing the positive impact of our strategy’.
5 Assessment determined on a straight-line basis for performance between the minimum, target and maximum levels of performance set in this
table.
Long-term incentive awards
(Audited)
For the 2019 performance year, the Committee determined to
grant Ewen Stevenson an LTI award of £2,094,400, after taking
into consideration performance achieved for the financial year
ended 31 December 2019. The award will be subject to a three-
year performance period starting 1 January 2020. As the award is
not entitled to dividend equivalents per regulatory requirements,
the number of shares to be awarded will be adjusted to reflect the
expected dividend yield of the shares over the vesting period. The
Committee has not granted an LTI award to Noel Quinn given he
has been in an interim capacity in the Chief Executive role.
Taking into account feedback we received from proxy voting
agencies on the 2018 LTI scorecard, we have introduced a relative
performance measure in our LTI scorecard. We believe a relative
measure along with an absolute financial metric will provide a
more complete view of overall performance.
Based on this feedback, the 2019 LTI scorecard gives equal
weighting to RoTE, relative TSR and customer measures. The
RoTE measure will ensure the payout of LTI awards is aligned with
value creation. The relative TSR measure will ensure LTI payout
realised by our executive Directors is aligned with shareholder
experience.
We are putting customer feedback at the centre of decision
making and are in the process of implementing a new customer
centricity framework, which is designed to inspire us to do what is
right for customers. It will help us to share feedback directly with
our people and allow them to take immediate action to improve
customer experiences. The customer measure in the 2019 LTI
scorecard will reward our executive Directors for improvement in
HSBC Holdings plc Annual Report and Accounts 2019
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Corporate governance Report of the Directors | Corporate governance report
customer experience and satisfaction in our key home and scale
markets.
RoTE targets for the LTI award have been set in line with targets
included in our business update. For the relative TSR measure, in
line with our shareholders' expectation, the minimum performance
has been set at the median of the peer group. For maximum
payout, our TSR performance over the three-year performance
period will need to be in the upper quartile of our peer group.
For the customer measure, performance will be assessed based
on improvements made in our customer satisfaction scores in
home and scale markets and the progress we make during the
three-year performance period in meeting the customer-linked
business objectives.
The LTI is also subject to a risk and compliance underpin, which
gives the Committee the discretion to adjust down the overall
scorecard outcome to ensure that the Group operates within risk
Performance conditions for LTI awards in respect of 2019
and/or compliance tolerance when achieving its financial targets.
For this purpose, the Committee will receive information including
any risk thresholds outside of tolerance for a significant period of
time and any risk management failures that have resulted in
significant customer detriment, reputational damage and/or
regulatory censure.
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, shares equivalent to the
net number of shares that have vested (after those sold to cover
any income tax and security payable) will be held for a retention
period of up to one year, or such period as required by regulators.
Measures
RoTE (with CET1 underpin)1, 2
Relative TSR3
Customers
Minimum
(25% payout)
10.0%
Target
(50% payout)
11.0%
Maximum
(100% payout)
12.0%
At median of the peer group
Straight-line vesting between
minimum and maximum
At upper quartile of peer group
Performance will be assessed by the Committee taking into consideration:
• customer satisfaction scores at the start and end of the three-year performance period for our global
businesses in home and scale markets as per data provided by an independent third party on HSBC’s
performance across our products and services; and
• progress against customer objectives linked to our strategy over the next three years.
Weighting
%
33.3
33.3
33.3
1 To be assessed based on RoTE in the 2022 financial year. The measure will also be subject to a CET1 underpin. 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 Awards will vest on a straight-line basis for performance between the minimum, target and maximum levels of performance set in this table.
3 The peer group for the 2019 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, Morgan Stanley, Standard Chartered and UBS Group.
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HSBC Holdings plc Annual Report and Accounts 2019
Scheme interests awarded during 2019
(Audited)
report. No non-executive Directors received scheme interests
during the financial year.
The table below sets out the scheme interests awarded to
Directors in 2019, as disclosed in the 2018 Directors’ remuneration
Scheme awards in 2019
(Audited)
Marc Moses
John Flint (stepped down on
5 August 2019)
Ewen Stevenson (appointed
1 January 2019)
Noel Quinn (appointed 5
August 2019)
Type of interest
Basis on which
awarded
award made
LTI deferred shares2 % of salary3
Face value
awarded1
£000
Percentage
receivable for
minimum
performance
Number
of
shares
awarded
Date of award
End of performance
period
25 February 2019
2,859
25
458,567
31 December 2021
LTI deferred shares2 % of salary3
25 February 2019
4,919
25
788,933
31 December 2021
Deferred shares
Deferred shares
Deferred shares
Deferred shares
Deferred shares
Deferred shares9
Deferred cash9
Replacement award
(2018 performance
period)4
Replacement award5
Replacement award6
Replacement award7
Replacement award8
Annual incentive
28 May 2019
1,509
— 241,988
31 December 2018
28 May 2019
28 May 2019
28 May 2019
28 May 2019
25 February 2019
561
851
2,083
1,181
877
684
—
84,397
31 December 2017
— 128,045
31 December 2018
— 313,608
31 December 2019
— 177,883
31 December 2020
— 140,585
31 December 2018
—
N/A
31 December 2018
Annual incentive
25 February 2019
1 The face value of the award has been computed using HSBC's closing share price of £6.235 taken on 24 February 2019 for Marc Moses, John
Flint, Noel Quinn and Ewen Stevenson's 2018 replacement award. Ewen Stevenson's other replacement awards were calculated using a closing
share price of £6.643 taken on 30 November 2018.
2 LTI awards are subject to a three-year forward-looking performance period and vest in five equal annual instalments, subject to performance
3
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.
In line with regulatory requirements, scheme interests awarded during 2019 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 320% of salary for John Flint and 319% of
salary for Marc Moses 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 of 5% per annum for the vesting period (i.e. £4.867).
4 Deferred award made in lieu of a variable pay award Ewen Stevenson would have otherwise received from The Royal Bank of Scotland Group plc
(‘RBS’) for the 2018 performance year. The award was determined based on the pre-grant assessment disclosed by RBS for the performance year
2018 long-term incentive awards. The deferred shares will vest in five equal annual instalments commencing from March 2022 and will be subject
to a one-year retention period post vest. Awards will be subject to our malus and clawback policy and any future vesting adjustment that may be
applied and disclosed by RBS in their Directors’ remuneration report (or that we have been made aware of by RBS).
5 Deferred award granted in lieu of awards granted by RBS in March 2015 and which were not subject to any further performance conditions at the
time of forfeiture by RBS. The deferred shares will vest in March 2020 and will be subject to a six-month retention period.
6 Deferred awards granted in lieu of awards granted by RBS in March 2016 and adjusted for the performance outcome as disclosed in RBS’s
Annual Report and Accounts 2018. The deferred shares will vest in two equal annual instalments in March 2020 and March 2021, and on vesting,
the shares will be subject to a six-month retention period.
7 Deferred award granted in lieu of awards granted by RBS in March 2017. These awards will be subject to performance adjustment as applied and
disclosed in RBS’s Annual Report and Accounts 2019. The deferred shares will vest in annual instalments between March 2021 and March 2024.
On vesting, the shares will be subject to a six-month retention period.
8 Deferred award granted in lieu of awards granted by RBS in March 2018. These awards will be subject to any 'pre-vest performance test'
assessed and disclosed by RBS in its Annual Report and Accounts 2020. The deferred shares will vest in equal annual instalments between March
2021 and March 2025. On vesting the shares will be subject to a one-year retention period.
9 Noel Quinn was not an executive Director at the date of these awards. These awards were part of his discretionary annual incentive award for
performance achieved during the period to 31 December 2018. The awards will vest in five equal annual instalments between the third and
seventh anniversary of the award date. On vesting, the deferred shares will be subject to a one-year retention period. As the deferred share
awards are 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 of 5% per annum for the vesting period (i.e. £4.867).
The above table does not include details of shares issued as part of the fixed pay allowance and shares issued as part of the 2019 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 2018 are set out on the following page.
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Performance conditions for LTI awards in respect of 2018 (granted in 2019)
Measures
Average RoTE (with CET1
underpin)1
Employer advocacy2
Environmental, social and
governance rank3
Total4
Minimum
(25% payout)
10.0%
65.0%
Target
(50% payout)
11.0%
70.0%
Maximum
(100% payout)
12.0%
75.0%
Score to achieve an ‘average
performer’ rating
Mid-point score between average
and outperformer threshold scores
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 John Flint and Marc Moses received and/or
will receive after they stepped down as executive Directors are set
out in the following section.
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.
Payments for loss of office
Departure terms for John Flint
(Audited)
John Flint stepped down as an executive Director and Group Chief
Executive on 5 August 2019. His 12-month notice period expires
on 4 August 2020.
In accordance with the approved Directors' remuneration policy
and contractual terms agreed with him, he is being paid his fixed
pay during his notice period. For the period between 5 August
2019 and 31 December 2019, he received a salary of £503,333, a
fixed pay allowance ('FPA') of £694,840, cash in lieu of pension
allowance of £50,333, and benefits totalling £42,190. The value of
benefits includes medical and insurance related benefits of
£25,940 and tax return and legal assistance of £16,250. As per the
shareholder approved policy, John Flint will also receive cash in
lieu of unused holiday totalling £306,400 on expiry of his notice
period.
In accordance with the contractual terms agreed and our approved
Directors’ remuneration policy, John Flint was granted good leaver
status in respect of outstanding unvested share awards. Good
leaver status was determined taking into consideration his 30
years of service with HSBC and is conditional upon satisfaction of
non-compete provisions under which he cannot undertake a role
with a defined list of competitor financial services firms for two
years after his employment ceases with HSBC. As a good leaver,
John Flint has been made eligible to receive:
• an annual incentive award for 2019, pro-rated for the time
spent in the Group Chief Executive role, as set out on page
192);
• his unvested awards that are due to vest after his employment
with the Group ceases, on the scheduled vesting dates, subject
to the relevant terms (including post-vest retention periods,
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HSBC Holdings plc Annual Report and Accounts 2019
malus and, where applicable, clawback) and the achievement
of any required performance condition. For the purpose of his
2018 LTI award, performance will be measured at the end of
the original performance period (31 December 2021), with the
maximum number of shares available pro-rated for his time in
employment with the Group during the performance period
(which is 416,381 shares after pro-ration through to the end of
his notice period); and
• certain post-departure benefits for a period of up to seven years
after his employment ceases.
It is not expected that John Flint will receive an annual incentive
award in respect of 2020, and he will not receive an LTI award for
2019 or 2020, nor 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 Marc Moses
(Audited)
Marc Moses stepped down as executive Director and Group Chief
Risk Officer on 31 December 2019 and will continue to provide
support to the Group Chief Executive during his 12-month notice
period until he formally retires on 9 December 2020.
During his notice period, he will continue to receive his base
salary, FPA, cash in lieu of pension allowance and other benefits
as per our approved Directors’ remuneration policy. He will also be
eligible to receive an annual incentive award for 2020 based on his
contribution.
In accordance with the approved Directors’ remuneration policy
and taking into consideration his 14 years of service with HSBC,
Marc Moses will be considered as a good leaver on his retirement
from HSBC on 9 December 2020. The good leaver status will be
conditional upon satisfaction of non-compete provisions under
which he cannot undertake a role with a defined list of competitor
financial services firms for two years after his employment ceases
with HSBC. As a good leaver, he has been made eligible to
receive:
• an annual incentive award for 2019 (details are provided on
page 192);
• his unvested awards that are due to vest after he ceases
employment, 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 2017 and
2018 LTI awards will be pro-rated for the period he was
employed by the Group during the performance period with the
maximum number of shares being 384,405 and 292,973,
respectively; and
• certain post-departure benefits for a period of up to seven years
after he ceases employment.
Marc Moses will not receive an LTI award for 2019 or 2020, nor
any compensation or payment for the termination of his service
contract or his ceasing to be a Director of any Group company.
External appointments
During 2019, executive Directors did not receive any fees from
external appointments.
Executive Directors’ interests in shares
(Audited)
The shareholdings of all persons who were executive Directors in
2019, including the shareholdings of their connected persons, at
31 December 2019 (or the date they stepped down 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 executive Directors from 31 December 2019 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 shareholder
expectations and guidelines. The Committee also has full
discretion in determining any penalties for non-compliance.
Shares
(Audited)
With regard to the post-employment shareholding requirement,
we believe that our remuneration structure achieves the objective
of ensuring there is ongoing alignment of executive Directors'
interests with shareholder experience post-cessation of their
employment due to the following features of the 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.
• 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.
An executive Director who ceases employment as a good leaver
after a tenure of five years will have share interests 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.
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.
Shareholding at
31 Dec 2019, or
date stepped
down from the
Board, if earlier2
(% of salary)
Shareholding
guidelines
(% of salary)
At 31 Dec 2019, or date stepped down from the Board, if earlier
Share
interests
(number
of shares)
Share options3
Scheme interests
Shares awarded subject to
deferral1
without
performance
conditions4
with
performance
conditions5
400%
400%
300%
300%
250%
210%
504%
191%
441,925
1,060,599
233,972
1,450%
1,777,688
n/a
n/a
—
5,505
—
—
n/a
390,806
372,335
945,921
569,173
n/a
—
788,933
—
1,252,464
n/a
Executive Directors
Noel Quinn (appointed 5 August 2019)
John Flint (stepped down on 5 August 2019)
Ewen Stevenson (appointed 1 January 2019)
Marc Moses
Group Managing Directors6
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 The value of the shareholding is calculated using an average of the daily closing share prices in the three months to 31 December 2019 (£5.896).
3 All share options are unexercised.
4
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.
5 LTI awards granted in February 2017 are subject to the performance conditions as set out in the 'Determining executive Directors' performance'
section on page 192. LTI awards granted in February 2018 are subject to the performance conditions as disclosed in the Annual Report and
Accounts 2017. LTI awards granted in February 2019 are subject to the performance conditions as set out on page 197.
6 All Group Managing Directors are expected to meet their shareholding guidelines within five years of the date of their appointment. The
shareholding guidelines for Group Managing Directors have been updated from 250,000 shares to 250% of reference salary from 1 January 2019
to align with the approach used for executive Directors.
Share options
(Audited)
John Flint
Date of award
Exercise price
Exercisable
21 Sep 18
22 Sep 15
£
5.4490
4.0472
from
until
At 1 Jan 2019
Granted in
year
Exercised in
year1
1 Nov 23
1 Nov 18
30 Apr 24
30 Apr 19
5,505
4,447
—
—
—
4,447
5,505
0
At 5 August
2019 (date
stepped
down)
1 John Flint exercised 4,447 Sharesave options on 13 March 2019. The HSBC closing price on this date was £6.201.
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
HSBC Holdings plc Annual Report and Accounts 2019
199
Corporate governance Report of the Directors | Corporate governance report
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 2019 was £5.919. Market
value is the mid-market price derived from the London Stock
Exchange Daily Official List on the relevant date. Under the
Securities and Futures Ordinance of Hong Kong, the options are
categorised as unlisted physically settled equity derivatives.
Summary of shareholder return and Group Chief
Executive remuneration
The following graph shows the TSR performance against the FTSE
100 Total Return Index for the 10-year period that ended on
31 December 2019. The FTSE 100 Total Return Index has been
chosen as this is a recognised broad equity market index of which
HSBC Holdings is a member. The single figure remuneration for
the Group Chief Executive over the past 10 years, together with
the outcomes of the respective annual incentive and long-term
incentive awards, is presented in the following table.
HSBC TSR and FTSE 100 Total Return Index
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Group Chief
Executive
Michael
Geoghegan
Stuart
Gulliver
Stuart
Gulliver
Stuart
Gulliver
Stuart
Gulliver
Stuart
Gulliver
Stuart
Gulliver
Stuart
Gulliver
Stuart
Gulliver
John
Flint
John
Flint
Noel
Quinn
Total single figure
£000
Annual incentive1
(% of maximum)
Long-term
incentive1,2,3
(% of maximum)
7,932
8,047
7,532
8,033
7,619
7,340
5,675
6,086
2,387
4,582
2,922
1,977
82%
58%
52%
49%
54%
45%
64%
80%
76%
76%
61%
66%
19%
50%
40%
49%
44%
41%
—%
—%
100%
—%
—%
—%
1 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 was met and the award vested in 2018. The value of the award at vesting was included in the 2018 single figure
of remuneration and included as long-term incentive for 2018.
2 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 are therefore
related 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.
3 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 remuneration of the year in which the performance period ends. John Flint and Noel Quinn did not receive the 2016 LTI
award for which the performance period ended on 31 December 2019.
200
HSBC Holdings plc Annual Report and Accounts 2019
Comparison of Group Chief Executive and
employee pay
The following table compares the changes in Group Chief
Executive pay to changes in employee pay between 2018 and
2019.
Percentage change in remuneration between 2018 and 2019
Group Chief Executive
Employee group
Base salary1
Benefits2, 3
Annual incentive4
3%
34%
-20%
6%
2%
-4%
1 Employee group consists of local full-time UK employees as
representative of employees from different businesses and functions
across the Group. The change for the Group Chief Executive is based
on the annualised base salary for the Group Chief Executive role 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
Group Chief Executive role.
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 an annual incentive pool, as
disclosed on page 44, 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 2018 and 2019 scorecard outcome,
reflecting performance achieved in those years, and change in
annual incentive maximum opportunity following reduction in cash in
lieu of pension allowance. Details of the 2019 total single figure of
remuneration for the Group Chief Executive are on page 191.
Pay ratio
The following table shows the ratio between the total pay of the
Group Chief Executive and the lower quartile, median and upper
quartile pay of our UK employees.
Total pay ratio
2019
Method
A
Lower
quartile
169 : 1
Median
105 : 1
Upper
quartile
52 : 1
Total pay and benefits amounts used to calculate the ratio
Lower quartile
Median
Upper quartile
(£)
Method
Total
pay and
benefits
Total
salary
Total
pay and
benefits
Total
salary
Total
pay and
benefits
Total
salary
2019
A
28,920
24,235
46,593
41,905
93,365
72,840
Our ratios have been calculated using the option ‘A’ methodology
prescribed under the UK Companies (Miscellaneous Reporting)
Regulations 2018. Under this option, the ratios are computed
using full-time equivalent pay and benefits of all employees
providing services in the UK at 31 December 2019. We believe this
approach provides accurate information and representation of the
ratios. The ratio has been computed taking into account the pay
and benefits of over 40,000 UK employees, other than the
individuals performing the role of Group Chief Executive. We
calculated our lower quartile, median and upper quartile pay and
benefits information for our UK employees using:
• full-time equivalent annualised fixed pay, which includes salary
and allowances, at 31 December 2019;
• variable pay awards for 2019, including notional returns paid
Relative importance of spend on pay
during 2019;
The following chart shows the change in:
• gains realised from exercising awards from taxable employee
•
total staff pay between 2018 and 2019; and
• dividends paid out in respect of 2018 and 2019.
In 2019 and 2018, we returned a total of $1bn and $2bn,
respectively, to shareholders through share buy-backs.
Relative importance of spend on pay
7.3%
3.5%
Return to shareholder
Employee pay
Dividends
Share buy-back
share plans; and
• full-time equivalent value of taxable benefits and pension
contributions.
For this purpose, full-time equivalent fixed pay and benefits for
each employee have been computed by using each employee’s
fixed pay and benefits at 31 December 2019. Where an employee
works part-time, fixed pay and benefits are grossed up, where
appropriate, to full-time equivalent. One-off benefits provided on a
temporary basis to employees on secondment to the UK have not
been included in calculating the ratios above as these are not
permanent in nature and in some cases, depending on individual
circumstances, may not truly reflect a benefit to the employee.
Total pay and benefits for the Group Chief Executive have been
calculated as the amounts in the single figure of remuneration
table for both John Flint, who served as Group Chief Executive
until 4 August 2019, and Noel Quinn, who served from 5 August
2019. The total remuneration does not include an LTI award as
neither John Flint nor Noel Quinn received an LTI award that had a
performance period that ended during 2019. In a year in which a
value of an LTI 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 pay ratios, 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 those reported by other listed
peers on the FTSE 100 and our international peers.
In the Annual Report and Accounts 2018, we voluntarily disclosed
a median pay ratio of 118:1. The decrease in median ratio is
primarily driven by a lower annual incentive outcome for the Group
Chief Executive (a 66.4% outcome in 2019 compared with 75.7%
outcome in 2018) and a reduction in the cash in lieu of pension
allowance for the executive Directors.
Total pay and benefits for the median employee for 2019 was 4%
higher at £46,593 compared with 2018.
HSBC Holdings plc Annual Report and Accounts 2019
201
Corporate governance Report of the Directors | Corporate governance report
Our UK workforce comprises a diverse mix of employees across
different businesses and levels of seniority, from junior cashiers in
our retail branches to senior executives managing our global
business units. We aim to deliver market competitive pay for each
role, taking into consideration the skills and experience required
for the business. Our approach to pay 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 actively promote learning and development
opportunities for our employees to provide them a framework to
develop their career. As an individual progresses in their career we
would expect their total compensation opportunity to also
increase, reflecting their role and responsibilities.
Pay structure varies across roles in order to deliver an appropriate
mix of fixed and variable pay. Junior employees have a greater
portion of their pay delivered in a fixed component, which does
not vary with performance and allows them to predictably meet
their day-to-day needs. Our senior management, including
Non-executive Directors
(Audited)
executive Directors, generally have a higher portion of their total
compensation opportunity structured as variable pay and linked to
the performance of the Group, given their role and ability to
influence the strategy and performance of the Group. Executive
Directors also have a higher proportion of their variable pay
delivered in shares, which vest over a period of seven years with a
post-vesting retention period of one year. During this deferral and
retention period, the awards are linked to the share price so the
value of award realised by them after the vesting and retention
period will be aligned to the performance of the firm.
We are satisfied that the median pay ratio is consistent with the
pay, reward and progression policies for our UK workforce, taking
into account the diverse mix of our UK employees, the
compensation structure mix applicable to each role and our
objective of delivering market competitive pay for each role
subject to Group, business and individual performance.
The following table shows the total fees and benefits of non-executive Directors for 2019, together with comparative figures for 2018.
Fees and benefits
(Audited)
(£000)
Kathleen Casey
Henri de Castries
Laura Cha
Lord Evans of Weardale (retired on 12 April 2019)
Irene Lee
José Antonio Meade Kuribreña
Heidi Miller
David Nish
Sir Jonathan Symonds
Jackson Tai
Mark Tucker
Pauline van der Meer Mohr
Total
Total ($000)
Footnotes
2019
2018
2019
2018
2019
2018
Fees1
Benefits2
Total
3
4
5
6
7
8
9
223
194
298
55
454
157
625
230
638
398
1,500
265
5,037
6,425
171
161
255
200
361
—
573
187
653
228
1,500
239
4,528
6,039
9
4
—
24
3
2
2
16
21
57
231
8
377
481
23
4
13
2
5
—
9
11
1
47
97
17
229
305
232
198
298
79
457
159
627
246
659
455
1,731
273
5,414
6,906
194
165
268
202
366
—
582
198
654
275
1,597
256
4,757
6,344
1 The Director’s remuneration policy was approved at the 2019 AGM and the new fees became effective from 13 April 2019. Fees include a travel
allowance of £4,000 for non-UK based non-executive Directors and for all non-executive Directors effective from 1 June 2019.
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.
3 Reappointed as a member of the Financial System Vulnerabilities Committee on 12 April 2019.
4
Includes fees of £104,000 in 2019 (2018: £80,000) as a Director, Deputy Chairman and member of the Nomination Committee of The Hongkong
and Shanghai Banking Corporation Limited.
Includes fees of £260,000 in 2019 (2018: £210,000) as a Director, Chair of the Remuneration Committee, and member of the Audit Committee
and the Risk Committee of The Hongkong and Shanghai Banking Corporation Limited and as a Director, Chair of the Risk Committee and member
of the Audit Committee of Hang Seng Bank Limited.
5
6 Appointed as a member of the Board and the Nomination & Corporate Governance Committee on 1 March 2019, and as a member of the Group
Risk Committee on 1 June 2019.
Includes fees of £431,000 in 2019 (2018: £412,000) as Chair of HSBC North American Holdings Inc.
7
8 Appointed as a Chair of the Financial System Vulnerabilities Committee on 12 April 2019.
9 The Group Chairman’s benefits in 2019 included £13,020 in respect of life assurance and £19,126 in respect of healthcare insurance, as approved
by the Group Remuneration Committee.
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HSBC Holdings plc Annual Report and Accounts 2019
Non-executive Directors’ interests in shares
(Audited)
The shareholdings of persons who were non-executive Directors in
2019, including the shareholdings of their connected persons, at
31 December 2019, or date of cessation as a Director if earlier, are
set out below. Non-executive Directors are expected to meet the
shareholding guidelines within five years of the date of their
appointment. All non-executive Directors who had been appointed
for five years or more at 31 December 2019 met the guidelines.
Shares
Kathleen Casey
Laura Cha
Henri de Castries
Lord Evans of Weardale (retired on 12 April 2019)
Irene Lee
José Antonio Meade Kuribreña (appointed on 1 March 2019)
Heidi Miller
David Nish
Sir Jonathan Symonds
Jackson Tai
Mark Tucker
Pauline van der Meer Mohr
Voting results from Annual General Meeting
2019 Annual General Meeting voting results
Remuneration report
(votes cast)
Remuneration policy
(votes cast)
2020 annual incentive scorecards
The weightings and performance measures for the 2020 annual
incentive award for executive Directors are disclosed below. The
performance targets for the annual incentive measures are
commercially sensitive and it would be detrimental to the Group’s
interests to disclose them at the start of the financial year. Subject
2020 annual incentive scorecards measures and weightings
Measures
Grow profit before tax
RWA optimisation
Customer satisfaction
Employee experience
Environment1
Risk and compliance
Personal objectives
Total
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
15,125
16,200
19,251
12,892
11,904
—
15,700
50,000
43,821
66,515
307,352
15,000
For
96.81%
Against
3.19%
Withheld
––
9,474,837,851
312,644,682
44,564,150
97.36%
2.64%
––
9,525,856,097
258,383,075
47,468,297
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.
Executive Directors will be eligible for an annual incentive award
of up to 215% of base salary.
Group Chief
Executive
Group Chief
Financial Officer
%
30.0
20.0
10.0
10.0
10.0
10.0
10.0
100.0
%
20.0
20.0
10.0
10.0
10.0
10.0
20.0
100.0
1 Environment measure will assess performance against reduction in carbon emissions, financing and investment of sustainable businesses and
projects and improvement in climate risk management and organisational behaviours.
The 2020 annual incentive is subject to a risk and compliance
underpin, which gives the Committee the discretion to adjust
down the overall scorecard outcome to ensure that the Group
operates within risk and/or compliance tolerance when achieving
its financial targets. For this purpose, the Committee will receive
information including any risk thresholds outside of tolerance for a
significant period of time and any risk management failures that
have resulted in significant customer detriment, reputational
damage and/or regulatory censure.
Long-term incentives
Details of the performance measures and targets for LTI awards to
be made in 2020, in respect of 2019, are provided on page 195.
The performance measures and targets for awards to be made in
respect of 2020, granted in 2021, will be provided in the Annual
Report and Accounts 2020.
HSBC Holdings plc Annual Report and Accounts 2019
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Corporate governance Report of the Directors | Corporate governance report
Workforce remuneration
Remuneration principles
Our pay and performance 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, while performing their role in the long-term interests of our stakeholders.
With this in mind, the key principles that underpin the performance and pay decisions for our workforce are outlined below.
Principle
Our approach in 2019
Fair,
appropriate
and free from
bias
• We increased the use of simplified or guided decision making to support managers, particularly the less experienced ones, to make
informed, consistent and fair pay decisions. Managers of 96% of our junior employees are now supported by simplified or guided
decision making.
• Our simpler and more transparent framework for determining variable pay awards for our junior employees has streamlined the
parameters and principles that managers are asked to consider and apply when making fixed and variable pay recommendations.
• Managers in similar roles come together to review the performance and behaviour ratings of their team and make any necessary
adjustments based on that review of the peer group to mitigate the risk of bias and take a broader view of team performance.
• As part of our annual pay review we undertake analytical reviews to check and identify for bias and provide these reports to our
senior management and Group Remuneration Committee as part of their review of annual pay review outcomes.
• We review our pay practices regularly and also work with independent third parties to review equal pay. If pay differences are
identified that are not due to an objective reason such as performance or skills and experience, we make adjustments.
• We make pay and performance reporting tools available to our managers for the purpose of undertaking an analytical review of pay
decisions for their team.
Reward and
recognise
sustainable
performance
and values-
aligned
behaviour
• We have a robust performance management process that underpins our approach and aligns reward with sustainable Group,
business and individual performance, and drives clear pay differentiation.
• Group and business unit performance is used in determining the Group variable pay pool and its allocation to each business unit.
Where performance in a year is weak, as measured by both financial and non-financial metrics, this will have a direct and
proportionate impact on the relevant pool.
• Assessment of individual performance is made with reference to a balanced scorecard of clear and relevant financial and non-
financial objectives, including appropriate risk and compliance objectives.
• We believe it is important to recognise our people not just for results, but also for upholding our values. As such, subject to local law,
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. Our leaders set the tone by valuing the behaviours that get a job done as much as the
outcome.
• We also undertake analytical reviews to ensure there is clear pay differentiation across both performance and behaviour ratings,
which are provided to senior management and the Group Remuneration Committee as part of their oversight of the remuneration
outcomes for the Group’s workforce.
• We recognise examples of exceptional positive conduct through an increase in variable pay, and apply a reduction in variable pay for
misconduct or inappropriate behaviour that exposes us to financial, regulatory or reputational risk.
• Our global ‘At Our Best’ recognition programme allows our people to award recognition points to their colleagues that can be
redeemed against a wide range of goods. In 2019, under this programme, we ran a special ‘Spotlight on customer service’
campaign, which resulted in 65,500 recognitions over a three-month period, and our GB&M business ran a special campaign
recognising outstanding examples of good conduct.
• We promote employee share ownership through variable pay deferral or voluntary enrolment in an all-employee share plan, which
assists with incentivising long-term sustainable performance.
• We maintain an appropriate balance between fixed pay, variable pay and employee benefits, taking into consideration an employee’s
seniority, role, individual performance and the market.
• We ensure fixed pay increases are consistently targeted towards our junior population where fixed pay represents a higher
proportion of total compensation.
• We continue to embed our simpler and more transparent framework for determining variable pay awards for our junior employees,
launched in 2018, with a view to ensuring employees have more visibility and clarity on the factors that influence their total
remuneration.
• We offer employee benefits that are valued by a diverse workforce, appropriate at the local market level and support HSBC’s
commitment to employee well-being.
• We are informed, but not driven, by market position and practice.
• We apply the legal minimum wage in all countries and territories where we operate. In 2014, HSBC in the UK was formally
accredited by the Living Wage Foundation for having adopted the ‘Living Wage’ and the ‘London Living Wage’.
• We seek to create a culture where our people can fulfil their potential, gain new skills and develop their careers for the future.
• To support this, we promote a continuous feedback culture, Everyday Performance and Development, and encourage all our people
to have regular conversations with their line managers about their performance, pay, development and well-being throughout the
year, in addition to their formal annual review discussions.
• We also encourage them to use our online career planning tools to help them with their thinking about future roles and the
capabilities they require.
• Line managers are provided with clear guidance materials to support them in making fair and appropriate decisions at key stages in
the performance and pay decision-making process.
• Employees also receive notifications and guidance throughout the performance and pay review period to support their understanding
of what is expected of them and what they can expect.
• We comply with relevant regulations and ensure this applies at a high standard, taking into account the spirit of the regulations
across all of our countries and territories.
Competitive,
simple and
transparent
total
compensation
packages
Supporting a
culture of
continuous
feedback
through
manager and
employee
empowerment
Compliance
with
regulations
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HSBC Holdings plc Annual Report and Accounts 2019
Remuneration structure
Total compensation, which comprises fixed and variable pay, is the
key focus of our remuneration framework, with variable pay
differentiated by performance and adherence to the HSBC Values.
We set out below the key features and design characteristics of
our remuneration framework, which apply on a Group-wide basis,
subject to compliance with local laws:
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.
Benefits
Provided in accordance
with local market practice.
Annual incentive1
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.
Deferral instruments
Alignment with the
medium- to long-term
strategy, stakeholder
interests and adherence to
the HSBC Values.
• 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 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.
• Elements of fixed pay may change to reflect an individual’s position, role or grade, cost of living in the country, individual
skills, competencies, capabilities and experience.
• Fixed pay is generally delivered in cash on a monthly basis.
• Benefits may include, but are not limited to, the provision of a pension, medical insurance, life insurance, health
assessment and relocation support.
• All employees are eligible to be considered for a discretionary variable pay award. Individual awards are determined on the
basis of individual performance against a balanced scorecard.
• 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
('RTS') 604/2014 are limited to 200% of fixed pay.2
• 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, five or seven years.
• A Group-wide deferral approach is applicable to all employees. A portion of annual incentive awards above a specified
threshold is deferred in shares vesting annually over a three-year period with 33% vesting on the first and second
anniversaries of grant and 34% on the third anniversary. Local employees in France are granted deferred awards that vest
66% on the second anniversary and 34% on the third anniversary.
• For MRTs identified in accordance with the UK's PRA and 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 years3. 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 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 deferral period of up to
eight years 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. In Australia, local
MRTs are subject to a four-year deferral period in respect of deferred cash awards. Local MRTs are also subject to the
minimum deferral rates discussed above, except in China (where a minimum deferral rate of 50% is applied for the Chief
Executive Officer), 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 more than one regulation, 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, which prohibits employees from entering into any personal
hedging strategies in respect of HSBC securities.
• Generally, the underlying instrument for all deferred awards is HSBC shares to ensure alignment between the long-term
interest of our employees and 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, 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 2019
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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 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
senior management functions, have a six-month retention period applied to their awards.
Buy-out awards
Support recruitment of
talent.
Guaranteed variable
remuneration
Support recruitment of
talent.
Severance payments
Adhere to contractual
agreements with
involuntary leavers.
• 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 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 the determination of any severance will take into consideration
the performance of the individual, contractual notice period, applicable local laws and circumstances of the case.
• Generally, 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 Executive Directors are also eligible to be considered for a long-term incentive award. See details on page 187.
2 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 AGM held on 23 May 2014 (98% in favour). The Group has also used the discount rate of 14.8% for individuals with seven-year deferral
period and 7.2% for individuals with five-year deferral period. This discount rate was used for one MRT in the UK and one MRT in the US.
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.
3
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HSBC Holdings plc Annual Report and Accounts 2019
Link between risk, performance and reward
Our remuneration practices promote sound and effective risk
management while supporting our business objectives.
We set out below the key features of our remuneration framework,
which help enable us to achieve alignment between risk,
performance and reward, subject to compliance with local laws
and regulations:
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, with the payout ratio generally 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 financial performance;
• 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, which are automatically included in the Committee’s definition of profit; and
• assessment of individual performance 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.
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 oversee.
• The Committee is responsible for approving the remuneration recommendations for the Group Chief Risk Officer and senior
management in control functions.
• Group policy is for control functions staff to report into their respective function. Remuneration decisions for senior functional roles
are led by, and must carry the approval of, the global function head.
• Remuneration is carefully benchmarked with the market and internally to ensure it is set at an appropriate level.
Variable pay
adjustments
and conduct
recognition
Malus
Clawback
Sales
incentives
Identification
of MRTs
• 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.
Malus can be applied to unvested deferred awards granted in prior years 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 MRTs on or after 1 January 2015 for a period of seven years, 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.
• We identify individuals as MRTs based on the qualitative and quantitative criteria set out in the RTS. 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 (consolidated) and HSBC UK Bank 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
function 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 identify 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
businesses and functions. The overall results are reviewed by the Group Chief Risk Officer.
• The Group Remuneration Committee reviews the methodology, key decisions regarding identification, and the results of the
identification exercise, including proposed MRT exclusions.
HSBC Holdings plc Annual Report and Accounts 2019
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Additional remuneration disclosures
This section provides disclosures required under the Hong Kong
Ordinances, Hong Kong Listing Rules and the Pillar 3 remuneration
disclosures.
For the purpose of the Pillar 3 remuneration 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.
MRT remuneration disclosures
The following tables set out the remuneration disclosures for
individuals identified as MRTs for HSBC Holdings. Remuneration
information for individuals who are only identified as MRTs at
HSBC Bank plc, HSBC UK Bank plc or other solo-regulated entity
levels is included, where relevant, in those entities' disclosures.
The 2019 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' 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 (REM1)
Number
of MRTs
Cash-
based1
4
12
18
585
155
26
151
135
73
5.9
6.9
33.6
360.9
86.5
18.1
78.9
62.3
51.7
Fixed ($m)
Share-
based
5.5
—
—
—
—
—
—
—
—
Total
11.4
6.9
33.6
360.9
86.5
18.1
78.9
62.3
51.7
Cash-
based
3.1
—
20.8
159.0
36.3
6.3
33.0
21.5
20.6
1,159
704.8
5.5
710.3
300.6
Of
which:
deferred
1.2
—
12.6
81.3
18.0
2.8
15.5
8.7
11.2
151.3
Executive Directors
Non-executive Directors
Senior management
Investment banking
Retail banking
Asset management
Corporate functions
Independent control
functions
All other
Total
Variable2 ($m)
Of
which:
deferred
Other
forms
Of
which:
deferred
Share-
based3
8.6
—
24.4
168.3
41.8
3.8
32.9
21.4
22.9
6.6
—
16.2
91.5
23.9
2.1
17.3
11.0
12.9
—
—
—
—
—
2.6
—
0.1
—
2.7
Total
11.7
—
45.2
327.3
78.1
12.7
65.9
43.0
43.5
Total
($m)
23.1
6.9
78.8
688.2
164.6
30.8
144.8
105.3
95.2
—
—
—
—
—
1.6
—
—
—
324.1
181.5
1.6
627.4
1,337.7
1 Cash-based fixed remuneration is paid immediately.
2 Variable pay awarded in respect of 2019. 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.
Guaranteed bonus, sign-on and severance payments (REM2)
Executive Directors
Senior management
Investment banking
Retail banking
Asset management
Corporate functions
Independent control functions
All other
Total
Guaranteed bonus and sign-
on payments1
Severance payments2
Made during
year ($m)
Number of
beneficiaries
Awarded
during year
($m)
Number of
beneficiaries
Highest such
award to a
single person
($m)
Paid during
year ($m)
Number of
beneficiaries
—
6.0
7.3
—
—
2.3
—
—
15.6
—
3
9
—
—
4
—
—
16
—
1.8
19.9
2.4
0.2
11.0
1.2
1.6
38.1
—
1
31
6
1
14
3
2
58
—
1.8
3.1
0.7
0.2
2.7
0.6
0.9
—
1.8
15.6
1.7
0.2
6.5
1.1
1.6
28.5
—
1
23
5
1
12
2
2
46
1 No sign-on payments were made in 2019. 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
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HSBC Holdings plc Annual Report and Accounts 2019
Deferred remuneration at 31 December1 (REM3)
Total outstanding2
Of which:
unvested
Of which: total
outstanding
deferred and
retained 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 paid out
in the financial
year4
4.6
35.4
185.8
38.4
8.4
30.7
19.6
23.2
37.9
53.8
251.8
53.3
6.7
52.1
25.4
34.9
—
—
—
—
7.5
—
0.1
—
4.6
35.4
185.8
38.4
8.4
30.7
19.6
23.2
33.8
43.1
208.7
44.2
5.1
42.5
23.5
26.9
—
—
—
—
6.1
—
0.1
—
4.6
35.4
185.8
38.4
8.4
30.7
19.6
23.2
37.9
53.8
251.8
53.3
6.7
52.1
25.4
34.9
—
—
—
—
7.5
—
0.1
—
—
—
—
—
—
—
—
—
(2.9)
(4.2)
(17.7)
(3.7)
(0.5)
(3.9)
(1.8)
(2.4)
—
—
—
—
1.0
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.7
4.7
66.4
12.2
4.3
10.4
4.9
8.3
2.0
7.3
101.5
20.5
3.5
18.6
15.5
12.1
—
—
—
—
1.9
—
—
—
$m
Cash
Executive Directors
Senior management
Investment banking
Retail banking
Asset management
Corporate functions
Independent control functions
All other
Shares
Executive Directors
Senior management
Investment banking
Retail banking
Asset management
Corporate functions
Independent control functions
All other
Other forms
Executive Directors
Senior management
Investment banking
Retail banking
Asset management
Corporate functions
Independent control functions
All other
1 This table provides details of balances and movements during performance year 2019. For details of variable pay awards granted for 2019, refer to
the 'Remuneration – fixed and variable pay amounts' table. 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 at 31 December 2019.
Includes any amendments due to malus or clawback. Page 205 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
Management body
All other
11
—
—
1
—
1
—
—
1
—
2
—
—
—
728
244
83
31
18
11
10
6
5
3
2
1
—
1
Total
739
244
83
32
18
12
10
6
6
3
4
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 2019
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Directors’ emoluments
The details of compensation paid to executive and non-executive Directors for the year ended 31 December 2019 are set out below.
Emoluments
Basic salaries, allowances and benefits
Pension contributions
Performance-related pay paid or
receivable1
Inducements to join paid or receivable
Compensation for loss of office
Notional return on deferred cash
Total
Total ($000)
Noel Quinn
John Flint
Ewen Stevenson
Marc Moses
Non-executive Directors
2019
£000
1,312
—
665
—
—
—
1,977
2,522
2018
£000
—
—
—
—
—
—
—
—
2019
£000
1,991
—
2018
£000
2,863
—
891
5,505
—
—
40
—
—
54
2,922
3,727
8,422
11,232
2019
£000
1,820
—
3,176
1,974
—
—
6,970
8,890
2018
£000
—
—
—
—
—
—
—
2019
£000
1,849
—
2018
£000
1,911
—
926
3,556
—
—
17
2,792
3,561
—
—
33
5,500
7,335
2019
£000
5,414
2018
£000
4,757
—
—
—
—
—
—
—
—
—
—
5,414
6,906
4,757
6,344
1
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 2019 was $26m. 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, 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, including
Douglas Flint valued at £5,201 ($6,634), Alexander Flockhart
valued at £1,621 ($2,068), Stuart Gulliver valued at £5,201 ($6,634)
and Iain Mackay at £998 ($1,273) during the year ended 31
December 2019. Tax support fees of £10,440 ($13,316) were also
provided for Iain Mackay during this period. The aggregate value
of Director retirement benefits for current Directors is nil. Amounts
are converted into US dollars based on the average year-to-date
exchange rates for the respective year.
There were payments under retirement benefit arrangements with
former Directors of $404,037. The provision at 31 December 2019
in respect of unfunded pension obligations to former Directors
amount to $7,727,021.
Emoluments of senior management and five highest
paid employees
The following table sets out the details of emoluments paid to
senior management, which in this case comprises executive
Directors and members of the Group Management Board, for the
year ended 31 December 2019, or for the period of appointment in
2019 as a Director or member of the Group Management Board.
Details of the remuneration paid to the five highest paid
employees, comprising one executive Director and four Group
Managing Directors, for the year ended 31 December 2019, are
also presented.
Emoluments
Basic salaries, allowances and benefits in kind
Pension contributions
Performance-related pay paid or receivable1
Inducements to join paid or receivable
Compensation for loss of office
Total
Total ($000)
1
Includes the value of deferred shares awards at grant.
Emoluments by bands
Hong Kong dollars
$7,500,001 – $8,000,000
$9,000,001 – $9,500,000
$22,000,001 – $22,500,000
$25,500,001 – $26,000,000
$27,500,001 – $28,000,000
$28,000,001 – $28,500,000
$28,500,001 – $29,000,000
$30,000,001 – $30,500,000
$33,000,001 – $33,500,000
$33,500,001 – $34,000,000
$37,000,001 – $37,500,000
$37,500,001 – $38,000,000
$46,500,001 – $47,000,000
$47,500,001 – $48,000,000
$52,500,001 – $53,000,000
$63,500,001 – $64,000,000
$70,500,001 – $71,000,000
$74,000,001 – $74,500,000
US dollars
$957,200 – $1,021,013
$1,148,640 – $1,212,453
$2,807,786 – $2,871,599
$3,254,479 – $3,318,292
$3,509,732 – $3,573,545
$3,573,546 – $3,637,359
$3,637,359 – $3,701,172
$3,828,799 – $3,892,612
$4,211,679 – $4,275,492
$4,275,492 – $4,339,305
$4,722,185 – $4,785,998
$4,785,998 – $4,849,812
$5,934,638 – $5,998,451
$6,062,265 – $6,126,078
$6,700,398 – $6,764,211
$8,104,291 – $8,168,104
$8,997,677 – $9,061,490
$9,444,370 – $9,508,183
$112,500,001 – $113,000,000
$117,000,001 – $117,500,000
$14,357,995 – $14,421,808
$14,932,315 – $14,996,128
210
HSBC Holdings plc Annual Report and Accounts 2019
Five highest paid employees
Senior management
£000
13,100
18
16,834
13,987
—
43,939
56,044
£000
38,459
168
40,746
14,253
1,415
95,041
121,224
Number of
highest paid employees
Number of
senior management
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
1
1
1
1
2
1
1
1
1
1
1
1
1
2
1
1
1
1
1
1
1
1
1
1
Share capital and other disclosures
Share buy-back programme
On 6 August 2019, HSBC Holdings commenced a share buy-back
to purchase its ordinary shares of $0.50 each up to a maximum
consideration of $1.0bn. This programme concluded on 26
September 2019, after the purchase and cancellation of
135,776,994 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 2019 was
$67,888,497 and the aggregate consideration paid by HSBC was
£817,587,930.
The table that follows outlines details of the shares purchased on a
monthly basis during 2019. The total number of shares purchased
during the year was 135,776,994, representing 0.66% of the
shares in issue and 0.67% of the shares in issue, excluding
treasury shares.
Month
Share buy-back of 2019
Aug-19
Sep-19
Dividends
Dividends for 2019
First, second and third interim dividends for 2019, each of
$0.10 per ordinary share, were paid on 5 July 2019,
26 September 2019 and 20 November 2019, respectively. Note 8
on the financial statements gives more information on the
dividends declared in 2019. On 18 February 2020, the Directors
declared a fourth interim dividend for 2019 of $0.21 per ordinary
share in lieu of a final dividend, which will be payable on 14 April
2020 in cash in US dollars, or in sterling or Hong Kong dollars at
exchange rates to be determined on 30 March 2020, with a scrip
dividend alternative. As the fourth interim dividend for 2019 was
declared after 31 December 2019, it has not been included in the
balance sheet of HSBC as a liability. The reserves available for
distribution at 31 December 2019 were $31.7bn.
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 1/40th of a
Series A dollar preference share), and £0.01 per Series A sterling
preference share was paid on 15 March, 17 June, 16 September
and 16 December 2019.
Dividends for 2020
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 1/40th of a Series A dollar preference share) and
£0.01 per Series A sterling preference share were declared
on 3 February 2020 for payment on 16 March 2020.
Share capital
Issued share capital
The nominal value of HSBC Holdings’ issued share capital paid
up at 31 December 2019 was $10,319,276,773 divided into
20,638,524,545 ordinary shares of $0.50 each, 1,450,000 non-
cumulative preference shares of $0.01 each and one non-
cumulative preference share of £0.01, representing approximately
99.9999%, 0.0001%, and 0% respectively of the nominal value of
HSBC Holdings’ total issued share capital paid up at 31 December
2019.
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/our-approach/
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
Number
of shares
Highest price
paid per share
Lowest price
paid per share
Average price
paid per share
£
£
£
93,613,105
42,163,889
135,776,994
6.3790
6.2810
5.7830
5.8630
6.0033
6.0621
Aggregate
price paid
£
561,986,347
255,601,583
817,587,930
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 2019 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 2022.
Information on the policy adopted by the Board for paying interim dividends
on the ordinary shares may be found on page 323, under the heading
‘Shareholder information’.
Dividend waivers
HSBC Holdings' employee benefit trusts, which hold 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 2019 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 2019 and 2020 may be found on page
261, under the heading ‘Dividends’ and in Note 8 on the financial statements.
Further details of the rights and obligations attaching to the HSBC Holdings’
issued share capital may be found in Note 31 on the financial statements.
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).
HSBC Holdings plc Annual Report and Accounts 2019
211
Corporate governance Report of the Directors | Corporate governance report
Share capital changes in 2019
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 2018
First interim dividend for 2019
Second interim dividend for 2019
Third interim dividend for 2019
All-employee share plans
HSBC Holdings
ordinary shares issued
Aggregate
nominal value
Market value per share
on
number
$
$
£
8 Apr 2019
140,792,298
70,396,149
5 Jul 2019
45,113,398
22,556,699
26 Sep 2019
109,720,334
54,860,167
20 Nov 2019
46,245,981
23,122,991
8.2417
8.3022
7.2477
7.7133
6.1984
6.5516
5.9748
6.0444
HSBC Holdings savings-related share option plan
HSBC ordinary shares issued in £
Options over HSBC ordinary shares lapsed
Options over HSBC ordinary shares granted in response to approximately 23,220 applications
from HSBC employees in the UK on 20 September 2019
HSBC International Employee Share Purchase Plan
HSBC share plans
Number
Aggregate
nominal
value
$
11,805,554
12,328,937
5,902,777
6,164,469
32,129,659
16,064,830
Exercise price
from
£
to
£
4.0472
5.9640
HSBC Holdings
ordinary shares
issued
607,478
Aggregate
nominal
value
$
303,739
Market value per share
from
£
5.8090
to
£
6.7090
HSBC Holdings
ordinary shares
issued
Aggregate
nominal
value
$
Market value per share
from
£
to
£
Vesting of awards under the HSBC Share Plan 2011
59,175,000
29,587,500
5.8640
6.7150
Authorities to allot and to purchase shares and
pre-emption rights
At the AGM in 2019, shareholders renewed the general authority
for the Directors to allot new shares up to 13,357,820,350
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 2,003,673,053 ordinary shares.
The Directors exercised this authority during the year and
purchased 135,776,994 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 4,007,346,106 ordinary shares in relation to any issue by
HSBC Holdings or any member of the Group of contingent
convertible securities that automatically convert into or are
exchanged for ordinary shares in HSBC Holdings in prescribed
circumstances. Further details about the issue of contingent
convertible securities may be found in Note 31 on the financial
statements.
Other than as disclosed in the tables above headed ‘Share capital
changes in 2019’, the Directors did not allot any shares during
2019.
Debt securities
In 2019, HSBC Holdings issued the equivalent of $10.97bn of debt
securities in the public capital markets in a range of currencies and
maturities in the form 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 31 on pages 295 and 305.
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. At 31 December 2019, pursuant to Chapter 6 of the UK
Companies Act 2006, 325,273,407 ordinary shares were held in
treasury. This was the maximum number of shares held at any
time during 2019, representing 1.58% of the shares in issue as at
31 December 2019. The nominal value of shares held in treasury
was $162,636,704.
Notifiable interests in share capital
At 31 December 2019, 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 October 2019 that on
14 October 2019 it had the following: an indirect interest in
HSBC Holdings ordinary shares of 1,038,312,888; qualifying
financial instruments with 244,560,589 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 5,848,899
voting rights, representing 5.12%, 1.20% and 0.02%,
respectively, of the total voting rights at that date.
No further notifications had been received pursuant to the
requirements of Rule 5 of the Disclosure, Guidance and
Transparency Rules between 31 December 2019 and 12 February
2020.
At 31 December 2019, according to the register maintained by
HSBC Holdings pursuant to section 336 of the Securities and
212
HSBC Holdings plc Annual Report and Accounts 2019
Futures Ordinance of Hong Kong:
Dealings in HSBC Holdings listed securities
• BlackRock, Inc. gave notice on 4 January 2020 that on
31 December 2019 it had the following interests in HSBC
Holdings ordinary shares: a long position of 1,414,136,299
shares and a short position of 14,651,147 shares, representing
6.96% and 0.07%, respectively, of the ordinary shares in issue
at that date. Since 31 December 2019, BlackRock, Inc. gave
notice on 9 January 2020 that on 6 January 2020 it had the
following interests in HSBC Holdings ordinary shares: a long
position of 1,423,358,955 shares and a short position of
14,825,645 shares, representing 7.01% and 0.07%,
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.
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 2019 and up to the date of this report.
The 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 2019.
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 2019 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.
Directors’ interests – shares and debentures
At 1 Jan
2019, or date of
appointment, if later
Beneficial
owner
Child
under 18
or spouse
Jointly with
another
person
Footnotes
Trustee
Total
interests
At 31 Dec 2019, or date of cessation, if earlier
HSBC Holdings ordinary shares
Kathleen Casey
Laura Cha
Henri de Castries
Lord Evans of Weardale (retired from the Board on 12 April
2019)
John Flint (stepped down from the Board on 5 August
2019)
Irene Lee
José Antonio Meade Kuribreña (appointed to the Board on
1 March 2019)
Heidi Miller
Marc Moses
David Nish
Noel Quinn (appointed to the Board on 5 August 2019)
Ewen Stevenson (appointed to the Board on 1 January 2019)
Sir Jonathan Symonds
Jackson Tai
Mark Tucker
Pauline van der Meer Mohr
1
1
2
2
2
1, 3
9,635
10,200
18,064
15,125
16,200
19,251
12,892
12,892
827,691
1,055,160
11,172
11,904
—
—
4,420
15,700
1,533,039
1,777,688
—
—
—
—
—
—
—
—
—
—
50,000
50,000
380,095
6,420
43,821
56,075
441,925
233,972
38,823
32,800
288,381
307,352
15,000
15,000
—
—
4,998
11,965
—
—
—
—
—
—
—
—
—
—
15,125
16,200
19,251
12,892
5,439
— 1,060,599
—
—
—
—
—
—
—
21,750
—
—
—
—
—
11,904
—
15,700
— 1,777,688
—
—
—
—
—
—
—
50,000
441,925
233,972
43,821
66,515
307,352
15,000
1 Kathleen Casey has an interest in 3,025, Heidi Miller has an interest in 3,140 and Jackson Tai has an interest in 13,303 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 184. At 31 December 2019, 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: Noel Quinn – 832,731; Marc Moses – 3,599,325; and Ewen Stevenson – 1,179,893.
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 11,965 shares of which he is custodian.
There have been no changes in the shares or debentures of the
Directors from 31 December 2019 to the date of this report.
Content
Listing Rule 9.8.4
The Report of the Directors comprises sections of the Annual
Report and Accounts incorporated by cross-reference, where
applicable, under Listing Rule 9.8.4.
Long-term incentives
Dividend waivers
Dividends
Change of control
Page references
195
211
211
214
Events after the balance sheet date
For details on events after the balance sheet date, see Note 36 on
the financial statements.
HSBC Holdings plc Annual Report and Accounts 2019
213
Corporate governance Report of the Directors | Corporate governance report
Change of control
Enterprise risk management framework
The Group is not party to any significant agreements that take
effect, alter or terminate following a change of control of the
Group. The Group does not have agreements with any Director or
employee that would provide compensation for loss of office or
employment resulting from a takeover bid.
Branches
The Group provides a wide range of banking and financial services
through branches and offices in the UK and overseas.
Research and development activities
During the ordinary course of business the Group develops new
products and services within the global businesses.
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 Group nor any of its subsidiaries inadvertently
breaches the Act, authority is sought from shareholders at the
AGM 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 $119,600 during 2019
(2018: $179,200).
Charitable donations
For details of charitable donations, see page 20.
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
misstatement, 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, on risk management, internal control and related financial
and business reporting. The procedures have been in place
throughout the year and up to 18 February 2020, the date
of approval of this Annual Report and Accounts 2019.
The key risk management and internal control procedures include
the following:
Global principles
The Group's Global Principles set an overarching standard for all
other policies and procedures and are fundamental to the Group’s
risk management structure. They inform and connect our purpose,
values, strategy and risk management principles, guiding us to do
the right thing and treat our customers and our colleagues fairly at
all times.
The enterprise risk management framework provides an effective
and efficient approach to how we govern and oversee the
organisation as well as how we monitor and mitigate risks to the
delivery of our strategy. It applies to all categories of risk, covering
core governance, standards and principles that bring together all
of the Group’s risk management practices into an integrated
structure.
Delegation of authority within limits set by the Board
Subject to certain matters reserved for the Board, the Group Chief
Executive has been delegated authority limits and powers within
which to manage the day-to-day affairs of the Group, including the
right to sub-delegate those limits and powers. Each relevant Group
Managing Director or executive Director has delegated authority
within which to manage the day-to-day affairs of the business or
function for which he or she is accountable. Delegation of
authority from the Board requires those individuals to maintain a
clear and appropriate apportionment of significant responsibilities
and to oversee the establishment and maintenance of systems
of control that are appropriate to their business or function.
Authorities to enter into credit and market risk exposures
are delegated with limits to line management of Group companies.
However, credit proposals with specified higher-risk characteristics
require the concurrence of the appropriate global function. 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.
The Board delegated authority to the Group Audit Committee
('GAC') and it 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.
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.
214
HSBC Holdings plc Annual Report and Accounts 2019
The effectiveness of the Group’s system of risk management and
internal control is reviewed regularly by the Board, the Group Risk
Committee ('GRC') and the GAC.
During 2019, the Group continued to focus on operational
resilience and invest in the non-financial risk infrastructure. There
was a particular focus on material and emerging risks with
significant progress made enhancing the end-to-end risk and
control assessment process.
The GRC and the GAC 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 its effectiveness of internal control
over financial reporting at 31 December 2019. 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.
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, and the
reporting of risk and control issues on a regular basis through the
various risk management and risk governance forums. Entity level
controls are internal controls that have a pervasive influence over
the entity as a whole. They include controls related to the control
environment, such as the Group'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 entity
level controls 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
if concerning financial reporting matters and/or the GRC for all
other risk types. HSBC is simplifying the suite of entity level
controls relied on to meet the principles of the COSO framework,
which is expected to complete in 2020.
Process level transactional controls
Key process level controls that mitigate the risk of financial
misstatement are identified, recorded and monitored in
accordance with the risk framework. This includes the
identification and assessment of relevant control issues against
which action plans are tracked through to remediation. Further
details on HSBC’s approach to risk management can be found on
page 73. The GAC has continued to receive regular updates on
HSBC’s ongoing activities for improving the effective oversight of
end-to-end business processes and management continued to
identify opportunities for enhancing key controls, such as through
the use of automation technologies.
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.
Disclosure Committee
Chaired by the Group Chief Financial Officer, the Disclosure
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
Disclosure 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, Global Head of Investor Relations, Group
Chief of Staff, Group Company Secretary and Chief Governance
Officer and Group Head of Finance. The Group's brokers, external
auditors 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 and Accounts 2019.
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 2019, 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.
Going concern
The Board, having made appropriate enquiries, is satisfied that the
Group as a whole has adequate resources to continue operations
for a period of at least 12 months from the date of this report, and
it therefore continues to adopt the going concern basis in
preparing the financial statements. Further information is provided
on page 41.
Employees
At 31 December 2019, HSBC had a total workforce equivalent to
235,000 full-time employees compared with 235,000 at the end of
2018 and 229,000 at the end of 2017. Our main centres of
employment were the UK with approximately 40,000 employees,
India with 40,000, Hong Kong with 31,000, mainland China with
28,000, Mexico with 16,000, the US with 10,000 and France with
8,000.
Our people span many cultures, communities and continents. By
focusing on employee well-being, diversity, inclusion and
engagement, as well as building our peoples’ skills and
capabilities for now and for the future, we aim to create an
environment where our people can fulfil their potential. We use
confidential surveys to assess progress and make changes. We
want to have an open culture where our people feel connected,
supported to speak up and where our leaders encourage
feedback. Where we make organisational changes, we support
our people throughout the change and in particular where there
are job losses.
Employee relations
We consult with and, where appropriate, negotiate with employee
representative bodies where we have them. 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.
We are committed to complying with the applicable employment
laws and regulations in the jurisdictions in which we operate.
HSBC’s global employment practices and relations policy provides
the framework and controls through which we seek to uphold that
commitment.
Diversity and inclusion
Our Group People Committee, which is made up of Group
Management Board members, governs our diversity and inclusion
agenda.
HSBC Holdings plc Annual Report and Accounts 2019
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Corporate governance Report of the Directors | Corporate governance report
We are committed to a company-wide approach to diversity and
inclusion. We want to embrace our people’s diverse ideas, styles
and perspectives to reflect and understand our customers,
communities, suppliers and investors. Our actions are focused on
ensuring our people are valued, respected and supported to fulfil
their potential and thrive. We want them to bring the best of
themselves to work to help deliver more sustainable outcomes for
all of our stakeholders.
Our Global Principles outline that our people must 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 as policy.
More information about our diversity and inclusion activity and our UK
Gender Pay Gap Report is available at www.hsbc.com/our-approach.
Gender diversity statistics1, 2
Male
Female
1 Combined executive committee and direct reports includes HSBC
executive Directors, Group Managing Directors, Group Company
Secretary and Chief Governance Officer and their direct reports
(excluding administrative staff).
2 Senior leadership refers to employees performing roles classified as
0, 1, 2 and 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
We understand that to have a skilled and capable workforce for
today and the future, we must invest in our people at all stages of
their careers. We measure our success through our retention,
engagement scores, internal mobility and from external awards.
We provide training through HSBC University, our online learning
portal and global network of training centres, which we launched
in 2017. We target a 97% completion rate for formal training on
our values, strategy and approach to risk management. This helps
keep our people aware of the risks we face so they can make
better decisions to grow our business in a safe way.
Our training has a strong foundation in good conduct, with topics
including managing non-financial risk, data privacy, cybersecurity,
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HSBC Holdings plc Annual Report and Accounts 2019
anti-money laundering, sanctions, anti-bribery and corruption,
insider risk, competition law, raising concerns and well-being.
We also have programmes to develop and advance our diverse
workforce, including programmes for ethnic minority employees,
people with disabilities, women, veterans and LGBT+ colleagues
in some regions.
Building for the future
Through HSBC University, we provide training to support our
people to develop technical and role-based skills, as well as
personal skills. We put a strong emphasis on leadership skills to
foster a culture of curiosity, innovation, collaboration and
performance.
We have introduced new programmes to develop digital skills and
understanding of sustainable finance and environmental
sustainability. We created online training to improve personal
skills, such as novel and adaptive thinking, design mindset, social
intelligence, curiosity and creativity. We also introduced a range of
self-directed resources and workshops to improve team cohesion
and performance.
Leadership development
Over 16,000 of our people participated in HSBC University’s
management and leadership programmes. These included an
online course for new managers or those returning to
management after a break. We also launched a new risk
management curriculum and an executive development
curriculum, which are designed to support our most senior leaders
with their approach to protect and grow the organisation.
We engage proactively in succession planning and understand the
importance of ensuring we have a diverse talent pipeline for senior
roles. In 2019, 67% of our most critical roles were filled by internal
talent, with 33% of those placements being female. We realise the
importance of accelerating the progress of our women to
strengthen the leadership pipeline. We have a number of
programmes to equip talented female staff with the skills and
networks necessary to make the leap to management.
Nurturing talent
We promote a continuous feedback culture and so encourage all
our people to have regular performance conversations with their
line managers throughout the year, in addition to their formal
annual discussions. We also encourage them to use our online
career planning tool to help them with their thinking on future
roles and the capabilities they require.
Managers are encouraged to have open dialogue with our people
through feedback sessions. In addition to access to HSBC
University, all employees have access to other experiences, such
as volunteering and sustainability opportunities, participation in
our employee resource groups, mentoring and sponsorship
programmes.
In 2019, we launched a portal that provides access to career
development resources and tools for all our people. Its features
include guidance to help our people have conversations about
their careers with their line managers by focusing on strengths
and aspirations.
We also created a new and more inclusive approach to identify
potential future leaders by enabling our people to self-elect into an
assessment and development process, which examines learning
agility, leadership ability and aspiration.
Internship, graduate and international manager programme
We recognise that to be prepared for the future, we need to build
talent from the earliest stages of careers. Our global intern and
graduate programme in 2019 had more than 80,000 applicants,
from which we recruited 860 graduates, of which 45% were
female. Once hired, our graduates go through several rotations
during a two-year period before being placed in their destination
roles. Some of our highest-performing graduates continue into our
international manager programme, a fast-track career path for
future leaders of our business. We currently have 271 individuals
across 46 countries and territories on the scheme.
Health and safety
Remuneration
We are committed to providing a healthy and safe working
environment for our employees, contractors, customers and
visitors on our 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 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, we delivered a range of
programmes in 2019 to help us understand and manage
effectively the risks we face and improve the buildings in which
we operate:
• We continued to deliver improvements in health and safety
culture, through more than 2,000 hours of education and
awareness programmes targeted at our areas of highest risk,
which are construction and facilities management. This has
helped to deliver continued reductions in the numbers of
injuries, with HSBC’s injury rate for facilities management
approximately one-tenth of the industry rate, according to the
US Occupational Safety and Health Administration.
• We developed and implemented an improved health and safety
training and awareness programme for all employees globally,
ensuring roles and responsibilities were clear and understood.
The programme, which included a new section for branch
managers and staff, was completed by over 250,000 of our
employees.
• We implemented improved systems and processes for hazard
identification and remediation. We also updated our suite of
management information dashboards to continually improve
our awareness and management of our key risks.
• An independent subject matter expert assessed our health and
safety management system against the new international
standard ISO 45001. The expert confirmed the robustness of
our policies, procedures and processes, while identifying areas
for continual improvement.
• Our global safety management system was subjected to an
extensive third line of defence review and resulted in zero high
risk items being identified.
• We continue to focus on enhancing the safety culture in our
supply chain through our SAFER Together programme, building
the awareness and capability to act and behave in the safest
ways.
Employee health and safety
Number of workplace fatalities
Number of major injuries to employees
All injury rate per 100,000 employees
1
2
1
29
189
1
27
189
2
33
209
Footnotes
2019
2018
2017
1 2019: Contractor fatality (cleaning accident).
2 Fractures, dislocation, concussion and loss of consciousness.
HSBC’s pay and performance 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, while
performing their role in the long-term interests of our stakeholders.
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
a long-term career with the Group.
Further information on the Group’s approach to remuneration is given on
page 204.
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 that
were granted, exercised or lapsed during 2019 is shown in the
following table. Further details required to be disclosed pursuant
to Chapter 17 of the Rules Governing the Listing of Securities on
The Stock Exchange of Hong Kong Limited are available on our
website at www.hsbc.com/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 and Chief Governance
Officer, 8 Canada Square, London E14 5HQ.
Particulars of options held by Directors of HSBC Holdings are set out on
page 199.
Note 5 on the financial statements gives details of share-based payments,
including discretionary awards of shares granted under HSBC share plans.
All-employee share plans
HSBC operates all-employee share option plans under which
options are granted over HSBC ordinary shares. Subject to leaver
provisions, options are normally exercisable after three or five
years. During 2019, 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
19 September 2019, the day before the options were granted, was
£6.1600.
The UK HSBC Holdings Savings-Related Share Option Plan will
expire on 23 May 2025. A resolution will be proposed at the 2020
AGM to extend the plan to 24 April 2030, unless the Directors
resolve to terminate the plans at an earlier date.
The HSBC International Employee Share Purchase Plan was
introduced in 2013 and now includes employees based in
27 jurisdictions, although no options are granted under this plan.
HSBC Holdings Share Option Plans
Dates of awards
Exercise price
Usually exercisable
At
Granted
Exercised
Lapsed
At
from
to
from
to
from
to Footnotes
1 Jan 2019
during year
during year
during year
31 Dec 2019
Savings-Related Share Option Plan
1
20 Sep 2013 20 Sep 2019
(£)
4.0472
(£)
5.9640 1 Nov 2018 30 Apr 2025
57,065,513
32,129,659
11,805,554
12,328,937
65,060,681
HSBC Holdings ordinary shares
1 The weighted average closing price of the shares immediately before the dates on which options were exercised was £6.0088.
HSBC Holdings plc Annual Report and Accounts 2019
217
Corporate governance Report of the Directors | Corporate governance report
Statement of compliance
The statement of corporate governance practices set out on pages
156 to 219 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
www.hkex.com.hk
www.hsbc.com/our-approach/
corporate-governance/board-
responsibilities
Board and senior management
www.hsbc.com/who-we-are/leadership
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.hsbc.com/our-approach/
corporate-governance/board-
committees
www.hsbc.com/our-approach/
corporate-governance/board-
responsibilities
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 2019, HSBC complied with the
provisions and requirements of both the UK and Hong Kong
Corporate Governance Codes.
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. HSBC
Holdings has codified obligations for transactions in 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
following specific enquiry 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
18 February 2020
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HSBC Holdings plc Annual Report and Accounts 2019
Directors’ responsibility statement
The Directors are responsible for preparing the Annual Report and
Accounts 2019, 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 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 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.
The Directors are responsible for the maintenance and integrity of
the Annual Report and Accounts 2019 as they appear on the
Company’s website. Legislation in the UK governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
The Directors consider that the Annual Report and Accounts 2019,
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
158 to 161 of the Annual Report and Accounts 2019, 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 Group Audit Committee has responsibility, delegated to it from
the Board, for overseeing all matters relating to external financial
reporting. The Group Audit Committee report on page 173 sets out
how the Group Audit Committee 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
18 February 2020
HSBC Holdings plc Annual Report and Accounts 2019
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Corporate governance Report of the independent auditors to the members of HSBC Holdings plc
Report of the independent auditors to the members of
HSBC Holdings plc
Opinion
In our opinion, HSBC Holdings plc’s (‘HSBC’) Group financial statements1 and parent company financial statements:
• give a true and fair view of the state of the Group’s and parent company's affairs at 31 December 2019 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 for opinion
In expressing this opinion, we believe that the audit evidence we have obtained is sufficient and appropriate. Our work has been
undertaken, and our 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. Our responsibilities and those of the directors are explained later in this
report.
Independence
We 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. To the best of our knowledge and belief, non-audit services prohibited by the
FRC’s Ethical Standard were not provided to the Group or the parent company. Other than those disclosed in note 6 to the financial
statements, we have provided no non-audit services to the Group or the parent company in the period from 1 January 2019 to 31
December 2019.
Our audit approach
Overview
This was the first 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. In addition to forming this opinion, in this report we have also provided
information on how we approached the audit, how it changed from the previous year and details of the significant discussions that we
had with the Group Audit Committee ('GAC').
We approached our audit by considering what would be considered to be material to the users of the financial statements. The scope of
our audit and the nature, timing and extent of audit procedures performed were then determined based on our risk assessment taking
into account changes from the prior year, the financial significance of subsidiaries and other qualitative factors. Finally we executed the
planned approach and concluded based on the results of our testing ensuring that sufficient audit evidence had been obtained to support
our opinion. We discussed our approach and the results of our audit with the GAC.
Materiality
In order to perform our work, we had regard to the concept of materiality. We set certain quantitative thresholds for materiality. These,
together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit
procedures on the individual financial statement line items and disclosures.
The table provides you with details of how we determined materiality for both the Group and the parent company.
Overall materiality
$1bn (2018: $1bn).
$900m (2018: $900m).
Group financial statements
Parent company financial statements
How we determined it
5% of adjusted profit before tax
Rationale for benchmark
applied
We believe a standard benchmark of 5% of adjusted profit
before tax is an appropriate quantitative indicator of
materiality, although certain items could also be material for
qualitative reasons. This benchmark is standard for listed
entities and consistent with the wider industry.
We selected adjusted profit because, as discussed on page
47, management believes it best reflects the performance of
HSBC and how the Group is run. We excluded the
adjustments made by management on page 263 for certain
customer redress programmes and fair value movements of
financial instruments, as in our opinion they are recurring
items that form part of ongoing business performance.
0.75% of total assets. This would result in an overall
materiality of $1.9bn and is therefore reduced below 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 We have audited HSBC Holdings plc’s financial statements which comprise the consolidated and parent company balance sheets as at
31 December 2019, 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. Certain required disclosures have been presented
elsewhere in the Annual Report and Accounts 2019, 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 Risk sections on pages 73 to 151; the Capital
sections on pages 152 to 153; and the Directors' remuneration report disclosures on pages 184 to 217.
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HSBC Holdings plc Annual Report and Accounts 2019
Our 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 as a whole. The misstatements identified during the audit were
carefully considered to assess if they were individually or in aggregate material. We agreed with the GAC that we would report to them
misstatements identified during our audit above $50m (2018: $50m), as well as misstatements below that amounts that, in our view,
warranted reporting for qualitative reasons. We reported items for 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. We 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.
Risk assessment, scoping and audit approach
When planning the Group audit, we considered if multiple errors might exist which, when aggregated, could exceed our overall
materiality of $1bn. In order to reduce the risk of multiple errors that could aggregate to this amount, we used a lower level of materiality
of $750m, known as performance materiality, to identify the individual balances, classes of transactions and disclosures that were
subject to audit. The scope of our audit and the nature, timing and extent of testing also considered other qualitative factors, such as
balances that have a level of uncertainty or judgement associated with them. Our audit approach remained broadly unchanged, and
reflects how HSBC is organised. It incorporated four important aspects.
(1) Audit approach to HSBC’s global businesses
We designed audit approaches for the products and services that substantially make up HSBC’s global businesses, such as lending,
deposits and derivatives. These global business approaches were designed by partners and team members who are specialists in the
relevant businesses. These approaches were provided to the audit partners and teams around the world that contributed to the Group
audit.
(2) Audit work for Significant Subsidiaries
Through our risk assessment and scoping we identified certain entities (collectively the Significant Subsidiaries) for which we obtained
audit opinions. We obtained full scope audit opinions for The Hongkong and Shanghai Banking Corporation Limited, HSBC Bank plc,
HSBC Bank UK plc, HSBC North America Holdings Inc, HSBC Bank Canada and HSBC Mexico S.A. We obtained audit opinions over
specific balances for HSBC Global Services (UK) Limited, HSBC Global Services (HK) Limited and HSBC Group Management Services
Limited and HSBC Bank Middle East Limited - UAE Operations. The audits for HSBC Bank plc, HSBC Bank UK plc, HSBC Global Services
(UK) Limited and HSBC Group Management Services Limited were performed by other PwC teams in the UK. All other audits were
performed by other PwC network firms.
We asked the partners and teams reporting to us on the Significant Subsidiaries to work to assigned materiality levels reflecting the size
of the operations they audited. The performance materiality levels ranged from $50m to $675m. Certain Significant Subsidiaries were
audited to a local statutory audit materiality that was less than our overall Group materiality.
We were in active dialogue throughout the year with the partners and teams responsible for the audits of the Significant Subsidiaries.
This included consideration of how they planned and performed their work, including their use of the global business approaches. We
visited these Significant Subsidiaries and attended Audit Committee meetings for some of them. We also attended meetings with
management in each of these Significant Subsidiaries at the year-end.
The audit of The Hongkong and Shanghai Banking Corporation in Hong Kong relied upon work performed by PwC network firms in
Malaysia, China and India. Similarly, the audit of HSBC Bank plc in the UK relied upon work performed by PwC network firms in France
and Germany. We considered how the audit partners and teams for the Significant Subsidiaries instructed and provided oversight to the
work performed in these locations. Collectively, PwC network firms completed audit procedures covering 85% of assets and 82% of
total operating income.
(3) Audit work performed at Operations Centres
A significant amount of the operational processes and controls which are critical to financial reporting are undertaken in operations
centres run by HSBC Operations Services and Technology ('HOST') across 11 different locations. Financial reporting processes are
performed in HSBC’s four Finance Operations Centres. We coordinated and provided oversight on the audit work performed by PwC
teams in the UK, Poland, China, Sri Lanka, Malaysia, India and the Philippines. This work was relied upon by us, as well as the PwC
teams auditing the Significant Subsidiaries.
(4) Audit procedures undertaken at a Group level and on the parent company
We ensured that appropriate further work was undertaken for the HSBC Group and parent company. This work included auditing, for
example, the impairment assessment of goodwill, the consolidation of the Group’s results, the preparation of the financial statements,
certain disclosures within the Directors' remuneration report, litigation provisions and exposures, taxation, and management’s entity
level and oversight controls relevant to financial reporting.
Subsidiaries' balances that were not identified as part of a Significant Subsidiary were subject to procedures which mitigated the risk of
material misstatement, including testing of entity level controls, information technology general controls, testing at the Operations
Centre, analytical review procedures and understanding and assessing the outcome of local external audits.
Our audit in 2019
In April 2019, we held a meeting in Shanghai of the partners and senior staff from the Group audit team and the PwC teams who
undertake audits of the Significant Subsidiaries and the Operations Centres. The meeting focused primarily on: reassessing our
approach to auditing HSBC’s businesses; changes at HSBC and changes in our PwC teams; and how we continued to innovate and
improve the quality of our audit. We also discussed and agreed our significant audit risks.
HSBC Holdings plc Annual Report and Accounts 2019
221
Corporate governance Report of the independent auditors to the members of HSBC Holdings plc
Other matters relevant to our audit in 2019 included:
(1) Rotational approach to scoping
We worked with the Significant Subsidiaries in 2019 to develop an approach for rotating certain smaller locations in and out of scope
over a number of reporting periods. These locations, which are subject to local external audits, are individually relatively small compared
to the Group. Notwithstanding their size, the rotational approach is designed to ensure that over time these locations are subject to
audit work as part of the Group audit. Australia was removed from the scope for 2019 and Malaysia was included. HSBC Global Services
(HK) Limited was also included in the scope of work for 2019, due to the increase in its contribution to the Group’s financial
performance.
(2) The impact of geopolitical events on the macro environment
Current geopolitical events were considered to determine if changes in our approach were required, for example; the impacts of the
UK's departure from the EU, China-US trade arrangements and the social unrest in Hong Kong. We specifically considered how these
matters were reflected in expected credit losses and 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 2019, and
therefore the financial statements cannot reflect changes which will occur in the future as a result of these or other events.
(3) Adding unpredictability to our audit procedures
As required by auditing standards, we undertook procedures which were deliberately unexpected and could not have reasonably been
predicted by HSBC management. As an example, we performed incremental testing to assess the appropriateness of costs incurred that
were charged against the restructuring provisions recognised by the Group in 2019.
(4) Using the work of others
We continued to make use of evidence provided by others. This included testing of controls performed by Group Internal Audit and
management themselves in some low risk areas. We used the work of PwC experts, for example, valuation experts for our work around
the assumptions used in the impairment assessment over goodwill and actuaries on the estimates used in determining pension
liabilities. An increasing number of controls are operated on behalf of HSBC by third parties. We rely on audit evidence that is scoped
and provided by other auditors that are engaged by those third parties. For example, we obtain a report evidencing the testing of
external systems and controls supporting HSBC’s payroll and HR processes.
(5) Innovation in the audit
We are committed to driving innovation and the use of technology in the audit. In 2019 we have focused on innovation led by members
of the audit team. We have trained a number of team members on the use of tools available and allowed them to develop technology
solutions for use in the audit.
Responsibilities of the Directors and auditors
The Directors have, on page 219 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.
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. It is important that you understand the scope in order to understand the
assurance that our opinion provides. A further description of the scope of an audit is provided on the FRC’s website at www.frc.org.uk/
auditorsresponsibilities. 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.
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. We apply judgement in selecting the specific laws and regulations as the focus of our
audit procedures. 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 Regulation Authority provides 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 we had not already considered in our
audit.
Matters reported to the GAC
We escalated those matters which we believe are important to the GAC for their consideration. We attended each of the 10 GAC
meetings held during the year. We also met with members of the GAC on a number of other occasions outside of GAC meetings. During
these various interactions we reported and discussed our observations on a variety of accounting matters, particularly those involving
management judgement, and our views on controls over financial reporting. We can confirm that this report is consistent with the
reporting made to the GAC.
During the April GAC meeting, the audit plan was presented. This was supplemented by subsequent update where we refreshed our risk
assessment. As a result of changes within HSBC and more broadly in the macroeconomic and geopolitical environment, we increased
our assessment of the risk in relation to impairment of goodwill, pension liabilities and impairment of investment in subsidiaries. All
statutory audits require auditors to 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. Whilst
management override of controls remains a significant audit risk, our assessment is that the risk has reduced for 2019 due to HSBC
publicly stating they will not achieve a number of the financial targets established in their strategy update from June 2018.
We reported to the GAC all of the matters that presented 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. These matters are
discussed below together with an explanation of how the audit was tailored to address these specific areas. This is not a list of all audit
risks and we do not form an opinion on any one area, but on the financial statements overall. The list reflects the same key audit matters
from the prior year, with the addition of impairment of goodwill, pension liabilities and impairment of investment in subsidiaries, and the
removal of management override of controls.
222
HSBC Holdings plc Annual Report and Accounts 2019
IT Access Management
Consideration of key audit matter
Our 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 and change controls contribute to mitigating the risk of potential fraud or errors as a result of changes to applications and
data. Management implemented remediation activities that have contributed to progress being made in reducing the risk over access management in the
financial reporting process. The significance of IT controls to our audit and the status of the remediation was discussed at GAC meetings during the year.
Procedures performed to support our discussions and conclusions
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.
• Highly privileged access was restricted to appropriate personnel.
Other areas that were independently assessed included password policies, security configurations, controls over changes to applications, operating
systems and databases.
Where control deficiencies were identified, a range of other procedures were performed:
• Where access outside of policy was identified, we understood the nature of the access, and, where required, obtained additional evidence on whether
that access had been exploited.
• Testing of controls to manage the monitoring of business access, in particular, automation implemented to identify and resolve cases where users are
found to have access which represent a possible toxic combination of privileges.
• Substantive testing relating to automated controls, specific year-end reconciliations (i.e. custodian, bank account and suspense account
reconciliations) and confirmations with external counterparties.
Relevant references in the Annual Report and Accounts 2019
Effectiveness of internal controls, page 214.
Impairment of loans and advances
Consideration of key audit matter
This is the second year that expected credit losses (‘ECL’) have been reported under IFRS 9. The underlying processes and controls have matured since
2018. HSBC has updated certain ECL models during the year.
The global credit environment has remained benign for an extended period of time, in part due to the globally low interest rates. However, there are a
growing number of regional and country specific risks.
We continued to critically assess the more judgemental decisions made by management, in particular the severity and likelihood of alternative downside
economic scenarios that form part of the forward economic guidance and their impact on ECL. We also considered; the determination of customer credit
ratings and probabilities of default, and the impact they had on the determination of significant increases in credit risk; the appropriateness of post model
adjustments made to reflect model and data limitations; and the estimation of specific impairments for wholesale exposures that had defaulted or were on
the watch or worry list.
We discussed a number of areas with the GAC, including: changes made to models and the inputs into them; geopolitical risks, such as the social unrest
in Hong Kong, the US-China trade tensions and the UK's departure from the EU; the migration of customer risk ratings; and impairments of significant
wholesale exposures.
Procedures performed to support our discussions and conclusions
• Performed risk based substantive testing of models that were updated during the year, including independently rebuilding the modelling for certain
assumptions.
• Independently reviewed the updates to the scripts used in the underlying tool to calculate ECL to validate that they reflected approved updates to
models, parameters and inputs.
• Tested the 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. Substantive testing was performed over the critical data used in the year end ECL calculation.
• Tested the review and challenge of multiple economic scenarios by an expert panel and internal governance committee and assessed the
reasonableness and likelihood of these scenarios using our economic experts. Relevant economic, political and other events were considered in
assessing the reasonableness of alternative downside scenarios. The severity and magnitude of the scenarios were compared to external forecasts and
data from historical economic downturns, and the sensitivities of the scenarios on the ECL were considered.
• Observed management’s 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 impairments of significant wholesale exposures, and
substantively tested a sample of significant wholesale exposures.
Relevant references in the Annual Report and Accounts 2019
Credit risk disclosures, pages 84.
GAC Report, page 177.
Note 1.2d: Financial instruments measured at amortised cost, page 244.
HSBC Holdings plc Annual Report and Accounts 2019
223
Corporate governance Report of the independent auditors to the members of HSBC Holdings plc
Goodwill impairment
Consideration of key audit matter
The macroeconomic and geopolitical environment has become more challenging, impacting both 2019 and the outlook into 2020. Furthermore, a business
update has been announced that will impact the future performance of certain businesses across the Group. These matters are considered a potential
indicator of impairment for goodwill.
An impairment test was performed by HSBC using a value in use (‘VIU’) model that estimates the value of each cash generating unit (‘CGU’). The VIU was
less than the carrying value for certain CGUs, being Global Banking and Markets, Europe - Commercial Banking, Latin America - Commercial Banking,
Middle East and North Africa - Commercial Banking and North America - Global Private Banking. This resulted in an impairment being recognised of
$7.3bn, with $5.6bn of goodwill remaining on the balance sheet at 31 December 2019 for other CGUs.
The value of the VIU is based on the requirements of the relevant accounting standard and assumptions about future cash flows which are estimated
using the Group’s Annual Operating Plan (‘AOP’), long term growth rates and discount rates. These assumptions, which are judgemental, are derived from
a combination of management estimates, market data and other information provided by external parties.
We discussed the appropriateness of these assumptions with the GAC, particularly those for which variations had the most significant impact on the
carrying value of the VIU. We focused on the assumptions related to the revenue growth rates and cost reduction targets in the AOP, and the long term
growth rates and discount rates for specific businesses in certain locations. Our discussions and focus on assumptions was driven by consideration of the
achievability of management’s AOP and the prospects for different types of banking business in the future. For these assumptions we considered
reasonably possible alternatives.
Procedures performed to support our discussions and conclusions
• We assessed the appropriateness of the methodology, including the estimation of VIUs and the CGUs to which they relate.
• A reasonable range for the discount rate used within the model was independently calculated with the assistance of our valuation experts, and
compared to the rates used by management.
• The determination of assumptions within the model including the long-term growth rates, discount rates and Annual Operating Plan were challenged.
Where available, external information was obtained and used to audit management’s assumptions.
• We assessed whether the cash flows included in the model were in accordance with the relevant accounting standard.
• We performed sensitivity analysis on certain key assumptions used.
• The controls in place over the model, and its mathematical accuracy, were tested.
• We read and assessed the disclosures made in the Annual Report and Accounts 2019 in relation to goodwill.
Relevant references in the Annual Report and Accounts 2019
GAC Report, page 177.
Note 1.2(a): Critical accounting estimates and judgements, page 242.
Note 21: Goodwill and intangible assets, page 289.
Investment in associate – Bank of Communications Company, Limited (‘BoCom’)
Consideration of key audit matter
At 31 December 2019, the market value of the Group’s investment in BoCom was $9bn 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 $2.5bn 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 based on the requirements of the relevant accounting standard and is dependent on many assumptions, both short-term and long-term
in nature. These assumptions, which are judgemental, are derived from a combination of management estimates, analysts’ forecasts and market data.
We discussed the appropriateness of these assumptions with the GAC, particularly those for which variations had the most significant impact on the
carrying value of the VIU. We focused on the assumptions relating to forecast cash flows and the impact of meeting regulatory capital requirements. We
also discussed with the GAC the effective tax rate and loan impairment rate assumptions and considered reasonably possible alternatives. Our discussions
and focus on assumptions was driven by consideration of the current levels of uncertainty due to the impact of China-US trade tensions, and the overall
outlook for the Chinese banking market, and the broader Chinese economy.
Procedures performed to support our discussions and conclusions
• We assessed the appropriateness of the methodology used to estimate the VIU.
• A reasonable range for the discount rate used within the model was independently calculated with the assistance of our valuation experts and
compared to the discount rate used by management.
• We challenged the basis for determining assumptions and the inputs used. Where available, we obtained corroborating information for inputs into
assumptions from external market information, third-party sources, including analyst reports, and historical publicly available BoCom information.
• We assessed whether the approach to estimating the VIU was in accordance with the relevant accounting standard.
• We performed sensitivity analysis on key assumptions used.,
• The controls in place over the model, and its mathematical accuracy, were tested.
• We observed meetings in September and November 2019 between management and senior BoCom executive management, held specifically to identify
facts and circumstances impacting assumptions relevant to the determination of the VIU.
• We read and assessed the disclosures made in the Annual Report and Accounts 2019 in relation to BoCom.
• Representations were obtained from HSBC that 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 2019
GAC Report, page 177.
Note 1.2(a): Critical accounting estimates and judgements, page 243.
Note 18 Interests in associates and joint ventures, page 283.
224
HSBC Holdings plc Annual Report and Accounts 2019
Defined benefit pensions obligations
Consideration of key audit matter
HSBC has $40.6bn of pension liabilities from defined benefit schemes. The valuation of these pension liabilities is dependent on a number of assumptions,
including discount rate, inflation rates and mortality rates. Relatively small changes in these assumptions can have a material impact on the valuation of
the pension obligations.
We focused our testing and discussions with the GAC on the largest schemes in the UK and the US, which made up 83% of the overall defined benefit
pension obligations at 31 December 2019. We discussed the key assumptions, including results of the work performed by our actuarial experts and how
the estimate compare to our independently expected range.
Procedures performed to support our discussions and conclusions
• We tested the controls for determining the actuarial estimates.
• We engaged our actuarial experts to understand the judgements made by management and their actuarial expert in determining the key financial and
demographic estimates used in estimating the pension liabilities.
• We assessed the reasonableness of the estimates using independently developed assumptions and external market data.
• We assessed management's approach to determining discount rates and inflation estimates and compared these to market practice.
• We read and assessed the disclosures made in the Annual Report and Accounts 2019 in relation to pensions.
Relevant references in the Annual Report and Accounts 2019
GAC Report page 177.
Note 5, page 253.
Impairment of investment in subsidiaries (Parent Company only)
Consideration of key audit matter
The net asset value of HSBC Overseas Holdings (UK) Limited was below the carrying amount as at 31 December 2019, which was considered an indicator
for impairment. This is considered an indicator of potential impairment.
An impairment test was performed to calculate the recoverable amount of HSBC Overseas Holdings (UK) Limited. The recoverable amount is based on the
requirements of the relevant accounting standard and is dependent on many assumptions, including future cash flows, long term growth rates, discount
rates and fair values. These assumptions, which are judgemental, are derived from a combination of management estimates, market data and other
information provided by external parties. The recoverable amount was less than the carrying value which resulted in an impairment being recognised of
$2.5bn.
We discussed the appropriateness of the recoverable amount and the assumptions used with the GAC
Procedures performed to support our discussions and conclusions
• We assessed the appropriateness of the methodology used to calculate the recoverable amount.
• The determination of assumptions, including future cash flows, long term growth rates, discount rates and fair values were challenged. Where
available, external information was obtained and used to audit management’s assumptions.
• We assessed whether the estimation of the recoverable amount was in accordance with accounting standards.
• We read and assessed the disclosures made in the Annual Report and Accounts 2019 in relation to investment in subsidiaries.
Relevant references in the Annual Report and Accounts 2019
Note 19, page 286.
There were a number of other matters which were covered in the meetings with the GAC, including;
•
internal controls over financial reporting. At the GAC meetings in December 2019 and February 2020, there was an update on the
control environment over financial reporting. We provided information on the aggregate number of new and outstanding control
deficiencies identified by PwC and management. Those deemed to be significant in their potential impact on financial reporting, but
not material, were discussed individually;
• other areas where management judgement had been applied. During the year this included discussions relating to: customer redress
programmes, particularly in the UK; restructuring provisions & other related costs; the present value of in-force long-term insurance
business; fair value of financial instruments; and uncertain tax positions.
• a discussion on the results of quality inspections performed with respect to the audit work of different PwC Network firms on which
we rely and the rotation plans of the audit partners working on the Group audit.
Going concern
On page 41, 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.
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or draw
attention to in respect of the directors’ statement in the financial statements
about whether the directors considered it appropriate to adopt the going
concern basis of accounting in preparing the financial statements and the
directors’ identification of any material uncertainties to the Group’s and the
parent company’s ability to continue as a going concern over a period of at
least twelve months from the date of approval of the financial statements.
We have nothing material to add or to draw attention to.
However, because not all future events or conditions can be predicted, this
statement is not a guarantee as to the Group’s and parent company’s ability
to continue as a going concern. For example, the terms of the United
Kingdom's withdrawal from the European Union are not clear, and it is
difficult to evaluate all of the potential implications on the group’s trade,
customers, suppliers and the wider economy.
We are required to report if the directors’ statement relating to Going
Concern in accordance with Listing Rule 9.8.6R(3) is materially inconsistent
with our knowledge obtained in the audit.
We have nothing to report.
HSBC Holdings plc Annual Report and Accounts 2019
225
Corporate governance Report of the independent auditors to the members of HSBC Holdings plc
Other required matters and reporting on other information
The Annual Report and Accounts 2019 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, we have set out certain areas, our related responsibilities and reporting. Except as outlined in the table, we have not
provided an audit opinion or any form of assurance. It is important that you understand the limitations in the scope of our 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 2019
Our responsibility
Our reporting
Directors’ remuneration report on pages 184 to 217
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 our opinion, this information has been properly
prepared in accordance with the Companies Act
2006.
The other required disclosures have been made.
In our 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.
We have no material misstatements to report.
We have nothing material to draw attention to or
to add to the confirmation or description.
Consider whether they are consistent with the
audited financial statements.
Consider whether they are prepared in
accordance with applicable legal requirements.
Report if we have identified any material
misstatements in either report. This is based on
our knowledge and understanding of the Group
and parent company and the environment they
operate in that was obtained during the audit.
Review the confirmation and description in the
light of the knowledge gathered during the audit,
including making enquiries and considering the
Directors’ processes used to support the
statements made.
Consider if the statements are aligned with the
relevant provisions of the UK Corporate
Governance Code (the “Code”).
Other areas
Strategic Report and the Report of the Directors
(as defined on pages 2 to 218).
Viability statement on page 41 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 173.
Directors’ statement on page 219 that they
consider the HSBC Annual Report and Accounts
2019, 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 157 to
218.
All other information in the Annual Report and
Accounts 2019 aside from the audited financial
statements and the auditors’ report.
Consider whether it deals appropriately with
those matters that I reported to the GAC.
Consider whether any information found during
the course of the audit would cause us to
disagree.
No exceptions to report.
No disagreements to report.
Nothing to report following my review.
Nothing to report following my review.
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.
226
HSBC Holdings plc Annual Report and Accounts 2019
Other Reporting
In addition, we are required to report to you under the Companies Act 2006 if:
• we have not received all of the information and explanations required for our audit;
• adequate accounting records have not been kept by the parent company;
• returns adequate for our 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.
We 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.
Scott Berryman (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London, United Kingdom
18 February 2020
HSBC Holdings plc Annual Report and Accounts 2019
227
Corporate governance Financial
statements
229
Financial statements
240 Notes on the financial statements
HSBC MyDeal
We launched MyDeal to make the deal execution
process in our primary capital markets business
more efficient. The customer can access the
secured platform on mobile or online and receive
real-time information of a deal throughout its life
cycle. This includes logistics, investor feedback
and book-building data.
MyDeal became available to customers in early
2019. By the end of 2019, we had used the
platform in a number of jurisdictions to manage
more than 84 deals with a combined value of
$47.5 billion. It has received positive feedback
from customers.
228
HSBC Holdings plc Annual Report and Accounts 2019 Page
229
230
231
232
233
236
236
237
238
239
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 income1,2
– interest expense3
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
Changes in fair value of designated debt and related derivatives4
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or
loss
Gains less losses from financial investments
Net insurance premium income
Other operating income
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 and right-of-use assets5
Amortisation and impairment of intangible assets
Goodwill impairment
Total operating expenses
Operating profit
Share of profit in associates and joint ventures
Profit before tax
Tax expense
Profit for the year
Attributable to:
– ordinary shareholders of the parent company
– preference shareholders of the parent company
– other equity holders
– non-controlling interests
Profit for the year
Basic earnings per ordinary share
Diluted earnings per ordinary share
Notes*
2
3
3
3
3
4
4
5
21
18
7
9
9
2019
$m
30,462
54,695
(24,233)
12,023
15,439
(3,416)
10,231
3,478
90
812
335
10,636
2,957
71,024
(14,926)
56,098
(2,756)
N/A
53,342
(18,002)
(13,828)
(2,100)
(1,070)
(7,349)
2018
$m
30,489
49,609
(19,120)
12,620
16,044
(3,424)
9,531
(1,488)
(97)
695
218
10,659
960
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
9,779
443
63,776
(12,331)
51,445
N/A
(1,769)
49,676
(17,315)
(15,707)
(1,166)
(696)
—
(42,349)
(34,659)
(34,884)
10,993
2,354
13,347
(4,639)
8,708
5,969
90
1,324
1,325
8,708
$
0.30
0.30
17,354
2,536
19,890
(4,865)
15,025
12,608
90
1,029
1,298
15,025
$
0.63
0.63
14,792
2,375
17,167
(5,288)
11,879
9,683
90
1,025
1,081
11,879
$
0.48
0.48
* For Notes on the financial statements, see page 240.
1
Interest income includes $45,708m (2018: $42,130m) of interest recognised on financial assets measured at amortised cost and $8,259m (2018:
$7,020m) of interest recognised on financial assets measured at fair value through other comprehensive income.
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.
Interest expense includes $21,922m (2018: $16,972m) of interest on financial instruments, excluding interest on financial liabilities held for trading
or designated or otherwise mandatorily measured at fair value.
2
3
4 The debt instruments, issued for funding purposes, are designated under the fair value option to reduce an accounting mismatch.
5 Includes depreciation of the right-of-use assets of $912m (2018: nil). Right-of-use assets have been recognised from 1 January 2019 following the
adoption of IFRS 16. Comparatives have not been restated.
HSBC Holdings plc Annual Report and Accounts 2019
229
Financial statementsFinancial statements
Financial statements
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 gains/(losses)
– fair value gains transferred to the income statement on disposal
– expected credit recoveries/(losses) recognised in the income statement
– income taxes
Cash flow hedges
– fair value gains/(losses)
– fair value (gains)/losses reclassified to the income statement
– income taxes
Share of other comprehensive income/(expense) of associates and joint ventures
– share for the year
Exchange differences
– other exchange differences
– income tax attributable to exchange differences
Items that will not be reclassified subsequently to profit or loss:
Remeasurement of defined benefit asset/liability
– before income taxes
– income taxes
Changes in fair value of financial liabilities designated at fair value 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 gains/(losses)
– income taxes
Effects of hyperinflation
Other comprehensive income/(expense) for the period, net of tax
Total comprehensive income for the year
Attributable to:
– ordinary shareholders of the parent company
– preference shareholders of the parent company
– other equity holders
– non-controlling interests
Total comprehensive income for the year
2019
$m
8,708
N/A
N/A
N/A
N/A
N/A
1,152
1,793
(365)
109
(385)
206
551
(286)
(59)
21
21
1,044
1,044
—
13
(17)
30
(2,002)
(2,639)
637
366
364
2
217
1,017
9,725
6,838
90
1,324
1,473
9,725
2018
$m
2017
$m
15,025
11,879
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
230
HSBC Holdings plc Annual Report and Accounts 2019
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
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
At
31 Dec
2019
$m
Notes*
11
14
15
16
22
18
21
7
23
24
15
25
26
4
27
7
28
31
31
31 Dec
2018
$m
162,843
5,787
35,859
238,130
41,111
207,825
72,167
981,696
242,804
407,433
110,571
684
22,407
24,357
4,450
154,099
4,956
38,380
254,271
43,627
242,995
69,203
1,036,743
240,862
443,312
136,680
755
24,474
20,163
4,632
2,715,152
2,558,124
38,380
59,022
35,859
56,331
1,439,115
1,362,643
140,344
4,817
83,170
164,466
239,497
104,555
118,156
2,150
97,439
3,398
3,375
24,600
165,884
5,641
84,431
148,505
205,835
85,342
97,380
718
87,330
2,920
2,619
22,437
2,522,484
2,363,875
10,319
13,959
20,871
2,127
136,679
183,955
8,713
192,668
10,180
13,609
22,367
1,906
138,191
186,253
7,996
194,249
2,715,152
2,558,124
* For Notes on the financial statements, see page 240.
The accompanying notes on pages 240 to 322 and the audited sections in: ‘Risk’ on pages 73 to 151, ‘Capital’ on pages 152 to 155, and
‘Directors’ remuneration report’ on pages 184 to 210 form an integral part of these financial statements.
These financial statements were approved by the Board of Directors on 18 February 2020 and signed on its behalf by:
Mark E Tucker
Group Chairman
Ewen Stevenson
Group Chief Financial Officer
HSBC Holdings plc Annual Report and Accounts 2019
231
Financial statementsFinancial statements
Financial statements
Consolidated statement of cash flows
for the year ended 31 December
Profit before tax
Adjustments for non-cash items:
Depreciation, amortisation and impairment1
Net gain from investing activities
Share of profits in associates and joint ventures
Gain 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 differences2
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 purchase/(disposal) of customer and loan portfolios
Net investment in intangible assets
Net cash flow on disposal of subsidiaries, businesses, associates and joint ventures
Net cash from investing activities
Issue of ordinary share capital and other equity instruments
Cancellation of shares
Net sales/(purchases) of own shares for market-making and investment purposes
Redemption of preference shares and other equity instruments
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 Jan4
Exchange differences in respect of cash and cash equivalents
Cash and cash equivalents at 31 Dec4, 5
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
– cash collateral and net settlement accounts
– less: items in the course of transmission to other banks
Cash and cash equivalents at 31 Dec4, 5
2019
$m
13,347
10,519
(399)
(2,354)
(929)
3,012
N/A
2,423
478
(2,297)
(3,742)
(18,910)
(53,760)
(7,390)
(2,308)
(21,863)
79,163
(25,540)
19,268
20,068
23,124
633
(533)
(2,267)
29,743
(445,907)
413,186
(1,343)
1,118
(2,289)
(83)
2018
$m
19,890
1,933
(126)
(2,536)
—
2,280
N/A
1,944
450
(1,303)
4,930
20,855
(44,071)
(25,399)
(1,515)
6,766
(5,745)
35,882
18,806
4,500
(2,187)
910
(332)
(3,417)
32,515
(399,458)
386,056
(1,196)
(204)
(1,848)
4
(35,318)
(16,646)
—
(1,000)
141
—
(4,210)
(9,773)
(14,842)
(20,417)
312,911
1,248
293,742
6,001
(1,998)
133
(6,078)
(4,077)
(10,762)
(16,781)
(912)
323,718
(9,895)
312,911
2017
$m
17,167
1,862
(1,152)
(2,375)
(79)
N/A
2,603
917
500
(381)
(20,757)
(13,615)
(108,984)
(37,281)
(5,303)
(6,570)
102,457
41,044
(1,369)
8,508
13,514
740
(685)
(3,175)
(12,414)
(357,264)
418,352
(1,167)
6,756
(1,285)
165
65,557
5,196
(3,000)
(67)
—
(3,574)
(9,005)
(10,450)
42,693
263,324
17,701
323,718
154,099
162,843
180,624
4,956
41,626
65,370
20,132
12,376
(4,817)
293,742
5,787
39,460
74,702
21,685
14,075
(5,641)
312,911
6,628
61,973
58,850
11,593
10,900
(6,850)
323,718
Interest received was $58,627m (2018: $45,291m; 2017: $41,676m), interest paid was $27,384m (2018: $14,172m; 2017: $10,962m) and
dividends received (excluding dividends received from associates, which are presented separately above) were $2,369m (2018: $1,702m;
2017: $2,225m).
1 The impact of the right-of-use assets recognised under IFRS 16 at the beginning of 2019 is not recognised in 2018 and 2017. This also includes
the impact of a $7.3bn goodwill impairment in 2019.
2 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.
3 Subordinated liabilities changes during the year are attributable to repayments of $(4.2)bn (2018: $(4.1)bn; 2017: $(3.6)bn) of securities. Non-cash
4
changes during the year included foreign exchange gains/(losses) of $0.6bn (2018: $(0.6)bn; 2017: $(0.6)bn) and fair value gains/(losses) of
$1.4bn (2018: $(1.4)bn; 2017: $(1.2)bn).
In 2019, HSBC included settlement accounts with bank counterparties of one month or less on a net basis. Comparatives have been re-presented
and also include the net impact of other cash equivalents not previously included in cash and cash equivalents. The net effect of these changes
increased cash and cash equivalents by $11.8bn in 2018 and decreased cash and cash equivalents by $(13.7)bn in 2017.
5 At 31 December 2019, $35,735m (2018: $26,282m; 2017: $39,830m) was not available for use by HSBC, of which $19,353m (2018: $19,755m;
2017: $21,424m) related to mandatory deposits at central banks.
232
HSBC Holdings plc Annual Report and Accounts 2019
Consolidated statement of changes in equity
for the year ended 31 December
Other reserves
Called up
share
capital
and share
premium
Other
equity
instru-
ments
Retained
earnings3,4
Financial
assets at
FVOCI
reserve
Cash flow
hedging
reserve
Foreign
exchange
reserve
Merger
and other
reserves4,6
Total
share-
holders’
equity
Non-
controlling
interests
$m
$m
$m
$m
$m
$m
$m
$m
$m
Total
equity
$m
23,789
22,367
138,191
(1,532)
(206)
(26,133)
29,777
186,253
7,996
194,249
—
—
—
—
—
—
—
—
—
—
—
557
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— (1,496)
—
—
(68)
—
—
—
—
—
7,383
—
—
—
(1,759)
1,424
204
1,000
—
—
—
1,146
—
278
—
—
204
(2,002)
5
21
217
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,000
5,624
1,424
204
1,000
(495)
2,687
(11,683)
(12)
2,475
478
(1,000)
414
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7,383
1,325
8,708
869
148
1,017
1,146
6
1,152
278
204
(2,002)
5
21
217
1,000
88
2
—
8
—
—
44
366
206
(2,002)
13
21
217
1,044
8,252
1,473
9,725
62
2,687
—
—
62
2,687
— (11,683)
(777)
(12,460)
—
(1,508)
(2,475)
—
68
—
—
478
(1,000)
414
—
—
—
—
21
(1,508)
—
478
(1,000)
435
24,278
20,871
136,679
(108)
(2)
(25,133)
27,370
183,955
8,713
192,668
At 1 Jan 2019
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/liability
– 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
Dividends to shareholders
Redemption of securities2
Transfers7
Cost of share-based payment
arrangements
Cancellation of shares9
Other movements
At 31 Dec 2019
HSBC Holdings plc Annual Report and Accounts 2019
233
Financial statementsFinancial statements
Financial statements
Consolidated statement of changes in equity (continued)
Other reserves
Called up
share
capital and
share
premium
$m
Other
equity
instru-
ments
$m
Retained
earnings3,4
$m
20,337
22,250
139,999
—
—
(585)
20,337
22,250
139,414
Financial
assets at
FVOCI
reserve5
$m
(350)
(1,021)
(1,371)
—
Cash flow
hedging
reserve
Foreign
exchange
reserve
Merger
and other
reserves4,6
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)
(222)
(19,072)
27,308
188,644
13,727
7,580
1,298
196,224
15,025
—
—
—
—
—
—
—
—
—
—
—
—
—
5,968
—
—
—
—
—
—
—
—
—
—
—
721
—
—
—
—
—
—
2,731
—
13,727
2,765
(245)
—
—
—
2,847
(301)
(64)
283
—
(245)
—
—
—
—
—
—
—
16,492
(245)
(610)
1,494
—
—
(11,547)
(5,851)
—
—
—
—
(237)
(2,200)
450
(4,998)
(67)
—
—
—
—
—
—
—
—
84
—
16
—
—
16
—
—
—
—
—
16
—
—
—
—
—
—
—
—
—
—
(7,061)
—
—
—
—
—
—
—
(7,061)
(7,061)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,200
—
269
—
—
—
—
—
—
—
—
—
—
622
—
—
—
—
(3,000)
—
—
—
—
—
—
—
—
—
—
—
—
5,140
—
—
—
—
10,798
328
—
—
(2,024)
2,395
(43)
—
(566)
3,206
—
(11,551)
500
—
489
(477)
—
131
131
—
—
—
—
—
(27)
—
(194)
—
(194)
—
—
—
—
—
8,966
—
—
—
—
—
8,966
—
—
—
—
—
—
(4)
(350)
—
—
—
—
—
—
(1)
—
—
—
—
—
—
—
11,126
131
(194)
8,966
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(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
20,337
22,250
139,999
(222)
(19,072)
27,308
190,250
7,621
197,871
At 31 Dec 2017
Impact on transition to IFRS 910
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/liability
– 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 issued1
Dividends to shareholders
Redemption of securities2
Transfers7
Cost of share-based payment
arrangements
Cancellation of shares8,9
Other movements
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/liability
– share of other comprehensive
income of associates and joint
ventures
– exchange differences
Total comprehensive income for
the year
Shares issued under employee
remuneration and share plans
Shares issued in lieu of dividends and
amounts arising thereon
Capital securities issued1
Dividends to shareholders
Cost of share-based payment
arrangements
Cancellation of shares9
Other movements
At 31 Dec 2017
At 31 Dec 2018
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
234
HSBC Holdings plc Annual Report and Accounts 2019
1
In 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. Under IFRSs these issuance costs and tax benefits are classified as
equity.
2 During 2019, HSBC Holdings redeemed $1,500m 5.625% perpetual subordinated capital securities on which there were $12m of external
issuance costs. In 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. Under IFRSs external issuance costs are classified as equity.
3 At 31 December 2019, retained earnings included 432,108,782 treasury shares (2018: 379,926,645; 2017: 360,590,019). 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.
4 Cumulative goodwill amounting to $5,138m has been charged against reserves in respect of acquisitions of subsidiaries prior to 1 January 1998,
including $3,469m charged against the merger reserve arising on the acquisition of HSBC Bank plc. The balance of $1,669m has been charged
against retained earnings.
5 The $350m at 31 December 2017 represents the IAS 39 available-for-sale fair value reserve as at 31 December 2017.
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.
7 Permitted transfers from the merger reserve to retained earnings were made when the investment in HSBC Overseas Holdings (UK) Limited was
previously impaired. In 2018, a part reversal of this impairment resulted in a transfer from retained earnings back to the merger reserve of
$2,200m. At 31 December 2019, an additional impairment of $2,475m was recognised and a permitted transfer of this amount was made from
the merger reserve to retained earnings.
8 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 $2,836m and other
reserves increased by $164m.
9 For further details, refer to Note 31 in the Annual Report and Accounts 2019. In August 2019, HSBC announced a share buy-back of up to
$1.0bn, which was completed in September 2019. In May 2018, HSBC announced a share buy-back of up to $2.0bn, which was completed in
August 2018. 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 buy-back programmes
have been cancelled.
10 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 and an increase in net
deferred tax assets of $0.4bn.
HSBC Holdings plc Annual Report and Accounts 2019
235
Financial statementsFinancial 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 designated debt and related derivatives1
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 subsidiaries2
Other operating income
Total operating income
Employee compensation and benefits
General and administrative expenses
Reversal of impairment/(impairment) of subsidiaries3
Total operating expenses
Profit before tax
Tax (charge)/credit
Profit for the year
Notes*
3
3
3
5
2019
$m
(2,554)
1,249
(3,803)
(2)
1,477
(360)
1,659
—
15,117
1,293
16,630
(37)
(4,772)
(2,562)
(7,371)
9,259
(218)
9,041
2018
$m
(1,112)
2,193
(3,305)
0
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
* For Notes on the financial statements, see page 240.
1 The debt instruments, issued for funding purposes, are designated under the fair value option to reduce an accounting mismatch.
2 The 2018 year included $44,893m (2019: nil) return on capital from HSBC Finance (Netherlands) resulting from restructuring the Group’s Asia
operation to meet resolution and recovery requirements.
3 The 2019 year includes $2,475m impairment of HSBC Overseas Holdings (UK) Limited (2018: reversal of $2,200m).
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 (expense)/income for the year, net of tax
Total comprehensive income for the year
2019
$m
9,041
—
—
—
(396)
(573)
177
(396)
2018
$m
52,825
—
—
—
865
1,090
(225)
865
8,645
53,690
2017
$m
5,539
(53)
(70)
17
(828)
(1,007)
179
(881)
4,658
236
HSBC Holdings plc Annual Report and Accounts 2019
HSBC Holdings balance sheet
Assets
Cash and balances with HSBC undertakings
Financial assets with HSBC undertakings designated and otherwise mandatorily measured at fair value
Derivatives
Loans and advances to HSBC undertakings
Financial investments
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
* For Notes on the financial statements, see page 240.
1 The 2018 year included $56,587m (2019: nil) capital injection to HSBC Asia Holdings Limited.
31 Dec 2019
31 Dec 2018
Notes*
$m
$m
15
24
15
25
28
31
2,382
61,964
2,002
10,218
16,106
559
203
3,509
23,513
707
56,144
—
126
594
161,473
160,231
333
—
357
—
255,240
245,181
464
30,303
2,021
56,844
1,915
18,361
288
110,196
10,319
13,959
20,743
37,539
62,484
145,044
255,240
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
The accompanying notes on pages 240 to 322 and the audited sections in: ‘Global businesses and geographical regions’ on pages 56 to
71, ‘Risk’ on pages 73 to 151, ‘Capital’ on pages 152 to 155 and ‘Directors’ remuneration report’ on pages 184 to 210 form an integral
part of these financial statements.
These financial statements were approved by the Board of Directors on 18 February 2020 and signed on its behalf by:
Mark E Tucker
Group Chairman
Ewen Stevenson
Group Chief Financial Officer
HSBC Holdings plc Annual Report and Accounts 2019
237
Financial statementsFinancial 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 financial assets with 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 financial investments
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 Dec2
Cash and cash equivalents comprise:
– cash at bank with HSBC undertakings
– loans and advances to banks of one month or less
– treasury and other eligible bills
2019
$m
9,259
2,657
72
1
2018
$m
52,887
(46,878)
70
—
2,584
(46,948)
41,471
(38,451)
—
(1,433)
(437)
(70)
1,899
1,227
437
459
17,018
(19,293)
6,755
(3,721)
—
(44)
(16,303)
500
—
—
(1,006)
—
(4,107)
10,817
—
(7,582)
(1,414)
(2,792)
(2,077)
8,057
5,980
2,382
102
3,496
7,293
(7,305)
—
758
231
—
(1,094)
(740)
(1,883)
301
3,570
—
—
(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
3,108
4,949
8,057
3,509
4,548
—
2017
$m
5,475
(17)
33
(2)
(48)
(1,122)
(11,944)
(1,775)
(2,183)
134
—
1,020
954
721
443
(8,294)
—
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
—
Interest received was $2,216m (2018: $2,116m; 2017: $2,103m), interest paid was $3,819m (2018: $3,379m; 2017: $2,443m) and
dividends received were $15,117m (2018: $10,411m; 2017: $10,039m).
1 The 2018 year included $44,893m (2019: nil) return on capital from HSBC Finance (Netherlands) resulting from restructuring the Group’s Asia
2
operation to meet resolution and recovery requirements.
In 2019, HSBC included settlement accounts with bank counterparties of one month or less on a net basis. Comparatives have been re-presented
and also include other cash equivalents not included in 2018 cash and cash equivalents. The net effect of these changes increased cash and cash
equivalents by $1,548m in 2018 and had no impact in 2017.
238
HSBC Holdings plc Annual Report and Accounts 2019
HSBC Holdings statement of changes in equity
for the year ended 31 December
Called up
share
capital
Share
premium
Other
equity
instruments
Retained
earnings1,2
Financial
assets at
FVOCI reserve
Merger
and other
reserves2
Total
shareholders’
equity
$m
$m
$m
$m
$m
$m
$m
Other reserves
At 1 Jan 2019
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 shares3
Capital securities issued
Dividends to shareholders
Redemption of capital securities
Transfers5
Other movements
At 31 Dec 2019
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
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 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
10,180
13,609
22,231
61,434
—
—
—
—
36
171
(68)
—
—
—
—
—
—
—
—
—
521
(171)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,488)
—
—
9,041
(396)
(396)
8,645
(56)
2,687
(1,000)
—
(11,683)
(20)
2,475
2
10,319
13,959
20,743
62,484
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)
—
—
—
—
—
—
—
—
—
—
—
—
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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
59
(59)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
112
—
(53)
(53)
—
(53)
—
—
—
—
—
—
—
59
39,899
147,353
—
—
—
—
—
—
68
—
—
—
(2,475)
47
9,041
(396)
(396)
8,645
501
2,687
(1,000)
—
(11,683)
(1,508)
—
49
37,539
145,044
37,381
—
37,381
—
—
—
—
—
—
269
—
—
—
2,200
49
39,899
37,371
—
—
—
—
—
—
—
—
—
—
—
10
103,787
890
104,677
52,825
865
865
53,690
721
1,494
(1,998)
5,967
(11,547)
(6,079)
—
428
147,353
104,858
5,539
(881)
(53)
(828)
4,658
570
3,205
(3,000)
5,103
(11,551)
(2)
(54)
37,381
103,787
Dividends per ordinary share at 31 December 2019 were $0.51 (2018: $0.51; 2017: $0.51).
1 At 31 December 2019, retained earnings included 326,191,804 ($2,543m) of treasury shares (2018: 326,503,319 ($2,546m); 2017: 326,843,840
($2,542m)).
2 HSBC Holdings distributable reserves at 31 December 2019 of $31,656m (2018: $30,705m) represents realised profits for the year included in
retained earnings of $11,516m (2018: $14,974m) and in merger reserve of $15,731m (2018: $15,731m). The distributable reserves are lower than
retained earnings of $62,484m (2018: $61,434m). In 2018, $44,893m (2019: nil) represented income generated from restructuring the Group’s
Asia operation to meet resolution and recovery requirements, which does not form part of distributable reserves.
In August 2019, HSBC announced a share buy-back of up to $1.0bn, which was completed in September 2019.
3
4 The 2018 year included 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. In 2018, a part reversal of this impairment resulted in a transfer from retained earnings back to the merger reserve of
$2,200m. At 31 December 2019, an additional impairment of $2,475m was recognised and a permitted transfer of this amount was made from
the merger reserve to retained earnings.
HSBC Holdings plc Annual Report and Accounts 2019
239
Financial statementsFinancial 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 measured at fair
value through profit or loss
Insurance business
Employee compensation and benefits
Auditors’ remuneration
Tax
Dividends
Earnings per share
Segmental analysis
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 through profit or loss
Derivatives
Financial investments
Assets pledged, collateral received and assets transferred
Interests in associates and joint ventures
Investments in subsidiaries
Structured entities
Page
240
251
252
252
253
259
259
261
262
263
265
266
273
274
275
279
282
283
286
287
21
22
23
24
25
26
27
Goodwill and intangible assets
Prepayments, accrued income and other assets
Trading liabilities
Financial liabilities designated at fair value
Debt securities in issue
Accruals, deferred income and other liabilities
Provisions
Subordinated liabilities
28
29 Maturity analysis of assets, liabilities and off-balance sheet
commitments
30
31
32
33
34
35
36
37
Offsetting of financial assets and financial liabilities
Called up share capital and other equity instruments
Contingent liabilities, contractual commitments and guarantees
Finance lease receivables
Legal proceedings and regulatory matters
Related party transactions
Events after the balance sheet date
HSBC Holdings’ subsidiaries, joint ventures and associates
Page
289
292
292
292
293
293
293
295
298
304
305
307
308
308
312
314
314
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’). Interest Rate
Benchmark Reform: Amendments to IFRS 9 and IAS 39 ‘Financial Instruments’, was endorsed in January 2020 and has been early
adopted as set out below. Therefore, there were no unendorsed standards effective for the year ended 31 December 2019 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 2019
IFRS 16 ‘Leases’
On 1 January 2019, we adopted the requirements of IFRS 16 retrospectively. The cumulative effect of initially applying the standard was
recognised as an adjustment to the opening balance of retained earnings at that date. Comparatives were not restated. The adoption of
the standard increased assets by $5bn and increased financial liabilities by the same amount with no effect on net assets or retained
earnings.
On adoption of IFRS 16, we recognised lease liabilities in relation to leases that had previously been classified as ‘operating leases’ in
accordance with IAS 17 ‘Leases’. These liabilities were recognised in ’other liabilities’ and measured at the present value of the remaining
lease payments, discounted at the lessee’s incremental borrowing rate at 1 January 2019. The associated right of use (‘ROU’) assets were
recognised in ’other assets’ and measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued
lease payments or provisions for onerous leases recognised on the balance sheet at 31 December 2018. In addition, the following
practical expedients permitted by the standard were applied:
• reliance was placed on previous assessments on whether leases were onerous;
• operating leases with a remaining lease term of less than 12 months at 1 January 2019 were treated as short-term leases; and
•
initial direct costs were not included in the measurement of ROU assets for leases previously accounted for as operating leases.
The differences between IAS 17 and IFRS 16 are summarised in the table below:
IAS 17
IFRS 16
Leases were classified as
either finance or operating
leases. Payments made
under operating leases
were charged to profit or
loss on a straight-line basis
over the period of the lease.
Leases are recognised as an ROU asset and a corresponding liability at the date at which the leased asset is made available
for use. Lease payments are allocated between the liability and finance cost. The finance cost is charged to profit or loss over
the lease term so as to produce a constant period rate of interest on the remaining balance of the liability. The ROU asset is
depreciated over the shorter of the ROU asset’s useful economic life and the lease term on a straight-line basis.
In determining the lease term, we consider all facts and circumstances that create an economic incentive to exercise an
extension option or not exercise a termination option over the planning horizon of five years.
In general, it is not expected that the discount rate implicit in the lease is available so the lessee’s incremental borrowing rate
is used. This is the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of a similar value
in a similar economic environment with similar terms and conditions. The rates are determined for each economic
environment in which we operate and for each term by adjusting swap rates with funding spreads (own credit spread) and
cross-currency basis where appropriate.
240
HSBC Holdings plc Annual Report and Accounts 2019
Interest Rate Benchmark Reform: Amendments to IFRS 9 and IAS 39 ‘Financial Instruments’
Amendments to IFRS 9 and IAS 39 issued in September 2019 modify specific hedge accounting requirements so that entities apply those
hedge accounting requirements assuming that the interest rate benchmark on which the hedged cash flows and cash flows of the
hedging instrument are based is not altered as a result of interest rate benchmark reform. These amendments replace the need for
specific judgements to determine whether certain hedge accounting relationships that hedge the variability of cash flows or interest rate
risk exposures for periods after the interest rate benchmarks are expected to be reformed or replaced continue to qualify for hedge
accounting as at 31 December 2019. For example, in the context of cash flow hedging, the amendments require the interest rate
benchmark on which the hedged cash flows are based, or on which the cash flows of the hedging instrument are based, to be assumed
to be unaltered over the period of the documented hedge relationship, while uncertainty over the interest rate benchmark reform exists.
The IASB is expected to provide further guidance on the implication for hedge accounting during the reform process and after the reform
uncertainty is resolved.
These amendments apply from 1 January 2020 with early adoption permitted. HSBC has adopted the amendments that apply to IAS 39
from 1 January 2019 and has made the additional disclosures as required by the amendments. Further information is included in Note 15.
Amendment to IAS 12 ‘Income Taxes’ and other changes
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 was applied on 1 January 2019 and had no material impact. Comparatives have not been restated.
In addition, HSBC has adopted 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. In 2018, HSBC adopted IFRS 9 and
made voluntary presentation changes, including to certain financial liabilities, which contain both deposit and derivative components,
and to cash collateral, margin and settlement accounts. The impact of this is included in the HSBC Holdings statement of changes in
equity for that year end and 2017 comparatives were not restated.
(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 2020, 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
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 are still developing and there may be changes
to it. Therefore the likely impact of its implementation remains uncertain.
(d) Foreign currencies
HSBC’s consolidated financial statements are presented in US dollars because the US dollar and currencies linked to it form the major
currency bloc in which HSBC transacts and funds its business. The US dollar is also HSBC Holdings’ functional currency because the US
dollar and currencies linked to it are the most significant currencies relevant to the underlying transactions, events and conditions of its
subsidiaries, as well as representing a significant proportion of its funds generated from financing activities.
Transactions in foreign currencies are recorded at the rate of exchange on the date of the transaction. Assets and liabilities denominated
in foreign currencies are translated at the rate of exchange at the balance sheet date, except non-monetary assets and liabilities
measured at historical cost, which are translated using the rate of exchange at the initial transaction date. Exchange differences are
included in other comprehensive income or in the income statement depending on where the gain or loss on the underlying item is
recognised.
In the consolidated financial statements, the assets, liabilities and results of foreign operations, whose functional currency is not US
dollars, are translated into the Group’s presentation currency at the reporting date. Exchange differences arising are recognised in other
comprehensive income. On disposal of a foreign operation, exchange differences previously recognised in other comprehensive income
are reclassified to the income statement.
(e) Presentation of information
Certain disclosures required by IFRSs have been included in the sections marked as (‘Audited’) in this Annual Report and Accounts 2019
as follows:
• 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 73 to 151;
•
the ‘Own funds disclosure’ included in the ‘Report of the Directors: Capital’ on pages 152 to 155; and
• disclosures relating to HSBC’s securitisation activities and structured products are included in the ‘Report of the Directors: Risk’ on
pages 73 to 151.
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.
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Notes on the financial statements
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.
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:
Judgements
Estimates
• The accuracy of forecast cash flows is subject to
a high degree of uncertainty in volatile market
conditions. Where such circumstances are
determined to exist, 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
• 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
• Key assumptions used in estimating goodwill impairment are described in Note 21
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.
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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
The most significant critical accounting judgements and estimates relate to the assessment of impairment of our investment in Bank of Communications
Co. Limited (‘BoCom’), which involves estimations of value in use:
Judgements
Estimates
• Management’s best estimate of BoCom’s earnings are based on management’s
explicit forecasts over the short to medium term and the capital maintenance
charge, which is management’s forecast of the earnings that need to be withheld in
order for BoCom to meet regulatory requirements over the forecast period, both of
which are subject to uncertain factors
• Key assumptions used in estimating BoCom’s value in use, the sensitivity of the
value in use calculations 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 instruments issued by HSBC for funding purposes that are designated under the fair value option to
reduce an accounting mismatch and on derivatives managed in conjunction with those debt instruments 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 it has 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:
•
•
‘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 and other
financial instruments managed on a fair value basis, together with the related interest income, expense and dividends, excluding the
effect of changes in the credit risk of liabilities managed on a fair value basis. 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 designated debt instruments and related derivatives’: Interest paid on debt instruments and interest cash
flows on related derivatives is presented in interest expense where doing so reduces an accounting mismatch.
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•
‘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 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:
Judgements
Estimates
• An instrument in its entirety is classified as valued using significant unobservable
• Details on the Group’s level 3 financial instruments and the
•
inputs if, in the opinion of management, a significant proportion of the
instrument’s inception profit or greater than 5% of the instrument’s valuation is
driven by unobservable inputs
‘Unobservable’ in this context means that there is little or no current market data
available from which to determine the price at which an arm’s length transaction
would be likely to occur. It generally does not mean that there is no data available
at all upon which to base a determination of fair value (consensus pricing data
may, for example, be used)
(d) Financial instruments measured at amortised cost
sensitivity of their valuation to the effect of applying reasonable
possible alternative assumptions in determining their fair value
are set out in Note 12
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
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).
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(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’ except for the effect of changes in the liabilities’ credit risk, which is
presented in ‘Other comprehensive income’, unless that treatment would create or enlarge an accounting mismatch in profit or loss.
Under the above criterion, the main classes of financial instruments designated by HSBC are:
• Debt instruments for funding purposes that are designated to reduce an accounting mismatch: 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.
• Financial liabilities that contain both deposit and derivative components: These financial liabilities are managed and their performance
evaluated on a fair value basis.
(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 and 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 and 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 and 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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(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.
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, which are 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
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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 85.
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
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.
HSBC Holdings plc Annual Report and Accounts 2019
247
Financial statementsFinancial statements
Notes on the financial statements
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
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
LGD
Other
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 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 applies multiple forward-looking global economic scenarios determined with reference to external forecast distributions
representative of our view of forecast economic conditions. This approach is considered sufficient to calculate unbiased expected loss in
most economic environments. In certain economic environments, additional analysis may be necessary and may result in additional
scenarios or adjustments, to reflect a range of possible economic outcomes sufficient for an unbiased estimate. The detailed
methodology is disclosed in ‘Measurement uncertainty and sensitivity analysis of ECL estimates’ on page 92.
Critical accounting estimates and judgements
The calculation of the Group’s ECL under IFRS 9 requires the Group to make a number of judgements, assumptions and estimates. The most significant are
set out below:
Judgements
Estimates
• Defining what is considered to be a significant increase in credit risk
• Determining the lifetime and point of initial recognition of overdrafts and credit cards
• Selecting and calibrating the PD, LGD and EAD models, which support the calculations,
including making reasonable and supportable judgements about how models react to current
and future economic conditions
• Selecting model inputs and economic forecasts, including determining whether sufficient
and appropriately weighted economic forecasts are incorporated to calculate unbiased
expected loss
• The sections marked as audited on pages 92 to 103,
‘Measurement uncertainty and sensitivity analysis of
ECL estimates’ set out the assumptions used in
determining ECL and provide an indication of the
sensitivity of the result to the application of different
weightings being applied to different economic
assumptions
(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’.
248
HSBC Holdings plc Annual Report and Accounts 2019
Net insurance premium income
Premiums for life insurance contracts are accounted for when receivable, except in unit-linked insurance contracts where premiums are
accounted for when liabilities are established.
Reinsurance premiums are accounted for in the same accounting period as the premiums for the direct insurance contracts to which they
relate.
Net insurance claims and benefits paid and movements in liabilities to policyholders
Gross insurance claims for life insurance contracts reflect the total cost of claims arising during the year, including claim handling costs
and any policyholder bonuses allocated in anticipation of a bonus declaration.
Maturity claims are recognised when due for payment. Surrenders are recognised when paid or at an earlier date on which, following
notification, the policy ceases to be included within the calculation of the related insurance liabilities. Death claims are recognised when
notified.
Reinsurance recoveries are accounted for in the same period as the related claim.
Liabilities under insurance contracts
Liabilities under non-linked life insurance contracts are calculated by each life insurance operation based on local actuarial principles.
Liabilities under unit-linked life insurance contracts are at least equivalent to the surrender or transfer value, which is calculated by
reference to the value of the relevant underlying funds or indices.
Future profit participation on insurance contracts with DPF
Where contracts provide discretionary profit participation benefits to policyholders, liabilities for these contracts include provisions for the
future discretionary benefits to policyholders. These provisions reflect the actual performance of the investment portfolio to date and
management’s expectation of the future performance of the assets backing the contracts, as well as other experience factors such as
mortality, lapses and operational efficiency, where appropriate. The benefits to policyholders may be determined by the contractual
terms, regulation, or past distribution policy.
Investment contracts with DPF
While investment contracts with DPF are financial instruments, they continue to be treated as insurance contracts as required by IFRS 4.
The Group therefore recognises the premiums for these contracts as revenue and recognises as an expense the resulting increase in the
carrying amount of the liability.
In the case of net unrealised investment gains on these contracts, whose discretionary benefits principally reflect the actual performance
of the investment portfolio, the corresponding increase in the liabilities is recognised in either the income statement or other
comprehensive income, following the treatment of the unrealised gains on the relevant assets. In the case of net unrealised losses, a
deferred participating asset is recognised only to the extent that its recoverability is highly probable. Movements in the liabilities arising
from realised gains and losses on relevant assets are recognised in the income statement.
Present value of in-force long-term insurance business
HSBC recognises the value placed on insurance contracts and investment contracts with DPF, which are classified as long-term and in-
force at the balance sheet date, as an asset. The asset represents the present value of the equity holders’ interest in the issuing insurance
companies’ profits expected to emerge from these contracts written at the balance sheet date. The present value of in-force business
(‘PVIF’) is determined by discounting those expected future profits using appropriate assumptions in assessing factors such as future
mortality, lapse rates and levels of expenses, and a risk discount rate that reflects the risk premium attributable to the respective
contracts. The PVIF incorporates allowances for both non-market risk and the value of financial options and guarantees. The PVIF asset is
presented gross of attributable tax in the balance sheet and movements in the PVIF asset are included in ‘Other operating income’ on a
gross of tax basis.
(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.
HSBC Holdings plc Annual Report and Accounts 2019
249
Financial statementsFinancial statements
Notes on the financial statements
Critical accounting estimates and judgements
The most significant critical accounting judgements and estimates relate to the determination of key assumptions applied in calculating the defined benefit
pension obligation for the principal plan.
Judgements
Estimates
• A range of assumptions could be applied, and different assumptions could
significantly alter the defined benefit obligation and the amounts recognised in
profit or loss or OCI.
• The calculation of the defined benefit pension obligation includes assumptions with
regard to the discount rate, inflation rate, pension payments and deferred pensions,
pay and mortality. Management determines these assumptions in consultation with
the plan’s actuaries.
• Key assumptions used in calculating the defined benefit pension obligation for the
principal plan and the sensitivity of the calculation to different assumptions are
described in Note 5
(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 deferred tax assets depends on judgements
Judgements
Estimates
• Assessing 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, assessing the
expected future profitability and 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.
Critical accounting estimates and judgements
The recognition and measurement of provisions requires the Group to make a number of judgements, assumptions and estimates. The most significant are
set out below:
Judgements
Estimates
• Determining whether a present obligation exists. Professional
advice is taken on the assessment of litigation 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 estimates as
appropriate. At more advanced stages, it is typically easier to
make estimates around a better defined set of possible
outcomes
• Provisions for legal proceedings and regulatory matters remain very sensitive to
the assumptions used in the estimate. There could be a wider 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.
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
populations identified as systemically mis-sold and the number of policies per
customer complaint. More information about these assumptions is included in
Note 27
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.
250
HSBC Holdings plc Annual Report and Accounts 2019
HSBC Holdings has issued financial guarantees and similar contracts to other Group entities. HSBC elects to account for certain
guarantees as insurance contracts in HSBC Holdings’ financial statements, in which case they are measured and recognised as insurance
liabilities. This election is made on a contract-by-contract basis, and is irrevocable.
2 Net fee income
Net fee income by global business
Funds under management
Account services
Cards
Credit facilities
Broking income
Unit trusts
Underwriting
Remittances
Global custody
Imports/exports
Insurance agency commission
Other
Fee income
Less: fee expense
Net fee income
Funds under management
Account services
Cards
Credit facilities
Broking income
Unit trusts
Underwriting
Remittances
Global custody
Imports/exports
Insurance agency commission
Other
Fee income
Less: fee expense
Net Fee income
Retail
Banking and
Wealth
Management
Commercial
Banking
Global
Banking and
Markets
Global Private
Banking
2019
$m
1,295
890
1,602
75
366
921
—
73
90
—
324
1,097
6,733
(1,861)
4,872
$m
120
654
358
785
40
22
6
362
18
497
20
891
3,773
(370)
3,403
$m
460
365
15
743
532
2
821
311
564
164
1
2,362
6,340
(3,287)
3,053
2018
$m
302
101
—
15
119
90
3
4
45
1
32
193
905
(134)
771
Corporate
Centre
$m
—
(7)
—
—
—
—
(1)
(3)
—
—
—
Total
$m
2,177
2,003
1,975
1,618
1,057
1,035
829
747
717
662
377
(2,301)
(2,312)
2,236
(76)
2,242
15,439
(3,416)
12,023
Retail
Banking and
Wealth
Management
Commercial
Banking
Global
Banking and
Markets
Global Private
Banking
Corporate
Centre
$m
1,383
991
1,575
71
494
937
1
96
100
3
354
1,110
7,115
(1,917)
5,198
$m
134
748
370
824
44
25
10
357
18
532
23
858
3,943
(388)
3,555
$m
421
332
16
813
533
3
708
320
584
176
1
2,362
6,269
(3,040)
3,229
$m
284
106
—
16
139
73
4
5
35
2
27
186
877
(135)
742
$m
(1)
—
(5)
(1)
—
—
—
—
(1)
(4)
(1)
(2,147)
(2,160)
2,056
(104)
Total
$m
2,221
2,177
1,956
1,723
1,210
1,038
723
778
736
709
404
2,369
16,044
(3,424)
12,620
2017
Total
$m
2,188
2,244
1,994
1,718
1,191
1,010
829
759
692
736
410
2,082
15,853
(3,042)
12,811
Net fee income includes $6,647m 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) (2018: $7,522m; 2017: $7,577m), $1,450m of fees payable on financial liabilities that
are not at fair value through profit or loss (other than amounts included in determining the effective interest rate) (2018: $1,682m; 2017:
$1,475m), $3,110m of fees earned on trust and other fiduciary activities (2018: $3,165m; 2017: $3,088m) and $237m of fees payable
relating to trust and other fiduciary activities (2018: $175m; 2017: $134m).
HSBC Holdings plc Annual Report and Accounts 2019
251
Financial statementsFinancial statements
Notes on the financial statements
3
Net income 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/(expense) from assets and liabilities of insurance businesses, including
related derivatives, measured at fair value through profit or loss
Derivatives managed in conjunction with HSBC’s issued debt securities
Other changes in fair value
Changes in fair value of designated 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
2019
$m
16,121
(5,890)
10,231
3,830
(352)
3,478
2,561
(2,471)
90
812
14,611
2018
$m
6,982
2,549
9,531
(1,585)
97
(1,488)
(626)
529
(97)
695
8,641
2017
$m
8,236
190
8,426
3,211
(375)
2,836
(343)
498
155
N/A
11,417
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.
2 The debt instruments, issued for funding purposes, are designated under the fair value option to reduce an accounting mismatch.
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 designated debt and related derivatives
Changes in fair value of other financial instruments mandatorily measured at fair value through profit or loss
2019
$m
(559)
2,036
1,477
764
(1,124)
(360)
1,659
2,776
2018
$m
(176)
421
245
(337)
260
(77)
43
211
2017
$m
(392)
211
(181)
292
(189)
103
—
(78)
Total
$m
12,108
(1,472)
10,636
11,338
(679)
10,659
10,802
(1,023)
9,779
Non-linked
insurance
Linked life
insurance
Investment
contracts with
DPF1
$m
9,353
(1,465)
7,888
8,616
(672)
7,944
8,424
(1,016)
7,408
$m
489
(7)
482
422
(7)
415
351
(7)
344
$m
2,266
—
2,266
2,300
—
2,300
2,027
—
2,027
Year ended 31 Dec
4
Insurance business
Net insurance premium income
Gross insurance premium income
Reinsurers’ share of gross insurance premium income
Year ended 31 Dec 2019
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
1 Discretionary participation features.
252
HSBC Holdings plc Annual Report and Accounts 2019
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 2019
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
1 Discretionary participation features.
Liabilities under insurance contracts
Gross liabilities under insurance contracts at 1 Jan 2019
Claims and benefits paid
Increase in liabilities to policyholders
Exchange differences and other movements
Gross liabilities under insurance contracts at 31 Dec 2019
Reinsurers’ share of liabilities under insurance contracts
Net liabilities under insurance contracts at 31 Dec 2019
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
$m
11,305
3,783
7,522
(1,402)
(411)
(991)
9,903
8,943
3,852
5,091
(605)
(311)
(294)
8,338
8,894
2,883
6,011
(942)
(297)
(645)
7,952
$m
1,217
900
317
(4)
(17)
13
$m
3,810
1,921
1,889
—
—
—
Total
$m
16,332
6,604
9,728
(1,406)
(428)
(978)
1,213
3,810
14,926
(446)
1,088
(1,534)
191
(181)
372
(255)
1,413
1,044
369
65
(223)
288
1,478
1,724
1,869
(145)
—
—
—
1,724
2,901
2,002
899
—
—
—
10,221
6,809
3,412
(414)
(492)
78
9,807
13,208
5,929
7,279
(877)
(520)
(357)
2,901
12,331
Non-linked
insurance
Linked life
insurance
Investment
contracts with
DPF1
Footnotes
2
2
$m
57,283
(3,804)
11,326
519
65,324
(3,521)
61,803
52,112
(69)
(3,852)
8,943
149
57,283
(2,438)
54,845
$m
5,789
(900)
1,217
45
6,151
(71)
6,080
7,548
—
(1,088)
(446)
(225)
5,789
(68)
5,721
$m
24,258
(1,900)
3,789
(183)
25,964
—
25,964
26,007
—
(1,869)
1,724
(1,604)
24,258
—
24,258
Total
$m
87,330
(6,604)
16,332
381
97,439
(3,592)
93,847
85,667
(69)
(6,809)
10,221
(1,680)
87,330
(2,506)
84,824
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.
5
Employee compensation and benefits
Wages and salaries
Social security costs
Post-employment benefits
Year ended 31 Dec
2019
$m
15,581
1,472
949
18,002
2018
$m
14,751
1,490
1,132
17,373
2017
$m
15,227
1,419
669
17,315
HSBC Holdings plc Annual Report and Accounts 2019
253
Financial statementsFinancial statements
Notes on the financial statements
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
2019
141,044
46,416
51,127
7,099
1,369
2018
135,239
48,757
48,990
8,206
1,658
2017
134,021
46,716
49,100
7,817
7,134
247,055
242,850
244,788
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
Share-based payments
2019
66,392
133,624
9,798
16,615
20,626
247,055
2019
$m
3,341
(337)
3,004
327
(55)
3,276
2018
67,007
127,992
9,798
17,350
20,703
242,850
2018
$m
3,473
(351)
3,122
322
(70)
3,374
2017
70,301
125,004
10,408
18,610
20,465
244,788
2017
$m
3,303
(337)
2,966
336
(78)
3,224
‘Wages and salaries’ includes the effect of share-based payments arrangements, of which $478m were equity settled (2018: $450m;
2017: $500m), as follows:
Conditional share awards
Savings-related and other share award option plans
Year ended 31 Dec
HSBC share awards
Award
Policy
2019
$m
521
30
551
2018
$m
499
23
522
2017
$m
520
26
546
Deferred share awards
(including annual incentive
awards, LTI awards
delivered in shares) and
Group Performance Share
Plans (‘GPSP’)
• An assessment of performance over the relevant period ending on 31 December is used to determine the amount
of the award to be granted.
• Deferred awards generally require employees to remain in employment over the vesting period and are generally not
subject to performance conditions after the grant date. An exception to these are the LTI, which is subject to
performance conditions.
• Deferred share awards generally vest over a period of three, five or seven years.
• Vested shares may be subject to a retention requirement post-vesting. GPSP awards are retained until cessation of
employment.
• Awards are subject to a malus provision prior to vesting.
• Awards granted to Material Risk Takers from 2015 onwards are subject to clawback post-vesting.
International Employee
Share Purchase Plan
(‘ShareMatch’)
• The plan was first introduced in Hong Kong in 2013 and now includes employees based in 27 jurisdictions.
• Shares are purchased in the market each quarter up to a maximum value of £750, or the equivalent in local currency.
• Matching awards are added at a ratio of one free share for every three purchased.
• Matching awards vest subject to continued employment and the retention of the purchased shares for a maximum
period of two years and nine months.
Movement on HSBC share awards
Conditional share awards outstanding at 1 Jan
Additions during the year
Released in the year
Forfeited in the year
Conditional share awards outstanding at 31 Dec
Weighted average fair value of awards granted ($)
254
HSBC Holdings plc Annual Report and Accounts 2019
2019
Number
(000s)
94,897
71,858
(67,737)
(1,963)
97,055
7.89
2018
Number
(000s)
104,525
61,569
(67,899)
(3,298)
94,897
7.66
HSBC share option plans
Main plans
Policy
Savings-related share
option plans (‘Sharesave’)
• From 2014, employees eligible for the UK plan could save up to £500 per month with the option to use the savings to
acquire shares.
• These are generally 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% (2018: 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 2019
Granted during the year
Exercised during the year
Expired during the year
Forfeited during the year
Outstanding at 31 Dec 2019
Of which exercisable
Weighted average remaining contractual life (years)
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)
1 Weighted average exercise price.
2 The weighted average fair value of options granted during the year was $1.36 (2018: $1.40).
3 The weighted average share price at the date the options were exercised was $7.99 (2018: $8.28).
Post-employment benefit plans
Footnotes
2
3
2
3
Savings-related
share option plans
Number
(000s)
57,065
32,130
(11,806)
(11,321)
(1,008)
65,060
2,149
2.77
64,670
20,501
(23,260)
(3,148)
(1,698)
57,065
3,513
2.59
WAEP1
£
4.92
4.69
4.40
5.46
4.99
4.81
4.53
4.49
5.45
4.14
5.20
4.53
4.92
4.09
The Group operates pension plans throughout the world for its employees. ‘Pension risk’ on page 134 contains details of the policies and
practices associated with these pension plans. Some are defined benefit plans, of which the largest is the HBUK section of the HSBC
Bank (UK) Pension Scheme (‘the principal plan’).
The principal plan has changed from being the combined HSBC Bank (UK) Pension Scheme to being only the HBUK section of the
scheme. This is because the HSBC Bank (UK) Pension Scheme was fully sectionalised in 2018 to meet the requirements of the Banking
Reform Act.
HSBC holds on its balance sheet the net surplus or deficit, which is 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
assets was £28.8bn ($38.1bn) and this exceeded the value placed on its liabilities on an ongoing basis by £1.4bn ($1.9bn), giving a
funding level of 105%. These figures include defined contribution assets amounting to £2.0bn ($2.6bn). 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. The next funding valuation will have an effective date of 31 December
2019.
HSBC Holdings plc Annual Report and Accounts 2019
255
Financial statementsFinancial statements
Notes on the financial statements
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 £160m ($212m) in each of 2020 and 2021.The main employer
of the principal plan is HSBC UK Bank plc, with additional support from HSBC Holdings plc. The HSBC Bank (UK) Pension Scheme is fully
sectionalised and no entities outside the ring fence participate in the HBUK section of the scheme. The sectionalisation, which took place
in 2018, did not materially affect the overall funding position of the plan.
The actuary also assessed the value of the liabilities if the plan was 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 £37bn ($49bn) at 31 December 2016.
Guaranteed minimum pension equalisation
Following a judgment issued by the High Court of Justice of England and Wales in 2018, we estimated the financial effect of equalising
benefits in respect of guaranteed minimum pension (‘GMP’) equalisation, and any potential conversion of GMPs into non-GMP benefits,
to be an approximate 0.9% increase in the principal plan’s liabilities, or £187m ($239m). This was recognised in the income statement in
2018. We continue to assess the impact of GMP equalisation, although no further amounts have been recognised in 2019.
Income statement charge
Defined benefit pension plans
Defined contribution pension plans
Pension plans
Defined benefit and contribution healthcare plans
Year ended 31 Dec
2019
$m
176
758
934
15
949
2018
$m
355
756
1,111
21
1,132
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 2019
Total employee benefit liabilities (within Note 26 ‘Accruals, deferred income and other
liabilities’)
Total employee benefit assets (within Note 22 ‘Prepayments, accrued income
and other assets’)
Defined benefit pension plans
Defined benefit healthcare plans
At 31 Dec 2018
Total employee benefit liabilities (within Note 26 ‘Accruals, deferred income and other
liabilities’)
Total employee benefit assets (within Note 22 ‘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
47,567
121
47,688
$m
(40,582)
(580)
(41,162)
42,799
110
42,909
(36,583)
(524)
(37,107)
$m
(16)
—
(16)
(35)
—
(35)
2017
$m
100
603
703
(34)
669
Total
$m
6,969
(459)
6,510
(1,771)
8,280
6,181
(414)
5,767
(2,167)
7,934
Employee compensation and benefit expense in respect of HSBC Holdings’ employees in 2019 amounted to $37m (2018: $37m). The
average number of persons employed during 2019 was 60 (2018: 43). 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.
256
HSBC Holdings plc Annual Report and Accounts 2019
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)
Principal1
plan
$m
Other
plans
$m
Principal1
plan
$m
Other
plans
$m
Principal1
plan
$m
At 1 Jan 2019
Service cost
– current service cost
– past service cost and gains/(losses) from settlements
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
Benefits paid
Other movements2
At 31 Dec 2019
At 1 Jan 2018
Service cost
– current service cost
– past service cost and losses from settlements
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
– other changes
Exchange differences
Benefits paid
Other movements2
At 31 Dec 2018
34,074
8,725
(26,616)
(9,967)
—
—
—
939
2,205
2,205
—
—
1,300
(1,014)
370
—
—
—
269
867
870
—
(3)
181
(620)
271
(64)
(40)
(24)
(246)
(183)
(63)
(728)
(293)
(2,548)
—
(521)
—
(2,548)
(1,348)
—
(1,036)
1,014
(180)
827
(180)
694
89
37,874
9,693
(30,158)
(10,424)
37,747
9,518
(29,552)
(10,537)
—
—
—
—
—
—
(293)
(44)
(249)
(202)
(179)
(23)
955
235
(743)
(265)
(1,478)
(1,478)
—
—
(2,002)
(1,132)
(16)
34,074
(591)
(591)
—
—
(187)
(544)
294
1,153
—
1,153
—
1,565
1,132
122
440
—
403
37
122
550
(75)
8,725
(26,616)
(9,967)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Other
plans
Principal1
plan
$m
(35)
—
—
—
—
20
—
—
20
(1)
—
—
Other
plans
$m
$m
7,458
(1,277)
(64)
(40)
(24)
(246)
(183)
(63)
211
(24)
(343)
2,205
(2,548)
—
264
—
190
366
870
(1,348)
844
—
74
360
(747)
(16)
7,716
(37)
8,195
(1,056)
—
—
—
(1)
—
—
—
—
3
—
—
(293)
(44)
(249)
212
(325)
(1,478)
1,153
—
(437)
—
106
(202)
(179)
(23)
(31)
(151)
(591)
403
37
(62)
6
219
(35)
7,458
(1,277)
1 Refer to page 255 for details on the principal plan.
2 Other movements include contributions by HSBC, contributions by employees, administrative costs and taxes paid by plan.
HSBC expects to make $384m of contributions to defined benefit pension plans during 2020. 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 plan1,2
Other plans1
2020
$m
1,081
471
2021
$m
1,113
525
2022
$m
1,145
521
2023
$m
1,178
486
2024
$m
1,212
479
2025-2029
$m
6,611
2,332
1 The duration of the defined benefit obligation is 18.1 years for the principal plan under the disclosure assumptions adopted (2018: 17.0 years) and
13.2 years for all other plans combined (2018: 12.3 years).
2 Refer to page 255 for details on the principal plan.
HSBC Holdings plc Annual Report and Accounts 2019
257
Financial statementsFinancial statements
Notes on the financial statements
Fair value of plan assets by asset classes
31 Dec 2019
Quoted
market price
in active
market
No quoted
market price
in active
market
$m
$m
33,921
312
31,699
—
1,910
8,702
1,455
6,376
—
871
3,953
350
—
2,052
1,551
991
610
232
—
149
Value
$m
37,874
662
31,699
2,052
3,461
9,693
2,065
6,608
—
1,020
Thereof
HSBC1
$m
—
—
—
—
—
1,422
2
8
1,183
229
31 Dec 2018
Quoted
market price
in active
market
No quoted
market price
in active
market
$m
$m
30,670
3,152
26,509
—
1,009
7,425
1,265
5,559
—
601
3,404
—
—
2,030
1,374
1,300
921
148
37
194
Value
$m
34,074
3,152
26,509
2,030
2,383
8,725
2,186
5,707
37
795
Thereof
HSBC1
$m
—
—
—
—
—
1,216
2
7
1,034
173
The principal plan2
Fair value of plan assets
– equities
– bonds
– derivatives
– other
Other plans
Fair value of plan assets
– equities
– bonds
– derivatives
– other
1 The fair value of plan assets includes derivatives entered into with HSBC Bank plc as detailed in Note 35.
2 Refer to page 255 for details on the principal plan.
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 plan1
UK
At 31 Dec 2019
At 31 Dec 2018
1 Refer to page 255 for details on the principal plan.
Discount rate
Inflation rate
Rate of increase
for pensions
Rate of pay
increase
%
2.00
2.80
%
3.10
3.40
%
2.90
3.10
%
3.65
3.65
Mortality tables and average life expectancy at age 604 for the principal plan3
UK
At 31 Dec 2019
At 31 Dec 2018
Mortality
table
Life expectancy at age 604 for
a male member currently:
Life expectancy at age 604 for
a female member currently:
Aged 60
Aged 40
Aged 60
Aged 40
SAPS S21
SAPS S22
28.0
28.1
29.4
29.6
28.2
28.4
29.8
30.0
1 Self-administered pension scheme (‘SAPS’) S2 table (males: 'Normal health pensioners' version; females: 'All pensioners' version) with a multiplier
of 0.94 for male and 1.15 for female pensioners. Improvements are projected in accordance with the continual mortality investigation (‘CMI’) 2018
core projection model with an initial addition to improvements of 0.25% per annum and a long-term rate of improvement of 1.25% per annum.
Separate tables have been applied to lower-paid pensioners and dependant members.
2 Self-administered pension scheme (‘SAPS’) S2 table (males: 'Normal health pensioners' version; females: 'All pensioners' version) with a multiplier
of 0.94 for male and 1.15 for female pensioners. Improvements are projected in accordance with the continual mortality investigation (‘CMI’) 2017
core projection model with a long-term rate of improvement of 1.25% per annum. Separate tables have been applied to lower-paid pensioners
and dependant members.
3 Refer to page 255 for details on the principal plan.
4 The presentation of the mortality table has been updated to show life expectancies at the age of 60 rather than 65 as presented in prior years to
better reflect market disclosure practices. The prior year data have been updated accordingly.
The effect of changes in key assumptions on the principal plan1
Impact on HBUK section of the HSBC Bank (UK) Pension Scheme obligation
Financial impact of increase
Financial impact of decrease
2019
$m
(1,305)
781
1,100
73
1,267
2018
$m
(1,078)
726
1,181
28
995
2019
$m
1,395
(738)
(1,026)
(72)
N/A
2018
$m
1,149
(716)
(1,112)
(29)
N/A
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
1 Refer to page 255 for details on the principal plan.
258
HSBC Holdings plc Annual Report and Accounts 2019
Directors’ emoluments
Details of Directors’ emoluments, pensions and their interests are disclosed in the Directors’ remuneration report on page 184.
6
Auditor’s remuneration
Audit fees payable to PwC
Other audit fees payable
Year ended 31 Dec
Fees payable by HSBC to PwC
Fees for HSBC Holdings’ statutory audit
Fees for other services provided to HSBC
– audit of HSBC’s subsidiaries
– audit-related assurance services
– other assurance services
– taxation compliance services
– taxation advisory services
– other non-audit services
Year ended 31 Dec
2019
$m
85.2
0.9
86.1
2019
$m
15.7
95.0
69.5
10.0
12.2
1.6
—
1.7
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
110.7
119.5
129.7
Footnotes
1
2
3
3
1 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.
Including services for assurance and other services that relate to statutory and regulatory filings, including comfort letters and interim reviews.
Including permitted services relating to attestation reports on internal controls of a service organisation primarily prepared for and used by third
party end user.
2
3
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
2019
$000
250
—
250
2018
$000
172
—
172
2017
$000
260
4
264
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 $17.2m (2018: $14.0m; 2017:
$3.5m). 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.
7
Tax
Tax expense
Current tax
– for this year
– adjustments in respect of prior years
Deferred tax
– origination and reversal of temporary differences
– effect of changes in tax rates
– adjustments in respect of prior years
Year ended 31 Dec
Footnotes
1
2
2019
$m
3,768
3,689
79
871
684
(11)
198
2018
$m
4,195
4,158
37
670
656
17
(3)
4,639
4,865
2017
$m
4,264
4,115
149
1,024
(228)
1,337
(85)
5,288
1 Current tax included Hong Kong profits tax of $1,413m (2018: $1,532m; 2017: $1,350m). The Hong Kong tax rate applying to the profits of
subsidiaries assessable in Hong Kong was 16.5% (2018: 16.5%; 2017: 16.5%).
In addition to amounts recorded in the income statement, a tax charge of $6m (2018: credit of $234m) was recorded directly to equity.
2
HSBC Holdings plc Annual Report and Accounts 2019
259
Financial statementsFinancial statements
Notes on the financial statements
Tax reconciliation
The tax charged to the income statement differs from the tax charge that would apply if all profits had been taxed at the UK corporation
tax rate as follows:
Profit before tax
Tax expense
Taxation at UK corporation tax rate of 19.00% (2018: 19.00%; 2017: 19.25%)
Impact of differently taxed overseas profits in overseas locations
Items increasing tax charge in 2019:
– non-deductible goodwill write-down
– local taxes and overseas withholding taxes
– other permanent disallowables
– non-deductible UK customer compensation
– UK tax losses not recognised
– adjustments in respect of prior period liabilities
– bank levy
– impacts of hyperinflation
– UK banking surcharge
– non-UK movements in unrecognised deferred tax
– non-deductible regulatory settlements
– deferred tax remeasurement due to US federal tax rate reduction
Items reducing tax charge in 2019:
– non-taxable income and gains
– effect of profits in associates and joint ventures
– deductions for AT1 coupon payments
– non-taxable gain on dilution of shareholding in SABB
– impact of changes in tax rates
– other items
Year ended 31 Dec
2019
$m
13,347
2,536
253
%
19.0
1.9
1,421
10.7
484
481
382
364
277
184
29
29
12
5
—
(844)
(467)
(263)
(181)
(11)
(52)
4,639
3.6
3.6
2.9
2.7
2.1
1.4
0.2
0.2
0.1
—
—
(6.3)
(3.5)
(2.0)
(1.3)
(0.1)
(0.4)
34.8
2018
$m
19,890
3,779
264
—
437
396
16
435
34
191
78
229
32
153
—
(691)
(492)
—
—
17
(13)
4,865
%
19.0
1.3
—
2.2
2.0
0.1
2.2
0.2
1.0
0.4
1.1
0.2
0.8
—
(3.5)
(2.5)
—
—
0.1
(0.1)
24.5
2017
$m
17,167
%
3,305
407
19.25
2.3
—
618
400
166
70
64
180
—
136
(16)
(132)
1,288
(766)
(481)
—
—
49
—
5,288
—
3.6
2.3
1.0
0.4
0.4
1.0
—
0.8
(0.1)
(0.8)
7.5
(4.4)
(2.8)
—
—
0.3
—
30.8
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 2019 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 20.90% (2018: 20.30%). The effective tax rate for the
year was 34.8% (2018: 24.5%). The effective tax rate for 2019 was significantly higher than for 2018 as 2019 included a non-deductible
impairment of goodwill of $7.3bn.
Following an amendment to IAS 12 effective 1 January 2019, the income tax consequences of distributions, including AT1 coupon
payments, are recorded in the income statement tax expense. Prior periods have not been restated.
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.
260
HSBC Holdings plc Annual Report and Accounts 2019
Movement of deferred tax assets and liabilities
Loan
impairment
provisions
Unused tax
losses and
tax credits
Derivatives,
FVOD1
and other
investments
Insurance
business
Expense
provisions
Fixed
assets
Retirement
obligations
Footnotes
Assets
Liabilities
At 1 Jan 2019
Income statement
Other comprehensive income
Equity
Foreign exchange and other adjustments
At 31 Dec 2019
Assets
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
2
2
2
2
$m
982
—
982
45
—
—
(44)
983
983
—
713
—
713
358
(72)
—
—
(17)
982
982
—
$m
1,156
—
1,156
266
—
—
(8)
1,414
1,414
—
1,373
—
1,373
—
(203)
—
—
(14)
1,156
1,156
—
$m
492
(376)
116
(386)
544
—
147
421
979
$m
—
(1,271)
(1,271)
(303)
—
—
(47)
(1,621)
—
(558)
(1,621)
1,282
(93)
1,189
(411)
51
(722)
—
9
116
492
—
(1,182)
(1,182)
—
(104)
—
—
15
(1,271)
—
(376)
(1,271)
$m
629
—
629
(18)
—
—
39
650
650
—
643
—
643
—
19
—
—
(33)
629
629
—
$m
1,151
—
1,151
(185)
—
—
36
1,002
1,002
$m
—
(1,387)
(1,387)
(149)
30
—
(107)
(1,613)
Other
Total
$m
738
$m
5,148
(283)
(3,317)
455
1,831
(141)
(391)
—
98
21
(871)
183
—
114
1,257
5,450
—
422
—
(1,613)
(401)
(4,193)
1,201
—
1,201
—
(68)
—
—
18
1,151
1,151
—
352
(1,387)
(1,035)
—
35
25
(15)
(397)
(1,387)
—
760
(968)
(208)
459
(328)
165
(8)
375
455
738
6,324
(3,630)
2,694
406
(670)
(532)
(23)
(44)
1,831
5,148
(1,387)
(283)
(3,317)
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 $4,632m (2018: $4,450m)
and deferred tax liabilities $3,375m (2018: $2,619m).
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 $1.3bn (2018: $1.8bn) includes $2.8bn (2018: $3.0bn) of deferred tax assets relating to the US, of which
$1.1bn relates to US tax losses that expire in 14 to 18 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
cover a five-year period and the forecasts have been extrapolated beyond five years by assuming that performance remains constant after
the fifth year.
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 $8.3bn (2018: $7.2bn). This amount includes unused UK corporation tax losses of $6.2bn (2018: $4.6bn) which are not
recognised due to uncertainty regarding the availability of sufficient future taxable profits against which to recover them. Of the total
amounts unrecognised, $6.4bn (2018: $4.7bn) had no expiry date, $1.3bn (2018: $1.3bn) 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 $13.4bn
(2018: $13.2bn) and the corresponding unrecognised deferred tax liability is $1.0bn (2018: $0.9bn).
8
Dividends
Dividends to shareholders of the parent company
Per
share
$
2019
Total
$m
Settled
in scrip
$m
Per
share
$
2018
Total
$m
Settled
in scrip
$m
Per
share
$
2017
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
0.21
4,206
1,160
0.21
4,197
0.10
0.10
0.10
0.51
2,013
2,021
2,029
375
795
357
10,269
2,687
0.10
0.10
0.10
0.51
2,008
1,990
1,992
10,187
1,494
393
213
181
707
0.21
4,169
1,945
0.10
0.10
0.10
0.51
2,005
2,014
2,005
826
193
242
10,193
3,206
62.00
90
62.00
90
62.00
90
1,324
11,683
1,270
11,547
1,268
11,551
HSBC Holdings plc Annual Report and Accounts 2019
261
Financial statementsFinancial statements
Notes on the financial statements
Total coupons on capital securities classified as equity
Perpetual subordinated capital securities
$2,200m issued at 8.125%
$3,800m issued at 8.000%
Perpetual subordinated contingent convertible securities
$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%
£1,000m issued at 5.875%
SGD750m issued at 5%
Total
2019
Footnotes
First call date
Per security
1, 3
2, 3
4
Apr 2013
Dec 2015
Nov 2019
Jun 2021
Sep 2024
Mar 2025
May 2027
Mar 2023
Mar 2028
Sep 2022
Sep 2023
July 2029
$0.000
$0.000
$56.250
$68.750
$63.750
$63.750
$60.000
$62.500
$65.000
€52.500
€60.000
€47.500
Jun 2022
SGD47.000
Sep 2026
£58.750
Sep 2023
SGD50.000
Total
$m
—
—
84
138
143
156
180
147
117
88
66
68
34
75
28
2018
Total
$m
2017
Total
$m
89
76
84
138
143
156
180
73
59
95
72
70
35
—
—
179
304
84
138
143
156
90
—
—
89
68
—
17
—
—
1,324
1,270
1,268
1 Discretionary coupons are paid quarterly on the perpetual subordinated capital securities, in denominations of $25 per security.
2 Discretionary coupons are paid semi-annually on the perpetual subordinated contingent convertible securities, in denominations of each security’s
issuance currency 1,000 per security.
3 Further details of these securities can be found in Note 31.
4 This security was called by HSBC Holdings on 22 November 2019 and was redeemed and cancelled on 17 January 2020. Between the date of
exercise of the call option and the redemption, this security was considered to be a subordinated liability. Refer to Note 31 for further details on
additional tier 1 securities.
After the end of the year, the Directors declared a fourth interim dividend in respect of the financial year ended 31 December 2019 of
$0.21 per ordinary share, a distribution of approximately $4,266m. The fourth interim dividend will be payable on 14 April 2020 to holders
on the Principal Register in the UK, the Hong Kong Overseas Branch Register or the Bermuda Overseas Branch Register on 28 February
2020. No liability was recorded in the financial statements in respect of the fourth interim dividend for 2019.
On 6 January 2020, HSBC paid a coupon on its €1,250m subordinated capital securities, representing a total distribution of €30m ($33m).
No liability was recorded in the balance sheet at 31 December 2019 in respect of this coupon payment.
9
Earnings per share
Basic earnings per ordinary share is calculated by dividing the profit attributable to ordinary shareholders of the parent company by the
weighted average number of ordinary shares outstanding, excluding own shares held. Diluted earnings per ordinary share is calculated
by dividing the basic earnings, which require no adjustment for the effects of dilutive potential ordinary shares, by the weighted average
number of ordinary shares outstanding, excluding own shares held, plus the weighted average number of ordinary shares that would be
issued on conversion of dilutive potential ordinary shares.
Profit attributable to the ordinary shareholders of the parent company
2019
$m
7,383
(90)
(1,324)
5,969
2018
$m
13,727
(90)
(1,029)
12,608
2017
$m
10,798
(90)
(1,025)
9,683
Per
share
$
0.48
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
2019
Number
of shares
Profit
Footnotes
$m
(millions)
5,969
20,158
Basic
Effect of dilutive potential
ordinary shares
Diluted
1
1
Per
share
$
0.30
2018
Number
of shares
(millions)
Profit
$m
12,608
19,896
Per
share
$
0.63
Profit
$m
9,683
2017
Number
of shares
(millions)
19,972
100
75
87
5,969
20,233
0.30
12,608
19,983
0.63
9,683
20,072
0.48
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
1.1m (2018: nil; 2017: nil).
262
HSBC Holdings plc Annual Report and Accounts 2019
10 Segmental analysis
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 2018 and 2017 adjusted performance information is presented on a constant
currency basis. The 2018 and 2017 income statements are converted at the average rates of exchange for 2019, and the balance sheets
at 31 December 2018 and 31 December 2017 at the prevailing rates of exchange on 31 December 2019.
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. 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.
Our global businesses
HSBC provides a comprehensive range of banking and related financial services to its customers in its four global businesses. The
products and services offered to customers are organised by these global businesses.
• RBWM offers a broad range of products and services to meet the personal banking and wealth management needs of individual
customers. Typically, customer offerings include personal banking products, such as current and savings accounts, mortgages and
personal loans, credit cards, debit cards and local and international payment services, as well as wealth management services,
including insurance and investment products, global asset management services and financial planning services.
• CMB offers a broad range of products and services to serve the needs of our commercial customers, including small and medium-
sized enterprises, mid-market enterprises and corporates. These include credit and lending, international trade and receivables
finance, treasury management and liquidity solutions (payments and cash management and commercial cards), commercial insurance
and investments. CMB also offers its customers access to products and services offered by other global businesses, such as GB&M,
which include foreign exchange products, raising capital on debt and equity markets and advisory services.
• GB&M provides tailored financial solutions to major government, corporate and institutional clients and private investors worldwide.
The client-focused business lines deliver a full range of banking capabilities including financing, advisory and transaction services, a
markets business that provides services in credit, rates, foreign exchange, equities, money markets and securities services, and
principal investment activities.
• GPB provides a range of services to high net worth individuals and families with complex and international needs within the Group’s
major markets.
HSBC adjusted profit before tax and balance sheet data
Net operating income/(expense) before change in
expected credit losses and other credit impairment
charges
1
– 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
2019
Retail
Banking and
Wealth
Management
Commercial
Banking
Global
Banking and
Markets
Footnotes
$m
$m
$m
Global
Private
Banking
$m
Corporate
Centre
$m
Total
$m
55,409
55,409
—
30,619
(2,756)
52,653
(32,795)
19,858
2,354
22,212
%
100.0
59.2
$m
23,400
17,026
6,374
16,525
(1,390)
22,010
(14,017)
7,993
55
8,048
%
36.2
59.9
$m
15,292
14,805
487
11,226
(1,184)
14,108
(6,801)
7,307
—
7,307
%
32.9
44.5
$m
14,916
18,517
(3,601)
5,601
(153)
14,763
(9,417)
5,346
—
5,346
%
24.1
63.1
$m
1,848
1,445
403
879
(22)
1,826
(1,424)
402
—
402
%
1.8
77.1
$m
(47)
3,616
(3,663)
(3,612)
(7)
(54)
(1,136)
(1,190)
2,299
1,109
%
5.0
(2,417.0)
$m
395,393
346,060
246,266
47,593
1,431
1,036,743
449
526,621
689,283
—
367,509
386,522
—
—
24,025
24,474
1,066,584
292,284
52,224
62,943
702,214
2,715,152
8,083
1,439,115
HSBC Holdings plc Annual Report and Accounts 2019
263
Financial statementsFinancial statements
Notes on the financial statements
HSBC adjusted profit before tax and balance sheet data (continued)
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/(expense) before change in
expected credit losses and other credit impairment
charges
1
– external
– inter-segment
of which: net interest income/(expense)
Change in expected credit losses and other credit
impairment (charges)/recoveries
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
21,374
16,794
4,580
15,432
(1,134)
20,240
(13,255)
6,985
33
7,018
%
33.1
62.0
$m
14,465
14,226
239
10,380
(712)
13,753
(6,275)
7,478
—
7,478
%
35.3
43.4
$m
15,025
17,554
(2,529)
5,122
31
15,056
(9,170)
5,886
—
5,886
%
27.8
61.0
$m
367,917
337,099
247,125
398
482,967
649,172
—
364,638
362,274
—
1,025,737
294,584
1,757
1,474
283
873
7
1,764
(1,425)
339
—
339
%
1.6
81.1
$m
39,602
—
45,520
65,053
(290)
2,283
(2,573)
(2,189)
119
(171)
(1,781)
(1,952)
2,413
461
%
2.2
(614.1)
$m
2,533
21,903
670,333
8,655
Retail
Banking and
Wealth
Management
Commercial
Banking
Global
Banking and
Markets
Footnotes
$m
$m
$m
Global
Private
Banking
$m
Corporate
Centre
$m
2017
Net operating income before loan impairment charges
and other credit risk provisions
1
– 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
19,708
16,582
3,126
13,573
(941)
18,767
(12,386)
6,381
12
6,393
%
31.1
62.8
$m
12,883
13,009
(126)
8,822
(468)
12,415
(5,770)
6,645
—
6,645
%
32.3
44.8
$m
14,823
16,086
(1,263)
4,746
(439)
14,384
(8,709)
5,675
—
5,675
%
27.6
58.8
$m
337,768
308,870
246,890
364
457,126
629,442
—
340,211
356,488
—
960,732
276,634
1,698
1,433
265
812
(17)
1,681
(1,384)
297
—
297
%
1.4
81.5
$m
40,013
—
46,706
65,491
1,061
3,063
(2,002)
(499)
179
1,240
(2,010)
(770)
2,316
1,546
%
7.6
189.4
$m
7,382
21,558
667,822
11,017
Total
$m
52,331
52,331
—
29,618
(1,689)
50,642
(31,906)
18,736
2,446
21,182
%
100.0
61.0
$m
994,276
22,301
2,589,195
1,379,738
Total
$m
50,173
50,173
—
27,454
(1,686)
48,487
(30,259)
18,228
2,328
20,556
%
100.0
60.3
$m
940,923
21,922
2,472,597
1,339,072
1 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.
Reported 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:
Reported external net operating income by country/territory
– UK
– Hong Kong
– US
– France
– other countries
Footnotes
1
2019
$m
56,098
9,011
18,449
4,471
1,942
22,225
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
1 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.
264
HSBC Holdings plc Annual Report and Accounts 2019
Adjusted results reconciliation
2019
Significant
Adjusted
items Reported Adjusted
Currency
translation
Revenue
ECL
LICs
Footnotes
$m
1
55,409
(2,756)
N/A
$m
689
—
N/A
$m
$m
56,098
52,331
(2,756)
(1,689)
N/A
N/A
$m
1,617
(78)
N/A
Significant
items Reported Adjusted
$m
$m
$m
(168)
53,780
50,173
—
N/A
(1,767)
N/A
N/A
(1,686)
Operating expenses
(32,795)
(9,554)
(42,349)
(31,906)
(1,109)
(1,644)
(34,659)
(30,259)
Share of profit in associates
and joint ventures
2,354
—
2,354
2,446
Profit/(loss) before tax
22,212
(8,865)
13,347
21,182
90
520
—
2,536
2,328
(1,812)
19,890
20,556
Currency
translation
Significant
items
Reported
$m
1,344
N/A
(83)
(915)
47
393
$m
(72)
N/A
—
$m
51,445
N/A
(1,769)
(3,710)
(34,884)
—
2,375
(3,782)
17,167
2018
2017
1 Net operating income before change in expected credit losses and other credit impairment charges/Loan impairment charges and other credit risk
2019
Reported and
adjusted
$m
1,036,743
24,474
2,715,152
1,439,115
2018
Currency
translation
$m
(12,580)
106
(31,071)
(17,095)
Adjusted
$m
994,276
22,301
2,589,195
1,379,738
Reported
Adjusted
$m
981,696
22,407
2,558,124
1,362,643
$m
940,923
21,922
2,472,597
1,339,072
2017
Currency
translation
$m
22,041
822
49,174
25,390
Reported
$m
962,964
22,744
2,521,771
1,364,462
provisions, also referred to as revenue.
Adjusted balance sheet reconciliation
Loans and advances to customers (net)
Interests in associates and joint ventures
Total external assets
Customer accounts
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)
– gain on partial settlement of pension obligation
– goodwill impairment
– 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
– currency translation on significant items
Currency translation
Reported profit before tax
Footnotes
1
2
2019
$m
22,212
(8,865)
(163)
768
84
(158)
—
(1,281)
—
—
(7,349)
—
(827)
61
2018
$m
21,182
(1,812)
53
(113)
(100)
(361)
—
(146)
(52)
—
—
(228)
(66)
(816)
17
520
2017
$m
20,556
(3,782)
(108)
274
(245)
(420)
(3,002)
(655)
(53)
188
—
—
—
198
41
393
13,347
19,890
17,167
1 Fair value movements on financial instruments include non-qualifying hedges and debt value adjustments on derivatives.
2 Comprises costs associated with preparations for the UK’s exit from the European Union, costs to establish the UK ring-fenced bank (including the
UK ServCo group) and costs associated with establishing an intermediate holding company in Hong Kong.
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
1 Loans and advances to banks and customers include reverse repos, stock borrowing and other accounts.
Footnotes
1
1
2019
$m
21,789
126,043
78,827
226,659
8,402
19,210
254,271
2018
$m
22,674
130,539
60,896
214,109
10,425
13,596
238,130
HSBC Holdings plc Annual Report and Accounts 2019
265
Financial statementsFinancial statements
Notes on the financial statements
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
2019
$m
25,722
10,040
9,783
72,456
4,691
25,140
78,827
2018
$m
34,664
9,710
10,772
66,530
3,351
28,186
60,896
226,659
214,109
1
Included within these figures are debt securities issued by banks and other financial institutions of $17,846m (2018: $18,918m), of which
$2,637m (2018: $2,367m) 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.
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. These are 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. These are 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. These are financial instruments valued using valuation techniques
where one or more significant inputs are unobservable.
266
HSBC Holdings plc Annual Report and Accounts 2019
Financial instruments carried at fair value and bases of valuation
2019
Level 1
Level 2
Level 3
$m
$m
$m
Total
$m
Level 1
$m
2018
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 investments
Liabilities
Trading liabilities
Financial liabilities designated at fair
value
Derivatives
186,653
62,639
4,979
254,271
178,100
53,271
6,759
238,130
26,505
1,728
271,467
9,373
239,131
84,087
7,749
2,136
2,023
43,627
242,995
357,577
23,125
1,868
263,885
12,494
203,534
78,882
5,492
2,423
2,000
41,111
207,825
344,767
66,925
16,192
53
83,170
66,300
18,073
58
84,431
9,549
1,331
149,901
235,864
5,016
2,302
164,466
239,497
6,815
2,845
136,362
201,234
5,328
1,756
148,505
205,835
Transfers between Level 1 and Level 2 fair values
Assets
Liabilities
Designated
and
otherwise
mandatorily
measured at
fair value
$m
1,332
673
2
85
Trading
assets
$m
3,304
2,726
435
4,959
Financial
investments
$m
5,257
3,486
367
17,861
Derivatives
Trading
liabilities
Designated
at fair value
Derivatives
$m
24
111
1
128
$m
278
220
79
1,821
$m
—
—
—
—
$m
—
117
—
138
At 31 Dec 2019
Transfers from Level 1 to Level 2
Transfers from Level 2 to Level 1
At 31 Dec 2018
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 and Markets and Corporate Centre fair value adjustments
Type of adjustment
Risk-related
– bid-offer
– uncertainty
– credit valuation adjustment
– debt valuation adjustment
– funding fair value adjustment
– other
Model-related
– model limitation
– other
Inception profit (Day 1 P&L reserves)
At 31 Dec
Bid-offer
2019
2018
GB&M
$m
1,040
428
115
355
(126)
241
27
71
68
3
72
Corporate
Centre
$m
125
79
1
38
—
7
—
3
3
—
—
GB&M
$m
1,042
430
99
442
(198)
256
13
79
79
—
85
Corporate
Centre
$m
138
76
6
52
—
4
—
3
3
—
—
1,183
128
1,206
141
IFRS 13 ‘Fair value measurement’ requires the 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.
HSBC Holdings plc Annual Report and Accounts 2019
267
Financial statementsFinancial statements
Notes on the financial statements
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 debt valuation adjustments
The credit valuation adjustment (‘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 debt valuation adjustment (‘DVA’) is an adjustment to the valuation of OTC derivative contracts to reflect the possibility that HSBC
may default, and that it may not pay the full market value of the transactions.
HSBC calculates a separate CVA and DVA for each legal entity, and for each counterparty to which the entity has exposure. With the
exception of central clearing parties, all third-party counterparties are included in the CVA and DVA calculations, and these adjustments
are not netted across Group entities.
HSBC calculates the CVA by applying the probability of default (‘PD’) of the counterparty, conditional on the non-default of HSBC,
to HSBC’s expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default.
Conversely, HSBC calculates the DVA by applying the PD of HSBC, conditional on the non-default of the counterparty, to the expected
positive exposure of the counterparty to HSBC and multiplying the result by the loss expected in the event of default. Both calculations
are performed over the life of the potential exposure.
For most products HSBC uses a simulation methodology, which incorporates a range of potential exposures over the life of the portfolio,
to calculate the expected positive exposure to a counterparty. The simulation methodology includes credit mitigants, such as
counterparty netting agreements and collateral agreements with the counterparty.
The methodologies do not, in general, account for ‘wrong-way risk’. Wrong-way risk is an adverse correlation between the counterparty’s
probability of default and the mark-to-market value of the underlying transaction. The risk can either be general, perhaps related to the
currency of the issuer country, or specific to the transaction concerned. When there is significant wrong-way risk, a trade-specific
approach is applied to reflect this risk in the valuation.
Funding fair value adjustment
The funding fair value adjustment (‘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
Designated
and
otherwise
mandatorily
measured
at fair value
through
profit or
loss Derivatives
$m
$m
7,289
28
39
—
—
—
—
—
—
—
66
2,070
—
Total
$m
8,009
1,836
40
3
66
2,070
4,863
Financial
investments
Trading
assets
$m
716
874
—
—
—
—
$m
4
934
1
3
—
—
433
2,023
4,037
4,979
393
7,749
427
1,030
—
—
—
—
543
2,000
20
1,140
—
3
—
—
5,596
6,759
5,106
32
49
—
—
—
305
5,492
2,136
16,887
—
—
—
—
65
2,358
—
2,423
5,553
2,202
49
3
65
2,358
6,444
16,674
Liabilities
Trading
liabilities
Designated
at fair value Derivatives
$m
$m
$m
4
—
—
47
—
—
2
53
12
—
—
46
—
—
—
58
—
—
—
5,016
—
—
—
5,016
—
—
—
5,328
—
—
—
5,328
—
—
—
—
—
2,302
—
2,302
—
—
—
—
—
1,755
1
1,756
Total
$m
4
—
—
5,063
—
2,302
2
7,371
12
—
—
5,374
—
1,755
1
7,142
Private equity including strategic
investments
Asset-backed securities
Loans held for securitisation
Structured notes
Derivatives with monolines
Other derivatives
Other portfolios
At 31 Dec 2019
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
268
HSBC Holdings plc Annual Report and Accounts 2019
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 investment (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.
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
At 1 Jan 2019
Total gains/(losses) recognised in profit or loss
– net income from financial instruments held for trading or
managed on a fair value basis
– 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
Total gains/(losses) recognised in other comprehensive income
(‘OCI’)
1
– financial investments: fair value gains/(losses)
– exchange differences
Purchases
New issuances
Sales
Settlements
Transfers out
Transfers in
At 31 Dec 2019
Unrealised gains/(losses) recognised in profit or loss relating to
assets and liabilities held at 31 Dec 2019
– net income from financial instruments held
for trading or managed on a fair value basis
– 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
Financial
invest-
ments
$m
2,000
Footnotes
Assets
Liabilities
Designated
and
otherwise
mandatorily
measured
at fair value
through
profit or
loss Derivatives
$m
5,492
598
$m
2,423
278
Trading
assets
$m
6,759
(112)
(112)
—
278
—
—
—
76
—
76
2,206
154
(895)
(2,107)
(1,558)
456
4,979
(22)
(22)
—
—
598
—
—
(1)
—
(1)
2,353
—
(276)
(434)
(23)
40
—
—
—
49
—
49
—
—
—
(100)
(710)
196
7,749
2,136
477
—
477
—
279
279
—
—
Trading
liabilities
Designated
at fair
value Derivatives
$m
58
(4)
(4)
—
—
—
1
—
1
8
6
(9)
(7)
(9)
9
53
—
—
—
—
$m
5,328
195
$m
1,756
930
—
930
195
—
—
18
—
18
157
1,601
(193)
(1,048)
(1,079)
37
5,016
57
—
57
—
—
—
—
52
—
52
—
—
—
(162)
(473)
199
2,302
(407)
(407)
—
—
HSBC Holdings plc Annual Report and Accounts 2019
269
6
—
—
10
(4)
269
261
8
271
—
(10)
(329)
(471)
287
2,023
(4)
—
—
(4)
Financial statementsFinancial statements
Notes on the financial statements
Movement in Level 3 financial instruments (continued)
Assets
Liabilities
Footnotes
Financial
invest-
ments
$m
1,767
251
Derivatives
Trading
liabilities
Designated
at fair value
Derivatives
Designated
and
otherwise
mandatorily
measured at
fair value
through
profit or loss
$m
3,958
608
—
608
—
Trading
assets
$m
5,080
284
284
—
—
$m
2,444
597
597
—
—
(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
—
—
—
—
251
17
15
—
2
275
—
(51)
(141)
(685)
567
2,000
—
—
—
—
$m
93
(4)
(4)
—
—
(3)
—
—
(3)
3
6
(11)
(2)
(24)
—
58
(5)
(5)
—
—
$m
4,107
(637)
$m
1,949
255
—
255
(637)
—
(144)
—
—
(144)
76
2,442
—
(32)
(1,112)
628
5,328
274
—
274
—
—
—
(82)
—
2
(84)
—
—
—
(18)
(464)
116
1,756
(351)
(351)
—
—
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
– 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
Total gains/(losses) recognised in other comprehensive income
(‘OCI’)
1
– financial 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 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
– 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
1
Included in ‘financial investments: fair value gains/(losses)’ in the current year 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
2019
2018
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
255
532
48
835
$m
(230)
(417)
(53)
(700)
$m
—
—
22
22
$m
—
—
(22)
(22)
$m
269
394
34
697
$m
(257)
(310)
(36)
(603)
$m
—
—
23
23
$m
—
—
(22)
(22)
1 Derivatives, trading assets and trading liabilities are presented as one category to reflect the manner in which these instruments are risk managed.
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
2019. The core range of inputs is the estimated range within which 90% of the inputs fall.
270
HSBC Holdings plc Annual Report and Accounts 2019
Quantitative information about significant unobservable inputs in Level 3 valuations
Fair value
2019
2018
Assets Liabilities
Footnotes
$m
$m
Private equity including
strategic investments
Asset-backed securities
2
8,009
1,836
4
—
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
373
— Market proxy
Prepayment
rate
1,463
— Market proxy
Bid quotes
Market proxy
Bid quotes
0%
0
0
9%
100
101
0%
0
61
9%
100
98
0%
10%
0
0
100
271
0%
50
71
10%
100
99
– other ABSs
Loans held for
securitisation
Structured notes
– equity-linked notes
– FX-linked notes
– other
Derivatives with
monolines
Other derivatives
– Interest rate derivatives:
40
3
—
—
3
66
—
5,063
3,768
1,046
249
Model –
Option model
Equity
volatility
Model –
Option model
Equity
correlation
5%
90%
6%
56%
8%
79%
13%
53%
9%
93%
9%
93%
17%
93%
40%
77%
Model –
Option model
FX volatility
1%
23%
3%
22%
1%
27%
3%
25%
Model –
Discounted
cash flow
—
Credit
spread
0.4%
2% 0.4%
2%
0.2%
1%
0.2%
1%
2,070
2,302
securitisation swaps
314
640
long-dated swaptions
other
– FX derivatives:
FX options
other
– Equity derivatives:
long-dated single stock
options
other
– Credit derivatives:
other
Other portfolios
– structured certificates
– repurchase agreements
– other
At 31 Dec 2019
3
838
255
93
119
230
78
143
4,863
1,515
1,604
1,744
51
155
218
104
293
712
129
2
—
—
2
16,887
7,371
Model –
Discounted
cash flow
Model –
Option model
Model –
Option model
Prepayment
rate
6%
7%
6%
7%
6%
7%
6%
7%
IR volatility
8%
22%
8%
21%
13%
39%
14%
36%
FX volatility
1%
25%
5%
11%
1%
27%
7%
12%
Model –
Option model
Equity
volatility
0%
89%
7%
74%
5%
83%
5%
81%
Model –
Discounted
cash flow
Credit
volatility
4%
4%
4%
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
evidence, such as prepayment rates implied from proxy observable security prices, current or historical prepayment rates and
macroeconomic modelling.
Market proxy
Market proxy pricing may be used for an instrument when specific market pricing is not available but there is evidence from instruments
with common characteristics. In some cases it might be possible to identify a specific proxy, but more generally evidence across a wider
range of instruments will be used to understand the factors that influence current market pricing and the manner of that influence.
HSBC Holdings plc Annual Report and Accounts 2019
271
Financial statementsFinancial statements
Notes on the financial statements
Volatility
Volatility is a measure of the anticipated future variability of a market price. It varies by underlying reference market price, and by strike
and maturity of the option.
Certain volatilities, typically those of a longer-dated nature, are unobservable and are estimated from observable data. The range of
unobservable volatilities reflects the wide variation in volatility inputs by reference market price. The core range is significantly narrower
than the full range because these examples with extreme volatilities occur relatively rarely within the HSBC portfolio.
Correlation
Correlation is a measure of the inter-relationship between two market prices and is expressed as a number between minus one and one.
It is used to value more complex instruments where the payout is dependent upon more than one market price. There is a wide range of
instruments for which correlation is an input, and consequently a wide range of both same-asset correlations and cross-asset correlations
is used. In general, the range of same-asset correlations will be narrower than the range of cross-asset correlations.
Unobservable correlations may be estimated based upon a range of evidence, including consensus pricing services, HSBC trade prices,
proxy correlations and examination of historical price relationships. The range of unobservable correlations quoted in the table reflects
the wide variation in correlation inputs by market price pair.
Credit spread
Credit spread is the premium over a benchmark interest rate required by the market to accept lower credit quality. In a discounted cash
flow model, the credit spread increases the discount factors applied to future cash flows, thereby reducing the value of an asset. Credit
spreads may be implied from market prices and may not be observable in more illiquid markets.
Inter-relationships between key unobservable inputs
Key unobservable inputs to Level 3 financial instruments may not be independent of each other. As described above, market variables
may be correlated. This correlation typically reflects the manner in which different markets tend to react to macroeconomic or other
events. Furthermore, the effect of changing market variables on the HSBC portfolio will depend on HSBC’s net risk position in respect of
each variable.
HSBC Holdings
Basis of valuing HSBC Holdings’ financial assets and liabilities measured at fair value
Footnotes
2019
$m
2018
$m
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
1
Liabilities at 31 Dec
– designated at fair value
– derivatives
2,002
—
61,964
30,303
2,021
707
—
23,513
25,049
2,159
1
In 2019, due to the restructuring of the Group’s Asia and UK operations to meet resolution and recovery requirements, changes in the terms of
financial assets have resulted in the derecognition of principal amounts of $33.3bn, relating to financial assets measured at amortised cost. Under
the revised terms, financial assets with principal amounts of $33.3bn (2018: nil) measured on fair value basis have been recognised.
272
HSBC Holdings plc Annual Report and Accounts 2019
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 2019
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 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
Carrying
amount
$m
69,203
1,036,743
240,862
85,735
59,022
1,439,115
140,344
104,555
24,600
72,167
981,696
242,804
62,666
56,331
1,362,643
165,884
85,342
22,437
Fair value
Quoted market
price Level 1
Observable
inputs Level 2
Significant
unobservable
inputs Level 3
$m
—
—
16
26,202
—
—
—
—
—
—
—
81
1,790
—
—
—
—
—
$m
$m
68,508
10,365
240,199
62,572
58,951
1,439,362
140,344
104,936
28,861
68,378
10,518
241,407
60,073
56,308
1,362,794
165,884
85,430
24,968
739
1,027,178
691
287
—
150
—
—
385
3,791
974,559
1,369
216
—
151
—
—
373
Total
$m
69,247
1,037,543
240,906
89,061
58,951
1,439,512
140,344
104,936
29,246
72,169
985,077
242,857
62,079
56,308
1,362,945
165,884
85,430
25,341
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.
Valuation
Fair value is an estimate of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. It does not reflect the economic benefits and costs that HSBC expects to flow from an
instrument’s cash flow over its expected future life. Our valuation methodologies and assumptions in determining fair values for which no
observable market prices are available may differ from those of other companies.
Loans and advances to banks and customers
To determine the fair value of loans and advances to banks and customers, loans are segregated, as far as possible, into portfolios of
similar characteristics. Fair values are based on observable market transactions, when available. When they are unavailable, fair values
are estimated using valuation models incorporating a range of input assumptions. These assumptions may include: value estimates from
third-party brokers reflecting over-the-counter trading activity; forward-looking discounted cash flow models, taking account of expected
customer prepayment rates, using assumptions that HSBC believes are consistent with those that would be used by market participants
in valuing such loans; new business rates estimates for similar loans; and trading inputs from other market participants including
observed primary and secondary trades. From time to time, we may engage a third-party valuation specialist to measure the fair value of
a pool of loans.
The fair value of loans reflects 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 in 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.
HSBC Holdings plc Annual Report and Accounts 2019
273
Financial statementsFinancial statements
Notes on the financial statements
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
Financial investments – at amortised cost
Liabilities at 31 Dec
Amounts owed to HSBC undertakings
Debt securities in issue
Subordinated liabilities
2019
2018
Carrying amount
Fair value1
Carrying amount
Footnotes
$m
$m
$m
Fair value1
$m
2
10,218
16,106
464
56,844
18,361
10,504
16,121
464
59,140
22,536
56,144
56,801
949
50,800
17,715
949
51,552
20,224
1 Fair values (other than Level 1 financial investments) were determined using valuation techniques with observable inputs (Level 2).
2 The 2019 period includes $16.1bn (2018: nil) of investments in highly liquid securities.
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
Securities1
Footnotes
2
Hong Kong Government
Other governments
Asset-backed securities
Corporate debt and other securities
Equities
At 31 Dec
2019
Mandatorily
measured at fair
value
Designated at
fair value
$m
2,344
630
1,714
—
1
—
2,345
$m
35,808
31
4,838
30,939
4,555
919
41,282
2019
Mandatorily
measured at fair
value
Designated at
fair value
$m
4
666
—
1,674
—
2,344
$m
—
754
363
3,752
30,939
35,808
Designated at fair
value
2018
Mandatorily
measured at fair
value
$m
2,349
641
1,708
—
—
—
2,349
$m
30,217
29
4,839
25,349
7,717
828
38,762
Designated at fair
value
2018
Mandatorily
measured at fair
value
$m
4
673
—
1,672
—
2,349
$m
—
713
399
3,756
25,349
30,217
Total
$m
38,152
661
6,552
30,939
4,556
919
43,627
Total
$m
4
1,420
363
5,426
30,939
38,152
Total
$m
32,566
670
6,547
25,349
7,717
828
41,111
Total
$m
4
1,386
399
5,428
25,349
32,566
1
Included within these figures are debt securities issued by banks and other financial institutions of $366m (2018 re-presented: $676m), of which
nil (2018: nil) are guaranteed by various governments.
2 Excludes asset-backed securities included under US Treasury and US Government agencies.
274
HSBC Holdings plc Annual Report and Accounts 2019
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
8,207,629
17,895,349
1,077,347
345,644
93,245
$m
31,899
177,006
—
—
—
$m
84,083
183,668
9,053
4,744
1,523
$m
455
1,208
—
—
—
Gross total fair values
27,619,214
208,905
283,071
1,663
Offset (Note 30)
At 31 Dec 2019
Foreign exchange
Interest rate
Equities
Credit
Commodity and other
Gross total fair values
Offset (Note 30)
At 31 Dec 2018
27,619,214
208,905
283,071
1,663
7,552,462
24,589,916
1,256,550
346,596
74,159
29,969
163,271
—
—
—
85,959
155,293
10,198
3,414
1,134
458
1,080
—
—
—
33,819,683
193,240
255,998
1,538
33,819,683
193,240
255,998
1,538
Total
$m
84,538
184,876
9,053
4,744
1,523
284,734
(41,739)
242,995
86,417
156,373
10,198
3,414
1,134
257,536
(49,711)
207,825
Fair value – Liabilities
Trading
Hedging
$m
84,498
175,095
11,237
5,597
2,038
$m
740
2,031
—
—
—
278,465
2,771
278,465
2,771
82,494
154,257
10,750
3,776
1,355
252,632
653
2,261
—
—
—
2,914
252,632
2,914
Total
$m
85,238
177,126
11,237
5,597
2,038
281,236
(41,739)
239,497
83,147
156,518
10,750
3,776
1,355
255,546
(49,711)
205,835
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 increased during 2019, driven by yield curve movements and changes in foreign exchange rates.
Notional contract amounts and fair values of derivatives by product contract type held by HSBC Holdings with subsidiaries
Notional contract amount
Assets
Trading
Hedging
Trading
Hedging
$m
24,980
48,937
73,917
16,623
44,059
60,682
$m
—
36,769
36,769
1,120
38,418
39,538
$m
161
435
596
207
283
490
$m
—
1,406
1,406
—
217
217
Total
$m
161
1,841
2,002
207
500
707
Liabilities
Trading
Hedging
$m
766
1,072
1,838
628
538
1,166
$m
—
183
183
155
838
993
Total
$m
766
1,255
2,021
783
1,376
2,159
Foreign exchange
Interest rate
At 31 Dec 2019
Foreign exchange
Interest rate
At 31 Dec 2018
Use of derivatives
For details regarding the use of derivatives, see page 139 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:
HSBC Holdings plc Annual Report and Accounts 2019
275
Financial statementsFinancial statements
Notes on the financial statements
Unamortised balance of derivatives valued using models with significant unobservable inputs
Unamortised balance at 1 Jan
Deferral on new transactions
Recognised in the income statement during the year:
– amortisation
– subsequent to unobservable inputs becoming observable
– maturity, termination or offsetting derivative
Exchange differences
Other
Unamortised balance at 31 Dec
1 This amount is yet to be recognised in the consolidated income statement.
Hedge accounting derivatives
Footnotes
1
2019
$m
86
145
(154)
(80)
(3)
(71)
1
(5)
73
2018
$m
106
161
(158)
(96)
(2)
(60)
(4)
(19)
86
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
Hedged risk
Interest rate3
At 31 Dec 2019
Interest rate3
At 31 Dec 2018
Notional amount1
$m
122,753
122,753
123,551
123,551
Hedging instrument
Carrying amount
Assets
$m
1,056
1,056
915
915
Liabilities
$m
2,208
2,208
2,123
2,123
Balance sheet
presentation
Derivatives
Derivatives
Change in fair value2
$m
(1,531)
(1,531)
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
90,617
1,859
153
1,897
15,206
3,009
4
12
At 31 Dec 2019
92,667
18,215
1,875
Financial assets designated
and otherwise mandatorily
measured at fair value
through other
comprehensive income
Loans and advances to
banks
Loans and advances to
customers
Debt securities in issue
Deposits by banks
797
39
836
2,304
5
24
(1,011)
202
1,524
Net income from
financial
instruments held for
trading or managed
on a fair value basis
(7)
(7)
276
HSBC Holdings plc Annual Report and Accounts 2019
HSBC hedged item by hedged risk (continued)
Hedged item
Ineffectiveness
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
Interest rate3
93,469
1,455
At 31 Dec 2018
94,924
14,171
4,780
18,951
231
(6)
225
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)
(37)
(37)
Profit and loss
presentation
Net income from
financial instruments
held for trading or
managed on a fair
value basis
1 Used in effectiveness testing; 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 $482m for FVOCI and assets of $2m 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 2019
Notional amount1,4
$m
36,769
36,769
Assets
$m
1,406
1,406
Liabilities
$m
183
183
Balance sheet
presentation
Derivatives
Change in fair value2
$m
1,704
1,704
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 $36,769m, of which the weighted-average maturity date is March 2027 and the
weighted-average swap rate is 1.53%. The majority of these hedges are internal to HSBC Group.
HSBC Holdings hedged item by hedged risk
Hedged risk
Interest rate3
Carrying amount
Assets
Liabilities
$m
$m
38,126
At 31 Dec 2019
—
38,126
—
Hedged item
Accumulated fair value hedge
adjustments included in
carrying amount2
Assets
$m
Liabilities Balance sheet
presentation
$m
Ineffectiveness
Change in fair
value1
Recognised
in profit and
loss
$m
$m
Profit and loss presentation
Debt
securities
in issue
1,088
1,088
(1,697)
(1,697)
7
7
Net income from financial
instruments held for trading or
managed on a fair value basis
1 Used in effectiveness testing; 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 $71m 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.
HSBC Holdings plc Annual Report and Accounts 2019
277
Financial statementsFinancial statements
Notes on the financial statements
Hedging instrument by hedged risk
Hedged risk
$m
$m
$m
Notional amount1
Assets
Liabilities
Balance sheet
presentation
Hedging instrument
Carrying amount
Foreign currency
21,385
455
254
Derivatives
Interest rate
At 31 Dec 2019
Foreign currency
Interest rate
At 31 Dec 2018
54,253
75,638
24,954
39,720
64,674
152
607
295
165
460
Derivatives
46
300
653
Derivatives
138
791
Derivatives
Hedged item
Ineffectiveness
Change in fair
value2
Change in fair
value3
Recognised in
profit and loss
$m
341
195
536
(198)
(77)
(275)
$m
341
193
534
(200)
(67)
(267)
$m
—
2
2
2
(10)
(8)
Profit and loss
presentation
Net income from
financial
instruments held
for trading or
managed on a fair
value basis
Net income from
financial instruments
held for trading or
managed on a fair
value basis
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 2019
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 2019
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 has affected profit or loss
Income taxes
Others
Cash flow hedging reserve at 31 Dec 2018
Hedges of net investments in foreign operations
Interest rate
Foreign
currency
$m
(26)
193
99
(53)
(9)
204
(40)
(67)
90
(11)
2
(26)
$m
(182)
341
(371)
4
3
(205)
(187)
(200)
227
(13)
(9)
(182)
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 2019, the fair values of outstanding financial
instruments designated as hedges of net investments in foreign operations were assets of nil (2018: $163m), liabilities of $485m (2018:
nil) and notional contract values of $10,500m (2018: $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 2019 was nil (2018: nil).
Interest rate benchmark reform: Amendments to IFRS 9 and IAS 39 ‘Financial Instruments’
Following the request received by the Financial Stability Board from the G20, a fundamental review and reform of the major interest rate
benchmarks is underway across the world's largest financial markets. This reform was not contemplated when IAS 39 was published,
and consequently the IASB has published a set of temporary exceptions from applying specific hedge accounting requirements to
provide clarification on how the standard should be applied in these circumstances.
Amendments to IFRS 9 and IAS 39 were endorsed in January 2020 and modify specific hedge accounting requirements. Under these
temporary exceptions, interbank offered rates (‘Ibors’) are assumed to continue unaltered for the purposes of hedge accounting until
such time as the uncertainty is resolved.
The application of this set of temporary exceptions is mandatory for accounting periods starting on or after 1 January 2020, but early
adoption is permitted. HSBC elected to apply these exceptions for the year ended 31 December 2019. Significant judgement will be
required in determining when uncertainty is expected to be resolved and therefore when the temporary exceptions will cease to apply.
However, at 31 December 2019, the uncertainty continued to exist and so the temporary exceptions apply to all of the Group’s hedge
accounting relationships that reference benchmarks subject to reform or replacement.
The Group has cash flow and fair value hedge accounting relationships that are exposed to different Ibors, predominantly US dollar Libor,
sterling Libor, and Euribor as well as overnight rates subject to the market-wide benchmarks reform, such as the European overnight
Index Average rate (‘Eonia’). Many of the existing derivatives, loans, bonds and other financial instruments designated in relationships
referencing these benchmarks will transition to new risk-free rates (‘RFRs’) in different ways and at different times. External progress on
the transition to RFRs is being monitored, with the objective of ensuring a smooth transition for the Group’s hedge accounting
relationships. The specific issues arising will vary with the details of each hedging relationship, but may arise due to the transition of
278
HSBC Holdings plc Annual Report and Accounts 2019
existing products included in the designation, a change in expected volumes of products to be issued, a change in contractual terms of
new products issued, or a combination of these factors. Some hedges may need to be de-designated and new relationships entered into,
while others may survive the market-wide benchmarks reform.
The hedge accounting relationships that are affected by the adoption of the temporary exceptions hedge items presented in the balance
sheet as ‘Financial assets designated and otherwise mandatorily measured at fair value through other comprehensive income’, ‘Loans
and advances to customers’, ‘Debt securities in issue’ and ‘Deposits by banks’.
The notional amounts of interest rate derivatives designated in hedge accounting relationships represent the extent of the risk exposure
managed by the Group that is directly affected by market-wide benchmarks reform and impacted by the temporary exceptions. The
cross-currency swaps designated in hedge accounting relationships and affected by Ibor reform are not significant and have not been
presented below:
Hedging instrument impacted by Ibor reform
Fair value hedges
Cash flow hedges
At 31 Dec 2019
Impacted by Ibor reform
Hedging instrument
€
$m
20,378
5,724
26,102
£
$m
4,533
6,594
11,127
$
$m
41,274
15,750
57,024
Other
$m
13,435
15,979
29,414
Total
$m
79,620
44,047
123,667
Not impacted
by Ibor reform
$m
43,133
10,206
53,339
Notional
amount1
$m
122,753
54,253
177,006
1 The notional contract amounts of interest rate 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.
The calculation of Eonia changed on 2 October 2019 so that going forward it is calculated as the euro short-term rate (‘€STR’) plus a fixed
spread of 8.5 basis points. This change has triggered a structural change in the sale and repurchase agreement (‘repo’) market in France,
whereby the overnight floating rate repo market referencing Eonia has significantly shifted into an overnight fixed rate repo market
referencing repo rates. In this context, regarding the accounting standard setters’ activities, management consider that continuing to
apply hedge accounting to the existing hedge relationships using forecast issuances of overnight repos, provides the most relevant
accounting.
For further information on Ibor transition, see our Areas of Special interest on page 81.
Hedging instrument impacted by Ibor reform held by HSBC Holdings
Impacted by Ibor reform
Hedging instrument
£
$m
5,222
—
5,222
$
$m
24,500
—
24,500
Other
$m
3,119
—
3,119
Total
$m
36,769
—
36,769
Not impacted
by Ibor reform
$m
—
—
—
Notional
amount
$m
36,769
—
36,769
€
$m
3,928
—
3,928
Fair value hedges
Cash flow hedges
At 31 Dec 2019
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
At 31 Dec
‘Other instruments’ comprises of loans and advances.
1
2 Fair value $89.1bn (2018: $62.1bn).
Footnotes
1
2
2019
$m
357,577
95,043
260,536
1,913
85
85,735
10,476
75,259
443,312
2018
$m
344,767
96,642
246,371
1,657
97
62,666
679
61,987
407,433
HSBC Holdings plc Annual Report and Accounts 2019
279
Financial statementsFinancial statements
Notes on the financial statements
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 2019
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
738
1,124
51
1,913
848
758
51
1,657
$m
22
19
9
50
34
21
9
64
Footnotes
2
2
3
2019
2018
Amortised cost
Fair value1
Amortised cost
Fair value1
$m
79,633
26,356
8,070
28,621
47,824
140,510
2,954
101,750
1,241
436,959
$m
80,589
26,387
8,259
28,973
47,820
142,511
2,889
107,364
1,913
446,705
$m
54,941
21,058
12,867
20,576
49,956
142,495
3,579
97,286
1,353
404,111
$m
54,763
20,580
12,701
21,083
49,955
144,099
3,390
98,419
1,657
406,647
1
Included within ‘fair value’ figures are debt securities issued by banks and other financial institutions of $61bn (2018: $56bn), of which $11bn
(2018: $8bn) are guaranteed by various governments.
2
Includes securities that are supported by an explicit guarantee issued by the US Government.
3 Excludes asset-backed securities included under US Government agencies and sponsored entities.
Maturities of investments in debt securities at their carrying amount
Debt securities measured at fair value through other comprehensive income
Debt securities measured at amortised cost
At 31 Dec 2019
Debt securities measured at fair value through other comprehensive income
Debt securities measured at amortised cost
At 31 Dec 2018
Up to 1 year
1 to 5 years
5 to 10 years
Over 10 years
$m
61,833
5,472
67,305
61,598
2,519
64,117
$m
123,740
14,395
138,135
124,075
10,086
134,161
$m
42,831
21,431
64,262
36,194
16,065
52,259
$m
32,132
33,961
66,093
24,504
33,317
57,821
Total
$m
260,536
75,259
335,795
246,371
61,987
308,358
280
HSBC Holdings plc Annual Report and Accounts 2019
Contractual maturities and weighted average yields of investment debt securities
Up to 1 year
1 to 5 years
5 to 10 years
Over 10 years
Amount
$m
Yield
%
Amount
$m
Yield
%
Amount
$m
Yield
%
Amount
$m
Yield
%
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 2019
Total carrying value
Debt securities 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 2019
Total carrying value
6,322
—
725
4,681
559
39,144
18
9,735
61,184
61,833
3,010
—
—
10
128
—
2,324
5,472
5,472
2.1
—
2.8
1.3
1.3
2.3
2.7
2.0
1.9
—
—
1.6
4.4
—
3.5
26,834
79
167
4,393
145
54,689
1
34,921
121,229
123,740
4,879
13
482
20
552
—
8,449
14,395
14,395
2.0
2.2
3.1
1.1
1.8
2.8
0.5
1.8
1.8
3.8
2.7
1.6
3.4
—
3.4
18,208
1
1,940
4,443
152
11,478
325
4,879
41,426
42,831
2,931
19
551
9
487
—
17,434
21,431
21,431
2.0
4.7
2.8
0.2
3.2
1.7
3.1
2.2
1.9
3.5
2.3
1.4
3.1
—
3.3
3,268
15,581
2,191
2,811
—
1,862
2,610
2,795
31,118
32,132
141
10,286
2,015
—
832
2
20,685
33,961
33,961
2.9
2.6
3.0
2.8
—
3.6
2.2
3.4
4.2
2.6
3.2
—
4.2
7.5
3.8
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 2019 by the
book amount of debt securities at that date. The yields do not include the effect of related derivatives.
HSBC Holdings
HSBC Holdings carrying amount of financial investments
Debt instruments measured at amortised cost
– treasury and other eligible bills
– debt securities
At 31 Dec
1 The 2019 period includes $16.1bn (2018: nil) of investments in highly liquid securities.
Financial investments at amortised cost and fair value
Footnotes
1
2019
$m
10,081
6,025
16,106
2018
$m
—
—
—
US Treasury
US Government agencies
US Government-sponsored entities
At 31 Dec
Maturities of investments in debt securities at their carrying amount
Debt securities measured at amortised cost
At 31 Dec 2019
Debt securities measured at amortised cost
At 31 Dec 2018
2019
2018
Amortised
cost
Fair value
Amortised
cost
Fair value
$m
$m
16,106
16,121
—
—
—
—
16,106
16,121
Up to 1 year
1 to 5 years 5 to 10 years
$m
3,010
3,010
—
—
$m
3,015
3,015
—
—
$m
—
—
—
—
$m
—
—
—
—
Over 10
years
$m
—
—
—
—
$m
—
—
—
—
Total
$m
6,025
6,025
—
—
HSBC Holdings plc Annual Report and Accounts 2019
281
Financial statementsFinancial statements
Notes on the financial statements
Contractual maturities and weighted average yields of investment debt securities
Debt securities measured at amortised cost
US Treasury
US Government agencies
US Government-sponsored agencies
Total amortised cost at 31 Dec 2019
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
Yield
$m
3,010
—
—
3,010
3,010
%
1.9
—
—
$m
3,015
—
—
3,015
3,015
%
1.7
—
—
$m
—
—
—
—
—
%
—
—
—
$m
—
—
—
—
—
%
—
—
—
The weighted average yield for each range of maturities is calculated by dividing the annualised interest income for the year ended
31 December 2019 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
2019
$m
14,034
1,975
26,017
60,995
24,626
50,231
2018
$m
11,470
151
51,659
95,210
22,510
34,028
177,878
215,028
Assets pledged as collateral include all assets categorised as encumbered in the disclosure on page 73 of the Pillar 3 Disclosures at 31 December 2019.
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.
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.
Hong Kong currency notes in circulation are secured by the deposit of funds in respect of which the Hong Kong Government certificates
of indebtedness are held.
Financial assets pledged as collateral which the counterparty has the right to sell or repledge
Trading assets
Financial investments
At 31 Dec
Collateral received
2019
$m
63,163
10,782
73,945
2018
$m
76,121
15,741
91,862
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 $468,798m
(2018: $482,818m). The fair value of any such collateral sold or repledged was $304,261m (2018: $350,848m).
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 while 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 following table, the counterparty’s recourse is not limited to the transferred assets.
282
HSBC Holdings plc Annual Report and Accounts 2019
Transferred financial assets not qualifying for full derecognition and associated financial liabilities
At 31 Dec 2019
Repurchase agreements
Securities lending agreements
Other sales (recourse to transferred assets only)
At 31 Dec 2018
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
45,831
35,122
2,971
62,216
32,486
2,647
45,671
3,225
2,885
60,361
2,426
2,647
2,974
2,897
77
2,625
2,630
(5)
18 Interests in associates and joint ventures
Carrying amount of HSBC’s interests in associates and joint ventures
Interests in associates
Interests in joint ventures1
Interests in associates and joint ventures
2019
$m
24,384
90
24,474
2018
$m
22,244
163
22,407
1 During 2019, HSBC increased its shareholding in HSBC Saudi Arabia, which is now recognised as a subsidiary.
Principal associates of HSBC
Bank of Communications Co., Limited
The Saudi British Bank
2019
Carrying amount
$m
18,982
4,370
Fair value1
$m
10,054
5,550
2018
Carrying amount
$m
17,754
3,557
Fair value1
$m
10,991
5,222
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
Footnotes
Country of incorporation
and principal place of
business
People’s Republic of
China
At 31 Dec 2019
Principal
activity
Banking services
1
Saudi Arabia
Banking services
HSBC’s
interest
%
19.03
29.20
1
In June 2019, the merger between The Saudi British Bank (‘SABB’) and Alawwal bank (‘Alawwal’) became effective. The merger involved SABB
issuing a fixed number of new shares to Alawwal’s shareholders in exchange for the transfer of Alawwal’s net assets and cancellation of its
shares. HSBC’s 40.0% interest in SABB reduced to 29.2% of the combined entity, resulting in a dilution gain of $828m recognised in HSBC’s
consolidated income statement. The dilution gain represents the difference between the carrying amount of HSBC’s interest in SABB that was
derecognised proportionate to the percentage reduction, and HSBC’s share of the increase in the combined entity’s net assets. The combined
entity continues to be an associate of HSBC.
A list of all associates and joint ventures is set out in Note 37.
Bank of Communications Co., Limited
The Group’s investment in Bank of Communications Co., Limited (‘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 2019, the fair value of the Group’s investment in BoCom had been below the carrying amount for approximately eight
years. As a result, the Group performed an impairment test on the carrying amount, which confirmed that there was no impairment at
31 December 2019 as the recoverable amount as determined by a value-in-use (‘VIU’) calculation was higher than the carrying value.
BoCom
At 31 Dec 2019
At 31 Dec 2018
VIU
$bn
21.5
Carrying value
Fair value
$bn
19.0
$bn
10.1
VIU
$bn
18.0
Carrying value
Fair value
$bn
17.8
$bn
11.0
HSBC Holdings plc Annual Report and Accounts 2019
283
Financial statementsFinancial statements
Notes on the financial statements
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 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 best 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 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, meaning that 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% (2018: 3%) for periods after 2023, which does not exceed forecast GDP growth in mainland China
and is consistent with forecasts by external analysts.
• Long-term asset growth rate: 3% (2018: 3%) for periods after 2023, which is the rate that assets are expected to grow to achieve long-
term profit growth of 3%.
• Discount rate: 11.24% (2018: 11.82%). This is based on a capital asset pricing model (‘CAPM’) calculation for BoCom, using market
data. Management also compares the rate derived from the CAPM with discount rates from external sources. The discount rate used
is within the range of 10.0% to 15.0% (2018: 10.4% to 15.0%) indicated by external sources.
• Expected credit losses as a percentage of customer advances: 0.95% (2018: ranges from 0.73% to 0.79%) in the short to medium term
and reflect increases due to the US-China trade tensions and BoCom’s actual results. For periods after 2023, the ratio is 0.76% (2018:
0.70%). This ratio was increased to provide greater weighting to the most recent data points and analyst forecasts.
• Risk-weighted assets as a percentage of total assets: 61% (2018: 62%) for all forecast periods. This is consistent with BoCom’s actual
results and slightly higher than the forecasts disclosed by external analysts.
• Cost-income ratio: ranges from 37.1% to 38.8% (2018: 38.7% to 39.0%) in the short to medium term. This is slightly above BoCom’s
actual results in recent years and within the range of forecasts disclosed by external analysts.
• Effective tax rate: ranges from 12.0% to 17.0% (2018: 13.8% to 22.3%) in the short to medium term reflecting BoCom’s actual results
and an expected increase towards the long-term assumption. For periods after 2023, the rate is 22.5% (2018: 22.5%), which is slightly
higher than the historical average.
• Capital requirements: Capital adequacy ratio of 11.5% (2018:11.5%) and tier 1 capital adequacy ratio of 9.5% (2018: 9.5%), based on
the minimum regulatory requirements.
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
• Expected credit losses as a percentage of customer advances
• Risk-weighted assets as a percentage of total assets
• Cost-income ratio
• Long-term effective tax rate
• Capital requirements – capital adequacy ratio
• Capital requirements – tier 1 capital adequacy ratio
Changes to key assumption to reduce headroom to nil
• Decrease by 99 basis points
•
•
•
•
•
•
•
•
Increase by 80 basis points
Increase by 122 basis points
Increase by 16 basis points
Increase by 624 basis points
Increase by 373 basis points
Increase by 900 basis points
Increase by 118 basis points
Increase by 190 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 may 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 period to period.
284
HSBC Holdings plc Annual Report and Accounts 2019
Sensitivity of VIU to reasonably possible changes in key assumptions
At 31 Dec 2019
Long-term profit growth rate
Long-term asset growth rate
Discount rate
Expected credit losses 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
Capital requirements – capital adequacy ratio
Capital requirements – tier 1 capital adequacy ratio
At 31 Dec 2018
Long-term profit growth rate
Long-term asset growth rate
Discount rate
Expected credit losses 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
rate1,2
Capital requirements – capital adequacy ratio
Capital requirements – tier 1 capital adequacy ratio
Favourable change
Unfavourable change
Increase
in VIU
bps
$bn
—
(50)
(54)
2019 to 2023: 90
2024 onwards: 70
(96)
(175)
(352)
107
—
—
100
(10)
(142)
2018 to 2022: 70
2023 onwards: 65
(140)
(160)
(280)
204
—
—
—
1.4
1.4
1.0
0.4
1.0
1.0
0.5
—
—
2.6
0.3
3.2
0.9
0.5
1.1
0.7
1.1
—
—
VIU
$bn
21.5
22.9
22.9
22.5
21.9
22.5
22.5
22.0
21.5
21.5
20.6
18.3
21.3
18.9
18.6
19.2
18.7
19.1
18.0
18.0
Decrease
in VIU
bps
$bn
(50)
—
56
2019 to 2023: 108
2024 onwards: 81
12
95
250
(346)
337
322
(10)
100
28
2018 to 2022: 83
2023 onwards: 77
80
200
250
(366)
258
243
(1.3)
—
(1.2)
(1.2)
—
(1.2)
(0.7)
(2.4)
(8.2)
(6.0)
(0.2)
(2.8)
(0.5)
(1.0)
(0.3)
(1.4)
(0.6)
(1.8)
(5.0)
(3.2)
VIU
$bn
20.2
21.5
20.3
20.3
21.5
20.3
20.8
19.1
13.3
15.5
17.8
15.3
17.5
17.0
17.8
16.7
17.5
16.2
13.0
14.8
1 Based on management’s explicit forecasts over the short to medium term.
2 Amounts at 31 December 2018 have been updated to align with the 2019 approach to describe the impact of the change in isolation.
Considering the interrelationship of the changes set out in the table above, management estimates that the reasonably possible range of
VIU is $18.5bn to $22.8bn (2018: $15.5bn to $19.6bn). The range is based on the favourable/unfavourable change in the earnings in the
short- to medium-term and long-term expected credit losses as a percentage of customer advances as 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 2019, HSBC included the
associate’s results on the basis of the financial statements for the 12 months ended 30 September 2019, taking into account changes in
the subsequent period from 1 October 2019 to 31 December 2019 that would have materially affected the results.
Selected balance sheet information of BoCom
Cash and balances at central banks
Loans and advances to banks and other financial institutions
Loans and advances to customers
Other financial assets
Other assets
Total assets
Deposits by banks and other financial institutions
Customer accounts
Other financial liabilities
Other liabilities
Total liabilities
Total equity
At 30 Sep
2019
$m
112,239
108,026
730,510
435,740
40,101
2018
$m
125,414
102,980
686,951
408,136
42,106
1,426,616
1,365,587
290,492
868,627
131,772
23,074
1,313,965
112,651
304,395
829,539
94,900
36,332
1,265,166
100,421
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
At 30 Sep
2019
$m
18,509
473
18,982
2018
$m
17,275
479
17,754
HSBC Holdings plc Annual Report and Accounts 2019
285
Financial statementsFinancial statements
Notes on the financial statements
Selected income statement information of BoCom
Net interest income
Net fee and commission income
Change in expected credit losses and other credit impairment charges
Depreciation and amortisation
Tax expense
Profit for the year
Other comprehensive income
Total comprehensive income
Dividends received from BoCom
Associates and joint ventures
For the 12 months ended 30 Sep
2019
$m
20,558
6,411
(7,479)
(1,934)
(1,636)
11,175
315
11,490
613
2018
$m
19,295
6,245
(5,602)
(767)
(1,554)
11,116
190
11,306
611
For the year ended 31 December 2019, HSBC’s share of associates’ and joint ventures’ tax on profit was $314m (2018: $306m). This is
included within ‘Share of profit in associates and joint ventures’ in the consolidated income statement.
19 Investments in subsidiaries
Main subsidiaries of HSBC Holdings
Europe
HSBC Bank plc
HSBC UK Bank plc
HSBC France
HSBC Trinkaus & Burkhardt AG
Asia
Hang Seng Bank Limited
Place of
incorporation or
registration
HSBC’s
interest %
Share class
At 31 Dec 2019
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
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
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 Note 25 ‘Debt securities in issue’ and Note 28 ‘Subordinated liabilities’, respectively.
A list of all related undertakings is set out in Note 37. 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 Holdings’ investments in subsidiaries during the year is primarily driven by new capital injections of
$3,721m (2018: net increase of $65,222m), partially offset by $2,562m impairment charges (2018: net reversal of $2,064m), which
includes $2,475m impairment of HSBC Overseas Holdings (UK) Limited.
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 2019, 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.
286
HSBC Holdings plc Annual Report and Accounts 2019
The amount of guarantees by HSBC Holdings in favour of other Group entities is set out in Note 32.
Information on structured entities consolidated by HSBC where HSBC owns less than 50% of the voting rights is included in Note 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
2019
2018
37.86%
37.86%
Hong Kong
Hong Kong
$m
1,229
7,262
720
212,485
191,819
5,558
3,251
3,461
$m
1,194
6,637
647
197,867
179,450
5,294
3,159
2,950
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 2019
At 31 Dec 2018
Conduits
Conduits
Securitisations
HSBC
managed funds
$bn
8.6
9.2
$bn
9.6
5.7
$bn
6.8
6.5
Other
$bn
6.7
4.4
Total
$bn
31.7
25.8
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 2019, Solitaire, HSBC’s principal SIC, held $2.1bn of ABSs (2018: $2.3bn). 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 2019, HSBC held $3.2bn
of CP (2018: $3.4bn).
• As at 31 December 2019, Barion, Malachite and Mazarin are fully redeemed vehicles with no current trading activity.
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 $12.4bn at 31 December 2019 (2018:
$16.1bn). First loss protection is provided by the originator of the assets, and not by HSBC, through transaction-specific credit
enhancements. A layer of secondary loss protection is provided by HSBC in the form of programme-wide enhancement facilities.
Securitisations
HSBC uses structured entities to securitise customer loans and advances it originates in order to diversify its sources of funding for asset
origination and capital efficiency purposes. The loans and advances are transferred by HSBC to the structured entities for cash or
synthetically through credit default swaps, and the structured entities issue debt securities to investors.
HSBC managed funds
HSBC has established a number of money market and non-money market funds. Where it is deemed to be acting as principal rather than
agent in its role as investment manager, HSBC controls these funds.
Other
HSBC has entered into a number of transactions in the normal course of business, which include asset and structured finance
transactions where it has control of the structured entity. In addition, HSBC is deemed to control a number of third-party managed funds
through its involvement as a principal in the funds.
Unconsolidated structured entities
The term ‘unconsolidated structured entities’ refers to all structured entities not controlled by HSBC. The Group enters into transactions
with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment
opportunities.
HSBC Holdings plc Annual Report and Accounts 2019
287
Financial statementsFinancial statements
Notes on the financial statements
Nature and risks associated with HSBC interests in unconsolidated structured entities
Total asset values of the entities ($m)
Securitisations
HSBC managed
funds
Non-HSBC
managed funds
Other
0–500
500–2,000
2,000–5,000
5,000–25,000
25,000+
Number of entities at 31 Dec 2019
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 2019
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
91
12
—
—
—
103
$bn
5.3
—
—
5.3
—
—
—
—
0.3
5.6
76
10
1
—
—
87
$bn
3.8
—
—
3.8
—
—
—
—
0.8
4.6
236
70
28
14
3
351
$bn
9.1
0.2
8.4
—
0.5
—
—
—
0.3
9.4
243
56
17
5
2
323
$bn
8.3
0.1
7.3
—
0.9
—
—
—
0.1
8.4
670
642
345
260
39
1,956
$bn
15.1
3.5
10.7
0.4
0.5
—
—
—
3.9
19.0
906
570
230
90
10
1,806
$bn
8.9
0.3
7.9
0.3
0.4
—
—
—
3.3
12.2
70
7
—
—
2
79
$bn
4.2
1.3
—
2.3
—
0.6
0.3
0.3
0.7
4.6
79
5
—
1
—
85
$bn
4.7
1.3
—
2.7
0.3
0.4
0.2
0.2
1.0
5.5
Total
1,067
731
373
274
44
2,489
$bn
33.7
5
19.1
8
1
0.6
0.3
0.3
5.2
38.6
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
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.
HSBC managed funds
HSBC establishes and manages money market funds and non-money market investment funds to provide customers with investment
opportunities. Further information on funds under management is provided on page 60.
HSBC, as fund manager, may be entitled to receive management and performance fees based on the assets under management. HSBC
may also retain units in these funds.
Non-HSBC managed funds
HSBC purchases and holds units of third-party managed funds in order to facilitate business and meet customer needs.
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.
288
HSBC Holdings plc Annual Report and Accounts 2019
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 2019 and 2018 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
2019
$m
5,590
8,945
5,628
20,163
2018
$m
12,986
7,149
4,222
24,357
1
Included within other intangible assets is internally generated software with a net carrying value of $4,829m (2018: $3,632m). During the year,
capitalisation of internally generated software was $2,086m (2018: $1,781m) and amortisation was $947m (2018: $687m).
Movement analysis of goodwill
Gross amount
At 1 Jan
Exchange differences
Other
At 31 Dec
Accumulated impairment losses
At 1 Jan
Impairment losses
Exchange differences
At 31 Dec
Net carrying amount at 31 Dec
Impairment testing
2019
$m
22,180
(154)
58
22,084
(9,194)
(7,349)
49
(16,494)
5,590
2018
$m
22,902
(617)
(105)
22,180
(9,314)
—
120
(9,194)
12,986
The Group’s impairment test in respect of goodwill allocated to each cash-generating unit (‘CGU’) is performed at 1 July each year. A
review for indicators of impairment is undertaken at each subsequent quarter-end and at 31 December 2019.
31 December 2019 impairment test
Having considered the extent of our 2020 business update, current market conditions and their combined potential impact on HSBC’s
operations, an interim impairment test was performed at 31 December 2019 for all CGUs. As a result, we recognised $7.3bn of goodwill
impairment related to five CGUs: GB&M; Europe – CMB; North America – GPB; Latin America – CMB; and Middle East and North Africa –
CMB.
Impairment resulted from a combination of factors, including our macroeconomic outlook, a corresponding judgement to reduce the
basis of the long-term growth rate assumption used to estimate value in use (‘VIU’), IFRS requirements which limit elements of
management-approved forecasts that should be considered when testing goodwill for impairment (see ‘Management’s judgement in
estimating cash flows of a CGU’ on page 290) and lower forecast profitability in some businesses. Significant inputs to the VIU
calculation are discussed in more detail within ‘Basis of the recoverable amount’ on page 290. Management considered the sensitivity of
certain assumptions and the outcome of reasonably possible alternative scenarios. This resulted in full impairment of goodwill for the five
CGUs.
Impairment results and key assumptions in VIU calculation – impaired CGUs
Cash-generating unit
GB&M
Europe – CMB
North America – GPB
Latin America – CMB
Middle East and North Africa – CMB
2019 impairment recognised
Carrying
amount
$bn
of which
goodwill
$bn
60.7
20.0
0.9
1.3
2.6
4.0
2.5
0.4
0.3
0.1
Value in use
Impairment
Discount rate
$bn
55.8
17.5
0.5
1.0
1.5
$bn
4.0
2.5
0.4
0.3
0.1
7.3
%
9.5
9.5
9.5
17.0
13.3
Growth rate
beyond initial
cash flow
projections
%
2.0
1.8
2.1
3.6
2.4
HSBC Holdings plc Annual Report and Accounts 2019
289
Financial statementsFinancial statements
Notes on the financial statements
Basis of the recoverable amount
The recoverable amount of all CGUs to which goodwill has been allocated was equal to its VIU at each respective testing date. The VIU is
calculated by discounting management’s cash flow projections for the CGU. The key assumptions used in the VIU calculation for each
individually significant CGU that is not impaired are discussed below.
Key assumptions in VIU calculation – significant CGUs at 31 December 2019
Goodwill at
31 Dec 2019
Discount
rate
Growth rate
beyond
initial cash
flow
Goodwill at
1 Jul 2019
Discount
rate
Nominal
growth rate
beyond
initial cash
flow
Goodwill at
1 Jul 2018
Discount
rate
Cash-generating unit
Europe – RBWM
$m
3,464
%
8.3
%
1.7
$m
3,496
%
8.3
%
3.2
$m
3,565
%
8.1
Nominal
growth rate
beyond initial
cash flow
projections
%
3.8
At 31 December 2019, aggregate goodwill of $2,126m (1 July 2019: $2,938m; 1 July 2018: $3,061m) 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 Board. The Board challenges and endorses planning
assumptions in light of internal capital allocation decisions necessary to support our strategy, current market conditions and
macroeconomic outlook. For the 31 December 2019 interim impairment test, cash flow projections until the end of Q1 2024 were
considered. As required by IFRSs, estimates of future cash flows exclude estimated cash inflows or outflows that are expected to arise
from restructuring initiatives before an entity has a constructive obligation to carry out the plan, and would therefore have recognised a
provision for restructuring costs. Our business update includes plans to reduce operating costs by approximately $4.5bn by 2022,
incurring costs to achieve these reductions of $6.0bn. Accordingly, we have excluded these components of the plan approved by the
Board as they relate to individual CGUs when calculating VIU.
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 operates. In addition, for the purposes of testing goodwill for impairment, management supplements this
process by comparing the discount rates derived using the internally generated CAPM, with the cost of capital rates produced by external
sources for businesses operating in similar markets.
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. Prior to the 31 December 2019 impairment test, these growth rates reflected GDP and inflation
(nominal GDP) for the countries within which the CGU operates or from which it derives revenue. At 31 December 2019 we considered
the extent to which growth rates based on nominal GDP data remained appropriate given the uncertainty in the macroeconomic
environment from the impact of social unrest in Hong Kong, trade disagreements between the US and China and the UK’s withdrawal
from the EU. We anticipate that when global growth does stabilise it will be at a slightly lower level than recent years. As a result, we
considered it appropriate to base the long-term growth rate assumption on inflation data, moving away from a higher nominal GDP basis.
This judgement had a material impact on the goodwill impairment outcome.
Sensitivities of key assumptions in calculating VIU
At 31 December 2019, Europe – RBWM was 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. A reasonable change in a single key assumption
may not result in impairment. Though taken together a combination of reasonable changes in key assumptions could result in a
recoverable amount that is lower than the CGU’s carrying amount.
Input
Key assumptions
Associated risks
Reasonably possible change
Cash-generating unit
Europe – RBWM
Cash flow
projections
• Level of interest rates
and yield curves.
• Competitors’ position
within the market.
• Level and change in
unemployment rates.
• Uncertain regulatory
• Cash flow projections decrease by 30%. This does
environment.
not result in an impairment.
• Customer remediation
and regulatory actions.
Discount
rate
• Discount rate used is a
• External evidence
• Discount rate increases by 100 bps. This does not
reasonable estimate of a
suitable market rate for
the profile of the
business.
suggests that the rate
used is not appropriate
to the business.
result in an impairment.
290
HSBC Holdings plc Annual Report and Accounts 2019
Sensitivity of VIU to reasonably possible changes in key assumptions and changes to current assumptions to achieve nil headroom
In $ billions (unless otherwise stated)
At 31 December 2019
Carrying amount
VIU
Impact on VIU
100 bps increase in the discount rate – single variable
30% decrease in cash flow projections – single variable
Cumulative impact of all changes
Changes to key assumption to reduce headroom to NIL – single variable
Discount rate – bps
Cash flows – %
Present value of in-force long-term insurance business
Europe – RBWM
$bn
10.1
16.7
(2.3)
(5.6)
(7.1)
397
(39.4)
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)
including valuing the cost of policyholder options and guarantees using stochastic techniques.
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
2019
$m
7,149
NA
7,149
1,749
1,225
(836)
1,378
(18)
47
8,945
2018
$m
6,610
(78)
6,532
673
1,117
(719)
292
(17)
(56)
7,149
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:
• $1,126m (2018: $(56)m), directly offsetting interest rate-driven changes to the valuation of liabilities under insurance contracts.
• $36m (2018: $455m), 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.
• $216m (2018: $(107)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
2019
2018
Hong Kong
France1
Hong Kong
France1
%
1.84
5.44
3.00
%
0.44
1.27
1.70
%
2.29
5.90
3.00
%
1.52
2.35
1.70
1 For 2019, the calculation of France’s PVIF assumes a risk discount rate of 1.27% (2018: 2.35%) plus a risk margin of $130m (2018: $109m).
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. For further details of these guarantees and the impact of changes in economic
assumptions on our insurance manufacturing subsidiaries, see page 150.
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. For further details on the impact of changes in non-economic assumptions on our insurance manufacturing
operations, see page 151.
HSBC Holdings plc Annual Report and Accounts 2019
291
Financial statementsFinancial statements
Notes on the financial statements
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 5)
Right-of-use assets
Owned property, plant and equipment
Other accounts
At 31 Dec
Footnotes
1
2019
$m
9,057
14,744
49,148
123
14,830
10,198
3,592
8,280
4,222
10,480
12,006
2018
$m
8,715
13,957
33,202
735
13,753
9,623
2,506
7,934
N/A
10,060
10,086
136,680
110,571
1 Right-of-use assets have been recognised from 1 January 2019 following the adoption of IFRS 16. Comparatives have not been restated.
Prepayments, accrued income and other assets include $92,979m (2018: $74,151m) 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
1
‘Deposits by banks’ and ‘Customer accounts’ include repos, stock lending and other amounts.
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
2019
$m
4,187
6,999
1,404
70,580
83,170
2018
$m
4,871
8,614
1,400
69,546
84,431
Footnotes
1
2019
$m
17,660
5,893
130,364
10,130
419
2018
$m
19,003
5,458
109,351
14,282
411
164,466
148,505
1 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.
The carrying amount of financial liabilities designated at fair value was $6,120m more than the contractual amount at maturity
(2018: $11,496m less). The cumulative amount of change in fair value attributable to changes in credit risk was a loss of $2,877m (2018:
loss of $209m).
HSBC Holdings
Debt securities in issue (Note 25)
Subordinated liabilities (Note 28)
At 31 Dec
2019
$m
24,687
5,616
30,303
2018
$m
17,767
7,282
25,049
The carrying amount of financial liabilities designated at fair value was $2,227m more than the contractual amount at maturity
(2018: $920m more). The cumulative amount of change in fair value attributable to changes in credit risk was a loss of $1,386m (2018:
loss of $812m).
292
HSBC Holdings plc Annual Report and Accounts 2019
25 Debt securities in issue
HSBC
Bonds and medium-term notes
Other debt securities in issue
Total debt securities in issue
Included within:
– trading liabilities (Note 23)
– financial liabilities designated at fair value (Note 24)
At 31 Dec
HSBC Holdings
Debt securities
Included within:
– financial liabilities designated at fair value (Note 24)
At 31 Dec
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 5)
Lease liabilities1
Other liabilities
At 31 Dec
2019
$m
180,969
55,354
236,323
(1,404)
(130,364)
104,555
2019
$m
81,531
(24,687)
56,844
2019
$m
11,808
14,356
56,646
10,127
1,771
4,604
18,844
118,156
2018
$m
162,277
33,816
196,093
(1,400)
(109,351)
85,342
2018
$m
68,567
(17,767)
50,800
2018
$m
11,296
13,022
41,044
9,633
2,167
N/A
20,218
97,380
1 Lease liabilities have been recognised from 1 January 2019 following the adoption of IFRS 16. Comparatives have not been restated.
Accruals, deferred income and other liabilities include $111,395m (2018: $87,390m) of financial liabilities, the majority of which are
measured at amortised cost.
27 Provisions
Provisions (excluding contractual commitments)
At 1 Jan 2019
Additions
Amounts utilised
Unused amounts reversed
Exchange and other movements
At 31 Dec 2019
Contractual commitments1
At 1 Jan 2019
Net change in expected credit loss provision and other
movements
At 31 Dec 2019
Total provisions
At 31 Dec 2018
At 31 Dec 2019
Restructuring
costs
Legal proceedings
and regulatory
matters
Customer
remediation
Other
provisions
$m
130
402
(203)
(34)
61
356
$m
$m
1,128
282
(660)
(158)
13
605
788
1,674
(837)
(49)
70
1,646
$m
357
223
(81)
(108)
(111)
280
Total
$m
2,403
2,581
(1,781)
(349)
33
2,887
517
(6)
511
2,920
3,398
HSBC Holdings plc Annual Report and Accounts 2019
293
Financial statementsFinancial statements
Notes on the financial statements
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 1 Jan 2018
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
$m
334
73
(158)
(107)
(12)
130
$m
1,501
1,132
(1,255)
(279)
29
1,128
Customer
remediation
$m
1,454
288
(838)
(90)
(26)
788
Other
provisions
$m
469
232
(143)
(131)
(70)
357
Total
$m
3,758
1,725
(2,394)
(607)
(79)
2,403
537
(20)
517
4,011
2,920
1 Contractual commitments include the provision for contingent liabilities measured under IFRS 9 ‘Financial Instruments’ in respect of financial
guarantees and the expected credit loss provision on off-balance sheet guarantees and commitments.
Further details of ‘Legal proceedings and regulatory matters’ are set out in Note 34. Legal proceedings include civil court, arbitration or
tribunal proceedings brought against HSBC companies (whether by way of claim or counterclaim) or civil disputes that may, if not
settled, result in court, arbitration or tribunal proceedings. Regulatory matters 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 32 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 99.
Payment protection insurance
At 31 December 2019, $1.1bn (2018: $555m) 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.
Payments totalling $750m were made during 2019. An increase in provisions of $1.2bn was recognised during the year, primarily
reflecting the deadline of 29 August 2019 for bringing complaints announced by the FCA, and leading to:
• a higher than expected increase in the number of inbound complaints received prior to 29 August 2019;
• the effect on the total number of inbound complaints as a result of treating customer information requests relating to PPI policies
received between 29 June 2019 and 29 August 2019 as complaints;
• the additional operational expenses related to the increases in populations of potential claims;
• an industry-wide exercise by the Official Receiver to pursue redress amounts in respect of bankrupt and insolvent customers; and
• an increased volume of actual or forecast legal claims for PPI mis-selling, which is not affected by the deadline of 29 August 2019.
The estimated liability for redress for both single and regular premium policies is calculated on the basis of a refund 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).
Future estimated redress levels are based on historical redress paid to customers per policy.
At 31 December 2019, contact was made with customers who collectively held 3.0 million policies, representing 56% of total policies
sold. A total of 5.4 million PPI policies have been sold since 2000, generating estimated revenue of $3.4bn at 2019. The gross written
premiums on these policies were approximately $4.5bn. Although the deadline for bringing complaints has passed, customers can still
commence litigation for PPI mis-selling. Provision has been made for the best estimate of any obligation to meet those claims. Given the
limited period following the complaints time bar, the volume and quality of future claims through legal channels remains uncertain.
During the second half of 2019, we received an increasing number of legal claims and Letters Before Action. Our provision estimates that
approximately 45,000 claims will be settled in the future.
The following table summarises the cumulative number of information requests received between 29 June and 29 August 2019, and the
number of claims expected to be assessed in the future, excluding legal claims:
294
HSBC Holdings plc Annual Report and Accounts 2019
Cumulative PPI complaints received to 31 December 2019
Information requests received during autoconversion period (000s)
Information requests awaiting evaluation (000s)
Remaining autoconverted claims anticipated to be worked (000s)
Remaining reactive claims anticipated to be worked (000s)
Total remaining claims anticipated to be worked (000s)
Average uphold rate per claim
Average redress per claim ($)
Footnotes
Cumulative actual to
31 Dec 2019
1
1
1
1
2
3
1,889
234
167
44
211
86
3,226
1 Excludes invalid claims for which no PPI policy exists.
2
3
Including inbound and autoconverted claims, but excludes FOS complaints.
Including inbound and autoconverted claims, but excludes claims from the Official Receiver.
The PPI provision is based upon assumptions and estimates taken from historical experience. The profile of cases yet to be assessed
could therefore vary leading to different uphold rates or average redress levels being used to arrive at the provision.
We continued to monitor available information up until the date of the approval of the financial statements to ensure the provision
estimate was appropriate.
Sensitivity to key assumptions
• A 10% increase/decrease in the uphold rate for complaints yet to be worked would increase/decrease the redress provision by
approximately $40m.
• A 10% increase/decrease in the average redress for complaints yet to be worked would increase/decrease the redress provision by
approximately $56m.
• An increase/decrease in settled legal claim volumes of 10,000 would increase/decrease the redress provision by approximately $29m.
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
2019
$m
24,600
22,775
1,825
10,549
10,130
419
35,149
12,363
22,786
2018
$m
22,437
20,651
1,786
14,693
14,282
411
37,130
13,168
23,962
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 subordinated
liabilities 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 2019
295
Financial statementsFinancial statements
2019
$m
900
900
420
925
2018
$m
892
892
411
894
1,345
1,305
750
500
300
300
750
500
300
300
1,850
1,850
396
549
875
296
785
382
513
757
286
758
4,751
4,546
400
400
122
122
748
221
202
400
400
121
121
747
221
269
1,171
1,237
1,246
463
496
700
2,905
1,226
1,106
829
697
3,858
Notes on the financial statements
HSBC’s subsidiaries subordinated liabilities in issue
Additional tier 1 capital securities guaranteed by HSBC Holdings
$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
£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
6.50% subordinated notes
5.375% callable subordinated step-up notes
5.375% subordinated notes
6.25% subordinated notes
4.75% subordinated notes
Footnotes
First call date Maturity date
1
1
Jun 2030
Apr 2020
Nov 2031
Jun 1990
Sep 1990
Jun 1992
—
May 2025
—
Jul 2023
2
Nov 2025
Nov 2030
—
—
—
Aug 2033
Jan 2041
Mar 2046
Tier 2 securities issued by The Hongkong and Shanghai Banking Corporation Ltd
$400m
Primary capital undated floating rate notes (third series)
Jul 1991
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
Nov 2022
Nov 2027
—
—
—
—
—
—
Sep 2020
Jul 2097
Aug 2020
Nov 2034
Aug 2035
Jan 2039
6
6
3
4
4
5, 6
—
Jan 2021
507
507
Other subordinated liabilities each less than $150m
Oct 1996
Nov 2083
Securities issued by other HSBC subsidiaries
Other subordinated liabilities each less than $200m
Subordinated liabilities issued by HSBC subsidiaries at 31 Dec
3
7
26
26
29
29
236
12,363
273
13,168
1 See paragraph below, ‘Guaranteed by HSBC Holdings or HSBC Bank plc’.
2 The interest rate payable after November 2025 is the sum of the three-month sterling Libor plus 1.5 percentage points.
3 Some securities included here are ineligible for inclusion in the capital base of HSBC.
4 HSBC tendered for these securities in November 2019. The principal balance is $358m and $383m respectively. The original notional of these
securities are $1,000m and $750m respectively.
5 HSBC tendered for these securities in 2017. In January 2018, a further tender was conducted. The principal balance is $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.
296
HSBC Holdings plc Annual Report and Accounts 2019
HSBC Holdings’ subordinated liabilities
At amortised cost
Designated at fair value (Note 24)
At 31 Dec
HSBC Holdings’ subordinated liabilities in issue
Tier 2 securities issued by HSBC Holdings
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
€1,750m
€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
6.0% 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
2,3
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
Jun 2019
Jan 2024
Jun 2025
Jun 2028
Amounts owed to HSBC undertakings
$900m
10.176% subordinated step-up cumulative notes
Jun 2030
Jun 2040
Other securities issued by HSBC Holdings
Amounts owed to third parties
$1,500m
5.625% contingent convertible securities
4
Nov 2019
Jan 2020
At 31 Dec
2019
$m
18,361
5,616
23,977
2019
$m
2,076
1,611
1,626
545
245
2,036
2,738
1,490
1,886
1,059
855
1,064
1,294
—
—
1,736
1,321
21,582
892
892
1,503
1,503
23,977
2018
$m
17,715
7,282
24,997
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
24,105
892
892
—
—
24,997
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 CRR II. Prior period figures are included on a CRD IV basis.
2 These securities are included in the capital base of HSBC as fully CRR II-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.
4 This security was called by HSBC Holdings on 22 November 2019 and was redeemed and cancelled on 17 January 2020. Between the date of
exercise of the call option and the redemption, this security was considered to be a subordinated liability. Refer to Note 31 for further details on
additional Tier 1 securities.
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 CRR II by virtue of the application of grandfathering provisions. 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 CRR II by virtue of the same
grandfathering process.
These preferred securities, together with the guarantee, are intended to provide investors with rights to income and capital distributions
and distributions upon liquidation of the relevant issuer that are 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 total capital
ratio of HSBC Bank plc (on a solo or consolidated basis) falls below the regulatory minimum required, or if the Directors expect it to do so
HSBC Holdings plc Annual Report and Accounts 2019
297
Financial statementsFinancial statements
Notes on the financial statements
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 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 CRR II, either as fully eligible capital or by
virtue of the application of grandfathering provisions. In accordance with CRR II, 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 299 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, although 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.
298
HSBC Holdings plc Annual Report and Accounts 2019
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
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 liabilities
Financial liabilities designated at
fair value
– debt securities in issue: covered
– debt securities in issue: unsecured
– subordinated liabilities and preferred
securities
– other
Derivatives
Debt securities in issue
– covered bonds
– otherwise secured
– unsecured
Accruals and other financial liabilities
Subordinated liabilities
Total financial liabilities at 31 Dec
2019
HSBC
Maturity analysis of assets, liabilities and off-balance sheet commitments
Due not
more than
1 month
Due over
1 month
but not
more than
3 months
Due over
3 months
but not
more than
6 months
Due over
6 months
but not
more than
9 months
Due over
9 months
but not
more than
1 year
Due over
1 year
but not
more than
2 years
Due over
2 years
but not
more than
5 years
Due over
5 years
$m
$m
$m
$m
$m
$m
$m
$m
Financial assets
Cash and balances at central banks
154,099
—
—
—
—
—
—
644
412
74
150
7,826
82,379
14,547
61,629
6,203
38,997
64,472
381
24
4,877
61,254
8,562
45,924
6,768
17,933
35,795
4,956
38,380
252,009
4,846
241,941
41,554
190,675
51,893
118,585
20,197
164,741
36,128
—
—
—
62
200
27
2,592
36,005
7,245
25,006
3,754
—
—
—
—
—
—
—
—
—
452
152
540
—
—
—
—
Total
$m
154,099
4,956
38,380
254,271
422
22
780
112
2,859
6,848
2,356
294
2,005
34,568
43,627
425
642
242,995
69,203
36,755
106,203
227,811
295,661
1,036,743
6,931
25,069
4,755
22,923
71,751
11,529
66,761
252,275
147,139
13,911
39,958
3,428
431,137
535,061
70,545
8,226
6,305
2,298
2,362
—
240,862
17,485
18,202
48,427
90,193
132,610
443,312
Financial assets at 31 Dec 2019
1,209,990
200,086
123,208
65,512
65,512
165,252
325,924
465,943
2,621,427
Non-financial assets
—
—
—
—
—
—
—
93,725
93,725
Total assets at 31 Dec 2019
1,209,990
200,086
123,208
65,512
65,512
165,252
325,924
559,668
2,715,152
80,661
5,544
2,532
915
495
432
363
2,037
92,979
63,199
38,380
46,397
1,287,358
646,843
479,763
160,752
—
—
4,167
81,038
49,405
24,214
7,419
—
—
2,773
38,343
29,320
7,162
1,861
—
—
454
—
—
844
11,530
11,342
8,484
2,621
425
132,042
3,402
1,579
1,882
4,817
82,130
—
209
—
265
12,844
4,667
4,236
—
8,884
23
3,937
237,901
—
—
2,046
2,946
—
2,621
105
—
1,290
73
—
148
4,552
—
3,757
—
795
10
—
—
2,455
5,275
3,631
1,119
525
354
—
287
26,081
—
22,950
—
3,131
68
—
—
876
4,075
2,646
1,388
41
2
—
29
43,534
2,663
34,753
2,131
3,987
540
6,852
3,009
1,481
59
—
102
5,196
1,139
3,030
—
1,027
18
8,183
17,374
12,799
13,152
11,382
14,572
20,048
—
2,015
6,168
87,796
1,502
—
2
17,372
9,078
—
—
248
12,551
3,914
22
—
161
—
—
749
219
998
958
12,991
11,382
13,604
18,092
1,244
1,993
2,058
100
1,592
755
2,823
424
—
—
1,056
63,199
38,380
59,022
154
1,439,115
71
41
42
747,252
519,317
172,546
1,024
140,344
—
—
4,817
83,170
63,356
164,466
1,159
4,961
47,036
125,402
8,396
6,765
782
7,045
—
1,663
5,382
2,890
19,804
10,550
23,553
239,497
104,555
1,747
5,266
97,542
111,395
24,600
1,939,350
120,040
64,004
34,965
31,101
51,439
72,351
96,111
2,409,361
Non-financial liabilities
—
—
—
—
—
—
—
113,123
113,123
Total liabilities at 31 Dec 2019
1,939,350
120,040
64,004
34,965
31,101
51,439
72,351
209,234
2,522,484
Off-balance sheet commitments
given
Loan and other credit-related
commitments
– personal
– corporate and commercial
– financial
794,336
221,952
460,569
111,815
600
40
117
443
590
39
96
455
313
56
52
205
551
167
381
3
442
208
218
16
458
392
66
—
318
299
19
—
797,608
223,153
461,518
112,937
HSBC Holdings plc Annual Report and Accounts 2019
299
Financial statementsFinancial 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
Financial assets
Cash and balances at central banks
Items in the course of collection from other
banks
Hong Kong Government certificates
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
Financial investments
Accrued income and other financial assets
162,843
5,787
35,859
235,443
7,743
206,925
40,114
178,613
41,967
118,294
18,352
172,795
40,421
62,067
—
—
—
264
49
15
10,421
72,072
8,736
58,623
4,713
41,084
58,731
6,893
—
—
—
707
371
57
3,486
58,680
8,237
45,918
4,525
13,308
30,464
2,403
—
—
—
197
918
69
7,158
—
—
—
671
2,415
328
4,508
101,267
219,841
—
—
—
744
145
79
2,004
38,394
7,581
27,001
3,812
5,763
—
—
—
104
334
18
3,282
37,333
7,240
25,597
4,496
3,574
15,707
15,357
41,866
561
307
349
—
—
—
—
29,136
334
1,194
275,496
229,626
42,540
3,330
—
112,041
2,237
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
Off-balance sheet commitments received
Loan and other credit-related commitments
73,464
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
35,859
42,406
1,225,919
612,325
457,661
155,933
154,383
5,641
82,867
3,813
—
981
—
2,832
203,962
6,777
—
2,166
4,611
69,958
6
—
—
3,457
66,990
38,132
22,922
5,936
8,140
—
251
4,476
—
1,562
—
2,914
62
—
—
1,043
31,315
21,218
8,029
2,068
1,750
—
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
11,194
12,556
8,075
—
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
3,481
—
2,353
—
1,128
144
3,330
—
—
3,330
1,269
—
Total
$m
162,843
5,787
35,859
238,130
41,111
207,825
72,167
981,696
391,390
529,025
61,281
242,804
407,433
75,548
696,969
499,158
166,516
165,884
5,641
84,431
148,505
5,253
104,064
14,693
24,495
205,835
85,342
748
6,046
78,548
87,380
22,437
656
74,222
—
886
125
35,859
56,331
1,362,643
53
29
43
—
—
2
63,061
143,959
12,821
1,027
92,846
731
98
—
1,655
3,194
2,623
509
62
501
—
36
24,942
67,093
9,232
5,253
3
—
5,558
4,122
2,853
1,092
177
408
—
235
12,545
1,190
9,143
—
2,212
560
53,615
2,721
47,443
60,621
1,137
37,633
—
12,568
3,451
159
9,283
622
10,670
19,713
13,027
—
394
748
944
10,276
18,021
885
1,996
1,027
1,384
—
1,412
11,615
1,300
18,959
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
1
‘Customer accounts’ includes $408,090m (2018: $364,729m) insured by guarantee schemes.
300
HSBC Holdings plc Annual Report and Accounts 2019
HSBC Holdings
Maturity analysis of assets, liabilities and off-balance sheet commitments (continued)
Due over
1 month
but not
more than
3 months
Due over
3 months
but not
more than
6 months
Due over
6 months
but not
more than
9 months
Due over
9 months
but not
more than
1 year
Due over
1 year
but not
more than
2 years
Due over
2 years
but not
more than
5 years
Due not
more than
1 month
Due over
5 years
$m
$m
$m
$m
$m
$m
$m
$m
Total
$m
Financial assets
Cash at bank and in hand:
– balances with HSBC undertakings
Derivatives
Loans and advances to HSBC
undertakings
Financial assets with HSBC
undertakings designated and
otherwise mandatorily measured
at fair value
2,382
596
—
—
—
—
102
672
120
—
—
25
—
—
—
—
—
—
—
—
Financial investments
2,754
3,493
1,873
2,251
2,721
3,014
93
277
97
48
16
12
—
—
—
230
—
1,176
2,382
2,002
600
1,909
6,790
10,218
458
24,845
36,661
—
—
—
—
61,964
16,106
543
Accrued income and other financial
assets
Total financial assets at
31 Dec 2019
Non-financial assets
Total assets at 31 Dec 2019
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 2019
Non-financial liabilities
Total liabilities at 31 Dec 2019
Off-balance sheet commitments
Undrawn formal standby facilities,
credit lines and other commitments
to lend
5,927
—
5,927
—
—
—
—
1,838
—
900
1,503
4,241
—
4,241
4,442
—
4,442
464
—
—
—
—
—
574
—
1,038
—
1,038
2,090
—
2,090
2,324
—
2,324
2,737
—
2,737
4,084
26,984
44,627
93,215
—
—
4,084
26,984
162,025
206,652
162,025
255,240
—
—
—
—
—
—
303
—
303
—
303
—
—
—
—
—
—
55
—
55
—
55
—
—
—
—
—
—
10
—
10
—
10
—
—
—
464
5,651
5,651
—
20
6,710
6,710
—
85
17,942
12,326
5,616
78
10,134
23,786
22,924
—
—
15,805
—
—
2,076
32,657
—
35
14,782
55,761
326
30,303
24,687
5,616
2,021
56,844
1,877
18,361
109,870
326
15,805
32,657
56,087
110,196
—
—
—
—
—
—
—
—
—
HSBC Holdings plc Annual Report and Accounts 2019
301
Financial statementsFinancial 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
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 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
Total financial liabilities at 31 Dec 2018
Non-financial liabilities
Total liabilities at 31 Dec 2018
Off-balance sheet commitments given
Undrawn formal standby facilities,
credit lines and other commitments
to lend
3,509
540
—
—
3,052
11,563
—
—
33
7,134
—
7,134
—
—
—
—
1,321
—
319
—
1,640
—
1,640
—
—
27
11,590
—
11,590
949
—
—
—
—
—
353
—
1,302
—
1,302
—
—
158
—
—
—
158
—
158
—
2,125
—
2,125
—
—
188
—
2,313
—
2,313
—
—
—
—
—
968
—
—
—
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
—
22,178
41,904
161,248
203,152
83,933
161,248
245,181
—
—
949
12,306
12,306
—
339
23,770
—
—
36,415
—
36,415
10,618
5,461
5,157
499
27,030
41
17,715
55,903
214
56,117
25,049
17,767
7,282
2,159
50,800
942
17,715
97,614
214
97,828
—
—
—
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 ‘Due not
more than 1 month’ time bucket and not by contractual maturity.
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.
302
HSBC Holdings plc Annual Report and Accounts 2019
Cash flows payable by HSBC under financial liabilities by remaining contractual maturities
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 guarantees1
At 31 Dec 2019
Proportion of cash flows payable in period
Deposits by banks
Customer accounts
Repurchase agreements – non-trading
Trading liabilities
Financial liabilities designated at fair value
Derivatives
Debt securities in issue
Subordinated liabilities
Other financial liabilities
Loan and other credit-related commitments
Financial guarantees1
At 31 Dec 2018
Proportion of cash flows payable in period
Due over 1
month but
not more
than 3
months
Due over 3
months but
not more
than 1 year
Due over 1
year but not
more than 5
years
$m
4,167
81,037
3,403
—
4,666
105
17,374
—
9,079
$m
4,227
62,105
3,565
—
14,747
522
38,423
2,908
6,792
$m
3,371
9,900
368
—
76,155
1,076
36,584
5,197
5,637
Due not more
than 1 month
$m
46,471
1,288,577
132,156
83,170
13,447
237,897
8,757
1,847
127,898
Due over
5 years
$m
1,084
Total
$m
59,320
191
1,441,810
1,036
—
68,045
1,691
8,177
27,892
2,992
140,528
83,170
177,060
241,291
109,315
37,844
152,398
1,940,220
119,831
133,289
138,288
111,108
2,442,736
795,243
20,007
601
37
561
102
886
68
317
—
797,608
20,214
2,755,470
120,469
133,952
139,242
111,425
3,260,558
85%
4%
4%
4%
3,457
66,990
8,140
—
4,476
62
11,194
89
8,987
2,419
62,963
2,487
—
15,591
927
24,902
793
4,694
7,507
7,617
950
—
75,578
2,065
36,599
7,600
2,367
3%
556
130
—
—
89,261
1,323
13,656
27,670
1,260
56,508
1,364,528
166,118
84,431
189,384
208,737
93,646
36,501
127,645
103,395
114,776
140,283
133,856
2,327,498
5,279
113
1,109
289
944
160
377
14
780,266
23,518
2,630,687
108,787
116,174
141,387
134,247
3,131,282
84%
3%
4%
5%
4%
42,569
1,226,828
154,541
84,431
4,478
204,360
7,295
349
110,337
1,835,188
772,557
22,942
1 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied.
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 2019, 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.
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
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 2019
303
Financial statementsFinancial statements
Notes on the financial statements
Cash flows payable by HSBC Holdings under financial liabilities by remaining contractual maturities
Due not more
than 1 month
Due over 1
month but not
more than 3
months
Due over 3
months but
not more
than 1 year
Due over 1
year but not
more than 5
years
Amounts owed to HSBC undertakings
Financial liabilities designated at fair value
Footnotes
Derivatives
Debt securities in issue
Subordinated liabilities
Other financial liabilities
Loan commitments
Financial guarantees
At 31 Dec 2019
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
1
1
$m
—
88
1,838
128
1,588
956
4,598
—
11,061
15,659
—
—
1,321
—
—
—
1,321
—
8,627
9,948
$m
464
168
—
244
154
519
1,549
—
—
$m
—
784
—
1,137
718
365
3,004
—
—
Due over
5 years
$m
—
18,184
78
25,310
21,533
—
Total
$m
464
34,000
2,021
65,509
29,736
1,840
$m
—
14,776
105
38,690
5,743
—
59,314
65,105
133,570
—
—
—
—
1,549
3,004
59,314
65,105
949
237
—
379
248
675
2,488
—
—
—
2,656
—
1,159
757
228
4,800
—
—
—
14,384
339
29,178
4,019
—
47,920
—
—
—
11,653
499
30,801
25,311
—
68,264
—
—
—
11,061
144,631
949
28,930
2,159
61,517
30,335
903
124,793
—
8,627
2,488
4,800
47,920
68,264
133,420
1 Excludes performance guarantee contracts to which the impairment requirements in IFRS 9 are not applied.
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.
304
HSBC Holdings plc Annual Report and Accounts 2019
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 2019
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
Financial liabilities
Derivatives (Note 15)
Repos, stock lending and
similar agreements
classified as:
– trading liabilities
– non-trading liabilities
Customer accounts
At 31 Dec 2019
Derivatives (Note 15)
Repos, stock lending and
similar agreements
classified as:
– trading liabilities
– non-trading liabilities
Customer accounts
At 31 Dec 2018
1
2
3
1
2
3
1
2
4
1
2
4
277,261
(41,739)
235,522
(171,371)
(13,095)
(47,404)
3,652
7,473
242,995
21,465
(280)
21,185
(1,553)
(19,630)
348,561
(134,772)
213,789
(28,826)
(184,495)
—
(189)
33,039
(10,128)
22,911
(18,893)
—
—
680,326
(186,919)
493,407
(220,643)
(217,220)
(47,593)
2
279
4,018
7,951
165
21,350
27,549
241,338
735
23,646
35,922
529,329
250,275
(49,711)
200,564
(145,785)
(9,986)
(38,031)
6,762
7,261
207,825
18,217
372,358
(790)
(167,313)
17,427
205,045
(1,244)
(16,179)
(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
275,286
(41,739)
233,547
(171,371)
(20,137)
(37,844)
4,195
5,950
239,497
10,494
(280)
232,675
(134,772)
36,750
(10,128)
10,214
97,903
26,622
(1,553)
(28,826)
(18,893)
(8,656)
(68,638)
—
—
(357)
—
5
82
7,729
46
10,260
42,441
140,344
31
26,653
555,205
(186,919)
368,286
(220,643)
(97,431)
(38,201)
12,011
48,468
416,754
248,123
(49,711)
198,412
(145,785)
(14,895)
(29,998)
7,734
7,423
205,835
13,169
274,367
40,286
575,945
(790)
(167,313)
(12,468)
(230,282)
12,379
107,054
27,818
345,663
(1,244)
(21,788)
(21,245)
(11,133)
(85,087)
—
—
(164)
—
(190,062)
(111,115)
(30,162)
2
15
6,573
14,324
114
12,493
58,830
165,884
11
27,829
66,378
412,041
1 At 31 December 2019, the amount of cash margin received that had been offset against the gross derivatives assets was $2,350m (2018:
$3,935m). The amount of cash margin paid that had been offset against the gross derivatives liabilities was $8,303m (2018: $5,888m).
2 For the amount of repos, reverse repos, stock lending, stock borrowing and similar agreements recognised on the balance sheet within ‘Trading
assets’ $21,350m (2018: $18,280m) and ‘Trading liabilities’ $10,260m (2018: $12,493m), see the ‘Funding sources and uses’ table on page 133.
3 At 31 December 2019, the total amount of ‘Loans and advances to customers’ was $1,036,743m (2018: $981,696m), of which $22,911m (2018:
$28,066m) was subject to offsetting.
4 At 31 December 2019, the total amount of ‘Customer accounts’ was $1,439,115m (2018: $1,362,643m), of which $26,622m (2018: $27,818m)
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 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
2019
2018
Footnotes
Number
$m
Number
20,360,841,496
10,180
20,320,716,258
71,588,032
341,872,011
(135,776,994)
36
171
(68)
83,740,460
166,850,869
(210,466,091)
1
20,638,524,545
10,319
20,360,841,496
$m
10,160
42
83
(105)
10,180
HSBC Holdings plc Annual Report and Accounts 2019
305
Financial statementsFinancial statements
Notes on the financial statements
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
2019
Footnotes
2
Number
1,450,000
$m
—
2018
Number
1,450,000
2019
$m
13,959
2019
$m
24,278
$m
—
2018
$m
13,609
2018
$m
23,789
1 All HSBC Holdings ordinary shares in issue, excluding 325,273,407 shares held in treasury, confer identical rights, including in respect of capital,
2
dividends and voting.
Included in the capital base of HSBC as additional tier 1 capital in accordance with the CRR II 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 Group 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 they are
the HSBC Holdings non-cumulative preference shares outlined above and the contingent convertible securities described below. These
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 – contingent convertible securities
HSBC Holdings continues to issue contingent convertible securities that are included in its capital base as fully CRR II-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 Holdings’ general corporate purposes and to further strengthen its
capital base to meet requirements under CRR II. 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 Holdings, and HSBC Holdings 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 Group 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 Holdings 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 Holdings’ 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 Holdings 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.
306
HSBC Holdings plc Annual Report and Accounts 2019
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
Footnotes
1
First call
date
Nov 2019
Jun 2021
Sep 2024
Mar 2025
May 2027
Mar 2023
Mar 2028
Sep 2022
Sep 2023
Jul 2029
Sep 2026
Jun 2022
Sep 2023
2019
$m
—
1,995
2,240
2,453
2,993
2,346
1,797
1,940
1,119
1,418
1,299
722
549
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
20,871
22,392
1 This security was called by HSBC Holdings on 22 November 2019 and was redeemed and cancelled on 17 January 2020. Between the date of
exercise of the call option and the redemption, this security was considered to be a subordinated liability. Please refer to Note 28.
Shares under option
For details of the options outstanding to subscribe for HSBC Holdings ordinary shares under the HSBC Holdings savings-related share
option plan, see Note 5.
Aggregate options outstanding under these plans
31 Dec 2019
31 Dec 2018
Number of
HSBC Holdings
ordinary shares
Period of exercise
Exercise price
Number of
HSBC Holdings
ordinary shares
Period of exercise
Exercise price
65,060,681
2019 to 2025
£4.0472–£5.9640
57,065,513
2018 to 2024
£4.0472–£5.9640
Maximum obligation to deliver HSBC Holdings ordinary shares
At 31 December 2019, 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 163,567,253 (2018: 152,667,912). The total number of shares at 31 December
2019 held by employee benefit trusts that may be used to satisfy such obligations to deliver HSBC Holdings ordinary shares was
5,397,395 (2018: 5,928,890).
32 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
Footnotes
2
HSBC
2019
$m
20,214
75,933
1,576
97,723
6,316
56,326
734,966
797,608
2018
$m
23,518
71,484
1,408
96,410
7,083
67,265
705,918
780,266
HSBC Holdings1
2019
$m
11,061
—
289
11,350
—
—
—
—
2018
$m
8,627
—
215
8,842
—
—
—
—
1 Guarantees by HSBC Holdings are all in favour of other Group entities.
2
Includes $600,029m of commitments at 31 December 2019 (31 December 2018: $592,008m), 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.
The majority of 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 34.
HSBC Holdings plc Annual Report and Accounts 2019
307
Financial statementsFinancial statements
Notes on the financial statements
Financial Services Compensation Scheme
The Financial Services Compensation Scheme (‘FSCS’) has provided compensation to customers of financial services firms that have
failed. Following the financial crisis, the compensation paid out to customers was initially funded through loans from HM Treasury, which
were fully repaid in 2018 by the FSCS. The Group could be liable to pay a proportion of any future amounts that the FSCS borrows from
HM Treasury to the extent the industry levies imposed to date are not sufficient to cover the compensation due to customers in any
future possible collapse. The ultimate FSCS levy to the industry as a result of a collapse cannot currently be estimated reliably. It is
dependent on various uncertain factors including the potential recoveries of assets by the FSCS, changes in the level of protected
products (including deposits and investments) and the population of FSCS members at the time.
Associates
HSBC’s share of associates’ contingent liabilities, contractual commitments and guarantees amounted to $46.7bn at 31 December 2019
(2018: $48.5bn). No matters arose where HSBC was severally liable.
33 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
One to two years
Two to three years
Three to four years
Four to five years
Later than one year and no later than five years
Later than five years
At 31 Dec
Total future
minimum
payments
2019
Unearned
finance
income
$m
$m
1,674
1,634
1,889
1,704
1,558
6,785
6,136
(157)
(155)
(151)
(136)
(132)
(574)
(614)
Present
value
$m
1,517
1,479
1,738
1,568
1,426
6,211
5,522
14,595
(1,345)
13,250
Total future
minimum
payments1
2018
Unearned
finance
income1
$m
$m
2,229
N/A
N/A
N/A
N/A
7,420
5,032
14,681
(196)
N/A
N/A
N/A
N/A
(628)
(619)
(1,443)
Present
value1
$m
2,033
N/A
N/A
N/A
N/A
6,792
4,413
13,238
1 The disclosure requirements of IFRS 16 were adopted from 1 January 2019. Comparatives have not been restated.
34 Legal proceedings and regulatory matters
HSBC is party to legal proceedings and regulatory matters in a number of jurisdictions arising out of its normal business operations.
Apart from the matters described below, HSBC considers that none of these matters are material. The recognition of provisions is
determined in accordance with the accounting policies set out in Note 1. While the outcome of legal proceedings and regulatory matters
is inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in
respect of these matters as at 31 December 2019 (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 for the
Southern District of New York (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 February 2019, the US
Court of Appeals for the Second Circuit (the ‘Second Circuit Court of Appeals’) reversed that dismissal and remanded the cases to the US
Bankruptcy Court. In August 2019, HSBC and other parties filed a petition for writ of certiorari to the US Supreme Court seeking review
of the Second Circuit Court of Appeals decision. Further proceedings in the US Bankruptcy Court have been stayed pending the
resolution of that petition.
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 to file amended complaints.
As a result of that opinion, all claims against one of the HSBC companies have been dismissed, and certain claims against the remaining
HSBC defendants have also been dismissed. In May 2019, the liquidators appealed certain issues from the US Bankruptcy Court opinion
to the US District Court for the Southern District of New York (the ’New York District Court’).
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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 2020 for UK-based defendants and November 2020 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. In June 2019,
the Trustee, Kingate and HBBM entered into a global settlement agreement pursuant to which the Trustee and Kingate released HBBM
from any and all claims arising out of or relating to Kingate including all pending litigation in the US, UK and Bermuda. Following court
approval of the settlement in the US, Bermuda and British Virgin Islands, the Bermuda action was discontinued in October 2019, and the
Trustee dismissed certain of its US claims against HBBM in November 2019.
Cayman Islands litigation: In February 2013, Primeo Fund (‘Primeo’) (in liquidation since April 2009) brought an action against HSBC
Securities Services Luxembourg (‘HSSL’) and Bank of Bermuda (Cayman) Limited (now known as HSBC 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, in June 2019, the Court of Appeal of the Cayman Islands dismissed Primeo’s claims against HSSL and HSBC
Cayman Limited. In August 2019, Primeo filed a notice of appeal to the UK Privy Council and, in September 2019, HSSL and HSBC
Cayman Limited indicated that they will seek to dismiss the appeal.
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 (‘HSBC Bank’) 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. In December 2018, Alpha Prime brought additional
claims before the Luxembourg District Court seeking damages against various HSBC companies. A preliminary hearing is scheduled for
June 2020.
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 asserting identical claims before the Luxembourg District Court. In December 2018, Senator brought
additional claims against HSSL and HSBC Bank Luxembourg branch before the Luxembourg District Court, seeking restitution of
Senator’s securities or money damages. These matters are currently pending before the Luxembourg District Court.
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 to the Irish Supreme Court, and a hearing is scheduled for March 2020.
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.
Anti-money laundering and sanctions-related matters
In December 2012, among other agreements, HSBC Holdings plc (‘HSBC Holdings’) agreed to an undertaking with the UK Financial
Services Authority, which was replaced by a Direction issued by the UK Financial Conduct Authority (‘FCA’) in 2013, and consented to a
cease-and-desist order with the US Federal Reserve Board (‘FRB’), both of which contained certain forward-looking anti-money
laundering (‘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. Reflective of HSBC’s significant progress in
strengthening its financial crime risk management capabilities, HSBC’s engagement with the current Skilled Person will be terminated
and a new Skilled Person with a narrower mandate will be appointed to assess the remaining areas that require further work in order for
HSBC to transition fully to business-as-usual financial crime risk management. The Independent Consultant will continue to carry out an
annual OFAC compliance review at the FRB’s discretion. The role of the Skilled Person/Independent Consultant is discussed on page 145.
Through the Skilled Person/Independent Consultant’s prior 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’s and HSBC UK’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 N.A. (‘HSBC Bank USA’), HSBC North America Holdings Inc. and HSBC USA Inc. (the ‘Nominal Corporate Defendants’)
in New York state court against certain current and former directors and officers of the Nominal Corporate Defendants (the ‘Individual
Defendants’). The complaint alleges that the Individual Defendants breached their fiduciary duties to the Nominal Corporate Defendants
and caused a waste of corporate assets by allegedly permitting and/or causing the conduct underlying the five-year deferred prosecution
agreement with the US Department of Justice (‘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; furthermore, in March 2019, the appellate court denied the Nominal Corporate Defendants’
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motion for reargument or 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 further motion to dismiss in 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 the Bank Secrecy Act, 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 and, in March 2019, the plaintiff’s application for leave to appeal was denied. In October 2019, the Ontario
Superior Court of Justice dismissed the remaining common law misrepresentation claim against HSBC Holdings.
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. In one case, in August 2019, the Second Circuit Court of Appeals affirmed the dismissal of the plaintiffs’ claims, and this matter is
now concluded. Currently, 10 actions remain pending in federal courts in New York or the District of Columbia. Motions to dismiss were
filed in three of those cases and the courts granted HSBC’s motions in all three cases in March, September and October 2019. The
plaintiffs are seeking to amend their complaint in one of the cases and have appealed the decisions in the two other cases. HSBC has
filed motions to dismiss in three further cases which remain pending. The four remaining 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 HSBC with
AML, anti-terrorist financing and sanctions laws, regulations and requirements, and the regulatory compliance of HSBC more generally.
In August 2019, HSBC Holdings concluded a settlement with the claimants to resolve this claim.
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 have been 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.
In October 2019, the Belgian court approved a settlement between HSBC Swiss Private Bank and Belgian authorities in which HSBC
Swiss Private Bank agreed to pay €295m to resolve the Belgian authorities’ investigation into historical tax-related offences. The Belgian
court also dismissed proceedings against HSBC Holdings and HSBC Private Bank Holdings (Suisse) SA.
In December 2019, HSBC Swiss Private Bank entered into a three-year deferred prosecution agreement with the DoJ (the ‘Swiss Tax
DPA’). This concluded the DoJ’s investigation into HSBC Swiss Private Bank’s legacy business with US clients. Under the terms of the
Swiss Tax DPA, HSBC Swiss Private Bank agreed to pay $192m to the DoJ and the US Internal Revenue Service and has a number of
ongoing cooperation obligations.
HSBC continues to cooperate with tax-related investigations by other tax administration, regulatory or law enforcement authorities.
Based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these ongoing matters,
including the timing or any possible impact on HSBC.
London interbank offered rates, European interbank offered rates and other benchmark interest rate
investigations and litigation
Euro interest rate derivatives: 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 appealed the decision and, in September 2019, the General Court of
the European Union (the ‘General Court’) issued a decision largely upholding the EC’s findings on liability but annulling the fine. HSBC
and the EC have both appealed the General Court’s decision to the European Court of Justice.
US dollar Libor: Beginning in 2011, HSBC and other panel banks have been named as defendants in a number of private lawsuits filed
in the US with respect to the setting of US dollar Libor. The complaints assert claims under various US laws, including US antitrust and
racketeering laws, the US Commodity Exchange Act (‘US CEA’) and state law. The lawsuits include individual and putative class actions,
most of which have been transferred and/or consolidated for pre-trial purposes before the New York District Court.
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 dollar 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: Between January and March 2019, HSBC and other panel banks were named as defendants
in three putative class actions filed in the New York District Court on behalf of persons and entities who purchased instruments paying
interest indexed to US dollar ICE Libor from a panel bank. The complaints allege, among other things, misconduct related to the
suppression of this benchmark rate in violation of US antitrust and state law. In July 2019, the three putative class actions were
consolidated, and the plaintiffs filed a consolidated amended complaint. In August 2019, the defendants filed a motion to dismiss the
complaint, which remains pending.
Singapore interbank offered rate (‘Sibor’), Singapore swap offer rate (‘SOR’) and Australia bank bill swap rate (‘BBSW’):
In July and August 2016, HSBC and other panel banks were named as defendants in two putative class actions filed in the New York
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District Court on behalf of persons who transacted in products related to the Sibor, SOR and BBSW benchmark rates. The complaints
allege, among other things, misconduct related to these benchmark rates in violation of US antitrust, commodities and racketeering laws,
and state law.
In the Sibor/SOR litigation, following a decision on the defendants’ motion to dismiss in October 2018, the claims against a number of
HSBC entities were dismissed, and the Hongkong and Shanghai Banking Corporation Limited (‘HBAP’) remained as the only HSBC
defendant in this action. In October 2018, HBAP filed a motion for reconsideration of the decision based on the issue of personal
jurisdiction; this motion was denied in April 2019. Also in October 2018, the plaintiffs filed a third amended complaint naming only the
Sibor panel members, including HBAP, as defendants; the court dismissed the third amended complaint in its entirety in July 2019
against all defendants. In August 2019, the plaintiffs filed an appeal to the Second Circuit Court of Appeals, which remains pending.
In the BBSW litigation, in November 2018, the court dismissed all foreign defendants, including all the HSBC entities, on personal
jurisdiction grounds. In April 2019, the plaintiffs filed an amended complaint, which the defendants moved to dismiss. In February 2020,
the court again dismissed the plaintiffs’ amended complaint against all the HSBC entities.
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, 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 initiated an investigation into the onshore foreign exchange
market and identified a number of banks, including HSBC, as subjects of its investigation.
In February 2017, the Competition Commission of South Africa (the ‘Competition Commission’) referred a complaint for proceedings
before the South African Competition Tribunal (the ‘Tribunal’) against 18 financial institutions, including HSBC Bank, for alleged anti-
competitive behaviour in the South African foreign exchange market. In April 2017, HSBC Bank filed an exception to the complaint based
on a lack of jurisdiction and statute of limitations. In January 2018, the Tribunal approved the provisional referral of additional financial
institutions, including HSBC Bank USA, to the proceedings. In June 2019, the Tribunal issued a decision requiring the Competition
Commission to revise its complaint. Several financial institutions named in the complaint, including HSBC Bank USA, have appealed part
of the decision to the Competition Appeal Court of South Africa, and the Competition Commission has cross-appealed.
In October 2018, HSBC Holdings and HSBC Bank 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 the 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 two motions for certification of class actions
filed in Israel alleging foreign exchange-related misconduct. In July 2019, the Tel Aviv Court allowed the plaintiffs to consolidate their
claims and, in September 2019, the plaintiffs filed a motion for certification of the consolidated class action. 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 civil 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.
Precious metals fix-related litigation
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 Limited as defendants. The complaints allege that,
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Notes on the financial statements
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, 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 separate 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 June 2019, a similar claim was issued against
PBGB in the High Court of England and Wales by additional claimants. These actions are ongoing.
In February and October 2019, PBGB received letters before claim by two largely separate groups of investors in Eclipse film finance
schemes, each of which asserted various claims against PBGB in connection with its role in facilitating the design, promotion and
operation of such schemes. These matters are at an early stage.
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:
• an investigation by the DoJ regarding US Treasury securities trading practices;
• an investigation by the US Commodity Futures Trading Commission regarding interest rate swap transactions related to bond
issuances;
• an investigation by the Swiss Competition Commission in connection with the setting of Euribor and Japanese yen Libor;
• an investigation by the FCA in connection with collections and recoveries operations in the UK;
• an information request from the UK Competition and Markets Authority concerning the financial services sector;
• putative class actions brought in the New York District Court relating to the Mexican government bond market, the US government-
sponsored enterprise bond market, and the market for US dollar-denominated supranational sovereign and agency bonds;
• two group actions pending in the US courts and a claim issued in the High Court of England and Wales in connection with HSBC
Bank’s role as a correspondent bank to Stanford International Bank Ltd from 2003 to 2009; and
•
litigation brought against various HSBC companies in the US courts relating to residential mortgage-backed securities, based primarily
on (a) claims brought against HSBC Bank USA in connection with its role as trustee on behalf of various securitisation trusts; and (b)
claims against several HSBC companies seeking that the defendants repurchase various mortgage loans.
There are many factors that may affect the range of outcomes, and the resulting financial impact, of these matters, which could be
significant.
35 Related party transactions
Related parties of the Group and HSBC Holdings include subsidiaries, associates, joint ventures, post-employment benefit plans for HSBC
employees, Key Management Personnel (‘KMP’) as defined by IAS 24, close family members of KMP and entities 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 plc. 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, Group Company Secretary
and Chief Governance Officer, Head of Wholesale Market and Credit Risk 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.
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Key Management Personnel
Details of Directors’ remuneration and interest in shares are disclosed in the ‘Directors’ remuneration report’ on pages 184 to 210.
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
2019
$m
64
8
27
99
2018
$m
52
6
34
92
2019
(000s)
18
15,546
15,564
2017
$m
43
5
35
83
2018
(000s)
24
17,940
17,964
Key Management Personnel
Advances and credits
Guarantees
Deposits
2019
2018
Balance at
31 Dec
Highest amounts
outstanding
during year
Balance
at 31 Dec
Highest amounts
outstanding
during year
Footnotes
1
2
3
$m
283
34
268
$m
328
34
659
$m
169
0.6
300
$m
288
0.6
802
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 plc during 2019 with Directors, disclosed pursuant to section 413 of the
Companies Act 2006, totalled $3m (2018: $1m).
3 Comparatives have been re-presented to correct foreign currency translation errors impacting 2018 reported balances.
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.
Transactions and balances during the year with associates and joint ventures
Unsubordinated amounts due from joint ventures
Unsubordinated amounts due from associates
Amounts due to associates
Amounts due to joint ventures
Guarantees and commitments
2019
2018
Highest balance
during the year
Balance at
31 Dec
Highest balance
during the year
Balance at
31 Dec
$m
132
4,554
2,517
28
647
$m
123
2,054
516
28
407
$m
130
3,887
2,020
22
790
$m
115
3,000
273
22
523
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 2019, $5.4bn (2018: $4.4bn) of HSBC post-employment benefit plan assets were under management by
HSBC companies, earning management fees of $8m in 2019 (2018: $8m). At 31 December 2019, HSBC’s post-employment
benefit plans had placed deposits of $530m (2018: $297m) with its banking subsidiaries, earning interest payable to the schemes
of $0.3m (2018: 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.
HSBC Holdings plc Annual Report and Accounts 2019
313
Financial statementsFinancial statements
Notes on the financial statements
The combined 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 2019, the gross notional value of the swaps was $9.9bn (2018: $10.5bn);
these swaps had a positive fair value to the scheme of $1.2bn (2018: $1.0bn); and HSBC had delivered collateral of $1.2bn (2018: $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 37.
Transactions and balances during the year with subsidiaries
2019
2018
Highest balance
during the year
Balance at
31 Dec
Highest balance
during the year
$m
$m
$m
Balance at
31 Dec
$m
Assets
Cash and balances with HSBC undertakings
5,029
2,382
Financial assets with HSBC undertakings designated and otherwise mandatorily
measured at fair value
Derivatives
Loans and advances to HSBC undertakings
Prepayments, accrued income and other assets
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
61,964
3,902
43,436
655
163,258
278,244
1,553
2,183
892
4,628
11,541
61,964
2,002
10,218
480
161,473
238,519
464
2,021
892
3,377
11,061
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
The above outstanding balances arose in the ordinary course of business and on substantially the same terms, including interest rates
and security, as for comparable transactions with third-party counterparties.
Some employees of HSBC Holdings are members of the HSBC Bank (UK) Pension Scheme, which is sponsored by a separate Group
company. HSBC Holdings incurs a charge for these employees equal to the contributions paid into the scheme on their behalf. Disclosure
in relation to the scheme is made in Note 5.
36 Events after the balance sheet date
A fourth interim dividend for 2019 of $0.21 per ordinary share (a distribution of approximately $4,266m) was declared by the Directors
after 31 December 2019. These accounts were approved by the Board of Directors on 18 February 2020 and authorised for issue.
The Directors approved the 2020 business update after 31 December 2019, setting out a plan that aims to reallocate capital to areas that
can deliver stronger returns, to reduce costs across the Group, and to simplify the business. One change as part of this plan is a change
to the global businesses that form the Group’s reportable segments as described in Note 10 of the financial statements on page 263. The
existing Retail Banking and Wealth Management and Global Private Banking global businesses will be merged to create one new global
business, Wealth and Personal Banking, which will become a reportable segment during 2020.
The ECL at 31 December 2019 was estimated based on a range of forecast economic conditions as at that date. Since early January
2020, the coronavirus outbreak has spread across mainland China and beyond, causing disruption to business and economic activity. The
impact on GDP and other key indicators will be considered when determining the severity and likelihood of downside economic scenarios
that will be used to estimate ECL under IFRS 9 in 2020.
37 HSBC Holdings’ subsidiaries, joint ventures and associates
In accordance with section 409 of the Companies Act 2006 a list of HSBC Holdings plc subsidiaries, joint ventures and associates, the
registered office addresses and the effective percentages of equity owned at 31 December 2019 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.
314
HSBC Holdings plc Annual Report and Accounts 2019
Subsidiaries
Subsidiaries
Almacenadora Banpacifico S.A. (In Liquidation)
Assetfinance December (F) Limited
Assetfinance December (H) Limited
Assetfinance December (M) Limited (In
Liquidation)
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
Beau Soleil Limited Partnership
Beijing Miyun HSBC Rural Bank Company
Limited
Billingsgate Nominees Limited
Canada Crescent Nominees (UK) Limited
Canada Square Nominees (UK) Limited
Capco/Cove, Inc.
Card-Flo #1, Inc.
Card-Flo #3, Inc.
CC&H Holdings LLC
CCF & Partners Asset Management Limited
CCF Holding (LIBAN) S.A.L. (In Liquidation)
Charterhouse Administrators ( D.T.) Limited
Charterhouse Management Services Limited
Charterhouse Pensions Limited
Chongqing Dazu HSBC Rural Bank Company
Limited
Chongqing Fengdu HSBC Rural Bank
Company Limited
Chongqing Rongchang HSBC Rural Bank
Company Limited
CL Residential Limited (In Liquidation)
COIF Nominees Limited
Cordico Management AG (In Liquidation)
Dalian Pulandian HSBC Rural Bank Company
Limited
Decision One Mortgage Company, LLC
Dem 9
Dempar 1
Desarrollo Turistico, S.A. de C.V. (In
Liquidation)
Electronic Data Process México, S.A. de C.V.
Elysées Immo Invest
Equator Holdings Limited (In Liquidation)
Eton Corporate Services Limited
Far East Leasing SA (In Dissolution)
Finanpar 7
Flandres Contentieux S.A.
Foncière Elysées
Fujian Yongan HSBC Rural Bank Company
Limited
Fulcher Enterprises Company Limited
Fundacion HSBC, A.C.
Giller Ltd.
GPIF Co-Investment, LLC
% 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)
99.99
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
n/a
100.00
100.00
100.00
100.00
100.00
100.00
100.00
n/a
100.00
74.99
100.00
100.00
100.00
100.00
100.00
100.00
100.00
n/a
100.00
100.00
n/a
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
n/a
15
16
17
32
17
17
17
16
17
18
16
17
17
16
19
20
20
21
0, 22
12, 23
17
17
17
24
25
26
0, 27
17
28
17
17
17
12, 29
12, 30
12, 31
32
0, 17
33
12, 34
0, 35
4, 36
37
15
15
38
32
20
39
38
40
37
(99.99)
(99.99)
(99.99)
(99.99)
(99.99)
(99.79)
(99.99)
(99.99)
(99.99)
(99.99)
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 Indexes Company Limited
Hang Seng Insurance Company Limited
Hang Seng Investment Management Limited
Hang Seng Investment Services Limited
Hang Seng Life Limited
Hang Seng Real Estate Management Limited
Hang Seng Securities Limited
Hang Seng Security Management Limited
Haseba Investment Company Limited
HFC Bank Limited (In Liquidation)
High Time Investments Limited
Honey Green Enterprises Ltd.
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
HSBC Agency (India) Private Limited
HSBC Alternative Investments Limited
HSBC Amanah Malaysia Berhad
HSBC Americas Corporation (Delaware)
HSBC Argentina Holdings S.A.
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
12, 41
HSBC Bank (RR) (Limited Liability Company)
(62.14)
42
(99.99)
11, 15
24
0, 26
HSBC Bank (Singapore) Limited
HSBC Bank (Taiwan) Limited
HSBC Bank (Uruguay) S.A.
HSBC Bank (Vietnam) Ltd.
HSBC Bank A.S.
100.00
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
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
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
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(62.14)
(99.99)
(99.99)
Footnotes
17
0, 43
15
12, 44
42
45
42
42
42
42
42
42
42
42
42
42
42
42
42
42
42
42
32
42
46
32
47
20
17
2, 48
20
49
50
51
52
17
49
26
53
17
2, 54
17
17
32
17
55
40
56
57
12, 58
48
59
0, 13, 60
51
61
62
63
64
HSBC Holdings plc Annual Report and Accounts 2019
315
Financial statementsFinancial statements
Notes on the financial statements
Subsidiaries
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 (In
Liquidation)
HSBC Bank Oman S.A.O.G.
HSBC Bank Pension Trust (UK) Limited
HSBC Bank plc
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
HSBC Broking Securities (Hong Kong) Limited
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.
% of share class
held by immediate
parent company (or
by the Group where
this varies)
99.00
70.00
100.00
100.00
100.00
n/a
n/a
94.54
100.00
70.03
100.00
100.00
51.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
n/a
100.00
n/a
100.00
100.00
(99.99)
(99.99)
HSBC Casa de Bolsa, S.A. de C.V., Grupo
Financiero HSBC
100.00
(99.99)
HSBC Cayman Limited
HSBC Cayman Services Limited
HSBC City Funding Holdings
HSBC Client Holdings Nominee (UK) Limited
HSBC Client Nominee (Jersey) Limited
HSBC Client Share Offer Nominee (UK) Limited
(In Liquidation)
HSBC Columbia Funding, LLC
HSBC Corporate Advisory (Malaysia) Sdn Bhd
HSBC Corporate Finance (Hong Kong) Limited
HSBC Corporate Trustee Company (UK)
Limited
HSBC Custody Nominees (Australia) Limited
HSBC Custody Services (Guernsey) Limited
HSBC Daisy Investments (Mauritius) Limited
HSBC Diversified Loan Fund General Partner
Sarl
HSBC Electronic Data Processing (Guangdong)
Limited
HSBC Electronic Data Processing (Malaysia)
Sdn Bhd
HSBC Electronic Data Processing (Philippines),
Inc.
HSBC Electronic Data Processing India Private
Limited
HSBC Electronic Data Processing Lanka
(Private) Limited
HSBC Electronic Data Service Delivery (Egypt)
S.A.E.
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
n/a
100.00
100.00
99.00
(99.99)
100.00
(99.99)
100.00
(99.99)
100.00
(99.99)
HSBC Enterprise Investment Company (UK)
Limited (In Liquidation)
100.00
HSBC Epargne Entreprise (France)
100.00
(99.99)
70
71
17
17
72
16
73
73
54
54
54
54
54
54
74
0, 74
26
0, 48
54
26
15
75
76
17
17
77
32
0, 26
49
54
17
56
20
78
0, 79
12, 80
81
82
83
84
85
32
40
316
HSBC Holdings plc Annual Report and Accounts 2019
Footnotes
Subsidiaries
53
65
56
21
66
0, 48
0, 48
67
49
68
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 (Netherlands)
HSBC Finance Corporation
HSBC Finance Limited
5, 69
HSBC Finance Mortgages Inc.
HSBC Finance Transformation (UK) Limited
HSBC Financial Services (Lebanon) s.a.l.
HSBC Financial Services (Middle East) Limited
HSBC Financial Services (Uruguay) S.A. (In
Liquidation)
HSBC France
HSBC Fund Services (Korea) Limited
HSBC Germany Holdings GmbH
HSBC Global Asset Management (Bermuda)
Limited
HSBC Global Asset Management (Canada)
Limited
% of share class
held by immediate
parent company (or
by the Group where
this varies)
(99.99)
(99.99)
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
99.60
100.00
100.00
99.00
92.96
100.00
100.00
100.00
HSBC Global Asset Management
(Deutschland) GmbH
100.00
(80.67)
HSBC Global Asset Management (France)
100.00
(99.99)
HSBC Global Asset Management (Hong Kong)
Limited
HSBC Global Asset Management
(International) Limited (In Liquidation)
HSBC Global Asset Management (Japan) K. K.
100.00
100.00
100.00
HSBC Global Asset Management (Malta)
Limited
100.00
(70.00)
HSBC Global Asset Management (México),
S.A. de C.V., Sociedad Operadora de Fondos
de Inversión, Grupo Financiero HSBC
100.00
(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)
100.00
100.00
100.00
100.00
(99.99)
HSBC Global Asset Management (Taiwan)
Limited
HSBC Global Asset Management (UK) Limited
HSBC Global Asset Management (USA) Inc.
HSBC Global Asset Management Argentina
S.A. Sociedad Gerente de Fondos Comunes de
Inversión
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
HSBC Global Services (China) Holdings Limited
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.
HSBC Institutional Trust Services (Asia) 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
(80.67)
(99.99)
14, 102
15
54
Footnotes
32
16
17
17
16
37
2, 17
26
17
86
17
87
88
89
37
90
43
21
66
43
91
22
92
93
94
15
6, 95
51
4, 96
97
17
98
99
100
2, 17
17
1, 17
101
17
54
17
2, 17
1, 52
17
2, 17
17
17
17
% 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 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.
100.00
100.00
100.00
100.00
100.00
100.00
HSBC Operational Services GmbH
90.10
(72.68)
21
103
51
104
105
21
51
98
106
2, 17
21
21
107
17
108
77
109
51
110
57
111
111
52
111
17
17
112
2, 17
113
22
114
115
17
17
17
Subsidiaries
HSBC Institutional Trust Services (Bermuda)
Limited
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 SAC 1 (Bermuda) Limited
HSBC Insurance SAC 2 (Bermuda) Limited
HSBC Insurance Services (Lebanon) S.A.L. (In
Liquidation)
HSBC Insurance Services Holdings Limited
HSBC International Finance Corporation
(Delaware)
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
HSBC International Holdings (Jersey) Limited
(In Liquidation)
100.00
(99.99)
HSBC International Trustee (BVI) Limited
HSBC International Trustee (Holdings) Pte.
Limited
HSBC International Trustee Limited
HSBC Inversiones S.A.
HSBC InvestDirect (India) Limited
HSBC InvestDirect Financial Services (India)
Limited
HSBC InvestDirect Sales & Marketing (India)
Limited
HSBC InvestDirect Securities (India) Private
Limited
HSBC Investment Bank Holdings B.V.
HSBC Investment Bank Holdings Limited
HSBC Investment Company (Egypt) S.A.E (In
Liquidation)
HSBC Investment Company Limited
HSBC Investment Funds (Canada) Inc.
HSBC Investment Funds (Hong Kong) Limited
HSBC Investment Funds (Luxembourg) SA
HSBC Invoice Finance (UK) Limited
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 LU Nominees Limited
HSBC Management (Guernsey) Limited
HSBC Markets (USA) Inc.
HSBC Marking Name Nominee (UK) Limited
HSBC Master Trust Trustee Limited
HSBC Mexico, S.A., Institucion de Banca
Multiple, Grupo Financiero HSBC
HSBC Middle East Finance Company Limited
HSBC Middle East Holdings B.V.
HSBC Middle East Leasing Partnership
HSBC Middle East Securities L.L.C
HSBC Mortgage Corporation (Canada)
100.00
100.00
100.00
99.99
99.54
99.99
(99.54)
98.99
(98.54)
99.99
(99.78)
(99.99)
(99.99)
(70.03)
100.00
100.00
94.54
100.00
100.00
100.00
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
99.99
80.00
100.00
n/a
n/a
100.00
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 (Suisse) SA
HSBC Private Bank (UK) Limited
HSBC Private Bank International
HSBC Private Banking Holdings (Suisse) SA
HSBC Private Banking Nominee 3 (Jersey)
Limited
HSBC Private Equity Advisors LLC
HSBC Private Equity Investments (UK) Limited
HSBC Private Trustee (Hong Kong) Limited
HSBC Private Wealth Services (Canada) Inc.
HSBC Professional Services (India) Private
Limited
HSBC Property (UK) Limited
HSBC Property Funds (Holding) Limited
HSBC Provident Fund Trustee (Hong Kong)
Limited
HSBC Qianhai Securities Limited
HSBC Real Estate Leasing (France)
HSBC Realty Credit Corporation (USA)
HSBC REGIO Fund General Partner S.à r.l.
HSBC REIM (France)
HSBC Representative Office (Nigeria) Limited
(In Liquidation)
HSBC Retirement Benefits Trustee (UK) Limited
HSBC Retirement Services Limited
HSBC Saudi Arabia
HSBC Savings Bank (Philippines) Inc.
2, 17
HSBC Securities (Asia) Limited
54
36
21
104
17
94
116
17
20
26
17
17
15
117
2, 69
0, 118
0, 119
120
HSBC Securities (Canada) Inc.
HSBC Securities (Egypt) S.A.E.
HSBC Securities (Japan) Limited
HSBC Securities (Philippines) Inc.
HSBC Securities (Singapore) Pte Limited
HSBC Securities (South Africa) (Pty) Limited
HSBC Securities (Taiwan) Corporation Limited
HSBC Securities (USA) Inc.
HSBC Securities and Capital Markets (India)
Private Limited
HSBC Securities Asia International Nominees
Limited (In Liquidation)
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.
26
49
54
121
49
3, 26
122
2, 17
123
17
124
125
126
127
15
103
128
17
20
114
126
17
129
126
125
0, 26
17
54
130
52
17
17
54
12, 131
40
26
114
40
132
1, 2, 17
1, 17
133
134
54
101
67
17
9, 135
51
136
137
26
52
138
54
54
54
21
20
127
114
(99.99)
(99.99)
(51.00)
(99.99)
(99.99)
(99.99)
(61.60)
(94.54)
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
n/a
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
51.00
99.99
100.00
100.00
100.00
100.00
99.99
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
HSBC Holdings plc Annual Report and Accounts 2019
317
Financial statementsFinancial statements
Notes on the financial statements
Subsidiaries
HSBC Securities Services Holdings (Ireland)
DAC
HSBC Securities Services Nominees Limited
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 (Guangdong)
Limited
HSBC Software Development (India) Private
Limited
HSBC Software Development (Malaysia) Sdn
Bhd
HSBC Specialist Investments Limited
HSBC Stockbrokers Nominee (UK) Limited (In
Liquidation)
HSBC Technology & Services (China) Limited
HSBC Technology & Services (USA) Inc.
HSBC Transaction Services GmbH
HSBC Trinkaus & Burkhardt (International) S.A.
HSBC Trinkaus & Burkhardt AG
HSBC Trinkaus & Burkhardt Gesellschaft fur
Bankbeteiligungen mbH
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
80.67
(80.67)
(80.67)
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
HSBC Trust Company (UK) Limited
HSBC Trust Company AG (In Liquidation)
HSBC Trustee (C.I.) Limited
HSBC Trustee (Cayman) Limited
HSBC Trustee (Guernsey) Limited
HSBC Trustee (Hong Kong) Limited
HSBC Trustee (Singapore) Limited
HSBC UK Bank plc
HSBC UK Client Nominee Limited
HSBC UK Holdings Limited
HSBC USA Inc.
HSBC Ventures USA Inc.
HSBC Violet Investments (Mauritius) Limited
HSBC Wealth Client Nominee Limited
HSBC Yatirim Menkul Degerler A.S.
HSI Asset Securitization Corporation
HSI International Limited
HSIL Investments Limited
Hubei Macheng HSBC Rural Bank Company
Limited
Hubei Suizhou Cengdu HSBC Rural Bank
Company Limited
Hubei Tianmen HSBC Rural Bank Company
Limited
Hunan Pingjiang HSBC Rural Bank Company
Limited
(80.67)
(80.67)
(80.67)
(62.14)
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
Imenson Limited
INKA Internationale Kapitalanlagegesellschaft
mbH
Inmobiliaria Banci, S.A. de C.V.
100.00
(62.14)
100.00
(80.67)
100.00
(99.68)
318
HSBC Holdings plc Annual Report and Accounts 2019
% of share class
held by immediate
parent company (or
by the Group where
this varies)
100.00
100.00
100.00
100.00
99.99
100.00
100.00
100.00
100.00
100.00
(99.99)
(99.99)
(99.99)
(99.99)
100.00
(99.99)
Footnotes
Subsidiaries
127
54
53
53
15
139
37
140
141
15
15
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 (Nominees) Limited
James Capel (Taiwan) Nominees Limited
John Lewis Financial Services Limited
Keyser Ullmann Limited
Lion Corporate Services Limited
Lion International Corporate Services Limited
Lion International Management Limited
Lion Management (Hong Kong) Limited
100.00
(99.99)
4, 40
Lyndholme Limited
142
143
81
17
32
144
26
6, 145
114
43
43
43
6, 43
43
6, 43
120
108
17
33
125
146
20
54
51
16
16
2, 17
123
26
78
1, 16
128
26
42
17
147
12, 148
149
12, 150
42
145
15
Marks and Spencer Financial Services plc
Marks and Spencer Unit Trust Management
Limited
Maxima S.A. AFJP (In Liquidation)
Mexicana de Fomento, S.A. de C.V.
Midcorp Limited
Midland Bank (Branch Nominees) Limited
Midland Nominees Limited
MIL (Cayman) 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 Guangzhou
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 Cyatheas Pasteur
SCI HSBC Assurances Immo
Serai Limited
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
SNCB/M6 - 2008 A
SNCB/M6-2007 A
SNCB/M6-2007 B
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
% of share class
held by immediate
parent company (or
by the Group where
this varies)
Footnotes
99.98
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
99.98
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
98.93
100.00
100.00
100.00
100.00
100.00
100.00
100.00
99.99
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
94.93
100.00
100.00
100.00
100.00
100.00
100.00
99.99
99.99
(99.99)
(99.99)
(99.99)
(99.90)
(99.99)
(85.00)
(99.99)
(99.99)
(99.99)
(99.99)
(99.99)
(99.99)
(99.99)
(99.99)
(99.99)
(99.99)
15
15
15
151
17
17
17
17
17
54
1, 110
110
1, 54
54
152
152
124
15
17
16
16
153
53
15
17
154
155
26
26
20
98
1, 17
1, 17
36
4, 38
4, 38
4, 38
4, 38
4, 38
4, 38
4, 38
4, 38
4, 36
40
1, 54
37
156
12, 157
158
1, 11, 159
11, 38
100.00
(99.99)
1, 11, 38
60.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
(99.99)
(99.99)
(99.99)
(99.99)
(99.99)
(99.99)
(99.99)
40
1, 11, 38
38
4, 38
4, 38
38
126
127
21
38
17
Subsidiaries
St Cross Trustees Limited
Sun Hung Kai Development (Lujiazui III)
Limited
Swan National Leasing (Commercials) Limited
(In Liquidation)
Swan National Limited
HSBC Odeme Sistemleri Bilgisayar Teknolojileri
Basin Yayin Ve Musteri Hizmetleri (In
Liquidation)
Thasosfin
The Hongkong and Shanghai Banking
Corporation Limited
The Venture Catalysts Limited
Tooley Street View Limited
Tower Investment Management
% of share class
held by immediate
parent company (or
by the Group where
this varies)
100.00
100.00
100.00
100.00
Footnotes
16
12, 160
32
17
161
100.00
(99.99)
100.00
(99.99)
40
100.00
100.00
100.00
100.00
Trinkaus Australien Immobilien Fonds Nr. 1
Brisbane GmbH & Co. KG
Trinkaus Australien Immobilien-Fonds Nr. 1
Treuhand-GmbH
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
Trinkaus Immobilien-Fonds Verwaltungs-GmbH
Trinkaus Private Equity Management GmbH
Trinkaus Private Equity Verwaltungs GmbH
Tropical Nominees Limited
Turnsonic (Nominees) Limited
Valeurs Mobilières Elysées
Wardley Limited
Wayfoong Nominees Limited
Wayhong (Bahamas) Limited
Westminster House, LLC
Woodex Limited
Yan Nin Development Company Limited
Joint ventures
100.00
(80.67)
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)
5, 54
17
2, 17
162
43
6, 43
43
6, 43
6, 43
43
6, 43
153
16
163
54
54
100
0, 26
21
42
The undertakings below are joint ventures and equity accounted.
Joint ventures
Global Payments Technology Mexico S.A. De
C.V.
HCM Holdings Limited (In Liquidation)
House Network Sdn Bhd
HSBC Jintrust Fund Management Company
ProServe Bermuda Limited
The London Silver Market Fixing Limited
Vaultex UK Limited
% of share class
held by immediate
parent company
(or by the Group
where this varies)
50.00
50.99
25.00
49.00
50.00
n/a
50.00
Footnotes
15
32
164
181
165
0, 1, 166
167
Associates
The undertakings below are associates and equity accounted.
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
Euro Secured Notes Issuer
GIE GNIFI
GZHS Research Co Ltd
% of share class
held by immediate
parent company
(or by the Group
where this varies)
Footnotes
19.03
15.31
24.54
8.20
26.00
33.33
33.99
33.99
33.99
38.66
16.66
n/a
168
169
170
1, 171
172
173
1, 174
1, 175
176
54
177
0, 178
33.00
(20.50)
179
Hang Seng Qianhai Fund Management
Company Limited
70.00
(43.49)
Icon Brickell LLC(In Liquidation)
n/a
Jeppe Star Limited
100.00
(33.99)
MENA Infrastructure Fund (GP) Ltd
Northstar Trade Finance Inc.
Novo Star Limited
Quantexa Ltd
Services Epargne Entreprise
sino AG
The London Gold Market Fixing Limited
The Saudi British Bank
Trinkaus Europa Immobilien-Fonds Nr. 7
Frankfurt Mertonviertel KG
Vizolution Limited
We Trade Innovation Designated Activity
Company
(20.11)
33.33
20.08
33.99
10.51
14.34
24.94
n/a
29.20
n/a
17.95
8.52
1, 12, 180
0, 182
183
184
185
186
187
188
189
0, 166
190
0, 43
1, 191
1, 192
HSBC Holdings plc Annual Report and Accounts 2019
319
Financial statementsFinancial statements
Notes on the financial statements
Footnotes for Note 37
Description of Shares
0
1
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 an agent or principal. HSBC’s consolidation policy is
described in Note 1.2(a).
Management has determined that these undertakings are
excluded from consolidation in the Group accounts as these
entities do not meet the definition of subsidiaries in accordance
with IFRS. HSBC’s consolidation policy is described in Note
1.2(a).
Directly held by HSBC Holdings plc
Preference Shares
Actions
Redeemable Preference Shares
GmbH Anteil
Limited and Unlimited Liability Shares
Liquidating Share Class
Nominal Shares
2
3
4
5
6
7
8
9
10 Non-Participating Voting Shares
11
12
13
14
Parts
Registered Capital Shares
Russian Limited Liability Company Shares
Stückaktien
Registered offices
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
Paseo de la Reforma 347, Col. Cuauhtemoc , Mexico, 06500
1 Centenary Square, Birmingham, United Kingdom, B1 1HQ
8 Canada Square , London, United Kingdom, E14 5HQ
5 Donegal Square South , Belfast, Northern Ireland, BT1 5JP
Camden House West The Parade, Birmingham, United Kingdom,
B1 3PY
Arnold House St Julians Avenue, St Peter Port, Guernsey, GY1
3NF
37 Front Street, Hamilton, Bermuda, HM 11
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
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
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
320
HSBC Holdings plc Annual Report and Accounts 2019
Registered offices
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
70
71
72
73
74
75
76
77
78
79
MMG Tower, 23 floor Ave. Paseo del Mar Urbanizacion Costa
del Este, Panama
15, rue Vernet , Paris, France, 75008
No. 1 1211 Yanjiang Zhong Road, Yongan, Fujian, China
83 Des Voeux Road Central , Hong Kong
Königsallee 21/23 , Düsseldorf, Germany, 40212
No. 44, Xin Ping Road Central, Encheng, Enping , Guangdong,
China, 529400
34/F and 36/F, Hang Seng Bank Tower, 1000 Lujiazui Ring
Road,, China (Shanghai) Pilot Free Trade Zone,, Shanghai ,
China, 200120
Commerce House, Wickhams Cay 1, P.O. Box 3140, Road Town,
Tortola, VG1110, British Virgin Islands
The Corporation Trust Company of Nevada 311 S. Division
Street, Carson City, Nevada, United States Of America, 89703
HSBC House Esplanade, St. Helier, Jersey, JE4 8UB
10th Floor, North Tower 2 Leboh Ampang, Kuala Lumpur,
Malaysia, 50100
13th Floor, South Tower 2 Leboh Ampang, Kuala Lumpur,
Malaysia, 50100
21 Collyer Quay #10-02 HSBC Building , Singapore, 049320
52/60 M G Road, Fort, Mumbai, India, 400 001
557 Bouchard, Level 20 , 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
Level 36 Tower 1 International Towers Sydney, 100 Barangaroo
Avenue, Sydney, New South Wales, Australia, 2000
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 , Vietnam
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 30444, United Arab Emirates
Majer Consulting, Office 54/44, Building A1, Residence Ryad
Anfa,, Boulevard Omar El Khayam, Casa Finance City (CFC),
Casablanca, Morocco
Al Khuwair Office PO Box 1727 PC111 CPO Seeb, Muscat,
Oman
1800 Tysons Boulevard Suite 50, Tysons, 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
P.O. Box 1109, Strathvale House, Ground floor, 90 North Church
Street , George Town, Grand Cayman, Cayman Islands,
KY1-1102
90 North Church Street, Strathvale House - Ground Floor, PO
Box 1109, George Town, Grand Cayman, Grand Cayman,
Cayman Islands, KY1-1102
HSBC House Esplanade, St. Helier, Jersey, JE1 1HS
c/o Rogers Capital St. Louis Business Centre, Cnr Desroches &
St Louis Streets, Port Louis, Mauritius
49 avenue J.F. Kennedy , Luxembourg, Luxembourg, 1855
Registered offices
Registered offices
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
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, 1781
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
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,, Dubai, Dubai, United
Arab Emirates
World Trade Center Montevideo Avenida Luis Alberto de Herrera
1248, Torre 1, Piso 15, Oficina 1502, Montevideo, Uruguay, CP
11300
Level 12, HSBC Building 37, Chilpae-ro, Jung-gu, Seoul, Korea,
Republic Of (South)
Immeuble Coeur Défense 110, Esplanade du Général de Gaulle-
La défense 4, Courbevoie, France, 92400
HSBC House Esplanade, St. Helier, Jersey, JE4 8WP
HSBC Building 11-1, Nihonbashi 3-chome, Chuo-ku, Tokyo,
Japan, 103-0027
80 Mill Street, Qormi, Malta, QRM 3101
Herrengasse 1-3 , Wien, Austria, 1010
Gartenstrasse 26 , Zurich, Switzerland
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
Bouchard 557, Piso 18° , Cdad. Autónoma de Buenos Aires,
Argentina, 1106
100 Mareva House 4 George Street, Nassau, Bahamas
101 70 York Street, Toronto, Ontario, Canada, M5J 1S9
102 Breite Str. 29/31 , Düsseldorf, Germany, 40213
103 18 HSBC Centre, 6th Floor, Cybercity, Ebene, Mauritius, 72201
18th Floor, Tower 1, HSBC Centre, 1 Sham Mong Road,
Kowloon, Hong Kong
104
105 Level 32, HSBC Main Building 1 Queen's Road Central, Hong
Kong SAR, Hong Kong
106
107
7/F HSBC Centre 3058 Fifth Ave West, Bonifacio Global City,
Taguig City, Philippines
HSBC Building Minet El Hosn, Riad el Solh, Beirut 1107-2080,
PO Box 11-1380, Lebanon
108 300 Delaware Avenue Suite 1401, Wilmington, Delaware,
United States Of America, 19801
109 Woodbourne Hall, Road Town PO Box 916, Tortola, British Virgin
Islands
110 Craigmuir Chambers, PO Box 71, Road Town, Tortola, British
Virgin Islands
111
9-11 Floors, NESCO IT Park Building No. 3 Western Express
Highway, Goregaon (East), Mumbai, India, 400063
112 3, Aboul Feda Street, Zamalek, Cairo , Egypt
113
300 - 885 West Georgia Street, Vancouver, British Columbia,
Canada, V6C 3E9
114 16 Boulevard d'Avranches, Luxembourg, Luxembourg, 1160
115 21 Farncombe Road , Worthing, United Kingdom, BN11 2BW
18/F, Unit 2101, 2113, 2113A, 2115 and 2116 of 21/F, HSBC
Building, 8 Century Avenue, China (Shanghai) Pilot Free Trade
Zone, Shanghai, China, 200120
Plot No.312-878 Mezzanine Floor,, Bldg. of Sheikh Hamdan Bin
Rashid, Dubai Creek, Dubai, United Arab Emirates
117
116
118
119
Unit 101 Level 1, Gate Village Building No. 8 Dubai International
Financial Centre, Dubai, United Arab Emirates, PO BOX 506553
Level 16 HSBC Tower, Downtown Dubai, Dubai, United Arab
Emirates
120
121
122
123
124
885 West Georgia Street Suite 300, Vancouver, British Columbia,
Canada, V6C 3E9
HSBC House Level 9, One Queen Street, Auckland, New
Zealand, 1010
21-23 Yorckstraße, Düsseldorf, Nordrhein-Westfalen, Germany,
40476
The Corporation Trust Incorporated, 2405 York Road, Suite 201,
Lutherville Timonium, Maryland, United States Of America,
21093
557 Bouchard, Level 22 , Ciudad de Buenos Aires, Capital
federal, Argentina, C1106ABG
125 HSBC House Esplanade, St. Helier, Jersey, JE1 1GT
126 Quai des Bergues 9-17 , Geneva, Switzerland, 1201
127 1 Grand Canal Square Grand Canal Harbour, Dublin 2, D02
P820, Ireland
128 Büyükdere Cad. No.128 D Blok Esentepe Sisli Istanbul, Turkey
129 1441 Brickell Avenue , Miami, Florida, United States Of
America, 33131
130 300-885 West Georgia Street, Vancouver, British Columbia,
Canada, V6C 3E9
131
Block 27 A&B, Qianhai Enterprise Dream Park No. 63 Qianwan
Yi Road, Shenzhen-Hong Kong Cooperation Zone, Shenzhen,
China, 518052
132 St Nicholas House, 10th Floor Catholic Mission St Lagos, Nigeria
133 HSBC Building 7267 Olaya - Al Murrooj, Riyadh, Saudi Arabia,
12283 - 2255
134 Unit 1 GF The Commerical Complex Madrigal Avenue, Ayala
135
136
6/F HSBC Centre, 3058 Fifth Avenue West, Bonifaco Global City,
Taguig City, Philippines
1 Mutual Place 107 Rivonia Road , Sandton , Sandton, Gauteng,
South Africa, 2196
137 13F 333 Keelung Road, Sec.1, Taipei, Taiwan, 110
138
Palm Grove House PO Box 438, Road Town, Tortola, British
Virgin Islands
139 Kapelanka 42A , Krakow, Poland, 30-347
140
141
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
142
L22, Office Tower 2, Taikoo Hui, 381 Tianhe Road, Tianhe
District, Guangzhou, Guangdong, Guangdong, China
143 HSBC Centre River Side, West Avenue, 25B Raheja woods,
Kalyaninagar, Pune, India, 411006
144
Level 19, HSBC Building, Shanghai ifc 8 Century Avenue
Pudong, Shanghai, China
145 Yorckstraße 21 - 23 40476, Duesseldorf, Germany
146
P.O. Box 309 Ugland House , Grand Cayman, Cayman Islands,
KY1-1104
147 No. 56, Yu Rong Street , Macheng, China, 438300
148 No. 205, Lie Shan Road Suizhou, Hubei, China
149 Building 3, Yin Zuo Di Jing Wan Tianmen New City?Tianmen,
Hubei Province, China
150
RM101, 102 & 106 Sunshine Fairview, Sunshine Garden,
Pedestrian Walkway, Pingjiang, China
151 6, rue Adolphe , Luxembourg, L-1116
152
153
154
155
156
Kings Meadow Chester Business Park, Chester, United Kingdom,
CH99 9FB
PO Box 1109 Strathvale House, 90 North Church Street, George
Town, Grand Cayman, Cayman Islands
World Trade Center 1, Floor 8-9 Jalan Jenderal Sudirman
Kavling 29 - 31, Jakarta, Indonesia, 12920
5th Floor, World Trade Center 1, Jl. Jend. Sudirman Kav. 29-31,
Jakarta, Indonesia, 12920
No 1 Mutual Place 107 Rivonia Road , Sandton , Sandton ,
Gauteng, South Africa, 2196
157 No.198-2, Chengshan Avenue (E) , Rongcheng, China, 264300
158
Woodbourne Hall, Road Town PO Box 3162, Tortola, British
Virgin Islands
159 43 rue de Paris , Saint Denis, France, 97400
HSBC Holdings plc Annual Report and Accounts 2019
321
Financial statementsFinancial statements
Notes on the financial statements
Registered offices
160 RM 2112, HSBC Building, Shanghai ifc No. 8 Century Road,
Pudong, Shanghai, China, 200120
161 Büyükdere Cad. No.122 D Blok Esentepe Sisli Istanbul , Turkey
162
11 Dr. Roy’s Drive PO Box 694GT, Grand Cayman, Cayman
Islands, KY1-1107
163 109 avenue des Champs-Elysees, Paris, France, 75008
164
Lot 6.05, Level 6, KPMG Tower 8 First Avenue, Bandar Utama,
Petaling Jaya, Selangor Darul Ehsan, Malaysia, 47800
165 c/o MUFG Fund Services (Bermuda) Limited The Belvedere
Building, 69 Pitts Bay Road, Pembroke, Bermuda, HM08
166 c/o Hackwood Secretaries Limited One Silk Street, London,
United Kingdom, EC2Y 8HQ
167
All Saints Triangle, Caledonian Road, London, United Kingdom,
N19UT
168 No.188, Yin Cheng Zhong Road China (Shanghai) Pilot Free
Trade Zone, Shanghai, China
169 49/F, The Lee Gardens, 33 Hysan Avenue , Hong Kong
170 13 - 15 York Buildings , London, United Kingdom, WC2N 6JU
171 First Floor The Bower, 207 Old Street, England, United Kingdom,
EC1V 9NR
172 Unit No. 208, 2nd Floor, Kanchenjunga Building 18 Barakhamba
Road, New Delhi - 110001, India
173 65 Gresham Street, 6th Floor, London , United Kingdom, EC2V
7NQ
174 Kacyiru BP 3094, Kigali, Rwanda
175 LR No. 1758/13 Grevella Grove Road, Kalamu House PO Box
47323-00100, Nairobi, Kenya
176 Plot No. 89-90 Mbezi Industrial Area Box 347, Dar es Salaam
City
177 3 avenue de l'Opera , PARIS, France, 75001
178
37 avenue Henri Lafleur , Nouméa, New Caledonia, BP K3
98849
179 Room 1303, 106 Feng Ze Dong Road, Nansha District,
Guangzhou, Guangdong, China
180
181
182
183
184
Flat 209 Hedge Fund Centre of Qianhai Shenzhen-Hong Kong
Fund Town, No. 128 Guiwan Five Road, Qianhai Shenzhen-Hong
Kong Cooperation Zone, Shenzhen, China
17F, HSBC Building, Shanghai ifc 8 Century Avenue, Pudong,
Shanghai, China
C T Corporation System 1200 South Pine Island Road,
Plantation, Florida, United States Of America, 33324
c/o Trident Trust Company Trident Chambers, PO Box 146,
Tortola, British Virgin Islands
Precinct Building 4, Level 3 Dubai International Financial Centre,
Dubai, United Arab Emirates, PO BOX 506553
185 833 Three Bentall Centre 595 Burrard Street, Vancouver, British
Columbia, Canada, V7X 1C4
186
Jayla Place Wickhams Cay I, PO Box 3190, Road Town, British
Virgin Islands
187 75 Park Lane, Croydon, Surrey, United Kingdom, CR9 1XS
188 32, rue du Champ de Tir , NANTES, France, 44300
189 Ernst-Schneider-Platz 1 , Duesseldorf, Germany, 40212
190
191
Al Amir Abdulaziz Ibn Mossaad Ibn Jalawi Street, Riyadh, Saudi
Arabia
Office Block A, Bay Studios Business Park, Fabian Way,
Swansea, SA1 8QB, Wales, United Kingdom
192 10 Earlsfort Terrace, Dublin, Ireland, D02 T380
322
HSBC Holdings plc Annual Report and Accounts 2019
Shareholder information
Fourth interim dividend for 2019
Interim dividends for 2020
Other equity instruments
2019 Annual General Meeting
Earnings releases and interim results
Shareholder enquiries and communications
Stock symbols
Investor relations
Where more information about HSBC is available
Taxation of shares and dividends
Cautionary statement regarding forward-looking statements
Certain defined terms
Abbreviations
Page
323
323
323
323
324
324
325
325
325
326
327
328
329
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 2019
The Directors have declared a fourth interim dividend for 2019 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 11 March 2020. 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 2019 and/or Strategic Report 2019 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
18 February 2020
27 February 2020
1
28 February 2020
11 March 2020
26 March 2020
30 March 2020
14 April 2020
Interim dividends for 2020
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 2020
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. For further details on these securities, please refer to Note 31 to the financial statements.
In 2019, HSBC did not issue contingent convertible securities.
2019 Annual General Meeting
All resolutions considered at the 2019 Annual General Meeting held at 11.00am on 12 April 2019 at the International Convention Centre,
8 Centenary Square, Birmingham B1 2EA were passed on a poll.
HSBC Holdings plc Annual Report and Accounts 2019
323
Additional information Additional information
Earnings releases and interim results
Earnings releases are expected to be issued on or around 28 April 2020 and 27 October 2020. The interim results for the six months to
30 June 2020 are expected to be issued on 3 August 2020.
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
Investor 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.
324
HSBC Holdings plc Annual Report and Accounts 2019
Shareholders who wish to receive a hard copy of this Annual Report and Accounts 2019 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/investors/shareholder-information/manage-your-
shareholding. 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 2019 will be available upon request after 11 March 2020 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
Mark Phin, 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 2019 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
2019 by 31 December 2020. This information will be available on HSBC’s website: www.hsbc.com/tax.
HSBC Holdings plc Annual Report and Accounts 2019
325
Additional information Additional information
Taxation of shares and dividends
Taxation – UK residents
The following is a summary, under current law and the current
published practice of HM Revenue and Customs (‘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 2019 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 2018 fourth interim dividend
and the first, second and third interim dividends for 2019 was set
out in the Secretary’s letters to shareholders of 6 March, 30 May,
28 August and 23 October 2019. 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
326
HSBC Holdings plc Annual Report and Accounts 2019
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.
It is anticipated that following the UK's departure from the
European Union, the UK government 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, but no assurance can be given that this will be the case.
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. These include 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 2019 is for informational purposes only. It was not
intended or written to be used, and cannot be used, for the
purpose of avoiding US federal tax penalties.
Taxation of dividends
Currently, no tax is withheld from dividends paid by HSBC
Holdings. For US tax purposes, a US holder must include cash
dividends paid on the shares or ADSs in ordinary income on the
date that such holder or the ADS depositary receives them,
translating dividends paid in UK pounds sterling into US dollars
using the exchange rate in effect on the date of receipt. A US
holder that elects to receive shares in lieu of a cash dividend must
include in ordinary income the fair market value of such shares on
the dividend payment date, and the tax basis of those shares will
equal such fair market value.
Subject to certain exceptions for positions that are held for less
than 61 days, and subject to a foreign corporation being
considered a ‘qualified foreign corporation’ (which includes not
being classified for US federal income tax purposes as a passive
foreign investment company), certain dividends (‘qualified
dividends’) received by an individual US holder generally will be
subject to US taxation at preferential rates. Based on the
company’s audited financial statements and relevant market and
shareholder data, HSBC Holdings was not and does not anticipate
being classified as a passive foreign investment company.
Accordingly, dividends paid on the shares or ADSs generally
should be treated as qualified dividends.
Taxation of capital gains
Gains realised by a US holder on the sale or other disposition of
shares or ADSs normally will not be subject to UK taxation unless
at the time of the sale or other disposition the holder carries on a
trade, profession or vocation in the UK through a branch or agency
or permanent establishment and the shares or ADSs are or have
been used, held or acquired for the purposes of such trade,
profession, vocation, branch or agency or permanent
establishment. Such gains will be included in income for US tax
purposes, and will be long-term capital gains if the shares or ADSs
were held for more than one year. A long-term capital gain realised
by an individual US holder generally will be subject to US tax at
preferential rates.
Inheritance tax
Shares or ADSs held by an individual whose domicile is
determined to be the US for the purposes of the United States –
United Kingdom Double Taxation Convention relating to estate and
gift taxes (the ‘Estate Tax Treaty’) and who is not for such
purposes a national of the UK will not, provided any US federal
estate or gift tax chargeable has been paid, be subject to UK
inheritance tax on the individual’s death or on a lifetime transfer of
shares or ADSs except in certain cases where the shares or ADSs
(i) are comprised in a settlement (unless, at the time of the
settlement, the settlor was domiciled in the US and was not a
national of the UK), (ii) are part of the business property of a UK
permanent establishment of an enterprise, or (iii) pertain to a UK
fixed base of an individual used for the performance of
independent personal services. In such cases, the Estate Tax
Treaty generally provides a credit against US federal tax liability for
the amount of any tax paid in the UK in a case where the shares or
ADSs are subject to both UK inheritance tax and to US federal
estate or gift tax.
Stamp duty and stamp duty reserve tax – ADSs
If shares are transferred to a clearance service or American
Depositary Receipt (‘ADR’) issuer (which will include a transfer of
shares to the depositary) under the current published HMRC
practice, UK stamp duty and/or stamp duty reserve tax will be
payable. The stamp duty or stamp duty reserve tax is generally
payable on the consideration for the transfer and is payable at the
aggregate rate of 1.5%.
The amount of stamp duty reserve tax payable on such a transfer
will be reduced by any stamp duty paid in connection with the
same transfer.
No stamp duty will be payable on the transfer of, or agreement to
transfer, an ADS, provided that the ADR and any separate
instrument of transfer or written agreement to transfer remain at
all times outside the UK, and provided further that any such
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 2019 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 and credit-worthy customers
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 or capital markets, which may
affect our ability to meet our obligations under financing
facilities or to fund new loans, investments and businesses;
other unfavourable political or diplomatic developments
producing social instability or legal uncertainty, such as the
unrest in Hong Kong, which in turn may affect demand for our
products and services; the coronavirus outbreak, which may
have adverse impacts on income due to lower lending and
HSBC Holdings plc Annual Report and Accounts 2019
327
Additional information Additional information
transaction volumes; climate change, which may cause both
idiosyncratic and systemic risks resulting in potential financial
impacts; 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;
consumer perception as to the continuing availability of credit;
exposure to counterparty risk, including third parties using us
as a conduit for illegal activities without our knowledge; the
expected discontinuation of certain key Ibors and the
development of alternative risk-free benchmark rates, which
may require us to enhance our capital position and/or position
additional capital in specific subsidiaries; price competition in
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
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 76 to 81.
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.
•
monetary, interest rate and other policies of central banks and
other regulatory authorities in the principal markets in which
we operate and the consequences thereof; 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; the UK’s exit from the
EU which may result in a prolonged period of uncertainty,
unstable economic conditions and market volatility, including
currency fluctuations; general changes in government policy
that may significantly influence investor decisions; the costs,
effects and outcomes of 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; and
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); our
ability to achieve our targets which may result in our failure to
achieve any of the expected benefits of our strategic initiatives;
model limitations or failure, which may require us to hold
additional capital and incur losses; changes to the judgments,
estimates and assumptions we base our financial statements
on; changes in our ability to meet the requirements of
regulatory stress tests; a reduction in the credit rating assigned
to us or any of our subsidiaries, which could increase the cost
or decrease the availability of our funding and affect our
liquidity position and net interest margin; changes to the
reliability and security of our data management, data privacy,
information and technology infrastructure, including threats
from cyber-attacks, which may impact our ability to service
clients and may result in financial loss, business disruption and/
or loss of customer services and data; changes in insurance
customer behaviour and insurance claim rates; our dependence
on loan payments and dividends from subsidiaries to meet our
obligations; changes in accounting standards, which may have
a material impact on the way we prepare our financial
statements; changes in our ability to manage third-party, fraud
and reputational risks inherent in our operations; employee
misconduct, which may result in regulatory sanctions and/or
reputational or financial harm; and changes in skill
requirements, ways of working and talent shortages, which
may affect our ability to recruit and retain senior management
and skilled personnel. 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
328
HSBC Holdings plc Annual Report and Accounts 2019
Abbreviations
Currencies
£
CA$
€
HK$
MXN
RMB
SGD
$
A
ABS¹
ADR
ADS
AFS
AGM
AI
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
Artificial intelligence
AIEA
ALCM
ALCO
AML
AML DPA
Average interest-earning assets
Asset, Liability and Capital Management
Asset and Liability Management Committee
Anti-money laundering
Five-year deferred prosecution agreement with the US
Department of Justice, entered into in December 2012
ASEAN
Association of Southeast Asian Nations
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
CRD IV¹
CRR¹
CRR II¹
CSA
CVA¹
D
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 Regulation and Directive
Customer risk rating
Revised Capital Requirements Regulation and Directive, as
implemented
Credit support annex
Credit valuation adjustment
Dodd-Frank
Dodd-Frank Wall Street Reform and Consumer Protection
Act (US)
DoJ
DPD
DPF
DVA¹
E
EAD¹
EC
ECB
ECL
EEA
Eonia
ESG
€STER
EU
Euribor
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
US Department of Justice
Days past due
Discretionary participation feature of insurance and
investment contracts
Debt valuation adjustment
Exposure at default
European Commission
European Central Bank
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
European Economic Area
Euro Overnight Index Average
Environmental, social and governance
Euro short-term rate
European Union
Euro interbank offered rate
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
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
Global Trade and Receivables Finance
Hang Seng Bank Hang Seng Bank Limited, one of Hong Kong’s largest banks
HKEx
HKMA
HMRC
HNAH
The Stock Exchange of Hong Kong Limited
Hong Kong Monetary Authority
HM Revenue and Customs
HSBC North America Holdings Inc.
Holdings ALCO
HSBC Holdings Asset and Liability Management Committee
Deferred Shares Awards of deferred shares define the number of HSBC
Hong Kong
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
HQLA
HSBC
Hong Kong Special Administrative Region of the People’s
Republic of China
High-quality liquid assets
HSBC Holdings together with its subsidiary undertakings
HSBC Bank
HSBC Bank plc, also known as the non-ring-fenced bank
HSBC Holdings plc Annual Report and Accounts 2019
329
Additional information Additional information
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
ISDA
J
Jaws
K
KMP
L
LCR
LFRF
LGBT+
LGD¹
Libor
LICs
LMA
LTI
LTV¹
M
HSBC UK Bank plc, also known as the ring-fenced bank
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
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
Malachite Funding Limited, a term-funding vehicle
Mazarin Funding Limited, an asset-backed CP conduit
US mortgage-backed security
Middle East and North Africa
Model Oversight Committees
Monoline
Monoline insurance company
MREL
MRT¹
N
Net operating
income
NII
NIM
NSFR
NYSE
O
OCC
OCI
Minimum requirement for own funds and eligible liabilities
Material Risk Taker
Net operating income before change in expected credit
losses and other credit impairment charges/Loan impairment
charges and other credit provisions, also referred to as
revenue
Net interest income
Net interest margin
Net stable funding ratio
New York Stock Exchange
Office of the Comptroller of the Currency (US)
Other comprehensive income
330
HSBC Holdings plc Annual Report and Accounts 2019
OECD
OFAC
OTC¹
P
PBT
PD¹
Organisation of Economic Co-operation and Development
Office of Foreign Assets Control
Over-the-counter
Profit before tax
Probability of default
Performance
shares¹
Ping An
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
PIT
POCI
PPI
PRA
PRC
Point-in-time
Purchased or originated credit-impaired financial assets
Payment protection insurance
Prudential Regulation Authority (UK)
People’s Republic of China
Principal plan
HSBC Bank (UK) Pension Scheme
PVIF
PwC
R
RAS
RBWM
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
RoTE
RWA¹
S
SABB
SAPS
SDG
SE¹
SEC
Ring-fenced bank
Risk-free rate
Risk Management Meeting of the Group Management Board
Risk not in VaR
Return on equity
Return on average tangible equity
Risk-weighted asset
The Saudi British Bank
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
SRI
T
T1
T2
TCFD¹
TLAC¹
TSR¹
U
UAE
UK
UN
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
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
UN PRI
United Nations Principles of Responsible Investment
US
V
VaR¹
VIU
United States of America
Value at risk
Value in use
1 A full definition is included in the glossary to the Annual Report and
Accounts 2019 which is available at www.hsbc.com/investors.
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
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
Morgan Stanley & Co. International plc
25 Cabot Square
London E14 4QA
United Kingdom
Bank of America Securities
2 King Edward Street
London EC1A 1HQ
United Kingdom
HSBC Bank plc
8 Canada Square
London E14 5HQ
United Kingdom
HSBC Holdings plc
Incorporated in England on 1 January 1959 with
limited liability under the UK Companies Act
Registered in England: number 617987
Registered Office and Group Head Office
8 Canada Square
London E14 5HQ
United Kingdom
Telephone: 44 020 7991 8888
Facsimile: 44 020 7992 4880
Web: www.hsbc.com
Registrars
Principal Register
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
United Kingdom
Telephone: 44 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
© Copyright HSBC Holdings plc 2020
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, London (Strategic Report) and by Global
Finance with Superunion (rest of Annual Report and Accounts)
Photography
Beatrice wind farm image on page 46 courtesy
of © Beatrice Offshore Windfarm Ltd
Printed by Park Communications Limited, London, on Nautilus
SuperWhite 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
Incorporated in England with limited liability
Registered number 617987